Tax on Trusts in Malta

| 10 Mar 2023

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Malta is a sought after trusts regime with solid legal base in relation to their set-up, management and also tax treatment.  Malta trusts are used both for personal as well as business needs. Being a full European Union Member State, Malta offers a regulated environment with flexible legislation and fully authorised reliable service providers. 

Although Malta is traditionally a civil law jurisdiction, it has the rare privilege of being one which has adopted trusts in its legislation and allows for the creation of domestic trusts and recognition of foreign law trusts. Trusts are very flexible and efficient vehicles for asset protection and management but are also equally adaptable to trade and commerce. 

The Introduction to Tax on Trusts in Malta

The creation of trusts in Malta is regulated by the Trusts and Trustees Act. The Act provides for the setup of trusts and for the authorisation and supervision of trustees. In this regard, the MFSA is the competent authority for the purposes of the Act. The Act incorporates within its provisions the Hague Convention on the Law Applicable to Trusts and on their Recognition which Malta has ratified.  

What is a Trust?

A trust is a fiduciary relationship which binds the trustees to deal with property over which they have control for the benefit of the beneficiaries, or for a charitable purpose in accordance with the terms of the trust.  A trust may come into existence either by an instrument in writing - including via a will - or by way of an oral declaration.  Where assets are held, acquired or received by a person for another on the basis of oral arrangements of a fiduciary nature, express or implied, these shall be presumed to be a mandate or a deposit rather than a trust, unless there is evidence of the intention to create an oral trust. A trust may continue until its 125th anniversary unless sooner terminated. This limit does not apply to a trust setup for a charitable purpose, to a unit trust or to a retirement scheme licensed in terms of the Retirement Pensions Act and set up as a trust. 

Malta Trust Taxation

From a Malta tax point of view, a trust is taxed in Malta if it is being managed by trustees who are located in Malta.  All income received by the trust is taxable in Malta, however the regime provides for specific treatment for various scenarios.  In fact, Malta adopts two transparency models in respect of trusts. The transparency models should operate when the trust has non-resident beneficiaries, and its trust assets are made up of non-Malta assets or shares in a Malta company.  The income received by the trust is not deemed attributable to the trust but is deemed to have been received directly by the beneficiaries. Such income and gains may be chargeable to Malta tax in the hands of the beneficiaries depending on their tax residency and domicile.  

When is a trust not subject to Malta tax?

Therefore, if all beneficiaries of the trust are not resident and not domiciled in Malta and the income of the trust does not arise in Malta, the receipt of the income by the trust or its subsequent distribution to its beneficiaries should not be subject to Malta tax. On the other hand, where all beneficiaries of a trust are resident but not domiciled in Malta and the income of the trust arises solely outside Malta, then such beneficiaries would be chargeable to Malta tax on foreign source income which is remitted to Malta. Therefore, any foreign income which remains outside Malta would not be taxable in Malta. In such scenario, foreign capital gains received by the trust should always be exempt from Malta tax even when remitted to Malta. Where beneficiaries receive or are deemed to receive income that is taxable in Malta, they are required to register for income tax purposes and to send an annual tax return. 

How much is Taxation on Trusts in Malta?

Alternatively, a licensed trustee may opt for a trust to be treated for tax purposes as a company ordinarily resident and domiciled in Malta, and thus taxed at the standard corporate income tax rate of 35%.  One is to note that such election is irrevocable and registration is to happen within 30 days of the trust’s setup or the appointment of a Maltese resident trustee. Distributable profits are allocated in the same manner applicable to companies and treated as a distribution of dividends to shareholders.  

If the trust is not able to avail itself of transparency under the provisions of the Income Tax Act, the trustee has the obligation to register the trusts for tax purposes in accordance with the provisions of Regulation 2(1) of the Trusts (Income Tax) Regulations.  Where a trust is registered for income tax purposes, the trustee is obliged to submit a return in accordance with Article 24A of the Income Tax Management Act and Regulation 6 of the Trusts (Income Tax) Regulations. 

The Settlement of Property on Trust

The settlement of property on trust that (i) constitutes a transfer outside the scope of capital gains tax under the Income Tax Act (meaning, for instance, transfers of luxury cars, pieces of art, pleasure boats) or (ii) of property located outside Malta by any person not ordinarily resident and domiciled in Malta for tax purposes is not taxed in Malta. Similarly, the transfer of all the property of a trust involving only a change in the trustee of a trust and where there is no change in the beneficiaries or in the beneficial interest is also not a taxable event in Malta. 

A trust normally consists of a passive activity and therefore no economic activity results from the trust, thereby falling outside of the scope of the Value Added Tax Act. Other laws and regulations may have an impact on the taxation of trusts and trustees.  Malta is also signatory to several Double Tax Treaties that may apply in the particular circumstances. 

Final Recommendations on Malta Trust Taxation

It is recommended therefore that a careful tax assessment is carried out throughout before the setup of a new Malta trust, before the resettlement of a Malta trust and during the trust’s operation to ensure that the correct course of action is selected.  


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