Trusts and Foundations
Trusts were first introduced under Maltese Law by legislative enactment in 1989. This legislative enactment was subsequently amended throughout the years and today trusts are regulated by the Trusts and Trustee Act, Chapter 331 of the Laws of Malta (hereinafter the ‘Act’).
The Act allows for the creation of trusts having Maltese law as their proper law. Although it is also possible for trusts created in Malta to be regulated by a foreign law. By virtue of The Recognition of Trusts Act of 1994 Malta also became a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition thereby allowing it to recognize the existence and validity of trusts established in any of the jurisdictions of the member states of this Convention and also increasing the potential of the Maltese trust.
Trusts may be used for tax planning purposes both personal and otherwise. They also serve as flexible and versatile vehicles for use in commercial transactions as well as for holding and management of assets. Following the 2014 amendments to the Trusts and Trustee Act, it is now also possible for ‘family trusts’ to be set up in the form of companies the objects and activities of which would be limited to acting as trustees to specific settlors in respect of family estates and for the exclusive benefit of the members of the families in question.
For additional information on trusts including family trusts and how they can be used in particular scenarios, please feel free to contact us advising us of your circumstances and we will provide with a tailor made solution and advice on all the financial, tax and legal aspects applicable.
The taxation of Maltese foundations and therefore all matters relating to taxation upon settlement, distribution and reversion of property endowed to a foundation is then regulated by the Income Tax Act (Chapter 123 of the Laws of Malta) and more specifically by Legal Notice 312 of 2010 entitled “Foundations (Income Tax) Regulations, 2010” (hereinafter the ‘Regulations’).
The Regulations establish that as a general rule, foundations created in terms of the aforementioned Schedule or as recognized thereunder are to be treated in the same manner as companies ordinarily resident and domiciled in Malta for the purposes of the Maltese Income Tax Acts. As a result, Maltese laws applicable to the taxation of income and gains derived by Maltese resident companies apply equally to foundations created or recognized under the Second Schedule to the Civil Code. As a general rule, the profit earned by a foundation is taxed at the corporate tax rate of 35%. The beneficiaries of the foundation, upon receipt of a distribution of profit from the foundation would then be eligible to claim the refunds of tax envisaged under the Income Tax Management Act as if they were shareholders of a company.
However, the Regulations further give the option to foundations regulated by the aforementioned Schedule, acting through their administrators, to give notice in writing to the Commissioner of Inland Revenue irrevocably electing to be taxed in the same way as trusts pursuant to the Maltese Income Tax Acts. If such an election is made, the profits received by the foundation are still taxed at the corporate rate of 35%, however where the foundation’s income is all foreign sourced and all the beneficiaries are non-Maltese residents, the income of the foundation shall (for the purposes of the Maltese Income Tax) be deemed to have been received directly by the beneficiaries who will be directly liable to pay tax in Malta and no tax would be due at the level of the foundation. This mechanism is commonly referred to as Tax Transparency and is not available if no election is made.
It is possible to establish a foundation with segregated cells and in such a case; the Regulations specify that each cell of the foundation is deemed to be a separate foundation for income tax purposes.
Finally, in the specific case of public foundations registered in Malta which are engaged in philanthropic work, subject to the satisfaction of certain conditions, the income thereof may be exempt from Malta tax.
This paper is for information purposes only and should not be construed as legal advice.
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