Trusts are considered to be transparent for tax purposes if the income of the trust is distributed to the beneficiaries. In such cases, tax is charged directly to the beneficiaries. As a consequence, where all the beneficiaries of the trust are not resident in Malta, and where all the income attributable to the trust does not arise in Malta, there are no tax implications which arise under Maltese law. Income attributable to a trust which is not distributed to the beneficiaries is taxed in the hands of the trustees at a rate of 35%.
Alternatively, it is also possible for a trustee of a trust, under Maltese Law, to irrevocably elect that the trust shall, for tax purposes, be treated as a company ordinarily resident and domiciled in Malta. This election is only permissible where the only income attributable to that trust are dividends, interest, royalties, rents, capital gains and/or income from investments. The income attributable to the trust will be taxable as the income which is received by a company which is normally resident and domiciled in Malta for tax purposes. Where the trustee elects to treat the trust as a company for tax purposes, the provisions of the Income Tax Act regulating companies would apply and any distributions to beneficiaries should, at least for local tax purposes, be treated as dividends. This would give the trust the possibility to make use of over 60 double taxation treaties that are currently in force and the possibility to enjoy the various tax benefits provided to shareholders.
In general, the tax implications of the income related to such trust are as follows:
- Is taxed at 35%
- Distributable profits are allocated in the same manner applicable to companies
- Distribution of the allocated profits is treated as distribution of dividends to shareholders who will then be eligible to receive the refunds of tax paid in Malta as if they were shareholder of a Maltese company. This may give rise to an effective tax rate of 5%.