A trust is an obligation which binds a person or persons (called the trustee) to deal with the property of which the trustee is deemed to be the legal owner (called the trust property) for the benefit of persons (called the beneficiaries ) or for a charitable purpose in accordance with the terms of the trust. The setting up of trusts in Malta is regulated by the Trusts and Trustees Act.
The settlement of an asset on trust falls under the very wide definition of a taxable transfer and therefore subject to capital gains under the Income Tax Act, even if the transfer is made for no consideration. The Income Tax Act provides that gains and profits relating to the settlement of property in trust means the difference in the market value of the property at the time of the settlement and the cost of acquisition of the property. The Act, however, does provide an exhaustive list of transfers that are subject to capital gains, where any transfers that fall outside the list are not subject to capital gains on the settlement.
The law provides an exhaustive list of taxable transfers for capital gains purposes. Broadly speaking, these are the transfer of immovable property; the transfer of securities, business, goodwill, copyright, patents, trademarks and trade names, and the transfer of a beneficial interest in a trust (this is subject to certain particular exceptions, however, it is not the purpose of this article to delve into the specific details of such exceptions). Therefore transfers that do not fall within these limits are not taxable transfers for capital gains.
It could be that the settlement of property on trust, that although is provided for in the exhaustive list mentioned above, would be exempt from capital gains – either because the law provides that no transfer has in fact taken place or else because the law provides no gain or loss has been made on a particular transfer.
The law provides that no transfer has taken place when the three following conditions are satisfied:
- A trust is created by a written instrument;
- There exists a sole settlor;
- The sole settlor is also the sole beneficiary.
The Income Tax Act also provides for an exemption from capital gains where:
- The settlor makes a direct donation of such trust to beneficiaries that are persons other than the settlor himself, and
- The relevant trust instrument specifically provides that the beneficiaries have an irrevocable vested right to receive all the property settled in trust as specified in the said written instrument, and
- The relevant trust instrument specifically provides that the beneficiaries are either the spouse, descendants and ascendants in the direct line and their relative spouses, or in the absence of descendants to his brothers or sisters and their descendants of the beneficiary, or
- Approved philanthropic institutions, and
- The beneficiaries include persons who are in existence at the time of the settlement of such property on trust.
Duty is due on the transfer of immovable property and related rights in accordance with the Duty on Documents and Transfers Act. This is also applicable to the settlement of relevant assets on trust. The Act does, however, provide certain exemptions. These exemptions include transfers by a settlor to the trustees of a trust which the settlor is the sole beneficiary and where the settlor has an irrevocable vested right to receive the trust property; transfers by a settlor to the trustees of a trust created for the purpose of a designated commercial transaction; and transfers by a settlor to the trustees of a trust created for the purpose of a commercial transaction not being a designated commercial transaction but which has been approved by the Commissioner of Inland Revenue.
Trusts are generally considered to be transparent for tax purposes, meaning that income attributable to a trust is not charged tax in the hands of the trustee if such income is distributed to the beneficiaries. When all the beneficiaries of a trust are non-Maltese residents and when all the income attributable to a trust is derived from sources outside Malta, there will be no tax impact under Maltese tax law. Beneficiaries are then charged tax on income distributed by the trustees. Income attributable to a trust that is not so distributed to beneficiaries is charged tax while in the hands of the trustee at the rate of 35% and there will be no further refunds or reductions.
It may be in the interest of the beneficiaries that any benefit that they receive from the trust is actually taxed in Malta. The Income Tax Acts provide the trustee with the irrevocable option to have a trust treated as a company for tax purposes. This would give the trust the possibility to make use of over forty-eight double taxation treaties that are currently in force and the possibility to enjoy the various tax benefits provided to non-Maltese resident or domiciled shareholders. The non-resident beneficiaries will be eligible to receive the refunds provided under the Income Tax Acts as if they were shareholders, the trustee may also seek to obtain an advance revenue ruling from the Commissioner of Inland Revenue. Effectively this will grant the trust the possibility to be treated as an International Trading Company with an effective tax liability of 4.17%, alternatively, the trust could operate what is known as the Foreign Income Account (FIA), where beneficiaries receiving distributions from the FIA are entitled to refunds reducing the effective tax rate to 6.25%. This applies to trusts formed up to 31st December 2006. Trusts registered after 1st January 2007, will following distributions to beneficiaries be entitled to refunds reducing the effective tax to 5%. This works out as a 6/7th refund of the 35% tax paid on trust income.
As the Trust consists of the holding of property and other assets, there is no economic activity carried on and it is therefore outside the scope of VAT. Since the Trustee services essentially consist of management and administration of assets of which the Trustee is the legal owner, it is considered that any sums that the Trustee is entitled to appropriate from the trust assets by way of remuneration do not constitute consideration for services rendered. Therefore no economic activity is deemed to be carried out, where such remuneration is specified under the terms of the deed of the Trust. However, if the Trustee exploits the property of the Trust for consideration then this exploitation is considered as an economic activity, and if such activity is taxable under Maltese VAT legislation, then the Trustee has to register for VAT in Malta.