Trusts were introduced into the Maltese legal system by the "Trust Act, 1988", which legislation though substantially based on the Jersey Trust law, coded the basic recognised common law principles relating to the trusts.
This legislation has been recently amended by "The Recognition of Trusts Act" to enable individuals or companies including international financial institutions to set up unit trusts under foreign legal rules with which they are familiar, while managing the trusts from Malta with the consequent tax advantages.
The said change has been brought about by a two pronged approach:
i) The Income Tax Act was amended to introduce a special regime for collective investment organisations, whether set up as unit trusts or as variable capital companies in Malta, and
ii) The provisions in the Hague Convention on the law applicable to trusts and their recognition were endorsed as part of the Maltese domestic legislation by the "Recognition of Trusts Act".
2. Trusts And Foreign Trusts
2.1 The Proper Law
Under Maltese law, a trust shall be governed by the proper law of the trust. The proper law shall be that chosen by the settlor, and where no such law has been expressly chosen, the proper law is that law with which the trust is most closely connected. The law, in accordance with the Hague Convention, establishes the criteria to be followed in determining the choice of the proper law. The proper law shall regulate the validity as well as the interpretation, effects and administration of the trust.
* Refer to explanatory memorandum entitled "The Taxation of Collective Investment Schemes, Collective Investment Companies (Fund Managers).
2.2 Trusts and 'Foreign Trusts'
Consequently, we distinguish between two types of "trusts, namely:
i)'THE TRUST': Where the proper law of the trust is the law of Malta. In this case the validity of the trust, its construction, its effect and its administration shall be governed by the Trust Act;
ii)'THE FOREIGN TRUST': Where the proper law of the trust is not the law of Malta. In this case the trust will be governed by such foreign law as is chosen by the settlor, or, where no such law has been chosen, in accordance with the Recognition of Trusts Act (basically the Hague Convention).
3. The Trust Act, 1988
The Trust Act regulates the validity, construction, effects and administration of trusts where the proper law is the law of Malta.
3.1 Meaning
A trust is when a person, called a trustee, holds or has vested in him property under the obligation to deal with that property for the benefit of a person, called the beneficiary, or for a purpose which is not for the benefit of the trustee.
The person who provides the trust property, the settlor, divests himself of the legal ownership of that property but may be a beneficiary. The trustee is bound to use the property in the manner and for the purposes laid down in the trust instrument and in accordance with the law.
3.2 Requisites for Qualification
A trust may qualify to be a trust if:
- the settlor is not resident in Malta;
- the trust property does not include immovable property situated in Malta;
- the beneficiaries are not resident in Malta, except in the case of a charitable trust;
- a nominee company is appointed as one of the trustees.
An individual holding a permanent resident permit granted under the Immigration Act, 1970 is considered to be a "non resident" for these purposes.
The fee payable to the Malta Financial Services Centre for the creation of a trust is Lm200.
3.3 Form
A trust can be created by a will or by a written instrument.
A trust can, also be created by, a unilateral declaration made in writing by an authorized nominee company which declares to be the trustee of a trust and states:
- the name of the trust;
- the terms of the trust;
- the names or information enabling the identification of the beneficiaries.
This declaration is called a "Unilateral Declaration of Trust" and has the same effect as a written instrument.
A Unilateral Declaration of Trust need not contain the name of the settlor, but in this case, the "nominee company" must confirm that on the date of the declaration the settlor was not resident in Malta.
3.4 Duration
Except in the case of a Charitable Trust, a trust may not continue for more than 99 years.
3.5 Beneficiaries
A settlor of a trust may also be a beneficiary under the trust. The beneficiaries must be identified or identifiable. Furthermore, the terms of a trust may:
- provide for the addition of beneficiaries;
- exclude a beneficiary from benefit;
- impose an obligation on the beneficiary as a condition for benefit;
- authorize the beneficiary to sell, charge, transfer or otherwise deal with his interest in any manner provided this is done by a written instrument.
3.6 Protective Trust
It is possible to constitute a trust where the terms of the trust make the interest of a beneficiary:
(a) liable to termination;
(b) subject to restriction on alienation or dealing;
(c) subject to diminution or termination in the event of the beneficiary becoming bankrupt, or insolvent, or any of his property becoming liable to seizure for the benefit of his creditors.
3.7 Trustees
A trust shall at all times have an authorized nominee company as a trustee or as one of the Trustees and any decision or discretion taken, done or exercised by the trustees without the agreement of the said nominee company acting as a trustee shall be invalid.
The trustee shall, in relation to the trust property, have all powers of a natural person having the absolute title to such property. However, he shall exercise his powers in the interest of the beneficiaries and in accordance with the terms of the trust. The trustee is obliged to act with the prudence, diligence, and attention of a bonus paterfamilia and observe the utmost good faith.
Trustees shall keep trust property distinct and separate from their own property as well as from any other property held by them under any other trust or title, and separately identifiable therefrom.
Furthermore, trustees shall keep accurate accounts and records of their trusteeship and shall, upon a request by any beneficiary, provide a copy of such accounts within a reasonable time.
A trustee shall be personally liable for any breach of trust and nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from his own fraud, wilful misconduct or gross negligence however, he shall not be liable for any breach of trust committed by a co-trustee unless he was or should have been aware of such breach or of the trustee's intention to commit a breach and he conceals such breach or fails to take proper steps to protect or restore the trust property or to prevent the breach.
3.8 Dealings with Third Party
Where in any transaction or matter affecting a trust a trustee informs a third party that he is acting as trustee, a claim by such third party in relation thereto shall extend only to the trust property.
Where on the other hand the trustee fails to inform the third party that he is acting as trustee and that party is otherwise unaware of this, the trustee shall be personally liable to such third party. However, the trustee shall have a right of recourse against the trust property by way of indemnity of such liability, unless the trustee acted in bad faith.
3.9 The Protector
A trust may provide for the office of Protector of the Trust, and unless the trust provides otherwise, the Protector shall have the following powers:
- to appoint a new or additional trustee;
- to remove a trustee;
- to require the trustee to obtain the protector's discretion.
In the exercise of his office, the Protector shall not be deemed to be a trustee.
3.10 Exception To Rules of Inheritance Or Succession
In the case where a person not domiciled in Malta transfers or disposes of movable property to a trust during his lifetime, the Maltese Court will recognize the trust notwithstanding any rule relating to inheritance or succession over movable property (including forced heirship, legitim or similar rights) existing in the law of his domicile or of any other system of foreign law applicable under the Maltese conflicts law. This however does not waive the applicability of the Maltese mandatary provisions. In any case, if the recognition of the trust is prevented because of the application of Maltese conflict rules or mandatory provisions the Maltese courts shall try to give effect to the objects of the trusts by other means.
4. The Recognition of Trusts Act
The Recognition of Trusts Act regulates those trusts where the proper law is a foreign law.
4.1 Introduction
The Act provides for giving force of law to those provisions in the Hague Convention, 1984 which relate to the law applicable to trusts and to their recognition. In particular Articles 1 to 12, 14 15, 16 (the first paragraph only), 17, 18 and 22 (first paragraph only) of the said convention were grafted into Maltese domestic legislation.
4.2 Recognition of Foreign Trusts
Maltese law will recognize a trust which is created under and is governed by a law which is not the law of Malta, provided that such trust adheres to the basic recognized principles of trust law as are enshrined in the Hague Convention. These basic principles of trust law are the same as those endorsed in the Trust Act as part and parcel of the Maltese law on trust.
A trust which is governed by a foreign law is called a "foreign trust".
A foreign trust which qualifies for registration as a trust in accordance with the Trust Act (as outlined in 3.2 above ) may be registered with the Malta Financial Services Centre.
Maltese Law will recognise a foreign trust as a Juridical entity according to its proper law even if this is NOT registered in the Malta Financial Services Centre. However, in order to qualify for all the fiscal and other incentives and exemptions granted to "trusts" it must be registered with the Malta Financial Services Centre.
4.3 Exceptions to Application of the Proper Law
Notwithstanding the generality of the application of the proper law rule, this is always subject to the following exceptions:
i) In matters relating to:
(a) the protection of minors and incapable parties;
(b) the personal and proprietary effects of marriage;
(c) succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives (except as provided below);
(d) the transfer of title to property and security interests in property;
(e) the protection of creditors in matters of insolvency;
(f) the protection, in other respects, of third parties acting in good faith, where the Maltese conflict rules require the application of the laws of Malta or of a foreign state, and such laws are mandatory (i.e. laws that cannot be derogated by voluntary act), the relevant legislations shall be applied to the exclusion of the proper law.
However, in the case where a person not domiciled in Malta transfers or disposes of movable property to a trust during his lifetime, the Maltese Court will recognize the trust notwithstanding any rule relating to inheritance or succession over movable property (including forced heirship, legitim or similar rights) existing in law of his domicile of any other system of foreign law applicable under the Maltese conflicts law. This however does not waive the applicability of the Maltese mandatory rules.
In any case, if the recognition of a trust is prevented because of this general exception, the Maltese courts shall try to give effect to the objects of the trust by other means:
(ii) the "overriding statutes" in the Maltese legislation, i.e. those Maltese laws which apply to international situation regardless of Maltese conflict rules, e.g. Exchange Control Law;
(iii) Matters of public policy.
Note: When applying conflict rules, the principle of 'RENVOI' is not applied.
5. Registration of the Trusts
A trust or foreign trust is registered with the Malta Financial Services Centre by the filing with the Centre of:
(a) certified copy of the trust instrument;
(b) a declaration by the nominee company acting as trustee that the trust satisfies all the conditions for registration;
(c) a fee of LM200 is payable to the Centre for the registration of the trust.
Any subsequent changes in the trust instrument must be registered with the Centre, and these shall not have any effect until they are so registered.
6 Tax Considerations
6.1 Tax Incentives
All trusts registered with the Malta Financial Services Centre (whether trusts or foreign trusts) shall enjoy the following fiscal benefits:
- The income tax chargeable on the income of the trust and on any income received by the beneficiaries is a fixed amount of Lm200 (approx. US$ 600) per annum which is payable by the trust.
- A trust need not file any tax returns. All that needs to be filed is an annual declaration by the nominee company acting as trustee confirming that the statutory conditions applicable to offshore trusts are satisfied.
- The trust property and the interests of the beneficiaries are exempt from death and donation duty.
- No stamp duty or other taxes are payable in respect of any documents concerning the trust.
- The trust property may be imported into Malta free of custom duty.
- Any transaction relating to the trust or to the trust property is not subject to exchange control unless carried out with a resident in Malta.
6.2 Tax Treaties
A trust can take advantage of the vast network of tax treaties to which Malta is a party.
The countries with which Malta has a tax Treaty are:
Australia France Pakistan Austria Germany Sweden Belgium Hungary Switzerland Bulgaria Italy United Kingdom Canada Libya United States of Cyprus Netherlands America Finland Norway
In addition treaties have been initialled or signed with the following countries:
China Kuwait Poland
(operative in 1996) (initialled) (operative 1996)
Czech Republic Luxembourg Republic of Korea
(initialled) (signed) (initialled)
India Malaysia Slovak Republic
(operative 1997) (initialled) (initialled)
Tunisia (initialled)
7. Nominee Company
A nominee company is a private company registered in Malta solely for the purpose of providing nominee services to offshore companies and trusts and is duly authorised by the Malta Financial Services Centre to give such services.
8. Confidentiality Relating To Trusts
All documents and information relating to trusts are considered confidential and secret and may not be disclosed. Furthermore, strict rules of confidentiality protect the discretion, deliberation and performance of the Trustee in the exercise of his duties. Likewise no person may disclose any documentation or information relating to or forming part of the accounts of a trust except when such disclosure is requested by a beneficiary under the trust.
These rules of confidentiality can only be waived by the terms of the trust itself, by a court order given for special reasons or as may be necessary for the purposes of the trust itself.
Furthermore, the Professional Secrecy Act, 1994 sets out strict rules of confidentiality which must be adhered to by all professionals, authorities, employees and individuals who receive privileged information in the course of their duties. This responsibility is sanctioned by heavy fines and imprisonment.
9. Guarantee of Exemptions
The registration of a trust or of a foreign trust shall constitute a contract between the Government of Malta and the trust guaranteeing the rights and exemptions and other privileges due, subject only to the due observances of the provisions of the law, for a period of ten years from the date of registration of the trust. This guarantee applies also against retrospective action whetherby legislation or otherwise.
10. Money Laundering Activities
Under Maltese Law, it a very serious offence to knowingly take part, whether as principal or accomplice or attempt to take part, in any activity of money laundering. A conviction of such an offence will have the following consequences:
- Shedding the veil of confidentiality;
- Punishable by very harsh fines and/or imprisonment;
- Possible confiscation of the property derived from the money laundering activity.
Money laundering can be generally defined as efforts to put into circulation, funds obtained from any criminal activity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
