Background
When establishing a trust, the person creating the trust (the ‘Settlor’) transfers legal ownership of selected assets to a Trustee. The Trustee becomes the legal owner of those assets, subject to a fiduciary obligation to hold and administer them in the interests of the designated persons or classes of persons (the ‘Beneficiaries’).
This transfer of ownership is often perceived as a significant barrier in estate and succession planning. In practice, Settlors are frequently reluctant to relinquish full control over their assets and instead seek to retain a degree of influence over how the trust property is managed or distributed.
Common Law vs Civil Law Legal Systems
The extent to which such control may be retained without undermining the validity of the trust varies considerably across legal systems.
Common law jurisdictions generally recognise the concept of ‘Reserved Powers’, allowing settlors to retain certain rights without necessarily invalidating the trust or exposing it to recharacterization as a sham.
By contrast, civil law jurisdictions have traditionally adopted a more restrictive approach. The retention of powers by the settlor may be viewed as incompatible with the fundamental principle that the trustee exercises independent control, thereby increasing the risk that the trust is disregarded or deemed non-existent.
The Italian Position: Settlor Control Undermining the Trust
Italian law adopts a notably restrictive approach to settlor reserved powers. While Italy recognises trusts primarily through the Hague Convention, the domestic legal and tax framework places strong emphasis on the genuine transfer of control to the trustee.
In this context, a trust may be regarded as ‘interposto’ (effectively non-existent) where the settlor retains, whether directly or indirectly, a level of control that undermines the trustee’s independence in administering and disposing of the trust property. The focus is not merely on formal ownership, but on the substantive allocation of powers within the structure.
This position has been reinforced in practice by the Italian Tax Authorities. In a notable ruling issued in March 2023, the Italian Revenue Agency clarified that a trust may be disregarded for tax purposes where governance arrangements indicate that effective control remains with the Settlor.
In particular, the ruling identified risk factors including:
(i) The Trustee acting in accordance with directions issued by a Guardian (functionally equivalent to a protector); and
(ii) The Settlor retaining the power to appoint and remove such Guardian, even where the exercise of that power is subject to the consent of the Beneficiaries.
These elements, when combined, were considered sufficient to demonstrate that the Settlor had not truly divested themselves of control, thereby undermining the validity and recognition of the trust for Italian tax purposes.
The Maltese Position: Flexibility Through Reserved Powers
Whilst Maltese trust law equally recognises the importance of preserving the trustee's independent role and ensuring that any reserved powers do not undermine the substance of the trust, the Trusts and Trustees Act (Chapter 331 of the Laws of Malta) expressly recognises that certain powers may be reserved without affecting the validity of the trust, provided that the structure remains genuine and the trustee continues to discharge fiduciary duties independently.
This reflects Malta’s common law influence, where the existence of Reserved Powers does not, in and of itself, invalidate a trust, provided that the trust is not a sham and the Trustee retains sufficient independent authority to discharge their fiduciary duties.
In particular, the Trust and Trustees Act expressly permits a settlor to:
(i) Retain a beneficial interest in the trust property, including being designated as a Beneficiary;
(ii) Reserve powers to appoint, add or remove Trustees, Protectors, or Beneficiaries;
(iii) Reserve powers relating to the investment and management of the trust assets, including the appointment of an investment advisor or investment manager.
From a cross-border planning perspective, this framework allows Maltese trusts to be structured in a way that accommodates legitimate settlor involvement while still respecting the core requirement, central also to the Italian tax analysis, that effective control must not remain with the settlor.
Why Malta Stands Out
For clients with civil law jurisdiction (including Italian) connections, the key point is not that Malta permits broader powers in the abstract, but that Maltese trust structures can be designed to align with the same substantive concern highlighted by the Italian tax authorities: the need for a real transfer of decision-making authority to an independent trustee.
Accordingly, when properly structured, a Maltese trust can match the governance expectations reflected in the Italian tax approach while benefiting from the statutory clarity provided by Maltese law on the treatment of Reserved Powers.
Get in Touch
Our subsidiary, Premier Fiduciary and Trusts Limited (C54929), is a licensed trustee regulated by the Malta Financial Services Authority in terms of the Trust and Trustees Act.
We support clients in designing and implementing tailored estate planning solutions, with particular expertise in cross-border structures and regulatory compliance.
If you are considering the use of Maltese trusts or would like to explore how these structures may support your planning objectives, we invite you to get in touch for an initial complementary consultation.
