Taxation of trusts in Malta : an anti-abuse perspective

Abstract

The Trusts and Trustees Act of 2004 has been a key instrument in the development of trusts in Malta. The Act is complemented by various provisions in the Income Tax Act, which specifically regulate the taxation of trusts. Against a background where trusts may be used as a tool to reduce, postpone or avoid tax liability, the Maltese legislator has had to face the challenge of creating a coherent tax regime, which at the same time would also encompass the necessary anti-avoidance rules. Trusts are the traditionally favoured tools of international tax planning. The more so if they are located in sound financial centres.1 This is mostly due to the unique characteristics found in a trust. Tax practitioners are facilitated in their work by the fact that there is a division in ownership; the trust property is kept as a separate patrimony to that of both the trustee and the settlor, making the division of ownership a very efficient tool to reduce tax liability. The legislator, in drafting the new law had to abide by two basic terms of reference, namely: 1. the extension of all fiscal benefits previously granted to nominees of non-residents to trustees of trusts in which non-residents have an interest; and 2. the retention of the existing exemptions to Maltese residents and ensuring that trusts are not used as a structure to minimise the incidence of taxation.2 This thesis has two main aims. The first aim is that of giving a deep analysis of the main provisions that deal with the taxation of trusts; the second, to establish whether the legislator has left any room for trusts to be used as a tool for tax avoidance in Malta. In this work an attempt shall be made to identify any grey areas which are found in relation to the taxation of trusts. Furthermore, the methods used in other countries to limit tax avoidance and tax evasion shall be briefly examined.