A relative newcomer to the Maltese legal scene, Trusts has now quickly gained ground as one of the most interested institute availability, due to its flexibility and multitude of uses. Trusts can be used for asset protection, for tax planning as well as for investment vehicles for collective investment schemes.
What is a Trust?
Whilst there are many different forms of Trusts, (please see notes below), however, in its purest and simplest form, a trust is essentially established when a person (a trustee), holds, as owner, assets, devolved into a trust, for the benefit of persons (beneficiaires). A trust is therefore essentially at transfer of an asset from a person (the settlor) to a trust, which transfer into this institute of trust, creates a distinct fund or patrimony from other assets owned directly by the settlor.
Key Persons within a Trust
Having established the parameters and main characteristics of a Trust, it is important to clarify some of the important aspects and players within the Trust.
The Settlor is the person who creates the trust or disposes of his assets into the trust. In other words a Trust may only into existence, insofar that the settlor initiates the process. The creation of a Trust can be undertaken at any time during his lifetime, provided he is not interdicted or incapacitated.
The Trustee is he who administrators the assets of the trust, holds and manages them, with the same power as if he were the owner of the assets under trust, however, not for his personal gain, but for the gain of third parties (the beneficiaries). In order to fulfill this role, the trustee must be empowered to have all ownership powers of the assets, including the power to sell, substitute and distribute the fruits to the beneficiaries. Of course, these powers may be mitigated by ensuring that the trustee acts in the maximum degree of probity. A trustee is essentially given a fiduciary role, and a very onerous responsibility, and must show the utmost degree of consciousness and scrutiny in managing the trust.
How is the Trustee Accountable for his Actions?
At the outset, the undertaking of a trustee role, is barring very few exceptions permitted under Maltese law, and typically restricted to certain forms of trusts, e.g. charitable trusts, subject to a licence.
This ensures that the regulator, the Malta Financial Service Authority, shall only approve and licence those trustees, which it believes are ‘fit and proper’. Fitness and propriety is established after a thorough due diligence process, after the applicant’s experience, expertise and financial standing are assessed through a very elaborate process.
Furthermore, barring few exceptions, a trustee licence is only provided to licensed body corporates, all having a minimum of three (3) directors. This ensures that the ‘four-eyes’ principle is always preserved, since the decision making powers is never concentrated in one individual but is held within a system of checks and balances.
More specifically, a trustee company will only be authorized to act in this capacity insofar that the following conditions are met:
- Its trading objects clearly and unequivocally state that it is authorized to act in this capacity, and there is no inclusion of any object which is incompatible with the aforesaid;
- There must be a minimum of three (3) directors, all of which must be approved persons;
- The company must have established adequate systems for the maintenance and preservation of proper records of identity and residence of beneficiaries, the dealing and the assets in connection with trust, as well as ensure continuous compliance with all applicable law;
Our in-house trust company, is licensed in accordance with the aforesaid parameters. Its board is composed individually of warrant holders, of legal and accounting extraction, with a proven track-record in the trust and fiduciary fields.
Moreover, and this is particularly relevant where the assets held in trusts, consist on particularly complex assets, or classes of assets, the trustee may, and indeed would be expected to rely on external expert assistance, such as independent auditors, legal consultants and advisors. This is not incompatible with the role of the trustee, but rather a corollary of the fact, that trustee should seek to maximize the return or preservation of the assets under the trust, and this may require the outsourcing of specialized assistance.
Another manner in which the acts of a trustee may be kept in check, and control is the inclusion of supervisor figures, which may have roles of either requesting information or have vetoing or power sharing roles within certain aspects of the trust itself. It is possible to require the inclusion of Protectors (see notes below), which request information or supervise the role of the trustee. Likewise, following recent amendments to the law, settlors may also have a more direct involvement in the supervisory requests over a trust, a marked derogation from the previous stance, whereby forms of interference or intervention by the settlor, would have resulted in the dissolution of a trust, or at least exposed the trust to attack, as being a ‘sham trust’.
This does not mean that the roles of a trustee, may be usurped. On the contrary, the undue intervention of third parties, and the divesting of the trustee roles by other parties would still render the trust invalid. The reason is that the trustee should be the administrative organ within the trust, and this has to remain so, during the establishment and tenure of the trust. By way of anology, the same would apply in the case of directors within a company. If the role of a director were to be hijacked and effectively handled by third parties, the latter would be labelled as ‘shadow director’ unleashing a series of repercussions of the corporate governance of the company. However, the fact that there is a legal framework which allows supervision and vetoing powers, may be a source of comfort to the settlor, in order to ascertain that the management of the trust is surely being undertaken and adhered to in accordance to his wishes.
The beneficiaries are the person/s entitled to benefit under a trust. Similarly to shareholders in a company, they are the persons, who are entitled to receive the proceeds and advantages deriving from the trust itself, and the degree and extent of this benefit may vary. However, contrary to a company, the identity of the beneficiary itself, allows a degree of flexibility, which would otherwise not be possible in a corporate context.
At the outset, it is the settlor which determines the identity of the beneficiaries. The founder enjoys a discretion to change the beneficiaries or even to vary the extent of their enjoyment, or to set a capping to their enjoyment, or even to subject to the enjoyment to a capping. Furthermore, it is possible to allow the trustee, when the trust is a discretionary one, to identify the beneficiaries himself, subject to conditions and parameters which may be decided by the settlor himself.
It is indeed possible, insofar that the beneficiary is always unequivocal and identifiable, to set a series of parameters, without necessarily identifying the beneficiaries directly by name, albeit caution is to be exercised to ensure that the drafting of the trust instrument adequately achieve this scope.
The benefit in a trust is of a personal nature, and therefore creditors, spouses, heirs and legatees may only exercise their rights to the extent of the beneficiary’s personal entitlement. It is not possible for any of the aforesaid to extend their interests in excess of the aforesaid personal entitlement or to seek redress against any other assets of the trust. It is however possible for this personal right to be a transferrable right, allowing the beneficiary to sell, charge or transfer his benefit to third parties.
This benefit can be subject to various permutations, as may be set by the trust deed or in the case of discretionary trust, permitted to the trustee. It is possible for the benefit to be conditional to the occurrence of an event, or even a resolutive condition. Beneficiaries may receive their interest by way of income or annuities, as well as distribution of capital, and use of assets (e.g. habitation rights). It is also possible to receive distribution of assets, if the trustee believes it apt to distribute assets or to liquidate the same, to better achieve the scope of the trust, or to use the proceeds of a trust as a collateral against loans or guarantees.
The inclusion of a protector may be useful for the settlor, when he wishes to have a person of his trust, supervising the work of the trustees, thereby ensuring that the trustees have and are truly exercising their powers in accordance with his wishes and in the best interest of the trust. The protector, does not necessarily have to be a licensed individual, as his role is more one of vigilant watchdog rather than executor. However, it is possible for the protector to exercise a series of important roles, ranging from request of information, to vetoing powers, to prior consent in the execution of certain key areas. It is also possible, provided there is an express inclusion to that effect in the trust deed that the protector be also entrusted to the removal or substitution of a trust.
Types of Trusts
In order of a trust to subsist, there must always be, irrespective of its form and aim, the divesting of property from the settlor to the trustee. This transfer is therefore the cornerstone element, and any legal challenges on the trust, will invariably point towards the effective transfer of such ownership. Once undertaken, the asset is ring-fenced and effectively separate from other property which is held in a personal capacity by the trustee.
Trusts can come into existence in various forms. They can be oral or even implied. However, in the case of most forms, there must be an underlying legal attestation by means of a written instrument, or else due to operation of law, or judicial decision. Some forms of trust, must on pain of nullity be in writing. This is particularly true in the case of unit trusts, as well as trusts created as collective investment vehicles. Some of the most prevalent forms of trust are the ones set forth below:
- Discretionary Trusts;
- Fixed Interest Trusts;
- Accumulation and Maintenance Trusts;
- Protection Trusts;
- Unit Trusts;
- Spendthrift Trusts;
- Charitable Trusts;
- Implied, Constructive or Resulting Trusts.
Which Asset may be Devolved in a Trust?
There are no literary no limitations to the assets which can be devolved inside a trust. These may range to immovable property, to monetary contributions, equity, personal property and indeed any form of asset which can be owned, insofar that it is identifiable with certainty. The trust may only be created insofar that the settlor divests an asset into the trust, howsoever nominal. The trustee may then add onto the initial endowment by means of subsequent contributions. Such subsequent contributions, would be recorded by separate amendment in the trust deed.
Taxation of Trusts
Having set the parameters and benchmarks, the next inevitable question is the taxation of trusts. What is the underlying advantage of setting up a Maltese trust. Before delving into the matter, it is important to identify the milestones, that once would expect during the duration of a trust (which barring any determinate life which may be directed by the settlor in the trust deed, will have a definite life of one hundred and twenty five years). The key aspects of a trust can therefore be identified as follows:
- Settlement of the property in a trust – the actual divesting of the ownership of the settlor into the trust itself;
- Daily management of the trust;
- Distribution of trust income (of whichever form to the Beneficiaries);
- Reversion of the assets held in a trust to the settlor;
- Assignment of the beneficial interest in a trust.
All of the aforesaid scenarios give rise to a taxable event, and a detailed analysis on each and every eventuality is necessary.
Divesting of Assets into the Trust
As discussed, the trust may only be established, insofar that the settlor divests an asset from his personal capacity to that of a trustee, who retains ownership properties, but with the underlying commitment to undertake such function in the name of a beneficiary. The assets which may be transferred, may be immovable of any designation, including immovable property or rights attributed to such immovable property, goodwill, Intellectual property rights etc;
The divesting of such assets to the trustee would create a taxable event, making the trust liable to tax. However, there are a number of exemptions to this role, which may be enlisted as follows:
- No transfer is deemed to take place where the settlor is also the sole beneficiary of the trust – the rationale is that the enjoyment of the actual asset is still vested in the same individual, albeit in a different form, and therefore should not be subject to a duplicate taxation;
- The transfer of the asset is undertaken by way of donation by the settlor to a number of exempt persons – such as spouses, descendants and ascendants in the direct line, or siblings of the settlor – the reason behind this exemption are manifest enough. The trust is used to devolve assets for the next of kin – in the same manner that a will would – thereby ensuring continuity and preservation of wealth to a closely-knit number of individuals, who are related to the settlor by marriage or blood ties;
- The trust deed makes an express provision whereby the beneficiaries have an irrevocable right to receive all the assets held on trust and the beneficiaries are the aforesaid persons described above, or philanthropic institutions. As a donation, the settlor would be exempt from any capital gains duty;
- Designated commercial transactions and commercial transactions governed by special provisions of law, such as the subscription to units in a collective investment scheme, or insurance policy, would also attract a blanket provision.
Day to Day Administration of Trusts
This aspect is relevant for trustees, and more precisely their tax residence. By way of default, of at least one of the trustees is resident in Malta, tax is payable in Malta on any income attributable to the trust, at a rate of 35%, chargeable to the trustee.
However, there is a possibility of look-through or transparency measures whereby any income arising from the trust would not be taxable at the trustee level, but at the level of the beneficiaries, insofar that the following conditions are met:
- All the beneficiaries are persons not ordinarily resident and/or domicilied in Malta;
- The income arises outside Malta; and
- Income in whichever form (interest / royalties / gains or profits) do not derive from any immovable property situated in Malta.
In this case, the see-through provisions shall be applicable, and the taxation shall be held at beneficiaries level. This may be of particular interest to beneficiaries which are resident in tax-friendly jurisdictions, or who are planning to establish their residence in any tax-friendly jurisdictions.
This see-through election is an irrevocable decision, which must be communicated to the commissioner of inland revenue, within 30 days from the establishment of the trust.
Distribution of Trust Income to the Beneficiaries
The taxation of this milestone is only relevant depending on whether the aforesaid election has been availed of. If the trust has already suffered taxation at the trustee level, then no further tax shall be level on any income remitted to the beneficiaries. On the other hand, income which is taxed at beneficiary level (tax transparency) are treated as income derived at the time the beneficiary is entitled to it, and aggregated and subject to any taxation, which may be dictated by the tax rules of his country of origin.
Reversion of Trust Property to Settlor
As a general precept, any income which is reverted from the trust to the settlor would be deemed to a taxable event, and this is compatible with the rule that the transfer of assets in a trust would be deemed to have created a separate patrimony. Therefore, it follows, that any reversion from a separate institute and from a separate patrimony to the originating settlor would create a taxable event. Nevertheless, it is possible to apply exemptions in a number of cases, when such reversion is occasioned.
Assignment of Beneficial Interest in a Trust
As a personal benefit, the beneficiary is able, to the extent of such benefit to assign it to a third party, in full or in part. As a transfer of an interest, the alienation thereof, would create a taxable event. By way of default, such transfer would result in a capital gains charge. However, where the gain or profits arises out of the transfer of an interest, which does not include taxable Trust property, such as securities, immovable property, intellectual property rights, business and business, then a blanket exemption is permissible.
A further exception to the rule is afforded in the case of temporary trust, undertaken by means of persons authorized by means of a valid licence under the Banking Act or Financial Institutions Act. In these cases, since the divestment of the trust asset was always of a temporary nature, the commissioner of inland revenue, may provide a tax exemption of the assignment of such interest to a subsequent beneficiary.
Duty on Documents
Another form of tax which is levied on the transmission of certain assets, such as immovable property and securities, is duty on documents. The settlement of these assets in a trust would therefore as a general rule be susceptible to duty on documents, with the exception of the following circumstances, which dovetail with the exceptions set forth in the actual settlement described earlier, which exceptions include:
- Transfer by a settlor of a trust whereby the settlor remains the sole beneficiary and where the settlor has an irrevocable vested right to receive the trust property;
- Transfers by a settlor created for the purpose of a designated commercial transaction approved by the commissioner – such as the redemption of units held in a trust used as a collective investment scheme.
Trusts Treated as Companies
The flexibility of a trust, is further enhanced by the possibility of a one time election whereby the trustee unequivocally and via a bespoke tax form, notifies the commission of inland revenue, of the wish for the company to be treated as a body corporate, ordinary resident and domiciled in Malta.
Such election, which is irrevocable, would effectively ensure that the trust would be taxable at the corporate income rate of 35%, however, upon a final distribution of dividends, the beneficiaries would be eligible to a series of tax refunds, the default of which is 6/7ths of the aforesaid 35% – thereby resulting in an effective tax leakage of just 5%. Trust are subject to a one time registration fee of EUR 466 and exempt from annual registration fees.
Uses of Trusts
Even if the trustee were to undertake this one time election and notify the commissioner of inland revenue of its intention to be treated as a company, this is restricted only to income tax purposes. For all effects and purposes, trusts are never conceived as active trading vehicles, but as wealth management and asset protection tools.
Naturally, a trustee is empowered to undertake all ancillary measures to protect the assets of a trust, as well as to undertake the management therefore, which includes entering into commercial agreements, intended at protecting and accruing the interests in the trust. However, the intention cannot be speculative but aimed at preserving and increasing the assets held in trust. Therefore, it is perfectly possible for the trust to enter in a lease agreement of a property held in trust, whereby the proceeds of such rent, would be transferred as an interest or an annuity to the beneficiaries.
Confidentiality is one of the cornerstone of trusts, and generally deemed to be of primary concern to the settlor. In order to protect the confidentiality of the trust instrument, the legislation allows for a series of safeguards;
- Provided the trust does not elect to be treated as a company, and the conditions for see-through are met, there is no obligation to disclose the trust to any third party. It effectively remains a document held under the custody of the trustee, and any such persons so authorised;
- Where any legal proceedings concerning a trust are instituted, court hearings are undertaken behind closed doors, and then again only the parties with an interest to the proceedings, such as the trustees and the beneficiaries may be in attendance.
Termination of a Trust
A trust has a limited duration which may be established by the settlor himself, or be subject to a resolutive condition which may bring the termination of the trust. In any case, the currency of a trust, is limited to one hundred and twenty five years from the date of the establishment thereof.
Nevertheless, it is possible, unless the trust deed provides otherwise, that the beneficiaries may, if they are unanimous in their decision, and under no incapacity to give their consent, file a court application requesting, the dissolution of the trust. Likewise, the Court may, upon a request by all the beneficiaries, rule that the dissolution of the trust is rendered necessary, as it is not possible to achieve the very parameters for which the trust was established.