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Guidance Note on the Tax Treatment of Trusts

Guidelines on the Malta tax treatment and administrative obligation in relation to trusts, including those administered by Retirement Scheme Administrators licensed by the Malta Financial Services Authority

This guidance applies to any trust that has at any time from 1 January 2012 onwards at least one trustee that is resident in Malta and constitutes a guideline for the purposes of Article 96(2) of the Income Tax Act. It is intended to provide guidance to practitioners, and to retirement fund administrators licensed by the Malta Financial Services Authority, on administrative matters related to the taxation of trusts, and on distributions from trusts, which are administered in or from Malta.

A - Registration of Trusts

Trustees have the obligation to register Trusts in accordance with the provisions of Regulation 2(1) of the Trusts (Income Tax) Regulations.

In those cases where trustees wish to register trusts that do not fall within the provisions of Regulation 2(1) of the Trusts (Income Tax) Regulations, the Commissioner for Revenue will allow such registrations for tax purposes if requested to do so by the trustees. In the event that the trustee opts for such registration, then this will be considered as being irrevocable until the trust is terminated or until such time where the trust has no trustees that are resident in Malta.

Trustees that have made an election in terms of Article 27D(1) of the Income Tax Act have the obligation to register the relevant trust in order to be able to meet the requirements of Regulation 5 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.

B - Registration of Beneficiaries of Trusts

Distributions made to beneficiaries may constitute income that is taxable in Malta. Where such is the case, the beneficiaries of such trusts are required to register for income tax purposes and to send an annual tax return.

C - Characterisation of Distributions made to Beneficiaries from a Retirement Fund or Scheme

The income of a retirement fund or scheme that is licensed, registered or otherwise authorised by the Malta Financial Services Authority under the provisions of the Special Funds (Regulation) Act is typically deemed to constitute trading income and falls under the provisions of Article 4(1)(a) of the Income Tax Act. This characterisation also applies to retirement funds or schemes that are constituted as trusts.

Pursuant to the provisions of Article 27D(1)(b) of the Income Tax Act, the option to make an election in terms of Article 27(D)(1)(c) of the Income Tax Act is not available where the income attributable to the trust is in the form of trading income. Therefore, where a retirement fund or scheme is constituted as a trust that is licensed, registered or otherwise authorised by the Malta Financial Services Authority under the provisions of the Special Funds (Regulation) Act and is also considered to have income that is of a trading nature, the trustee cannot elect in terms of Article 27D(1) of the Income Tax Act.

In line with the Guidelines on the Malta tax treatment of Retirement Benefits arising from Retirement Funds or Schemes issued on 25th July 2012, given that under the provisions of the Special Funds (Regulation) Act, the principal purpose of an applicable scheme is to provide retirement benefits, distributions of income to individuals that are beneficiaries of a trust to which paragraph 6 of these guidelines applies are to be characterised as pensions for the purposes of Article 4(1)(d) of the Income Tax Act.

D - Registration of Beneficiaries of Trusts that are licensed, registered or otherwise authorised by the Malta Financial Services Authority under the provisions of the Special Funds (Regulation) Act

Pursuant to the above, beneficiaries of trusts that receive distributions considered to be a pension arising in Malta are required to register for Maltese income tax purposes and to submit an annual tax return in terms of Article 10 of the Income Tax Management Act. These returns will also need to include details of any tax withheld by the trustees at source on the distribution under the provisions of Article 73 of the Income Tax Act or, if distributed free of withholding tax due to the provisions of a double tax treaty, then details of the treaty benefits being claimed would need to be provided, together with evidence of the tax residence of the recipient. Such evidence should ideally be in the form of a tax residence certificate issued by the tax authority of the jurisdiction in which the beneficiary is resident. Where it is not possible to procure such a certificate, such evidence may take the form of a declaration by the beneficiary to the trustee support by relevant documentation (e.g. utility bills excluding mobile telephones).

The trustees that are resident in Malta are obliged to inform the relevant beneficiaries of the requirement to register for tax purposes where this exists. Beneficiaries may authorise in writing the trustee to register them and complete any required income tax returns on their behalf.

25th July, 2012

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