This article provides a guide on the system of taxation on trusts in Malta. Malta, a whitelisted jurisdiction by the Organisation for Economic Co-operation and Development (OECD) with a growing reputation as a trust domicile, proves to be highly beneficial for trusts as it provides a low tax rate. Although a Civil law jurisdiction, Malta has successfully transposed the trust legislation into its system, regulating trusts and enabling domestic courts to recognise and uphold the trust principles.
Governing Bodies of Trustees and Taxes in Malta
There are three bodies that govern the trustees and taxes in Malta:
- The Trusts and Trustees Act (Cap 331): Regulates trusts in Malta and provides for the creation of trusts
- The Malta Financial Services Authority (MFSA): Authorises and supervises the trusts
- The Income Tax Act (Cap. 123) and the Income Tax Management Act (Cap. 372): Govern the taxation of trusts in Malta
Tax Liability for Trusts in Malta
Tax liability for trusts arises in cases where at least one of the trustees is a resident of Malta. The amount of tax to be paid depends on the income gained by the trust. However, there is no tax liability if the trust has income that is not attributable to tax purposes, including a trust property without chargeable assets.
As per “income attributable to trust,” under Article 27B (2) of the Income Tax Act, the aggregate of any relevant income accrued is derived by a trustee(s) of a trust. The income needs to be from property settled and acquired in the administration of such trust. This includes any income from the employment of such property.
Taxation of Trust Income in Malta
By the establishment of residence through one of the trusts, the following options apply:
Election to register the trust as a company in Malta
If a trustee is a resident of Malta and is granted authorisation by the trust, then Maltese law allows the trust to be treated as a company. This however, requires an election to be held within 30 days from the constitution of trust or the appointment of the Malta resident as a trustee.
For the relevant year of assessment, the trust must calculate and produce the income attributable to a trust. This includes dividends, interest, royalties, capital gains and income from investments. Such an election is irrevocable, and the income would be chargeable to tax at the rate of 35%. Distributable profits are allocated in the same manner to companies in Malta.
Addressing the trust as a company registered and operating in Malta helps the trustee claim relief from double taxation.
The rule of transparency
The Maltese tax framework operates with great transparency. The income attributable to trust is derived directly by the beneficiaries themselves.
Suppose the trust’s income comes from outside Malta; the income will be considered non-attributable and derived directly from the beneficiaries. The same applies to the trust’s income made up of:
- Interest, premium or royalties
- Gains or profits from the disposal of units in a collective investment scheme
All the beneficiaries must be non-ordinarily residents or domiciled in Malta or individuals whose income is exempt from tax. Ordinary residents of Malta are those who stay in the country for six months or at least 183 days in any calendar year.
If the income is obtained from outside Malta but is received by the trustee in Malta, then the trustee must notify the beneficiaries and inform them of their duties under the Income Tax Act. Essentially, the tax would only be chargeable in Malta on the local income and gains and not on any foreign income or gains if the beneficiaries are neither residents nor domiciled in Malta.
However, if the beneficiaries are ordinarily residents but not domiciled in Malta, the tax would be chargeable on the local source of income and gains and the income from a foreign source will be remitted to Malta. The transparency rule would not exempt foreign income remitted to Malta by trustees but liability at the beneficiary level.
