The applicability of the OECD model convention to trusts : a Maltese perspective

Abstract

Trusts are peculiar to common law systems and are generally not found in civil law countries. However, Malta, as a civil law country is an exception to this rule. Malta has fully incorporated the trust concept in 2004 by means of the Trusts and Trustees Act. The Maltese trust has proved to be a versatile tool in international tax planning especially in view of Malta’s extensive network of double tax treaties. Unfortunately, the OECD has not expressly dealt with the application of the Model Tax Convention to trusts. This lack of a clear rule can lead to several problems regarding the applicability of double tax treaties especially when civil law countries, such as Malta, are involved. To ensure the treaty entitlement of trusts, some countries have inserted in their tax treaties special provisions dealing with the problem. However, the fact that a treaty does not have express wording dealing with trusts, does not necessarily mean that it is not applicable to them. The primary aim of this dissertation is to assess whether a trust relationship involving a Malta trust is entitled to treaty benefits. The author starts off by delving into the general rules for treaty entitlement and its application to trusts. The author then moves on to discuss the conflicts of attribution of trust income. After exemplifying the issue, the author proposes the adoption of the OECD Partnership Report for solving the problem. In the author’s view, the principles that guided the Report are also applicable to trusts. Notwithstanding this, several OECD member countries have been reluctant to apply the principles of the OECD Partnership Report in the absence of an express treaty provision. Thus the author moves on to examine the recently introduced OECD Hybrids Report which proposed to insert a new treaty provision dealing with transparent entities. In the author’s view, even though the proposals brought forward by this Report are considered to be valuable, there still remains the need for a report that addresses the characteristics specific to trusts. Since trusts/trustees are usually entitled to passive income from the trust assets, the author proceeds to analyse if the trustees meet the beneficial ownership requirement in order to be protected by Articles 10, 11 and 12 of the OECD MC. Given the various interpretations of the term beneficial owner, the author is of the view that the control interpretation is the most appropriate in a trust context. However, the OECD still needs to provide a clear meaning of beneficial owner when applied to a trust arrangement. Since most of the issues highlighted throughout this dissertation are due to the way the current treaty framework is drafted, the author examines the applicability of a ‘New Approach’ to treaty entitlement and its relevance to trusts. The author then concludes by examining the applicability of Malta’s double tax treaties to trusts and by presenting an overall conclusion with some recommendations.