A trust is an obligation which binds a person or persons (called the trustee) to deal with property of which the trustee is deemed to be the legal owner (called the trust property) for the benefit of persons (called the beneficiaries ) or for a charitable purpose in accordance with the terms of the trust. The setting up of trusts in Malta is regulated by the Trusts and Trustees Act.

The settlement of an asset on trust falls under the very wide definition of a taxable transfer and therefore subject to capital gains under the Income Tax Act¸ even if the transfer is made for no consideration. The Income Tax Act provides that gains and profits relating to settlement of property in trust means the difference in the market value of the property at the time of the settlement and the cost of acquisition of the property. The Act however does provide an exhaustive list of transfers that are subject to capital gains¸ where any transfers that fall outside the list are not subject to capital gains on settlement.

The law provides and exhaustive list of taxable transfers for capital gains purposes. Broadly speaking¸ these are the transfer of immovable property; the transfer of securities¸ business¸ goodwill¸ copyright¸ patents¸ trademarks and trade names¸ and the transfer of a beneficial interest in a trust (this is subject to certain particular exceptions¸ however it is not the purpose of this article to delve into the specific details of such exceptions). Therefore transfers that do not fall within these limits are not taxable transfers for capital gains.

It could be that the settlement of property on trust¸ that although is provided for in the exhaustive list mentioned above¸ would be exempt from capital gains – either because the law provides that no transfer has in fact taken place or else because the law provides no gain or loss has been made on a particular transfer.

The law provides that no transfer has taken place when the three following conditions are satisfied:

• A trust is created by a written instrument
• There exists a sole settlor
• The sole settlor is also the sole beneficiary

The Income Tax Act also provides for an exemption from capital gains where:

• The settlor makes a direct donation of such trust to beneficiaries that are persons other than the settlor himself¸ and
• The relevant trust instrument specifically provides that the beneficiaries have an irrevocable vested right to receive all the property settled in 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.

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