Malta Escrow Services
An important corollary of the introduction of trust legislation in Maltese law, is the provision of escrow services by companies licensed by the Malta Financial Services Authority (MFSA) in terms of the Trusts and Trustees Act, Chapter 331 of the Laws of Malta. Escrow services are particularly valuable in commercial transaction, between independent parties, wishing to transact commercial dealings, and who wish to avail themselves of an escrow agent, who is acting under a fiduciary capacity and in accordance with specific instructions. This transactions can include, but are not limited to all forms of commercial transactions, including IPRs, financing, equity purchases and sales transactions.
Our in-house company, FBS Trust Limited, which is licensed by the MFSA, may provide the following services:
acting as security trustee for the holding, administration and safe-keeping of documents and financial and non-financial assets;
acting as escrow agent in the context of various commercial transactions;
- holding of shares on a fiduciary basis
Over the past few years, the Institute of Trusts has gained considerable ground in Malta, particularly in the field of financial services and tax planning, leading to amendments in the Civil Code and to the enactment of the Trust and Trustees Act (“the Act”), to codify Trust precepts in a Civil Law framework. The end result is a comprehensive and all-encompassing regulation of Trusts, in Malta, seeking to regulate the substantive, procedural and also fiscal aspects.
In terms of the Act, a Trust is described as “existing where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, or for a charitable purpose which is not for the benefit of the trustee, or for both such benefit and purpose afore-said”.
The key element therefore for a Trust to subsist is the transfer of property from the settlor to the trustee. The transfer creates a distinct patrimony or distinct fund in relation to such property, which is ring-fenced from any claims which creditors may have against the trustee. This distinct fund does not form part of the matrimonial property nor can it be inherited by the heirs of the trustee.
Alternatively, the aforesaid transfer may be effected in furtherance to a declaration of the trustee that he/she now holds the assets on Trust for the beneficiaries. The nature of the obligation is that the trustee must hold and deal with the assets which are subject to the Trust for the benefit of the beneficiaries or to achieve a purpose allowed by law.
Flexibility is one of the hallmarks of the institute of Trusts, and effectively Trusts may come into existence in any manner whatsoever, unilaterally, orally, by will, by operation of law, judicial decision etc; However, unit Trusts, must be created by an instrument in writing, and may be used as collective investment vehicles for Professional Investor Funds.
Types of Trusts
Drawing heavily on Common Law precepts, the following are the types of Trusts which may be established under the Act:
- Discretionary Trusts;
- Fixed Interest Trusts;
- Accumulation and Maintenance Trusts;
- Protection Trusts;
- Unit Trusts;
- Spendthrift Trusts;
- Charitable Trusts;
- Implied, Constructive or Resulting Trusts.
Key Elements of a Trust
Assets of a Trust
The subject-matter of the Trust can be constituted of land, money, shares, personal property or any other thing capable of being owned, and identifiable with reasonable certainty.
The Settlor is any “person who makes the trust and includes a person who provides trust property or makes a disposition on trust or to a trust”. The settlor is the person who initiates the process leading to the creation of a Trust and establishes the terms of the Trust. The settlor may create a Trust either during his lifetime or by will.
The settlor may not be a resident of Malta, though he/she may be an individual ordinarily residing in Malta by virtue of a Permanent Residence Permit.
A Trust creates fiduciary obligations upon the trustee who assumes such role, and the trustee is bound to administer the property with due care, similar to the duties of any administrator for the benefit of the beneficiaries. The Trustee is therefore empowered to preserve the property of the Trust, ensure its upkeep, maximise income and minimise risk, and also to sell, substitute the property or to distribute it to the beneficiaries.
A trustee company must be licensed by the Malta Financial Services Authority “MFSA”, and must ensure that the following requisites are all cumulatively satisfied:
- Its objects should include acting as trustee and activities ancillary thereto, and should not include objects which are incompatible with the trustee services;
- Its activities are compatible and connected with trustee services;
- There must be at least three (3) directors all of whom are approved persons;
- It has established adequate systems for maintaining proper records of the identity and residence of beneficiaries, the dealings and the assets in connection with trusts and compliance with applicable law;
- Every person having a direct or an indirect interest must be an approved person;
- Its name is not inconsistent with its trustee activity; and
- When it is not constituted in Malta, it must be constituted or incorporated in an approved jurisdiction.
In the case of an individual trustee, the trustee must:
- Be a resident of Malta;
- Be an approved person; and
- Have established adequate systems for maintaining proper records of the identity and residence of beneficiaries, the dealings and assets of the Trust in compliance with the applicable law.
Being an ‘approved person’ both in the case of corporate trustees and of individual trustees , means having a good reputation (and clean police conduct) and possessing sufficient experience and qualifications in financial, fiduciary, accounting and legal services to carry out the duties of a trustee in an apt, competent and transparent manner.
Conversely, a private trustee must be an individual who is related to the settler or who has known the settler for a minimum of ten (10) years. A private trustee, shall not, except to the extent permissible by MFSA regulation, receive any remuneration for being a trustee and shall not hold him/herself out as a trustee or act habitually as a trustee in relation to more than five (5) settlors.
For the better execution of their fiduciary obligations, trustees may delegate (but not divest) the management of the Trust property and appoint investment managers, accountants, advocates, brokers and other professionals in relation to any of the affairs of the Trust or to hold any of the Trust property.
The Beneficiary is any person entitled to benefit under a Trust (the Beneficiary is named in the Trust deed and has a vested benefit) or in whose favour a discretion to distribute property held in Trust may be exercised. Such person is entitled to benefit in the event that discretion is exercised in his/her favour under a discretionary Trust.
The Trust entitles the beneficiary to personal rights and creditors, spouses, heirs or legatees of the beneficiary may exercise their rights only to the extent of the beneficiary’s entitlements under the Trust. No other rights may be exercised in relation to the trust property or the trustee. Nevertheless, the beneficial interest is a transferable right, and a beneficiary is still entitled to sell, charge, or otherwise transfer his benefit under the Trust to third parties.
The terms of the Trust may provide for the addition of a person as a beneficiary, the exclusion of a beneficiary from a benefit, or the imposition on a beneficiary of an obligation as a condition for benefit. Moreover it shall be lawful for a trustee to be granted the discretion as to which beneficiaries are to benefit, the quantity of any benefit, at what time and in what manner beneficiaries are to benefit and such other powers relating to the appointment, application and advancement of the Trust property.
The rights of the beneficiaries in relation to the Trust may vary from receiving income and/or annuities, receiving distributions of capital, use of assets, distribution of assets, being supported by loans or guarantees or any combination of these as may be permitted by the terms of the Trust.
The protector may be appointed by the settlor to supervise the work of the trustees and to ensure that the trustees exercise their powers in the manner set forth by the settler and in the best interest of the Trust. The protector therefore serves as an additional re-assurance that there is a third party overlooking the management of the Trust and how the trustees are exercising their powers. The protector may appoint additional trustees or remove a trustee, if so empowered by the Trust deed.
Other Features of Maltese Trusts
- Foreign trusts need not be registered in Malta even if they are administered from this jurisdiction;
- Low registration fees – €466 registration fee;
- Exemption from annual registration fees, death duty, stamp duty, or customs duty on property imported into Malta;
- Stringent confidentiality rules in respect of the identity of the beneficiaries of a Trust;
- Similarly to Maltese Foundations, the perpetuity period for Maltese Trusts is 100 years;
Taxation of Trusts
A Trust may attract income tax during determinate stages in the life of a Trust. It is therefore essential to determine the aforesaid milestones, which may include the following:
The Settlement of the Property in a Trust
The settlement of the property on Trust by the Settlor, is tantamount to a transfer of asset from the settlor to the trustee. However, this transfer gives rise to income tax considerations, only insofar that the transfer gives rise to capital gains on a “taxable asset” namely:
- Immovable property or the assignment or cessation of any right over such property;
- Trademarks and trade-names; and
- The Transfer of beneficial interest in a Trust.
If the asset settled is a ‘taxable Asset’, then the trust is liable to tax. However, the Maltese Income Tax Act allows for a number of tax exemptions in relation to capital gains which are deemed to arise upon a settlement. Consequently:
- no transfer is deemed to have taken place where the settlor is also the sole beneficiary of such Trust;
- the settlement of trust property is done by way of donation by the settlor of such trust to the beneficiaries that are “exempt” persons (spouses, descendants, ascendants in direct line and relative spouses, or in the absence of descendants, to the settlor’s brothers and sisters and their descendants); and
- the relevant Trust instrument specifically provides that the beneficiaries have an irrevocable vested right to receive all the property settled in the Trust as specified in the said written instrument; and
- the relevant Trust instrument specifically provides that the beneficiaries are EITHER:
- the spouse, descendants and ascendants in the direct line and their relative spouses, or in the absence of descendants to his brothers or sisters and their descendants of the beneficiary; OR
- approved philanthropic institutions; AND
- the beneficiaries include persons who are in existence at the time of the settlement of such property on Trust.
Moreover, when the relevant Trust instrument specifically provides that the beneficiaries that are ‘exempt’ and who are in existence at the time of the settlement, have an irrevocable right to receive all the property settled in the Trust, then such settlement of the trust property is deemed to be a donation to the above mentioned person.
Furthermore, no loss or gain shall be deemed to arise pursuant to the settlement of Trust property when the trustee is holding such property for the purpose of:-
- Designated Commercial Transactions;
- Approved Commercial Transactions
The income tax implications are dependant on the tax residency of the trustee. By way of default, if at least one of the trustees is a person resident in Malta, tax shall be payable in Malta on any income attributable to a Trust, at the flat rate of 35%, chargeable to the trustee.
Income attributable to a Trust consists of income arising outside Malta or income related to Interest, Royalties, gains or profits on a disposal of shares or securities in a company the assets of which do not wholly or principally consist of immovable property situated in Malta.
Capital Gains derived from the transfer of property settled in trust in the administration of such trust or in the distribution or reversion of such property shall form part of the income attributable to a Trust.
When all the trustees of the Trust are non-resident trustees, the trustees shall be liable to tax in Malta, limitedly on all income arising in Malta (broadly, income which derives from activities performed in Malta). In order to preserve the benefits offered to non-resident beneficiaries, the Income Tax Act sets forth a number of look-through, transparency rules.
Thereby, all income attributable to a Trust consisting of:
- Income arising outside Malta; or
- Income referring to Interest/ Royalties/ Gains or Profits on a disposal of shares or securities in a company, the assets of which do not wholly or principally consist of immovable property situated outside Malta.
- And when all the beneficiaries are not persons ordinarily resident and domiciled in Malta or persons whose income is totally exempt from tax
then such income shall not treated to be income attributable to a trust but as income derived directly by the beneficiaires.
Distribution of Trust Income to the Beneficiaries
With regard to distribution of trust income to beneficiaries, no further tax is charged on income attributable to a Trust which has already suffered tax in the hands of the trustee. The amounts allocated to beneficiaries are aggregated with their other income and tax charged accordingly. Such amounts are treated as income derived thereby at the time of vesting or when beneficiary becomes entitled to it, or the income is distributed.
Income distributed to beneficiaries is not considered as a separate source of income, and Double Taxation relief claims may be made under the ITA notwithstanding that the foreign tax may have been paid by the trustee.
Reversion of Trust Property to Settlor
The general rule is that a reversion of trust property should be treated as a transfer of trust property to third parties. Nevertheless, income tax exemptions may apply exemptions in case of reversion of trust property to the settlor.
The Transfer or Assignment of Beneficial Interest in a Trust
As, set forth above, the transfer of beneficial Interest in a Trust (a transfer of a full or partial beneficial interest in a trust and any alienation of any such full or partial interest as a result of a disclaimer of such interest or as a result of a person not remaining a beneficiary of such Trust) is amongst the taxable assets contemplated by the Maltese Income Tax Act.
Gains or profits shall arise on the date of the execution of a written instrument whereby there is a transfer of the beneficial interest in a Trust which includes taxable Trust property at the rate of 35%. No tax shall arise if the Trust property does not include taxable Trust property (i.e. securities, immovable property, patents, trademarks, trade-names, business, goodwill).
A trustee who is in possession of a valid license under the Banking Act or Financial Institutions Act, may apply to the Commissioner of Inland Revenue for a determination that the Property has been settled on Trust as a result or consequence of another transaction or set of transactions and that the duration of such Trust is of a temporary nature.
If such application is accepted by the Commissioner, no further tax will be due in Malta on the attributable income and property of the trust.
Duty on Documents
The transfer of some assets (immovable property and securities) is susceptible to duty on documents tax, irrespective of whether such transfers of assets are being settled on Trust or otherwise. Nevertheless, exemptions from duty on documents are permissible in any of the following scenarios:
- transfers by a settlor to the trustees of a Trust of which the settlor is the sole beneficiary and where the settlor has an irrevocable vested right to receive the Trust property;
- transfers by a settlor to the trustees of a Trust created for the purpose of a designated commercial transaction;
- transfers by a settlor to the trustees of a Trust created for the purpose of a commercial transaction not being a designated commercial transaction but which has been approved by the Commissioner.
Trusts treated as Companies
Article 27D of the Income Tax Act and the Trusts (Income Tax) Regulations (hereinafter referred to as “the Regulations”), which came into force with retroactive effect as of 1 January 2005, make it possible for resident trustees, by notification to the Commissioner of Inland Revenue, to exercise an option whereby the income attributable to a trust would be subject to the same treatment as any trust which is derived by a company ordinary resident and domiciled in Malta.
The Trust must be registered with the Maltese Commissioner of Inland Revenue within thirty days from the appointment of the first trustee. The form has to be signed by each of the trustees of such trust that are persons resident in Malta, and all resident trustees are bound in solidum by the submission of the said form to the Commissioner of Inland Revenue.
Effectively this means that whilst tax is payable on the profits of the Trust at a rate of 35%, a beneficial tax refund regime is applicable to the beneficiaries, resulting in an effective tax rate of just 5% or less.
Click here for a more thorough understanding of the TAX TREATMENT OF THE MALTESE COMPANY and understand how the same tax treatment may be applied to a Malta Trust.