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Trusts, foundations and charities
Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?
The Trusts and Trustees Act regulates trusts and the conduct of Maltese trustees. All types of trusts are available in Malta, and the most common is the express trust. The act also provides that the Malta Financial Services Authority is the sole regulatory body in respect of such arrangements.
Trusts are commonly used in commercial transactions but may also be set up for inheritance, estate planning, charitable, social or philanthropic purposes. These purposes include the advancement of education, religion, health, culture and art, as well as social and community advancement. There are also specific regulations relating to protected disability trusts, which can be formed where at least one beneficiary has a disability.
What rules and procedures govern the establishment and maintenance of trusts?
The Trusts and Trustees Act chiefly outlines the basic principles of the Malta trust, comprising:
- the question of applicable law;
- the manner in which trusts may be created;
- the rights of the beneficiaries to a trust; and
- the general existence of the trust up to its termination (which, unless terminated for any other reason contemplated by the Trusts and Trustees Act, runs until its 125th anniversary).
The Trusts and Trustees Act also provides for the appointment of the trustees, as well as their powers and the rules governing their role as trustee. Importantly, the act also provides for the regulation of trustees by the Malta Financial Services Authority.
How are trusts taxed in your jurisdiction?
Tax liability in Malta arises where at least one of the trustees is a resident in the country. The amount of tax due is determined in relation to the income attributable to the trust. The Income Tax Act defines ‘income attributable to a trust’ as “the aggregate of any relevant income which has accrued to or is derived by a trustee or trustees of a trust, from property which was settled in such trust and from property which was acquired in the administration of such trust, including any income from the employment of such property”.
Where the trustee is a person resident in Malta they may elect to compute the chargeable income in relation to the income attributable to a trust for the relevant year of assessment as if the income were derived by a company resident and domiciled in Malta. Such election cannot be revoked and the income will be made subject to tax at the rate of 35%. If this method of taxation is chosen, distributable profits shall be allocated in the same manner applicable to such companies and the distribution of allocated profits to beneficiaries shall be treated as if they were dividends distributed to shareholders of the company. The option to treat the trust as a company is useful when the trustee wishes to claim relief from double taxation on income that has been subject to withholding taxes outside Malta.
In principle, trust income is taxable in the hands of the trustee at a rate of 35%. However, the Maltese tax framework operates a transparency rule for trusts in that, in several instances, income attributable to the trust is deemed to be derived directly by the beneficiaries themselves and therefore taxed in the hands of the beneficiaries. One such instance is where the trust income consists of income arising outside Malta and all the beneficiaries are persons not ordinarily resident or domiciled in Malta, or whose income is exempt from tax. In such cases, such income is not deemed attributable to the trust but rather derived directly by the beneficiaries.
The trust taxation framework was inserted into a broader legislative framework that offers tax exemptions and refunds to non-residents. Therefore, the trust taxation system ensures that such exemptions and refunds that could be used by non-residents outside the trust framework are not prejudiced in the trust scenario.
Where a beneficiary is neither resident nor domiciled in Malta, tax would only be chargeable in Malta on local source income and gains and not on any foreign income or gains. Where the beneficiary is ordinarily resident (but not domiciled) in Malta, tax would be chargeable on local source income and gains, as well as foreign source income that is remitted to Malta. Therefore, where foreign income is remitted to Malta by trustees, the transparency rule would not result in an exemption but liability at beneficiary level. The Maltese tax system is particularly beneficial for trusts set up by non-residents, resulting in either complete neutrality or a low effective tax rate.
Foundations and charities
Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?
Foundations are recognised in Malta through the Second Schedule of the Civil Code (Chapter 16 of the Laws of Malta). Maltese law allows for the establishment of ‘private’ or ‘purpose’ foundations. A private foundation is one that is established for the benefit of one or more persons, while a purpose foundation is one that is established exclusively:
- for a charitable, philanthropic or other social purpose;
- as a non-profit organisation; or
- for any other lawful purpose.
What rules and procedures govern the establishment and maintenance of foundations and charities?
Foundations are regulated in terms of the Second Schedule to the Civil Code (Chapter 16 of the Laws of Malta). Foundations must be created, under pain of nullity, either by means of a public deed or by testamentary disposition. A person seeking to set up a foundation must ensure that numerous requirements are observed, as follows. The foundation must necessarily be given a name in which the term ‘foundation’ is clearly legible; its purpose must be clearly stated, as must be the composition of its board of administrators and the names of the first administrators. Under the Trusts and Trustees Act, a person (ie, an individual or a body corporate) that operates in or from Malta and wishes to act as administrator of a private foundation must seek prior authorisation from the Malta Financial Services Authority. Conditions for an individual to act as an administrator include:
- operating in or from Malta;
- being an approved person; and
- proving to have established adequate systems for maintaining proper records of:
- the identity and residence of beneficiaries;
- any transactions relating to the assets of the foundations; and
- compliance with the applicable laws.
Should all the administrators reside abroad, a Maltese representative must be appointed. Further, an endowment must be made by the founder and the constitutive assets must be clearly named. The endowment can be made in money or other property, including the rights to money or property that will arise in the future.
Different requirements then exist, depending on whether the entity is a private or purpose foundation. However, regardless of whether it is private or purpose, the foundation will acquire legal personality as soon as it is registered with the registrar for legal persons and will not be permitted to carry on trade or commercial activities, even if the profits are destined for social purposes. Nevertheless, a foundation can be endowed with commercial property and can hold shares in a company (regardless of whether such company conducts a trade business or other such commercial activity), as long as it is only a passive owner of the assets.
The Second Schedule to the Civil Code specifically caters for the conversion of a foundation into a trust and a trust into a foundation. However, both such conversions are irrevocable.
How are foundations and charities taxed?
For income tax purposes, foundations are treated like companies ordinarily resident and domiciled in Malta, which are taxable at the standard corporate income tax rate of 35%. The administrators of the foundation can also elect that the foundation be treated under the same provisions as are applicable to trusts. Such an election is only possible where the income consists of dividends, interest, royalties, rents, capital gains and income from investments.
In principle, charitable institutions, organisations and foundations are exempt from Maltese income tax under Article 12(1)(e) of the Income Tax Act. However, this exemption applies only where it is granted by the minister responsible for finance and published under subsidiary legislation under the Income Tax Act.
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