Advantages of a Trust in Employee Benefit Schemes


Employment and Employee Benefit Schemes

Malta recognises the right to work as a fundamental right enshrined in its Constitution and has undertaken to promote working conditions that render this right effective.

Starting a new job is an exciting prospect, and once a job offer is accepted a contract of service is deemed to have been entered into. A contract of service is an agreement whereby an individual binds him/herself to render service to, or do work for, an employer in return of wages, which agreement may be entered into either verbally or in writing, both of which are enforceable by law. Upon entering into the contract of service agreement, one is then considered to be in employment.

Labour law in Malta is not rigorously regulated, and employment is essentially based on the contractual or verbal agreement entered into between the employer and the employee, provided that, as per Article 7 of the Employment and Industrial Relations Act, the statutory conditions of employment are respected and recognised. Thus, whereas certain conditions of employment are strictly regulated as a matter of law, other conditions are left entirely to the employer and employee to agree upon.

One of the conditions left entirely to the employers’ discretion is the introduction of benefit schemes.

At this day and age, the job market has become increasingly competitive, and it has become vital for businesses to recruit and retain the right employees. In view of this, businesses have introduced office perks, such as car spaces for parking, extended vacations, health insurance and gym memberships, for their employees.

However, are these perks enough for employees to retain employment with a company?

The loss of key employees has an impact on any business. Apart from the costs of replacement, the disruption involved can also have a disproportionate operational impact. The fallout from a key employee leaving is now widely accepted as a significant issue since turnover is costly for a business. The costs associated with an employee leaving include the employee’s own reduced productivity, costs of covering his/her role up until the time a replacement is recruited, the loss of any training investment, the lower productivity of a replacement while they learn the job, and direct recruiting costs.

This disruption can also have a material impact from a customer’s perspective, particularly where an employee played a key role within the business. In addition, some customers regard their commercial relationship as being with a key individual, rather than the business for which that individual works. If individuals moves to join a competing firm, there is the possibility that those customers will move with them.

The introduction of employee benefit schemes as an incentive strategy, although initially introduced in the 1980s, is now increasing in popularity.

Employers have found that having an employee benefit scheme in place assisted them in a number of ways, such as easier recruitment, improved employee retention, and faster progress towards the company’s business goals.

The most favoured employee benefit schemes include a bonus retention scheme and a share-option or share-award plans.

A bonus retention scheme is a payment/reward outside of an employee’s regular salary that is offered as an incentive to keep key employees with the company. This employee benefit scheme has become increasingly popular due to the fact that the bonus may be retained by the company, or a third party on behalf of a company, for a certain period of time and only given to the employee upon the fulfilment of any conditions set-out by the company.

A share option-plan is the right to buy a certain number of shares at a fixed price within a company. Employees may generally exercise their options, that is buying the shares, after a specified period, known as the vesting period. Employers may make the granting and exercising of options dependent on reaching certain targets, such as budget targets. When an employee exercises his/her options, they may either keep their share entitlement or, if the market price is higher, sell the shares at a profit.

On the other hand, a share-award plan is similar to the share-option plan, however the shares are actually given to the employees rather than providing the employees with the option to attain the shares.

How secure are Employee Benefit Schemes?

A question which may arise out of these employee benefit schemes is how the employer may protect these assets, such as shares and monies, during the period whereby these assets are no longer the company’s and not yet the employees’.

Asset protection has evolved over the years and in fact it has become increasingly popular for businesses to protect these assets since each customer, employee or creditor may be a potential threat to hard earned assets.

The aim of any successful asset protection plan is ultimately to protect any financial assets from a variety of potentially harmful risks in a comprehensive manner. These risks involve lawsuits, creditors and bankruptcy. Left unprotected, assets may be impacted negatively, and in many cases, depleted in their entirety. Placing these assets within the structure of a trust will circumvent all this as an element of separation of title holding and management is devised. Along with offering protection from lawsuits, creditors and bankruptcy, a trust also provides a safeguard from misappropriation. This will thus ensure that the employees receive the full benefits from the employee benefit schemes put in place by their employers.

What is a Trust?

In simple terms, a trust is a relationship where property is held by one party for the benefit of another. The settlor, in this case the employer, transfers property, such as shares or monies, to a trustee who holds the property for the trust’s beneficiaries, in this case the employees. The trust property shall constitute a separate fund owned by the trustee, distinct and separate from the personal property of the trustee and from any other property held by the trustee under other trusts, thus separating the property’s legal ownership and control from its equitable ownership and benefits. A trust thus creates an obligation binding the trustees to take care of property over which they have control for the benefit of beneficiaries.

The trustees will become the legal owners of the trust property and are under a legally binding obligation to administer the property of the trust in a particular way and for a particular purpose.

Maltese legislation places emphasis on the proper and effective segregation of the trust property to the effect that any personal creditors of a trustee are denied access to the property comprised in the trust fund.

The structure of a trust provides both employers and employees the security they envisage. Typically, employers are making use of trusts to hold the assets arising from the employee benefit schemes, however, trusts may also be used for pension schemes and insurance.

A multi-pillar pension system is sought to separate the major objectives of pension plans, while providing for different avenues to secure a pension policy. The most commonly referred to pillars are 3, the first being a state funded policy, the second pillar being a privately-managed and funded plan involving an employer while the third include personal savings and investment plans. The second pillar of pension provides for a privately managed and funded system that recipients/employees and the employers pay into. This can be either an occupational or private contributory pension plan. In this pillar, one may opt for pension funds and defined contribution accounts or plans.

Pension trusts involve the pooling of funds for investment. Alternatively, the employer can set up its own scheme for dealing with pension contributions made by the employer and the employee. Employees seeking to secure adequate provision for their retirement will definitely find this attractive.

Malta’s current regulatory and legislative framework is robust and ensures the integrity of pension plans. Pensions are currently regulated by the Retirement Pensions Act which came into force in January 2015, replacing the Special Funds (Regulation) Act. It regulates Retirement Schemes, Retirement Funds and the Service Providers related thereto.

Given the sensitivity, risk of fraud or abuse, a regulated pension scheme can safeguard the interests of the participants. The Malta Financial Services Authority (MFSA) being the regulator in this field of financial services which issues licenses, regulates and supervises banking, companies and investment services has oversight over such matters. A set of Regulations and Pensions Rules have been issued under the Act to supplement the legal framework for the licensing and regulation of Retirement Schemes (both Occupational and Personal), Retirement Funds and Service Providers related thereto, as well as for the requirement of recognition for persons carrying on back-office administrative services.

Due to the very nature of pension schemes, the element of security plays an important role. Trustees may delegate their powers and engage an asset manager to supervise investments. As the practice in other kinds of trusts, the trustees may appoint an asset manager to advise or manage the investment of fund assets.

Trusts used in a commercial context will generally benefit the whole spectrum of financial services, most especially because of the certainty and flexibility they bring. Insurance trusts is another area in which trust structures could be used, and have proved to be quite popular with employers.

Trusts may be used in cases of group insurances where trustees take out a group life, health or personal accident policy on behalf of a particular class of employees. In these particular cases, the employer enters into a trust deed with a trustee company, which will affect the health insurance policy for the employees. Therefore, the employees will be considered to be the beneficiaries of this trust.

Similarly, the concept of insurance trusts may be applied to other types of employees whose profession, by their nature, may expose them to liability. A firm of accountants, lawyers, investment advisers or indeed trustees, all require professional liability insurance or indemnity cover for their respective partners and associates and possibly also other employees.

Advantages of the use of Malta Trusts in Employment

Primarily, the favourable tax regime which the Maltese legislator sets out, places Malta as an ideal candidate for such kinds of trusts. The purely territorial system when dealing with taxation schemes means that only income derived or generated in Malta is taxable under the Maltese legislator.

Trusts are considered to be tax transparent – accordingly, income attributable to a trust is not charged in the hands of the trustee if it is distributed to a beneficiary (employee). Beneficiaries are charged tax on the income distributed by the trustees. Income attributable to a trust that is not  distributed to beneficiaries is charged to tax in the hands of the trustee at the rate of 35%. However, in certain circumstances the trustee will be entitled to avail himself of double taxation relief; in addition, the trustee may be entitled to claim tax refunds in terms of Maltese law.  When all the beneficiaries of a trust are neither resident nor domiciled in Malta and when all the income attributable to a trust does not arise in Malta, there are no Malta tax implications.

Besides the favourable tax regime, the professional and multidisciplinary Maltese financial services sector provides comprehensive support towards such set ups.

The MFSA, as a reputable and prudent regulatory supervision recognises that efficiencies, skills and cost effectiveness of operating in a jurisdiction are paramount.  Further to this, Malta has kept abreast with commercial and corporate legislative developments and as evident in this article, is keen on introducing specialised legislative rules and regulations in this regard, while being creative in devising and developing products that are already possible today at law while capitalising on existing and new opportunities.


An employee benefit trust is without a doubt attractive for both employers and employees alike. Not only does an employee benefit trust provide for employee incentives and attraction, but also provides for employee retention and asset protection, making a trust a powerful tool for businesses all around.  The only question business owners should be asking themselves is, ‘Why not?’

About the Authors

Dr Christina Borg DeBono joined CSB Group in December 2014 as a Junior Legal Associate.

Christina read Law at the University of Malta and was conferred a Bachelor of Laws with European Studies in 2011 and a Diploma of Notary Public in 2012. She obtained her Doctor of Laws in 2014 after having presented her thesis entitled “Should Criminal Law Stop at the Touchline? A Comparative Analysis of how Criminal Law is applied in the Sports Field. ”

Maria Xerri joined CSB as a trainee in December 2014 and has joined full time in July 2016 forming part of the legal team.

Maria studied Law and was conferred a Bachelor of Laws with Maltese in 2013 and a Diploma of Notary Public in 2014, both from the University of Malta. She is currently reading for a Doctor of Laws at the University of Malta. As part of her studies, Maria wrote a thesis on the OECD’s BEPS Action to counter harmful tax practices. Maria has also completed the ELSA Summer Law School on International Trade Law at Yaşar University in 2015.