Trusts have been used in estate planning as well as in international tax planning for decades. Malta has a fully fledged trust legislation and numerous licensed trustees authorised by MFSA to provide their services from Malta.
In a trust deed, the ownership of property settled on trust is divided between the trustee and the beneficiary whereby the trustee would be required to act entirely in the best interests of the beneficiary vis-à-vis the trust property. The trustee would be the legal owner of the property while acting for the benefit of the beneficiary.
Trust to be treated as a company
A trust can be taxed under different methods. It can irrevocably elect to have its income treated as income derived by a company, i.e. subject to 35% on profits, unless an exemption applies. Such trust would also be required to allocate its distributable profits to the five taxed accounts and distributions of profits from these taxed accounts to the beneficiaries of the trust shall be treated as if they were a distribution of dividends to shareholders of a company registered in Malta. Therefore, the tax refunds available to shareholders of Maltese companies would also be available to the beneficiaries, with the same advantages obtained.
Flow through of income
The election by a trust to be treated as a company is only available if the income attributable to the trust comprises of only royalties, dividends, capital gains, interest, rents or any other income from investments, i.e. income of a passive nature. Where an election for a trust to be treated as a company cannot be made, the trust shall not be treated as a separate person chargeable to tax, and therefore income would flow through to the beneficiaries.
The flow through of income would be allowed if:
- All the income of the trust consists of income arising outside Malta or else interest, royalties, or gains on disposal of shares in Maltese companies (excluding property companies) and funds; AND
- All the beneficiaries are persons that are either not ordinarily resident or not domiciled in Malta, or else are persons whose income is exempt under the Income Tax Act.
Where all the beneficiaries of the trust are not resident in Malta, and where the income attributable to the trust comprises only income referred to in (i) above, or else dividends distributed from the Foreign Income Account of a company registered in Malta, then the income of such trust shall be deemed to be derived directly by the beneficiaries.
Where the nature of the income of the trust or else the residency of the beneficiaries does not allow a trust to be treated as flow through, then the income attributable to such trust is subject to tax in Malta as if the trust is a person that is ordinarily resident and domiciled in Malta.
Trusts are nowadays used both by individuals and families to protect family assets as well as in the financial services sector. For example, collective investment schemes can take the form of unit trusts. Malta has also seen considerable interest in pension schemes being licensed by MFSA which normally take the form of a flow through trusts.