Trusts and Foundations In various circumstances, trusts and foundations are nowadays considered as better alternatives to the more traditional corporate structures especially as a wealth and succession tool. Maltese Trusts Trusts may be set up for a number of reasons, primarily for succession purposes but also to control and protect family assets especially when someone is too young or unable to handle their affairs. A trust exists when the settlor vests the trustee with the legal ownership of a property (no particular limitations thereof). The Trustee is under the fiduciary obligation to deal with the trust property for the benefit of the beneficiaries whether ascertained or yet to be ascertained. The property held on trust is kept separate and distinct from the trustee’s own patrimony but will not belong to the trust as a separate legal person. Generally, a trust structure involves a tripartite relationship: the settlor, who is the person who puts the property in a trust; the trustee, who is the person bearing legal ownership of the property held on trust. The role of a trustee is
mainly to deal with the trust’s assets in line with the trust deed; the beneficiaries, who include anyone who benefits from the assets held in the trust. There can be one or more beneficiaries, such as a whole family or a defined group of people, and even the settlor himself can act as the sole or joint beneficiary. Each beneficiary may benefit from the trust in a different way. Fiscal Implications of Maltese Trusts The creation and use of a local trust by Maltese residents for tax planning purposes offers no fiscal benefit to such residents. Maltese tax law “looks trough” a trust and hence ensures that no additional fiscal benefit exists by using a trust rather than carrying out the said transactions personally. However, as far as non-residents persons are involved, the creation of Maltese trusts can be a highly beneficial vehicle to experience tax minimisation.
Tax implications of trusts are normally regarded into 3 time segments: 1st the settlement of property in the trust. The settlement of property not located in Malta by nonresidents for the benefit of non-resident beneficiaries would not be subject to any taxes or stamp duty. 2nd income of a trust. When at least one of the trustees is resident in Malta (the use of Maltese trustees is normally recommendable to have a definite Maltese residence status), any income attributable to a trust becomes taxable in Malta in the hands of the trustees at a rate of 35% (obviously relief of foreign taxation through unilateral relief and the 15% withholding tax in case of qualifying investment income will apply). However, a trust has two alternatives how to be subject to tax on its income: o a “Look-through” approach, if all the income of a trust arises outside Malta, or consists of interest, royalties, gains or profits on a disposal of securities in a company the assets of which do not wholly or principally consist of immovable property in Malta, and where all the beneficiaries of the trust are not ordinarily resident and domiciled in Malta. In such case, such income shall not be deemed to be income attributable to the trust. This income shall be deemed to have been derived directly by the beneficiaries. o a “check-the-box” approach, meaning that, the trustee elects to have the trust be treated as a Maltese company for tax purposes as long as the only income attributable to the trust consists of dividends, interest, royalties, capital gains and income from investments. Any subsequent distributions from the trust to the beneficiaries shall be treated as a distribution of dividend. This provides the opportunity for the
beneficiaries to claim tax refunds on the original tax suffered in Malta. In addition, such an approach will also enable any dividends or capital gains derived from certain foreign corporate investment to be exempt in Malta (participation exemption). 3rd the distribution of property in the trust. The settlement of property not located in Malta and all trustees are not resident in Malta, such distribution fall outside the scope of Maltese taxation. Foundations There are 2 types of foundations under Maltese law: A ‘private foundation’ which is more family oriented or a ‘purpose foundation’ which are 'non-family' foundations. The latter are set up for many reasons, for example, to operate as a charity or voluntary organisations. For the purpose of this write-up, only ‘Private Foundations’ shall be considered. Once registered at the Public Registry, foundations are deemed to be separate legal persons. The assets of the foundation are entrusted to the administrator/s but are still owned by the foundation itself as a legal person. A foundation cannot carryout commercial and trading activities although it can easily be used for the purpose of holding assets, including shares, trademarks or other assets deriving income. Differently from trusts, a foundation may continue to be controlled by the founder (equivalent to settlor) due to the fact that a founder may himself be an administrator (equivalent to trustee) of the foundation. Fiscal Implications of Maltese Foundations A foundation may choose to be treated either as a company or as a trust for tax purposes. The tax treatment will be as explained above in the case of Trusts.
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