There are plenty of reasons why you should establish a trust in Malta, including the attractive trusts regime when it comes to tax and money transfer to trust beneficiaries. While setting up a trust in Malta, may be a vital element of your estate plan, there are a lot of other trust aspects that you should understand.
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Definition of Trusts in Simple Terms
A trust is an essential tool when it comes to an estate planning process. In efforts to help manage an individual’s property, trusts facilitate the transfer of the property’s obligations and benefits to third parties.
A trust is defined as a binding obligation between a trustor and trustee or trustees. The agreement stipulates the transfer of the legal ownership of a property by the trustor to the trustees for purposes of property management for the benefit of beneficiaries. The trust is regulated by specified terms.
There are two types of Trusts;
- Fixed Interest Trust is the type of trust where the trustee has no control of the interest to be given to the beneficiaries. The trust defines the interest.
- Discretionary Trust is the type of trust where the trustee defines the interest issued to the beneficiaries.
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Trusts in Malta – An Exceptional Jurisdiction
It is a rare thing to find trusts incorporated in the law systems of civil law countries. This is where Malta stands out from most of the civil law countries. As a unique jurisdiction, the law system in Malta provides for both trusts and foundations. In the Maltese trusts and trustees act, a trust remains active for a period of up to 125 years from the establishment date, a duration which is documented in the Trust Instrument.
According to the Malta trust law, the comprehensive definition of a trust recognises three elements, including the trustee, beneficiary, and the settlor. The trustee and beneficiary are defined as the key components of trusts in Malta, while the settlor is considered to be the third party that establishes the property in a trust.
Article 3 of the Malta Trusts and Trustees Act:
“A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.”
The Malta trust law provides for all forms of trusts outlined in most of the traditional law jurisdictions, including the following;
- Charitable Trusts
- Spendthrift Trusts
- Discretionary Trusts
- Fixed Interest Trusts
- Unit Trusts
- Accumulation and Maintenance Trusts
Why You Should Establish a Trust in Malta
There are plenty of benefits that come with establishing a trust in Malta. Here is a brief highlight of these benefits.
1. Adaptable Trusts Law
Since its establishment in 1988, the Malta trust law has seen some dynamic changes over the years. In 2004, the Malta trusts law was updated into the Trusts and Trustees Act. This Act was an update of the 1984 trusts laws which had been adopted from New Jersey. With the 2004 trusts laws, the procedure of setting up a trust in Malta has become quite easy and straightforward. One of the reasons why the Maltese trusts laws have become an attractive tool across the globe is the provision to establish a customised trust. You can now set up a trust with solutions that are tailored to your needs. It is also worth noting that Malta is one of the few jurisdictions that has successfully incorporated the Anglo-Saxon Trust concept.
2. Reputable Services
Settlors in Malta can rest assured that they will receive high-quality services from foundation administrators and professional trustees. There are over 130 international and Maltese service providers who are licensed and regulated by the Malta Financial Services Authority (MFSA).
3. Enforcement of Foreign Law
Malta is one of the few countries that recognise and enforce foreign law or trusts governed by international laws. Whether a settlor is establishing a trust as per the Hague Convention requirements or setting up a property trust governed by foreign law, the Maltese trust jurisdiction will recognise and enforce any trust law. Foreign investors do not have to worry about the Maltese public policies when setting up a Maltese Trust. The Maltese trusts laws apply the Anglo-Saxon concept in interpreting that such rules as forced heirship remain applicable only to a domiciled settlor during the setting up of a trust.
4. Recognition of Private Trusts
The Malta trust laws also allow the establishment of a trust through a notarial deed. This is where either the trustee and the settlor are related, or where the two parties have had a relationship for over 10 years. Such a mode of trust establishment is attractive for small scale trusts, where the settlor entrust all the functions of a trustee to a relative or any other person they have known for many years. This procedure is augmented by the depositary notary who aids the lay trustee.
5. Lower Set Up Fees
To establish a trust in Malta, there are significantly lower administration and set up costs that are required compared to other countries. Costs such as audit fees, legal fees, and trust management fees are much lower in Malta. It is significantly cheaper to set up a fully-fledged Maltese trust compared to the establishment of a similar trust in Switzerland or in any other country. While the set-up costs remain significantly lower in the country, the Maltese professional classes have maintained an undisputed global reputation.
Other Benefits Related to Malta Trusts
- Independent and unique trust laws.
- Legislation of trust laws is published in English.
- Malta is an English-speaking country with a government that supports business development.
- High professional standards with specialists holding international qualifications and experience, including investment advisors, notaries, lawyers, bankers, and accountants.
- Malta is situated in a eurozone location.
- Speedy authorisation of licensed trustees from other approved jurisdictions.
Main Components for Registering a Trust in Malta
A trust in Malta allows for the setting up of a legal entity for the transfer of property ownership to a trustee who is obliged to hold up the property for the benefit of others.
The Trust and Trustees Act of Malta stipulates that a trust has three main key components:
The Settlor – The person who makes the trust, person that provides trust property or the one that makes a disposition on trust.
The Trustee – Legal or natural person, holding the property or whom the property is bestowed in terms of trust.
The Beneficiary – The person entitled to benefit under the trust
In Detail, the main Components to Establish a Trust in Malta are;
1. The Settlor
This is the person that establishes a trust and states on the trust individuals or an individual who provides a trust property. A settlor must have the capacity to contract, one who is of age, and with a free disposition to the property stated on the trust. Once the fiduciary obligations are imposed on the trustee, the settlor is left without any rights as far as the property in the trust is concerned. However, the Trusts and Trustees Act may highlight the rights of a settlor, which are complemented by the trust deed. Here are some of the rights that may be entitled to a settlor;
- The settlor is entitled to seek after court directives as far as establishing the validity of a trust is concerned.
- The settlor is entitled to seek information from the trustee as per the terms of the Trust Deed.
- The settlor is entitled to revocable trusts and variation of terms as provided by the Trust Deed.
- The trustee is obliged to hold a property for the settlor in the event of interest lapses, trust termination, or lack of existing or possible beneficiary.
- The settlor is entitled to granting himself any beneficial interest in the trust property.
- The settlor is entitled to reserve for himself any power to appoint, remove, or add beneficiaries, trustees, or protectors.
- The settlor is entitled to reserve for himself any power or capacity to appoint an investment manager or investment advisor.
2. The Trustee
This is the person in whom the ownership of a property is vested or one who naturally or legally holds a property. Trustees in Malta are licensed, regulated, and supervised by the MFSA. According to the MFSA regulations, a trustee set up as a company;
- Should not act as a trustee to the public.
- Should not be obliged to handle property for more than five settlors at a go.
- Is only licensed to act in the capacity of a trustee to a settlor (s) and the provision of administrative services to particular trusts.
3. The Beneficiary
This is the person (s) who benefits from a trust or one to whom the distribution of a property stated in a trust is exercised to their favour. All beneficiaries must be mentioned by name or ascertained by relationship or class to the settlor. Children of all ages, including the conceived children, who are beneficiaries must be mentioned in the trust deed. As provided by the Trust Deed, the beneficiary may, in writing, charge, sell, and deal with the property to their own interest in any manner. Some of the rights of a beneficiary include the following;
- The beneficiary is entitled to solicit any information relevant to the trust from the trustee (s).
- The beneficiary has the right to seek court directives on establishing the validity of a trust.
- The beneficiary has the right to disclaim part of or their entire interest in a trust at any time as they wish, provided they do so in writing by involving a settlor.
- The beneficiary has the right to request for trust termination or distribution of trust property, provided they are ascertained and in existence. However, this right might not apply to minors or interdicted persons. This right is also excluded from application in cases of protective trusts.
Other Components when Setting Up a Trust in Malta
A protector is an additional party incorporated by the settlor as one who holds a trustworthy position, such as a family associate, lawyer, or member. The roles and powers of a protector are well stipulated in the Trust instrument, which includes but are not limited to;
- Acting as an investment advisor. They provide advice on the property investment opportunities currently available in the market.
- Remove trustees at any time, should they wish to do so.
- Appoint additional or new trustees to the trust deed, should there be a need to.
- Provide discretion in matters that are relevant to the trust, including the sale of trust property.
The File Note of Wishes
This is a document used to offer guidance to a trustee or trustees. However, the File Note of Wishes is not legally binding, and its content may change over time. The document becomes fundamentally essential in determining how the distribution of assets to the beneficiaries should be done, as this information is not outlined in the Trust Instrument. However, the significance of the File Note of Wishes is limited to particular types of trusts. For instance, the roles and rights of all beneficiaries are well captured in the Life Time and Fixed Interest types of trusts. In such cases, the File Note of Wishes would be irrelevant.
Essentially, the trustee is in charge of the funds as per the terms of the trust deed. A settlor may, therefore, be required to be discrete not to act as the de facto trustee by imposing obligations to the trustee via the File of Note Wishes. This would be a violation of the trustee’s rights and powers, resulting in consequences regarding trust recognition, including an influence on taxation.
The Trust Instrument
A Trust Instrument, on the other hand, is a legally binding document in writing that is used to set a boundary between the legal ownership and beneficial ownership of a property when establishing a trust. The document highlights the terms of a trust and the distribution guidelines. Examples of terms of a trust include the rights, interests, powers, duties, and responsibilities of the involved parties. The distribution guidelines stipulate the source of distributions; whether they will be sourced from capital or income. Where income is identified as the source of the distributions, the instrument highlights how the income is to be accumulated.
Taxation on Trusts in Malta
Here is an overview of what you should expect from a taxation perspective once you establish a trust in Malta.
Malta Taxation of Settlements
A settlement of a property on trust cannot be taxed if;
- The settlor is not domiciled in Malta for taxation purposes or a settlor’s whose property is located outside Malta.
- The assets under the trust are free from charges in terms of Maltese taxation on immovable property, including trademarks, patents, copyright, business goodwill, trade-names, beneficial interest, or securities.
Malta Taxation of Trustees
A trustee under a particular tax is open to the Maltese taxation if;
- The beneficiaries are not ordinarily residents or domiciled in Malta.
- The beneficiaries are not individuals resident in Malta
- The relevant income comprises of royalties, source interest, or gains obtained via the disposal of shares in a non-property Maltese company.
- The relevant income has its source being a foreign entity for Maltese taxation purposes.
- The relevant income is generated from dividends from a Maltese company with a foreign source for taxation purposes in Malta.
- The relevant income includes a Malta source interest, gains, or royalties obtained by the disposal of shares in a non-property Maltese company.
- The trustee is unqualified for fiscal transparency. In such cases, the trustee is obliged to make a flat tax rate of 35% if one of the trustees is a Malta resident for tax purposes.
Malta Taxation on Transfers of Beneficial Interests
A transfer of beneficial interests by a beneficiary is not open to taxation if;
- The trust property does not have chargeable assets.
- The beneficiary transferring the interests is not ordinarily resident or domiciled in Malta.
VAT Considerations on Trusts in Malta
There are a few considerations to keep in mind when it comes to VAT in trusts and the trustees.
VAT Considerations when Establishing a Trust in Malta
A trust is just an instrument bearing properties or assets. Since the instrument is not subjected to any economic activities, the trust is beyond the VAT scope. However, the trustee should be careful not to exploit the trust remuneration on luxurious things such as vacations, otherwise, they will be required to pay VAT.
VAT Considerations on the Trustee
Essentially, the trustee is the legal owner of the property under the trust by virtue of management and administrative services over the property. The money that the trustee is entitled to share out from the Trust assets through remuneration is legally considered to be outside the scope of the services offered by the company. When this is the case, then the trustee is not open to VAT as there is devoid of economic activity.
However, if the trustee exploits the assets under a trust through activities that are taxable under the Maltese VAT laws, then the trustee is subject to VAT payments. For instance, using an asset under trust as a holiday accommodation facility is considered to be an economic activity in Malta. In such a case, the trustee should register for VAT and make the necessary payments.
The taxable status or any other activity by the trustee on the trust asset should be undertaken on a case to case basis, according to the status of the said activity.
Establishing a Trust in Malta – Brief Overview
The reasons for setting up a trust in Malta can be categorised into three aspects, including the practical, domestic, and taxation issues. Some of the domestic issues that may necessitate anyone to establish a trust in Malta may include;
- Offering benefits of the trust asset for a charitable course.
- To avoid delays and expenses linked to Malta or foreign probate procedures.
- Protect a property from such third parties such as creditors or any other entities.
- Reserve assets until minor beneficiaries attain the majority age.
- To dispose of a property to the heirs of a settlor without the immediate transfer of the subject property in the event of the settlor’s death.
- To safeguard the property should the settlor or beneficiaries be incapacitated.
- Reduction of estate taxes.
- Delay taxable events to a future date.
- Transfer tax burdens to beneficiaries who may have lenient tax impositions.
- To assemble investments for easy and professional management or administration.
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