Nationalist MP Mario de Marco yesterday urged the government to reconsider an amendment to the Income Tax Act forming part of the Trusts and Trustees Bill involving foreigners enjoying a permanent residence permit in Malta.

He explained that people who had a permanent residence permit and received interest from a bank account held by a trust could end up being charged tax at up to 35 per cent on that interest.

It was being suggested that the maximum tax rate which a permanent resident could be charged on this type of income should be capped at a rate decided by the Minister of Finance. Unless this capping was made, Malta risked losing a substantial number of trusts which were aimed at avoiding such circumstances. Indeed, one of the aims of this bill was to make trusts more attractive for foreigners.

Dr de Marco earlier welcomed the way how the concept of trusts, found mostly in British legal concepts, had been merged with local law, which was based on continental law.

He recalled how the concept of trusts was introduced gradually in Malta, starting with offshore legislation in terms of which settlors had to be non-residents of Malta and the trusts could not include immovable property or shares based in Malta. In 1994 Malta also enacted the Recognition of Trusts Act for the recognition of foreign law trusts.

The legislation which had existed to date included tax and duty exemptions, with the trusts only being charged a flat rate and not a tax on the basis of the activities of the trust.

Over the past 10 years, however, Malta had dismantled the offshore business laws and converted itself into an onshore financial services centre. That process was being continued with this bill.

One of the positive changes being brought about was that nominee companies could no longer be among the trustees. The use of nominee companies had drawn criticism because they were viewed as lacking transparency and were not covered by money laundering laws. In such a delicate sector it was important that everything was above board and seen to be as such. The new law would allow a two-year phasing out period for the nominee companies, a period he considered reasonable.

The new law would also rightly modernise the monitoring of trustees. Indeed, this law would be called the Trusts "and Trustees" Act, for this purpose.

The bill, Dr de Marco said, included several clauses which would serve to make Malta attractive for the transfer of trusts to Malta.

It encouraged the use of trusts in financial and trade sectors while ensuring there was no tax leakage.

A positive feature was that the provisions of this law could not be used by residents of Malta to circumvent the mandatory rules of the Civil Code. Thus, for example, the legitim remained fully protected.

The new law defined the mandatory laws which trusts governed by Maltese law could not avoid, such as those involving the protection of minors and people with special needs, the personal and proprietary effects of marriage, succession rights, the transfer of title to property and security interests in property, the protection of creditors in matters of insolvency and protection, in other respects, of third parties acting in good faith.

However, in order to make this law attractive to foreigners, trusts for foreign domiciled persons would not be subject to the mandatory rules in the Civil Code.

There could, however, be a problem when a trust which included property in Malta was governed under foreign law. One had to be careful that even though Maltese law recognised trusts formed under foreign law, the choice of such foreign law was not made to avoid the mandatory requirements of Maltese law on public policy, such as the legitim. Indeed, he understood that various amendments were aimed to ensure that when the settlor was domiciled here and the property was here, the mandatory rules would prevail even when trusts were governed by foreign law.

Particularly important was the provision which made a clear distinction between property held in trust by the trustee and the personal property of the trustee, a distinction which was crucial.

Just as important were the clauses on the fiduciary obligations of trustees, which obligations, Dr de Marco pointed out, also extended to other areas where there were fiduciary relationships, such as foundations.

Dr de Marco observed that Labour MP Jose' Herrera on Tuesday had argued that trustees, in certain cases, should not be corporate as the trustees would, in such cases, enjoy limited liability. He could understand Dr Herrera's concern, but the law never obliged a settlor to appoint a corporate trustee.

There could be a problem when the settlor appointed a reputable company as a trustee but then the shareholders of that company were changed and the new shareholders did not enjoy such a good reputation. Yet the settlor could, in the trust contract, establish the circumstances under which the trustee could be removed.

Concluding, Dr de Marco said he was confident that the new trusts legislation would enable Malta to remain an attractive financial services centre of repute.

Earlier in the debate, Labour MP Leo Brincat said Malta was at a crossroads - should it base itself more on services to the detriment of the manufacturing sector? Although the global trend was towards services, he felt it would be wrong for Malta not to give parallel importance to manufacturing even if services were the only economic sector, apart from real estate, that was recording growth.

It was of concern that Malta seemed to be increasingly dependant on financial services and real estate, with other sectors such as manufacturing and tourism not performing well.

There was no doubt that the financial sector had grown thanks to the work of the operators, but it was also greatly helped by the consensus of the political parties, which consensus was continuing with this bill. All this assured investors of continuity.

One needed to continue to be imaginative, creative and pro-active in the financial services sector.

Trusts would be very beneficial to several sectors of society, such as those people who wanted to ensure that their children, particularly those with special needs, could continue to enjoy the fruit of their estate even when they could not administer it themselves.

This legislation would bring about a new area of activity in the wider context of financial services and he was sure there would be several financial institutions that would take this opportunity to sell their services in this specific sector.

One of the major changes that this law would bring about was that Malta residents would be able to set up a trusts under Maltese law incorporating assets which were in Malta and where the beneficiaries were also in Malta.

The MFSA should prepare a campaign, understandable to all, to educate the public on how to use and benefit from trusts. One should also consider introducing incentives to get this sector going.

At the same time, a proper balance should be struck between regulation and efficiency. There was no doubt that it had been wise for Malta to transfer from an offshore to an onshore financial jurisdiction. Malta would win more credibility for itself as it promoted itself as an onshore, and not an offshore jurisdiction.

He therefore agreed with the provisions of this law which would phase out nominee companies. It should be ensured that Malta continued to enjoy its reputation as a jurisdiction of high standards.

The Financial Services Intelligence Unit, which was still finding its feet, was useful to prevent abuse, such as money laundering.

Continuous monitoring was crucial once this law came into force and it should be updated as required by changing circumstances.

Mr Brincat invited the minister to explain what would happen in the case of bankruptcies and fraudulent preference where the onus of proving that such a fraudulent preference had taken place rested on the injured party to prove it

He also urged the government to better explain to the public the distinction between registered trustees and private trustees. It was important that the members of the public understood the core obligations and benefits which stemmed from this service.

Justyne Caruana (MLP) raised a number of points on which the bill differed from the Civil Code, especially where the legitim was concerned.

She observed that in terms of the bill, the legitim could be contested within five years while the Civil Code provided for 10 years. She called on the government to introduce an amendment to bring both laws in conformity to avoid conflict in the future.

Referring to matrimonial trusts, Dr Caruana said that everything should be done to avoid problems during separation proceedings.

Dr Caruana also asked why there was no appeal from decisions of the Court of Voluntary Jurisdiction. She said that there must be some form of review system under the principle of fair hearing enshrined in the Constitution and the European Convention on Human Rights.

She said that reference to the Maltese courts should also include reference to the Gozo courts because these were separate and distinct from each other.

Turning to the social aspect of the bill, Dr Caruana said trusts would benefit parents who had children with disability, children who squandered money and victims of drug and alcohol abuse. Through this law, such parents could bequeath property or funds which would be administered by a trustee with the children enjoying the fruits as beneficiaries.

Dr Caruana said promotion of Maltese legislation should be made so as to attract up-market trusts since that would go a long way to regenerate the economy. But Malta should not become a haven for undesirable trusts.

The social aspect of the bill was further emphasised by Labour MP Stefan Buontempo. Property owners who were parents of children with disability can now put their mind at rest as to the future of their children.

The greatest concern of these people was what was going to happen to their children once they passed away. Now, they could form a trust with their child as the beneficiaries and with guarantees that the children would continue to live comfortably.

Dr Buontempo called on the government to involve the Commission for Persons with Disability during the committee consideration of the bill to avoid any loopholes that may have been overlooked.

Dr Buontempo referred to the two types of Supplemental Needs Trusts for persons with special needs - third party trusts and those made through the capital earned by the beneficiary himself. He said that in the second instance the beneficiary might lose any social benefits received.

Concluding, Dr Buontempo said that the bill should not be seen for its financial benefits only. The National Commission for Persons with Disability should, as of now, organise information meetings for parents of handicapped children to explain what they stood to gain from the bill.

Other speakers will be reported tomorrow.