Contributed By Fenech & Fenech Advocates
The Income Tax Act (ITA) imposes income tax and capital gains on a limited number of chargeable assets, with respect to individuals, companies, trusts, foundations and partnerships.
Malta does not currently have any wealth tax, gift tax or inheritance tax in force, but the Duty on Documents and Transfers Act (DDTA) levies transfer duty (stamp duty) on the transfer of a limited number of assets, both during one’s lifetime and upon death.
Individuals may become tax resident in Malta in one of two ways:
The ITA applies the British concepts of "residence" and "domicile", as well as that of "ordinary residence" (Malta’s tax laws date back to when it was a British colony). Malta also operates a similar remittance-based system of taxation for individuals (and other persons alike). Accordingly, individuals who are resident but not domiciled in Malta (so-called "res non-doms") for tax purposes are subject to tax in Malta on:
These principles, and supplementary interpretative guidance on a number of practical issues that apply to individuals who are resident in Malta and benefit from the remittance basis of taxation, are now set out in a Revenue Guideline entitled "The Remittance Basis of Taxation for Individuals under the Income Tax Act" (the Guideline), supplemented by a Guideline entitled “Tax Residence” and, more recently, one entitled “Foreign Workers”, timed to coincide with Malta’s offering of a visa or residence permit to digital nomads interested in spending time there. The Guideline provides guidance on several key issues, such as the principle that an individual who moves to Malta to establish their residence there becomes tax resident there as of the date of their arrival, regardless of the duration of their stay in Malta in any particular year, and on issues surrounding remittances used to cover "ordinary expenses", and so on. Individuals who are "res non-dom" (ie, not beneficiaries under any one of the tax programmes discussed below) are now subject to a minimum annual tax charge of EUR5,000, assuming they have received at least EUR35,000 of foreign-sourced income in the tax year concerned.
Malta operates a self-assessment system of taxation. Individuals who are tax residents in Malta are taxed at progressive rates of tax, with the maximum tax band reaching 35%. Individuals may opt to apply "single", "married" or "parent" tax rates, the latter two where applicable and subject to statutory conditions.
The tax year for individuals is the calendar year, and individuals are obliged to submit a tax return, where applicable, by 30 June of the following year. Tax payable on certain forms of income, such as employment income, is deducted at source. Where tax on a particular source of income is not deducted at source, the taxpayer shall become subject to the payment of provisional tax thereon (payable in three instalments throughout the tax year on account of the estimated current tax year liability).
Malta has several attractive tax programmes in place, open to both EU/EEA/Swiss and non-EU/EEA/Swiss nationals, with the most commonly utilised programmes being the Residence Programme (TRP) and the Global Residence Programme (GRP). A key benefit of both programmes is a flat 15% rate of tax on any foreign-sourced income remitted to Malta, subject to a minimum annual tax payment of EUR15,000. In light of the fact that the funds remitted to Malta to cover ordinary expenses are now deemed to be income in nature, as per the Guideline, the tax programmes may also be attractive to individuals who may not necessarily remit large amounts of foreign-sourced income to Malta, opting to remit capital or capital gains to Malta instead, the amounts of which would thus be taxed in Malta at this reduced rate. Beneficiaries under the GRP are also issued with a residence card, which also acts as a Schengen visa.
A Maltese company, as defined, is deemed to be resident and domiciled in Malta by reason of its incorporation in terms of Maltese law and, accordingly, is taxable in Malta on a worldwide basis, subject to any applicable double tax treaties. A foreign company that is effectively managed and controlled in Malta is tax resident in Malta and, accordingly, is taxable on a remittance basis. For income tax purposes, the term "company" includes other entities, such as partnerships and foundations, either by operation of the law or upon registration by the entity concerned to be taxed as such.
The standard corporate tax rate applied to taxable income (ie, income minus a generous range of tax deductions, including the recently introduced notional interest deduction that intends to provide for equivalent tax treatment of debt and equity financing by allowing an additional deduction for the amount of return on equity financing – retained earnings, etc) is 35%. When a company distributes dividends out of profits on which it has paid tax at 35%, no further tax is due from the shareholders, and a credit for the tax paid by the distributing company is available to the shareholders against their tax liability in terms of the full imputation system of taxation applicable to companies. Subject to statutory conditions, a dividend payment may trigger a right in the shareholder’s hands to a tax-exempt refund of part or all of the Maltese tax paid by the company on the distributed profits. The standard tax refund is 6/7.
The ITA also includes an attractive participation exemption, covering holdings of as little as 5% of equity, subject to various other conditions. The exemption applies, inter alia, to any gains or profits that a resident corporate taxpayer may derive from a holding (covering shareholdings, partnership interests, interests in investment funds, etc) that qualifies as a "participating holding", subject as always to statutory conditions.
More recently, Malta has introduced tax grouping rules applying to companies, as defined, and allowing a group to be treated as a "fiscal unit" for income tax purposes. Where a group exercises this option, the parent company (which may be non-resident) shall become the "principal taxpayer", with the underlying subsidiaries being treated as "transparent subsidiaries". Among other things, the Rules regulate the manner in which the group’s chargeable income is computed. Intra-group transactions are generally to be ignored; the same goes for dividends, the payment of tax by subsidiaries and any resulting right to a tax refund at the level of the parent, with the resulting net tax charge being payable.
Foundations are regulated in terms of the Civil Code, which includes a full set of rules covering all aspects of foundations, including the creation, administration and termination thereof. Four types of foundations are catered for:
By default, a foundation is taxed as a company (see above). However, a foundation may opt to be taxed as a trust for tax purposes (see below) – eg, where the assets are located outside of Malta and beneficiaries are not resident and domiciled in Malta; once exercised, this option is irrevocable. If so taxed, the principle of tax transparency shall apply.
Malta has a fully fledged trust law, largely modelled on Anglo-Saxon trust law. In addition to the succession planning benefits associated with trusts (and foundations alike), trusts (and foundations that opt to be treated as trusts for tax purposes) may be interesting from a tax perspective for individuals who are non-residents or, being tax resident in Malta, are not domiciled there.
From a tax perspective:
Where a trust does not elect to be treated as a company for tax purposes, the principles of tax transparency may apply to the trust in specific cases, such as where:
Capital Gains Tax
Article 5 of the ITA brings to charge any gains realised upon the transfer of a very limited number of assets, including securities, Maltese real estate (unless subject to Property Transfer Tax), a business, intellectual property, and the beneficial interest in a trust. Assets such as cash, jewellery, artwork, cars and vessels are excluded, amongst others. As will be detailed below, these "personal" assets are also not subject to any form of capital or wealth tax, nor to any form of inheritance tax.
The ITA caters for several exemptions from capital gains tax. One such exemption relates to a transfer of shares in a Maltese company that is not a "property company", where the shareholder is not tax resident in Malta, and where the company is not owned or controlled directly or indirectly by individuals who are resident and domiciled in Malta. Other exemptions cover the sale of one’s residence, donations of chargeable assets to family members, and so forth.
The DDTA brings to charge transfers of marketable securities and partnership interests if the relevant document is executed in Malta or, if executed outside Malta, when said document is made use of in Malta, subject to certain exceptions, and transfers of immovable property in Malta, amongst others.
The default rate of transfer duty on transfers of marketable securities and partnership interests is 2%, going up to 5% if the company/partnership owns or has real rights over immovable property in Malta.
However, a company/partnership may be entitled to a duty exemption covering acquisitions or disposals of marketable securities issued by companies locally as well as acquisitions or disposals by said company/partnership of marketable securities.
Transfers of immovable property in Malta are subject to duty at the rate of 5%, applying to transfers inter vivos and causa mortis alike. Having said that, the DDTA caters for reduced rates of transfer duty and several exemptions, such as the first time buyers scheme, which is applicable to individuals purchasing their residential home for the first time in Malta, and exemption upon the transfer of one’s home to one’s heirs upon death, subject to statutory conditions.
Malta does not currently impose any taxes on property on the basis of ownership. In addition to transfer duty (as indicated above), income tax is charged in the form of a Property Transfer Tax under the ITA upon transfers (widely defined) of property or, in certain instances, with respect to any capital gains realised upon transfers of property inter vivos.
No wealth tax, gift tax, inheritance tax or similar taxes are currently in force in Malta.
The ITA imposes tax on capital gains on the transfer of several chargeable assets, including securities, business and real estate, including by way of donation, as well as a Property Tax on the transfer of real estate. There are a number of exceptions and exemptions, including on donations between family members and spouses, for example.
The DDTA does however levy transfer duty (stamp duty) on the transfer of a limited number of assets, both during one’s lifetime and on death.
The DDTA brings to charge transfers of marketable securities and partnership interests if the relevant document is executed in Malta or, if executed outside Malta, when said document is made use of in Malta, subject to certain exceptions, and transfers of immovable property or real rights thereon in Malta, amongst others.
The default rate of transfer duty on transfers of marketable securities and partnership interests is 2% or the value or the consideration, whichever is higher, going up to 5% if the company/partnership owns or has real rights over immovable property in Malta. Having said that, a foreign-owned Maltese company or partnership may (subject to the satisfaction of a number of conditions) qualify for a so-called duty exemption, which covers acquisitions or disposals of marketable securities issued by companies locally as well as acquisitions or disposals by said company/partnership of marketable securities, both during one’s lifetime and, in terms of current policy, also upon death.
Insofar as the transfer of real estate located in Malta or real rights thereon is concerned, the default rate is 5% of the value or the consideration, whichever is higher. There are several provisions in the law catering for a reduction in the quantum brought to charge or outright exemptions, mostly targeting transfers between family members, such as the transmission upon death of the residential property occupied by the deceased at the time of death to their children.
There are limited opportunities for income tax planning. A number of these opportunities arise around the transfer of assets that are subject to capital gains tax or Property Transfer Tax, and the transfer duty due from the owner of such, into companies, trusts or foundations during said owner’s lifetime, for the benefit of future generations.
Article 4A of the ITA caters for a so-called step-up in the value of capital assets, which is applicable to persons (individuals and entities alike) who become resident or domiciled in Malta, subject to said person having never been domiciled or resident in Malta at any point in time prior to the change in question. In such cases, said person shall have a right, at its option, to go for a step-up in the value of all assets to market value upon relocation to Malta.
There are no taxes levied on the owners of real estate in Malta. Tax is levied in the form of tax on capital gains or Property Transfer Tax on transfers of real estate, likewise transfer duty, subject to several exceptions and exemptions.
Maltese estate and transfer tax laws offer a significant level of stability, having been subject to relatively few changes over the last few decades; when made, any changes have typically benefitted the taxpayer. This has also been the case with the laws affecting the tax rules applicable to high net worth individuals, trusts, foundations and estates in general.
The recent COVID-19 pandemic has not changed the government’s approach in this regard. Whilst the government has thrown significant amounts at the economy to date, in terms of relief for struggling businesses, it has stated that it does not currently intend to raise taxes to cover this.
Malta has transposed the EU Directive on Administrative Cooperation in the field of Taxation (DAC) and all amendments thereto, including the Common Reporting Standard and the Tax Intermediaries Directive (DAC6), into domestic law.
The US Foreign Account Tax Compliance Act has also been transposed into Maltese law, with intermediaries being required to report financial account information to the US authorities.
Over the past few years, there has been an increase in families wishing to plan the succession of their family business. This led to the introduction of the Family Business Act, which introduced a regulatory framework for registered family businesses, as defined, catering inter alia for several fiscal incentives linked to facilitating a successful business transfer during the lifetime of the owners, and for support measures post-transfer.
Older generations often intend to plan for a transfer of wealth but are psychologically less prepared to do so than they think and the plan in question is rarely executed. This being said, it is quite common for older generations to donate shares in family businesses to their children during their lifetime (because such a donation may be subject to a capital gains tax exemption in the hands of the transferor), with the older generation retaining the right of usufruct over those shares for a period of time or, at times, for their lifetime. It is also common for older generations to retain a minority percentage shareholding with quasi full control over the business, through the introduction of weighted voting rights at board level or veto powers.
The rules of British private international law have traditionally been applied by Maltese courts when dealing with cross-border property and succession law matters. Therefore, Maltese courts have opted for the system of scission, whereby immovable property is regulated by the lex situs and movable property is regulated by the lex domicilii at the time of death.
These rules are now subject to Regulation 650/2012 on jurisdiction, applicable law, the recognition and enforcement of decisions, and the acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession (the Regulation), which applies to persons who died on or after 17 August 2015. The Regulation is binding throughout the European Union, with the exception of Denmark, the UK (when it was an EU Member State) and Ireland (which has opted out of its application). The participating remaining EU Member States will apply the rules of the Regulation even in cases involving citizens or residents of third countries (eg, Switzerland or the USA), particularly if they own assets such as immovable property and real estate within the EU. The Regulation achieves a degree of harmonisation of private international law rules, enabling individuals to organise their successions more efficiently and more rapidly within the area of freedom, security and justice.
Although only EU Member States and EU residents are technically bound by the Regulation, it is intended to apply to estates on a worldwide basis. The law applicable to the succession of the deceased as a whole shall be that of the deceased’s country of habitual residence at the time of death, unless the deceased has opted to apply the succession laws of their country of nationality. In more recent times, the availability of second passports for high net worth individuals may have an impact on this aspect of their lives, in terms of giving them more options in the choice of applicable succession laws.
The Civil Code provides for a form of forced heirship, whereby a portion of the deceased’s property is reserved by law in favour of the descendants and the surviving spouse of the deceased.
Accordingly, the descendants and/or the surviving spouse of the deceased are generally entitled to a credit of the value of the reserved portion against the deceased’s estate. Interest at the rate of 8% accrues to such credit from the date of the opening of succession if the reserved portion is claimed within two years from such date, or from the date of service of a judicial order if the claim is made after the expiration of said two-year period.
The actual amount reserved is regulated by law and depends on the existence of surviving descendants and/or a spouse, if any. In terms of the Civil Code, it is unlawful for the testator to encumber the reserved portion with any burden or condition and, therefore, the reserved portion is calculated on the whole estate after deducting the debts due from the estate and any funeral expenses incurred. To this end, the estate is deemed to include the property disposed of by the testator under a gratuitous title, even in contemplation of marriage, in favour of any person whomsoever, with the exception of such expenses as may have been incurred for the education of any of the children or other descendants.
Besides the grounds on which a person may become unworthy to inherit generally (as defined in the Civil Code), the persons entitled by law to a reserved portion may also be deprived of the reserved portion if the testator makes a specific declaration to this effect based on special grounds specified in the Civil Code. This declaration must be stated in a will of the testator.
In relation to the reserved portion, the law provides that testamentary dispositions exceeding the disposable portion shall be liable to abatement and limited to that portion at the time of the opening of the succession, provided that a demand for abatement is made within the time established by law. For the purposes of calculating the abatement, the property of the deceased shall be deemed to include all their property at the time of death, including property disposed of by donation (calculated at the value at the time of the donation).
It is legally possible to renounce one’s right to the reserved portion.
The Civil Code caters for the following three types of marriage contract, more commonly referred to as matrimonial regimes:
Community of Acquests
In terms of the Civil Code, the community of acquests shall apply by default to a marriage celebrated in Malta, in the absence of an agreement to the contrary. The spouses are free to choose a matrimonial regime other than the community of acquests to regulate their marriage, but this is the default regime if they fail to do so.
Furthermore, it is important to note that a marriage celebrated outside Malta by persons who subsequently establish themselves in Malta shall also result in the application of the community of acquests between the spouses. However, the spouses may take steps locally to opt for an alternative matrimonial regime to apply to their assets.
These rules are now subject to the application of Council Regulation (EU) 2016/1103 of 24 June 2016 implementing enhanced co-operation in the area of jurisdiction, applicable law and the recognition and enforcement of decisions in matters of matrimonial property regimes, which seeks to harmonise the applicable law with respect to matrimonial regimes across EU Member States.
The community of acquests generally covers all property acquired by each spouse after marriage, excluding paraphernal property; "paraphernal property" refers to property acquired by either spouse before the marriage, donations received, and property inherited by either spouse.
The community of acquests is jointly administered by both spouses. Having said that, the Civil Code also caters for extraordinary acts that require the consent of both spouses, such as acts of administration whereby an immovable property or real rights thereon are acquired, constituted or alienated, the borrowing or lending of money (excluding deposits in a bank account) and the settlement of community property on trust, including the variation and revocation of such property settled.
The community of acquests is jointly administered by both spouses. In terms of the Civil Code, either of the spouses may nullify the effect of an act carried out by their spouse with which they do not agree. A spouse who deems there to be maladministration of community property may bring about an action to bring the other spouse back into a normative routine. This is possible if there is agreement between the spouses. In the case of disagreement, the spouses have two options:
Separation of Estates
Under this system, each spouse retains their part of the estate, with full control and administration thereover. If a couple wishes to apply the separation of estates as their matrimonial regime, they must appear before a notary to enter into a marriage contract to this effect; such contract is to be registered in the Public Registry.
Community of Residue and Separate Administration
Under the community of residue system, the property that a spouse has and/or acquires prior to marriage remains their own, whereas the property acquired during marriage by each spouse will be held and administered by the spouse who made the acquisition as a sole owner. In practice, this system is rarely applied by couples.
Prenuptial, Antenuptial and Postnuptial Agreements
The Civil Code caters for prenuptial, antenuptial and postnuptial agreements, subject to such agreements following the formalities catered for by law.
With reference to prenuptial agreements specifically, spouses may enter into a prenuptial agreement with other stipulations as to which system of property (matrimonial regime) will prevail during the marriage. Certain clauses (primarily relating to inheritance) may be included in this agreement and are deemed to be valid on the basis that they are included in a prenuptial agreement; their inclusion in a contract other than a prenuptial agreement would be null.
A marriage, whether celebrated in Malta or abroad, shall be valid for all purposes in Malta if:
A decision of a foreign court on the status of a married person, or affecting such status, shall be recognised in Malta. The decision must have been handed down by a competent court of the country in which either of the parties to the proceedings is domiciled, or of which either of the parties is a citizen.
However, this is subject to EU Regulation 2016/1103 on implementing enhanced co-operation in the area of jurisdiction, applicable law and the recognition and enforcement of decisions in matters of matrimonial property regimes.
The donation of immovable property to one’s spouse, descendants in the direct line or ascendants in the direct line, or to one’s siblings or their descendants in the absence of ascendants and descendants in the direct line, is exempt from capital gains tax in the hands of the transferor in Malta. However, transfer duty is still payable on any such donation.
On a subsequent transfer of that property, the donee is deemed to have acquired the property on the date it was originally acquired by the donor.
If the transfer is made more than five years after the date of donation, the transferor may either:
These conditions apply solely where the property does not form part of a project, as defined.
If the transfer is made less than five years after the date of donation, the transfer is not subject to capital gains tax but the transferor is to pay Property Transfer Tax. Accordingly, the transferor shall pay a final withholding tax (again ranging from 5% to 10%) on the transfer value of the property so transferred.
Capital gains tax and transfer duty are both levied on a very limited number of assets (see 1.1 Tax Regimes). In addition, the ITA provides a number of generous exemptions from capital gains tax that act as incentives for asset owners to transfer their wealth to the younger generations tax free – one such exemption covers donations of all chargeable assets to one’s children and grandchildren, including donations of immovable property and securities.
Along similar lines, the DDTA provides for a number of exemptions and reduced rates of transfer duty for transfers of assets during one’s lifetime and upon death.
Since the exemptions and reduced rates of capital gains tax and transfer duty are already quite generous, this may make the need for complicated succession plans slightly redundant, unless for example an estate is comprised of significant illiquid assets, such as immovable property, the inheritance of which on the owner’s death will trigger a high transfer duty bill that the heirs would need to not only pay but also potentially finance. In such instances, succession planning that achieves a measure of tax deferral may be useful, if only from a cash flow point of view.
This is where trusts and foundations may come into play, keeping in mind that a foundation may also be set up with a number of cells, each of which constitutes a separate patrimony of assets and liabilities, and to which individual asset(s) may be allocated in order to be administered for one or more specific beneficiaries of the foundation to the exclusion of the others. The ITA caters for a number of exemptions from capital gains tax on the settlement of chargeable assets on trust, and likewise on the endowment of such upon a foundation, in either instance when such is set up for the benefit of, inter alia, the settlor/founder’s children and grandchildren.
There is no hard and fast rule regarding the manner in which digital assets are to be treated for succession purposes, as the matter is not currently regulated in Malta.
When considering digital assets such as email accounts or cloud accounts, the starting point should be the terms and conditions the deceased would have accepted with reference to the particular digital asset concerned. Each such set of terms and conditions is to be considered on a case-by-case basis, in order to take a view as to whether or not heirs have acquired a right to access that particular account. It is most often the case that accounts are non-transferable and, accordingly, the service provider would be expected to refuse to provide access to any such account to the account holder’s heirs.
The same principle applies to other digital assets, such as financial tokens and cryptocurrency, if there is no private key involved in the ownership thereof. If there is a private key, the heirs may only benefit if they have access to or hold that private key in practice. If financial tokens transferred upon death have the same characteristics as “marketable securities” as defined in the DDTA, transfer duty shall be levied on the transfer thereof to the deceased’s legatees or heirs inheriting such.
Maltese law caters for a wide range of both trusts and foundations. In the case of trusts, in addition to the typical discretionary trust, the law also caters for the settlement of spendthrift trusts, disability trusts and charitable trusts, as well as the concept of a private trust company that can go a long way to granting a number of settlors/a family office stronger controls over the family’s assets. Where foundations are concerned, one can set up the following:
Whilst the foundation is firmly rooted in civil law principles, being a separate legal person to the founder and the beneficiaries, the law has introduced some elements that are akin to the eco environment of the trust, with concepts such as the beneficiary statement that may take the place of a letter of wishes or the role of a protector, amongst others. This may make the Maltese private interest foundation in particular more attractive to a family that is drawn to the trust world but that would be more comfortable with a vehicle they can see, touch and be involved in, to the degree required.
As far as trusts are concerned, the private trust company is subject to a regulatory regime administered by the financial services authority, and provides a further option to families wishing to structure their wealth. A private trust company may be set up if:
The private trust company is interesting for individuals who wish to settle assets on a trust for the benefit of their family, yet retain a level of control over such through their family office or otherwise.
Malta has a fully fledged trust law, introduced in the late 1980s and largely modelled on Jersey trust law. Malta has also adopted the Hague Convention on the Law Applicable to Trusts and on their Recognition, with foreign trusts being recognised thereunder. The validity of a foreign trust and its construction and administration shall be governed by said foreign law and recognised in Malta in terms of the Hague Convention.
A trust falls within the scope of Maltese tax if one of the trustees is resident in Malta for tax purposes, and also when a trust has any income or capital gains arising in Malta. If a foreign trust has Maltese resident beneficiaries but no Malta resident trustees, and no income or capital gains chargeable to tax in Malta, that trust should fall outside the scope of Maltese tax.
However, a trust that falls within the scope of tax may be tax transparent in particular instances – for instance, if all trust assets are located outside of Malta and the trust beneficiaries are individuals who are resident or domiciled in Malta for tax purposes.
If a beneficiary is resident but not domiciled in Malta, where the principle of tax transparency is applicable, the remittance regime will apply; accordingly, the foreign-sourced income of the trust that is attributable to that particular beneficiary shall only be liable to tax in Malta if and to the extent said income is remitted to Malta.
The law caters for irrevocable trusts and for foundations where the right of the founder to terminate the foundation may be limited by the foundation deed.
Both entities provide opportunities to settlors and founders alike to maintain a level of control and/or involvement in the administration of the assets and, in the case of foundations, in the management of the foundation itself. This may be achieved in a number of ways:
The laws in question are drafted so as to give asset owners who are considering either type of arrangement a significant amount of flexibility in deciding the level of involvement and/or the extent of powers they wish to retain over the management of the arrangement.
When dealing with asset planning, there is no one vehicle that suits every family’s requirements, and the choice of vehicle typically depends on the asset owner’s needs and plans for the future, whether they wish to retain a measure of control over the manner in which the assets are administered, the extent to which they and/or the beneficiaries wish to be involved in the ongoing management thereof same, and the type of regime that best suits from a legal perspective.
As Malta is a civil law jurisdiction, the company has been the vehicle of choice for generations. Given the changing dynamic in family structures over the years, the use of trusts and foundations has increased, as they provide a level of flexibility in planning for future generations, particularly where the family dynamic is "non-traditional".
Family businesses – both large and small – have been and remain the key driver of Malta’s economy. In this context, the company has traditionally been the vehicle of choice. Families are now increasingly considering trusts and foundations as a means of facilitating the transfer of wealth to future generations and, perhaps more importantly at times, a means to ensure the proper management of long-established businesses for the benefit of all moving forward.
The Family Business Act was introduced fairly recently, and made a significant contribution on the local front to facilitating the transfer of family businesses to the younger generations in a tax-efficient manner, through various tax incentives, thereby increasing the chances of said businesses remaining viable for the future. In most cases, however, the key issue remains control, which the older generations are sometimes less than willing to relinquish.
A robust shareholders' agreement may go a long way towards regulating key concerns such as what happens in the case of the marriage of family members (which is crucial in Malta when considering that the default matrimonial regime is the community of acquests) or the manner in which a family member may exit the family business, including rules regulating transfers of shares in the business. Another step families are taking of late in terms of future-proofing their businesses is the inclusion of independent non-executive directors at board level; said directors may make a significant contribution in terms of offering expert advice on key areas of the business, improving corporate governance standards, and acting as mediators in situations of conflict.
In a transfer of shares in a Maltese company, the local capital gains tax rules distinguish between a transfer of a controlling interest and that of a smaller holding. A transfer of a controlling interest shall be deemed to have been made at the higher of the consideration and the market value of the shares. However, when dealing with the transfer of a non-controlling interest, the transfer value is determined depending on several factors, such as the date of acquisition of the shares in question.
The DDTA applies both in the case of transfers inter vivos and in the case of a transmission of shares on death, but makes no such distinction.
Disputes relating to succession matters are quite common in Malta and very much in line with similar trends in the rest of Western Europe. Most disputes relate to a spouse or child that has been excluded from the deceased’s will, or been left merely the reserved portion catered for by law, challenging said deceased’s will. Other cases refer to instances of alleged manipulation of elderly people by their spouse, child or carers, with the deceased having been driven to leave significant assets to such individuals or having had their assets depleted by them.
In more recent years, there have been allegations of trusts or foundations having been used by the deceased to hide assets from family members, or to provide for second families/partners of which the deceased's family had no knowledge.
The courts do not typically award damages to aggrieved parties in wealth disputes or disputes involving trusts, foundations or similar entities. The focus of the judgment in such cases is on ensuring that the party in question gets what is rightfully theirs – for instance, a child excluded from its parent’s inheritance is awarded assets equivalent to the reserved portion to which it is entitled by law.
The Trust and Trustees Act regulates both corporate and private trustees, as defined. Corporate trustees are typically regulated by the local financial services authority, and regularly act as trustees of trusts locally. The Act also caters for private trustees, providing that it is only an individual that may act as a private trustee, and then only if they are related to the settlor, by consanguinity or affinity in the direct line up to any degree or in the collateral line up to the fourth degree inclusively, or if they have known the settlor for at least ten years, and in either case provided the individual is not remunerated for their role as trustee (except as permitted by the financial services authority) and does not habitually hold themselves out to be a trustee.
On similar lines, in terms of the Civil Code, administrators of foundations may be both corporate (if operating locally, regulated by the local financial services authority) and natural persons.
In terms of standards, whilst the Civil Code specifically regulates the rights and obligations of fiduciaries generally, both sets of laws regulating trusts and foundations specifically stipulate the respective rights and obligations of trustees and administrators, setting high standards of behaviour for either type of fiduciary.
Both the local trusts law and the law regulating foundations include provisions to the effect that trustees and administrators, respectively, cannot negotiate their way out of liability for a breach of trust arising from their own fraud, wilful misconduct or gross negligence in the case of trustees, or arising from wilful misconduct, gross negligence or breach of duty in the case of administrators of foundations.
Maltese law does not set any particular investment approach that trustees or administrators are obliged to take in investing and administering trust and foundation assets, respectively. Both sets of laws require these fiduciaries to act in matters of investment like a bonus paterfamilias – ie, as a responsible head of a family would in investing that family’s wealth. In the absence of provisions to the contrary in the trust or foundation documentation concerned, it follows that the fiduciary is obliged to invest the assets of the trust or foundation prudently.
As indicated in 6.3 Fiduciary Regulation, Maltese law does not set any particular investment approach that trustees or administrators are obliged to take when investing and administering trust and foundation assets; both sets of laws require these fiduciaries to act in matters of investment like a bonus paterfamilias – ie, as a responsible head of a family would in investing that family’s wealth.
It would therefore be prudent to ensure diversification in terms of investment on principle. It is, however, permissible for a settlor or founder to allow the trustees/administrators to administer the trust or foundation funds without ensuring diversification if, for example, the key/sole significant asset of the trust or foundation is to be the family business.
Following up on the duty imposed on the fiduciaries to act as a bonus paterfamilias, it would be prudent for the fiduciary to source the required expertise, by engaging a qualified investment manager or adviser in the fulfilment of said duties.
In terms of the law, both trusts and private interest foundations may be used as commercial vehicles, although in the latter case certain restrictions apply. Having said that, neither is used very often, with the trust or foundation concerned typically setting up a special purpose vehicle (SPV) through which to undertake activity. The family business may be so held, with the settlor/founder and/or their children normally retaining positions at management level thereafter.
Domicile is a private international law principle based on the concept of a permanent home – ie, the place where a person has strong ties. An individual acquires a domicile of origin at birth, which is typically the domicile of one’s father at birth, but one may also acquire a domicile of choice during one’s life. An individual may only have one domicile at a given time, and cannot be without a domicile at any point in time.
EU/EEA/Swiss nationals may take up residence in Malta in the exercise of their EU Treaty rights, taking up residence there based on economic self-sufficiency, employment or study. Whilst EU/EEA/Swiss nationals may freely move to Malta at any time, they are obliged to apply for registration with the Expatriates Unit at Identity Malta Agency after three months of residence in Malta, through an application for a residence permit.
They may also apply to benefit from one of Malta’s tax programmes, such as the Residence Programme (modelled on much the same lines as the GRP). Like the GRP, beneficiaries of the Residence Programme benefit from a flat 15% rate applying to any foreign-sourced income remitted to Malta, subject to a minimum annual tax payment of EUR15,000.
Whilst also being entitled to relocate to Malta based on economic self-sufficiency, employment or study, non-EU/EEA/Swiss nationals (TCNs) will be required to satisfy more stringent conditions in doing so.
Where a TCN relocates to Malta on the basis of employment, their Single Permit Application submitted to the Expatriates Unit is typically subject to labour market considerations, whereby the employer is to provide justifications as to why they are employing a TCN rather than an EU/EEA/Swiss national. There are certain exceptions to said labour market considerations, with the most popular being the Key Employee Initiative Scheme, which exempts TCNs holding a managerial position and earning at least EUR30,000 per annum from labour market considerations; in addition, said employees’ applications are fast tracked from a processing time perspective.
On the other hand, a TCN wishing to relocate to Malta on the basis of economic self-sufficiency may only do so, in practice, once they benefit from one of the available tax or immigration programmes, such as the GRP or the Malta Permanent Residence Programme (MPRP).
Global Residence Programme
The GRP is a tax programme open to TCNs, and applies a flat 15% rate to any foreign-sourced income remitted to Malta, subject to a minimum annual tax payment of EUR15,000. The GRP is very popular with TCNs who wish to relocate to Malta and set up a home here, as the processing time is relatively short. Once the applicant becomes a beneficiary of the programme, they can move on to apply for a residence card allowing them to reside, settle and stay in Malta; this also doubles as a Schengen visa.
The TCN may opt to include their dependants, as defined under their GRP application, as they would be entitled to apply for a residence card.
Malta Permanent Residence Programme
On the other hand, the MPRP is an immigration programme, modelled on its predecessor, the Malta Residence and Visa Programme. The MPRP is more onerous than the GRP on several fronts, as the fees payable to the authorities, the quantum of the donation to be made to a voluntary organisation and the rental/purchase qualifying amounts involved therein are significantly higher than the GRP. It is, however, based on a different premise altogether, with taxation playing no part therein. Beneficiaries under the MPRP may apply for residence in Malta on the basis of economic self-sufficiency, with the added benefit that one may apply for a residence card issued for a five-year period (as opposed to for a one-year period when applied for by a beneficiary of the GRP), subject to ongoing compliance obligations.
Individuals may become tax resident in Malta in one of two ways:
Individuals may become a citizen of Malta by birth, registration or naturalisation.
Individuals born in Malta to a Maltese parent are automatically considered a citizen of Malta by birth.
Individuals married to and living with a citizen of Malta for at least five years may apply for Maltese citizenship, as can a widow or widower of a citizen of Malta. A direct descendant or second or subsequent generation descendant born abroad to a parent born in Malta, whose own parent was also born in Malta, may also apply for Maltese citizenship.
An individual may apply for citizenship by naturalisation if they have physically resided in Malta for an aggregate period of five years in the previous six-year period. In practice, however, it is understood that the authorities have not been as forthcoming as one might wish in this context, with residents having at times only managed to secure citizenship after significantly longer periods of residence.
If citizenship by naturalisation is not an option, an individual may consider following a path from residence to citizenship in terms of the Granting of Citizenship for Exceptional Services Regulations.
The Regulations form part of a wider reform of local laws to clearly cater for a regulatory framework leading from residence to citizenship. The Regulations require a basic period of residence (two routes are available: a 12-month residence period and a 36-month residence period). Applicants need to undergo an "eligibility test", focusing inter alia on due diligence reviews and checks on source of wealth and source of funds. Upon completion of the residence period and passing the eligibility test, an application for citizenship is to be lodged by the applicant.
Upon approval, the new citizens are required to rent or purchase a residential property in Malta for a minimum of five years, and to donate to philanthropic entities approved by the Commissioner of Voluntary Organisations.
The Trust and Trustees (Protected Disability Trusts) Regulations establish "protected disability trusts", which must adhere to the following conditions:
The ITA and DDTA both cater for certain exceptions and exemptions for income and capital gains derived by the trustees of a protected disability trust, subject to statutory conditions.
In terms of the Civil Code, the appointment of a tutor for minors is made by court order on the demand of any person. However, the appointment of a guardian over a person who has attained the age of majority does not need to be made before the courts.
An application to appoint a guardian is to be made to the Guardianship Board, and supported by evidence that the individual’s medical condition renders them not in a position to manage their personal affairs. On application, the reason for guardianship must be indicated. In the cases of a general guardianship, the particular case is re-assessed every six months to a year.
Around 18% of Malta’s population are aged 65 of over; this number has steadily increased over the last decade or so, much in line with the rest of Western Europe.
In the past few years, several fiscal incentives have been granted to incentivise individuals to plan for their future from a private pension perspective. The Personal Retirement Scheme Rules and the Voluntary Occupational Pension Scheme Rules contain said fiscal incentives in the form of several tax deductions and tax credits. There is admittedly more to be done locally in the context of pensions, both public and private, to prepare the population for the future from a financial perspective.
The Civil Code does not distinguish between children born in and out of wedlock, nor does it differentiate adopted children.
The Civil Code does provide that individuals who were not yet conceived at the time of the testator’s death are incapable of receiving by will. Accordingly, children born posthumously may not inherit.
Surrogate pregnancy arrangements are not recognised by Maltese law; accordingly, a surrogacy pregnancy contract may arguably be in breach of public policy rules locally. As a result, there is no clarity on how the local authorities may be expected to act if faced with a case involving a child born to a surrogate, locally or overseas. From a succession perspective, it appears that such a child would not have the succession rights that are granted to a child of the deceased under current law.
The Civil Unions Act was published in 2014 and introduced same-sex civil unions. Following the introduction of the Civil Unions Act, other laws, including the ITA, were amended to accord rights to same-sex partners in a civil union that are equivalent to the rights of spouses in a heterosexual marriage.
The Marriage Act and Other Laws (Amendment) of 2017, supplemented by the Conversion of Civil Unions into Marriage Regulations, 2017 (Legal Notice 382 of 2017), amended various laws so as to eventually grant same-sex partners the right to effectively convert their civil union into a marriage. As spouses for all purposes of the law, same-sex spouses now enjoy equality of treatment to heterosexual spouses across a range of laws, including taxation.
The ITA makes limited provision for tax-deductible donations to charities and organisations of a public and/or philanthropic character.
In addition to the particular arrangements to be found therein, the ITA provides for a general exemption from the payment of income with respect to the income (and, therefore, including chargeable capital gains) derived by any institution, trust, bequest or foundation having a public character and engaged in philanthropic work, should it be so declared for the purposes of said exemption by the relevant Minister. There is in fact a Legal Notice, updated from time to time, with a list of qualifying organisations.
Local charities typically take the form of a public benefit foundation. Such foundations must be registered with the Registrar for Voluntary Organisations in order to be entitled to receive donations from the public.