Trusts tax regime

Transfer of property by the settlor to the trust

In principle, the settlor may be taxed even if he or she does not receive any amounts upon transferring his or her property to the trust. Whatever the circumstance, the placement of property in a trust shall not create a more heavily taxed regime than that which would be applicable to any other transfer.

As such, there are some exemptions available:

• When the settlor is the only beneficiary of the trust;
• When the beneficiaries of the trust are heirs of the settlor, they have the irrevocable right to receive the property of the trust and they exist when the trust is created;
• When the beneficiaries of the trust are the heirs of the settlor and they include persons with a substantial incapacity to administer their property or cannot sustain themselves;
• When the the property consists of shareholdings, there is more than one settlor and they are the only beneficiaries of the trust in the same proportion that they previously were;
• Transfer of ownership due to change of trustee, providing there is no change in beneficiaries;
• When the property is transferred to a trust created for a specific commercial transaction that includes, among others, custody of the investment instruments and creation or holding of real or personal guarantees (mortgage, pledge, privileges, guarantees).

Normally, stamp duty shall be payable upon transfer of real estate or shareholdings to the trust.

However, there are some exemptions:

• When the settlor is the only beneficiary of the trust;
• When there is a change of trustees within the same trust;
• When the property returns to the settlor;
• When the trust is created for a specific commercial transaction or obtains approval for such a purpose.

Trust income

The trust shall be subject to taxation in Malta when at least one of the trustees is a resident of Malta.

Although a trust does not have legal personality, for tax purposes, the income attributable to a trust is relevant, namely income obtained by a trustee derived from:

• Property of the trust; and
• Property acquired during the administration of the trust; and
• Any income earned from managing the property of the trust.

Trust income can also include capital gains when the trustee:

• Transfers property of the trust during administration of the trust; and
• Distributes the property of the trust; or
• The property of the trust returns to the settlor.

The general principle is that income attributable to the trust is subject to a 35% tax rate, as applicable to a person domiciled in Malta (international taxation base), but excluding income that is allocated to the beneficiaries, subject to certain conditions. No one shall be subject to more tax on income earned from the trust if it has already been taxed at 35% as part of trustee income.

If the trustee resides in Malta and chooses to have the income of the trust taxed as a company:

• The income tax rate shall be 35%;
• This option shall be irrevocable;
• The trust deed shall expressly mention that the income from the trust shall consist only of royalties, dividends, capital gains, interest, rent or any other income derived from investments (operating activity or trading is not allowed);
• Taxable income shall be calculated as if it were a resident company domiciled in Malta;
• Trust distributions shall be treated as if they were distribution of dividends to shareholders of a company;
• Accounting obligations shall be the same as those of a company.

This option can be very useful, seeing as it is possible to create a non-corporate entity under foreign law, but having corporate treatment in Malta. In addition, depending on the type of income (if allocated to MTA and FIA tax accounts), there is the possibility of refunding the tax with respect to distributions made to non-resident beneficiaries. Various international double taxation relief mechanisms are also available. There are excellent tax planning opportunities when a trust, with beneficiaries that are non-residents of Malta, is used.

It is also possible for trusts to be treated as look through entities for tax purposes. In such cases, if the income from the trust comes from outside of Malta and if the beneficiaries are not residents of Malta or domiciled there, the income from the trust is deemed to have been obtained by its beneficiaries and not by the trust and shall therefore be exempt from taxation in Malta.

Transfer of beneficial interest

The transfer of beneficial interest means that the beneficiary in question ceases to be a beneficiary of the trust. This transfer shall be taxed under certain situations and there shall be exemptions in the following situations:

• When the Commissioner determines that an irrevocable right of renouncement of the beneficiary was not done for the one or main purpose of avoiding, reducing or postponing the taxation;
• When transfer of the beneficiary right is performed in a trust in which the trustee has ownership of a specific commercial transaction.

Return of the trust property to the settlor

The general rule is that the return of the trust property to the settlor is treated as a transfer to third parties, and the acquisition price shall be the value at which it was acquired as property of the trust. However, there are two exceptions:

• If the transfer of the property to the trust was exempt, in which case it is determined that there was no transfer to the trust;
• If the return takes place via the cancellation or termination of the trust, in which case it is deemed that there was no gain or loss in the return.