Maltese residents' creation and use of a local trust for tax planning purposes will not benefit such residents. By and large, Malta tax authorities adopt a "look through" approach and see through the trust and tax (or exempt from taxation, as the case may be) any transaction or party to the belief in the same manner as they would have done in the absence of such a trust.

From an international perspective, Malta trusts may provide tax planning opportunities to non-residents while also offering them the protection, security and estate planning benefits that come with the creation of trusts.

Generally, the settlement of foreign assets on trust by a non-resident settlor for the benefit of non-resident beneficiaries would not trigger off any Malta tax implications.

At which least one of the trustees of the trust is resident in Malta for tax purposes, the tax shall be payable in Malta on all income attributable to the trust. This would comprise the total income or gains chargeable to tax under Maltese law which accrue to or are derived by the trustee at any stage in the life of the trust.

The inclusion in Malta's tax legislation of a transparency model allows, in certain circumstances, for the tax authorities to look through the trust and tax the transaction (or exempt the transaction from tax, as the case may be), depending on the various factors that would attribute jurisdiction to tax to Malta or otherwise.

The Administration of a Trust

Income attributable to a trust is chargeable to Malta tax when at least one of the trustees of that trust is resident in Malta for income tax purposes.

The Malta tax residence of a trustee represents a relevant connection, connecting Malta and the income attributable to the trust of which he is a trustee and which suffices to justify Malta's assertion of jurisdiction to tax income attributable to that trust. Malta exercises jurisdiction to tax income attributable to a trust by reference to the Malta tax residence of at least one of the trustees of that trust and regardless, therefore, of the place of residence of the settlor, beneficiaries, other trustees if any, and the location of the trust assets or the source of income.

This, however does not mean that Malta will refrain from taxing chargeable income or gains derived by a trust when none of the trustees of that trust are persons resident in Malta for tax purposes. Such non-resident trustees would be chargeable to tax in Malta on domestic source income and gains.

Any flow or item of income was chargeable to tax under Malta tax legislation and accruing to or derived by a Malta resident trustee of a trust in his capacity. Such would effectively be taxable in Malta as income attributable to the trust. Moreover, Malta tax legislation adds chargeable gains realized by a trustee to the notion of income attributable to a conviction.

Any income attributable to a trust accruing to or derived by a trustee would, where at least one of the trustees is resident in Malta for income tax purposes, be chargeable to tax under Malta tax legislation at the flat rate of 35%. No provisional tax is payable regarding any income attributable to a trust. Furthermore, no person would be chargeable to further tax under the ITA on any income attributable to a faith which has suffered tax in the hands of the trustee.

Transparency

When at least one trustee of a trust is resident in Malta, the Malta tax base in respect of income attributable to that trust is clearly designed to capture any chargeable income and gains accruing to or derived (or deemed to be derived under a distribution or reversion of chargeable trust property) by the trustee in his capacity as such, regardless of the number and place of residence of other trustees of the same trust (if any).

However, the approach adopted in the design of the Malta taxable base is softened by applying specific rules, resulting in the adequate transparency of a given trust for tax purposes. In fact, by applying such rules, income otherwise attributable to a trust would be deemed to have been derived directly by the beneficiaries of that trust or would otherwise be allocated to the beneficiaries.

Income attributable to the trust deemed to have been derived directly by the beneficiaries

In certain defined circumstances, Malta tax legislation would deem all income otherwise attributable to a trust to have been derived directly by the trust's beneficiaries – irrelevant of the Malta tax residence of one or more of the trustees of the faith. As a result, to the extent that no income would be attributable to any such trust, that trust would be wholly and effectively transparent for local tax purposes. Consequently, no Malta tax would be chargeable under the ITA in the hands of the trustee/s on any income or gains accruing to it or released thereby.

Transparency is essentially achieved by reference to the nature of the trust property, the source of income or gains accruing to or derived by the relevant trust, and the beneficiaries' status as person resident, ordinarily resident, and/or domiciled in Malta. Chargeable income or gains otherwise characterized as constituting income attributable to a trust, are deemed to have been derived directly by the beneficiaries of that trust (despite the Malta tax residence of one or more of the trustees of the trust) and would thus not be chargeable to tax under the ITA in the hands of the trustees. For this to materialize, the following conditions ought to exist:

• All income attributable to the trust consists of:
  • income arising outside Malta; and/or
  • income referred to in interest, discount, premium, royalties or capital gains; and
• All beneficiaries of the trust are:
  • persons who are not ordinarily resident and domiciled in Malta; or
  • persons whose income is exempt from tax, such as philanthropic institutions, political parties, and sports clubs.

Another set of circumstances that afford transparency is when the chargeable income or gains otherwise characterized as constituting income attributable to a trust would be deemed to have been derived directly by the beneficiaries. Therefore, it would not be chargeable to tax under Malta tax legislation in the hands of the trustee. However, for such treatment to exist, the following conditions ought to be present:

• all income attributable to the trust must consist of:
  • dividends distributed by one or more companies registered in Malta; and/or
  • income arising outside Malta; and/or
  • income referred to in interest, discount, premium, royalties or capital gains; and
• all beneficiaries of the trust are persons who are not resident in Malta; and
• the trustee of the trust is licensed to act as a trustee; and
• the trustee provides the Director-General of Inland Revenue (DGIR), with a certificate in writing confirming that he holds one or more shares in the Malta registered company/ies distributing dividends referred to above for the benefit of a person or persons all of who are not resident in Malta in terms of the ITA.

Provided that the pertinent conditions are met, the DGIR would effectively look through the trust for Malta tax purposes and deem all chargeable income and gains to have been derived directly by the beneficiaries of the said trust. Such income and gains would, as a result of the income being deemed to be derived directly by the beneficiaries, be chargeable to tax exclusively in the hands of the beneficiaries in terms of Malta tax legislation. At any rate, to the extent that no income would, in fact, be attributable to the trust, no Malta tax would be chargeable in the hands of the trustee.

Income attributable to a trust and allocated to the beneficiaries

In addition to transparency models described above, resulting in the total look-through of trust for Malta tax purposes, Malta tax legislation further provides the transparent treatment of certain items or amounts of income attributable to a trust. In the latter circumstances, such specific items of income would fall to be characterized or treated as constituting income attributable to a trust which must be allocated to the beneficiaries, irrespective of the place of residence and / or domicile of the beneficiaries. An allocation to the beneficiaries of income attributable to a trust would only be made in respect of the following amounts of income:

• amounts over which the beneficiaries had a vested right in the year immediately preceding the year of assessment; and/or
• amounts over which an entitlement had been bestowed in favour of the beneficiaries by the end of the year immediately preceding the year of assessment; and / or
• amounts accruing to or derived by the trustee in a given year of assessment and which had been distributed to the beneficiaries by the end of the year immediately preceding that year of assessment.

In such a case, the DGIR would disregard a given trust regarding the amounts of income attributable to that trust but allocated to the beneficiaries. Given the pertinent conditions are met, the relevant items or parts of income attributable to trust but allocated to the beneficiaries would not be chargeable to tax in the trustee's hands. Instead, such items of income distributed to the beneficiaries would be aggregated with the beneficiaries' other chargeable income for tax purposes and taxed accordingly.

Tick the Box Provisions

Malta tax legislation affords the possibility for a licensed trustee to elect to have a trust treated as a company ordinarily resident and domiciled in Malta for tax purposes irrevocably. This election is possible where an instrument has established the trust in writing. The income attributable to the trust solely consists of dividends, interest, royalties, capital gains, and income from investments. Distributions effected by the trustees of such trusts to the beneficiaries would take the form of a dividend and be treated as such.

Different Types of Trusts and their Uses