During the Budget speech for 2019 presented on 22 October 2018, it was announced that Malta, like other EU Member States, will be implementing the EU Directive on Anti-Tax Avoidance, more commonly known as ATAD1.
Although no detailed provisions are available yet, the following is a brief summary of the expected changes which will be introduced with effect from 1 January 2019 as a result of ATAD1.
When interest and similar borrowing costs of a company exceed interest receivable, the maximum tax deduction that can be claimed in a tax period in respect of the excess costs will be 30% of EBITDA (that is, earnings before interest, tax, depreciation and amortisation). Unutilised costs may be carried forward (subject to any further limitations that may be applicable under the normal provisions of the Income Tax Act). The new restrictions will not apply in cases where the exceeding borrowing costs do not exceed €3,000,000 (three million Euros).
In line with the EU Directive, the regulations envisage the possibility of this limitation being calculated and applied at group level.
The limitation will not apply to financial undertakings. Nor will it apply to costs on loans used to fund long-term public infrastructure EU projects or loans concluded before 17 June 2016.
A change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event. In such a case, the company will become subject to tax in the same manner as if it has disposed of its assets. The accrued gains will be calculated by reference to the market value of the asset at the time of the exit. Where the country of the new residence of the taxpayer or of the new location of the assets is another EU Member State, the payment of the tax can be deferred.
No exit tax will be chargeable in the case of a temporary movement of assets that is linked to certain financial transactions as long as the assets are returned within 12 (twelve) months.
Controlled Foreign Company (CFC) Rules
An entity will be considered a CFC where it is subject to more than 50% (fifty per cent) control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in Malta.
The measure will not apply:
To a CFC with accounting profits of no more than €750,000 (seven hundred and fifty thousand Euros), and non-trading income of no more than €75,000 (seventy-five thousand Euros); or
To a CFC whose accounting profits amount to no more than 10% (ten per cent) of its operating costs for the tax period.
The parent company will be entitled to double taxation relief for the tax paid by the CFC on the included income. The regulations should also provide for the avoidance of double taxation that could arise if the CFC subsequently distributes its profits or the parent company disposes of its interest in the CFC.
General Anti-Abuse Rule (GAAR)
The Income Tax Act already contains a general anti-abuse provision (article 51) that empowers the Commissioner for Revenue to ignore tax avoidance schemes. The new regulations will add to this rule by applying the definition of tax avoidance schemes as used in the Directive. The measure will accordingly apply to arrangements which are not genuine, meaning that they are not put into place for valid commercial reasons that reflect economic reality, and which have been put in place with a main purpose of obtaining a tax advantage that defeats the object or purpose of tax law.
EU Dispute Resolution Mechanism (DRM)
The EU Directive on ERM will be implemented by the end of June 2019 and it will be instrumental in providing Maltese taxpayers with access to a new dispute resolution framework in relation to disputes with other EU tax authorities that may come about given the changes that are being implemented in the international tax arena.
EU Mandatory Disclosure Directive (DAC 6)
Regulations for the transposition of DAC 6 are being prepared and will meet the implementation deadlines set out in the Directive but no further details are available yet.
ATAD 2 effective as of 1 January 2020 and 1 January 2022
Apart from ATAD1, Malta will also have to implement the provisions of ATAD2 although these will take place on 1 January 2020 and 1 January 2022.
ATAD 2 will replace the original anti-hybrid provisions of ATAD 1 by extending them to include mismatches involving third countries and expanding the definition of hybrid mismatches to include hybrid permanent establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. It is still premature to make any further comments on ATAD2.
Patent Box Regime
Malta will introduce a new patent box regime that complies with the EU Code of Conduct (Business Taxation) and the OECD proposals on preferential intellectual property regimes (the so-called Modified Nexus approach). Once again, no further details are available at this stage.
ATAD will introduce new concepts into the Maltese tax legislation such as exit taxes and CFC rules. However, the changes should not have a dramatic effect to the tax system especially the principles of the full imputation system and the tax refunds which shareholders may claim upon a distribution of certain taxed profits. We expect no changes to the participation exemption regime and we’ll have to see whether the step-up provisions already contained in our tax legislation will be affected. If not, the step-up provisions and the participation exemption should continue to provide interesting opportunities.
It will be interesting to see how the interest limitation provisions will ‘interact’ with the newly introduced rules on Notional Interest Deduction which had an extremely positive effect on a number of Maltese companies
Very limited amendments are expected for the implementation of GAAR as required by the Directive since it is very similar to that already included in the Maltese Income Tax Act.
Malta has been an EU Member State since 1 May 2004 and the adoption of EU Directives coupled with a unique full imputation system of taxation as well as tax refunds has developed the country into an international financial centre. Malta is the country of choice for foreign investments into the EU. However, several companies in a multitude of sectors have set up in Malta for several reasons. Although the country and the local market are small, companies have no restrictions in accessing the EU market and beyond. Malta has developed an advanced IT infrastructure, very good telecommunications and connections, an extensive treaty network, a professional and business friendly atmosphere amongst professionals and regulators, and a can-do attitude all of which have contributed to Malta’s success beyond its relative size.
Corporate taxation and the full imputation system
Maltese registered companies are subject to income tax on chargeable income at a standard rate of 35%. Companies incorporated in Malta are subject to tax on their worldwide income but companies incorporated outside Malta but are tax resident in Malta by virtue of their effective management and control are subject to tax on income arising in Malta and income remitted to Malta. One may also claim that companies are not effectively subject to tax because of the full imputation system of taxation whereby the tax paid by the company is credited in full to the shareholder/s following a distribution of profits. This ensures that there is no double taxation as often happens under the classical system. Moreover, a system of tax refunds which shareholders may claim depending on the source of income leads to an effective tax rate which may be well below the 35% tax rate applicable to companies.
Every Maltese company is required to allocate its profits to five tax accounts. The allocation of profits to the tax accounts is a very important aspect of the Maltese tax system as it determines the tax treatment applicable to shareholders and the tax refunds which may be claimed upon a distribution of profits. The following is an overview of the five tax accounts, the type of income or gains allocated to each tax account and the tax refunds which may be claimed by shareholders:
Foreign Income Account (FIA)
Foreign source passive income such as dividends, interest, royalties, rent etc. and all capital gains from foreign sources (unless exempt).
5/7ths in the case of passive interest and royalties. 2/3rds where company claims double taxation relief including FRFTC. 100% in the case of income from a Participating Holding.
Maltese Taxed Account (MTA)
Profits from trading activities and profits which are not allocated to the FIA, IPA or FTA.
6/7ths in the case of trading income. 5/7ths in the case of passive interest and royalties.
Immovable Property Account (IPA)
Profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, as well as profits from rent, accommodation and activities related to immovable property situated in Malta.
None. No tax refunds
Final Tax Account (FTA)
Profits subject to a final withholding tax and income exempt from tax (e.g. participation exemption).
None. No tax refunds.
Untaxed Account (UA)
The difference between the company’s accounting profits or losses and the total of the amounts allocated to the other four tax accounts.
None or a FWT.
Participating holding and the participation exemption
A comparative study shows that Malta has one of the best participation exemption regimes. A Maltese company in receipt of dividend income or capital gains from a participating holding may claim the participation exemption. Alternatively, the company may elect to be subject and pay tax and this would enable the shareholder to claim a full refund.
A participating holding must be an equity holding which is defined as a holding of the share capital in a company which is not a property company and entitles the shareholder to at least any two of the following rights:
A right to vote;
A right to profits available for distribution, and
A right to assets available for distribution on a winding up of that company.
A participating holding arises when any one of the following criteria is met:
A company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 5% of any two of the above-mentioned rights; or
A company is an equity shareholder in a company and is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company; or
A company is an equity shareholder in a company and the equity shareholder company is entitled to a first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
A company is an equity shareholder which holds an investment representing a total value of at least €1,164,000 (or the equivalent in a foreign currency) in a company and such investment is held for an uninterrupted period of not less than 183 days; or
A company is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of trade.
A capital gain derived from a participating holding automatically qualifies for the participation exemption, however, in the case of dividends derived from a participating holding they will be exempt from tax provided that the body of persons in which the participating holding is held satisfies any one of the following three conditions:
it is resident or incorporated in the EU; or
it is subject to foreign tax of at least 15%; or
it does not have more than 50% of its income derived from passive interest or royalties.
Where none of the above three conditions are satisfied, then both of the following conditions must be satisfied:
the equity holding in the non-resident company is not a portfolio investment, and
the non-resident company or its passive interest or royalties are subject to tax of not less than 5%.
A portfolio investment is an investment in securities such as shares, bonds and such like instruments, held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company. Also, the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment.
The participation exemption may also apply to a participating holding in certain partnerships, collective investment vehicles and European Economic Interest Groupings.
Summary and illustrations
The mechanics of the full imputation system, the allocation of profits to the various tax accounts and the tax refunds and the overall effect of their interaction may be illustrated in the following examples:
TAS: Tax at Source. The credit of the tax paid by the company given to the shareholder is the effect of the full imputation system.
COMET: Combined Overall Malta Effective Tax. This is the net effect of the tax paid by the company and the tax refund received by the shareholder in Malta.
It is pertinent to point out that a tax refund becomes due to the shareholder by the Inland Revenue Department within 14 days from when the company’s audited financial statements (accounting for the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on the prescribed form, together with the dividend certificate and other documents as requested by the International Tax Unit are submitted by the shareholder or his tax representative.
Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements. The tax refund is also paid in the same currency, thus eliminating any forex risks.
Branches and oversea companies
A branch or a permanent establishment (PE) of a foreign company is subject to tax at the standard rate of 35% on the profits attributable thereto. It is interesting to note that the shareholders of the foreign company may still claim tax refunds provided the foreign company distributes profits which have been subject to tax in Malta (at the level of the branch or PE). This may also apply to a foreign company which is tax resident in Malta by virtue of its effective management and control. Such foreign companies registered in Malta are referred to as an ‘oversea company’ because of the same terminology used in The Companies Act.
Advance revenue rulings
Maltese legislation provides for Advance Revenue Rulings (ARR) which may be obtained by application from the International Tax Unit of the Inland Revenue Department. ARRs are valid for a period of five years and are renewable. The ARR is still valid even if there is a change in legislation although in this case the ARR expires once two years are over from the legislative change.
The attractiveness of ARRs has somewhat decreased following the EU Directive whereby the Maltese tax authorities provide information related to ARRs to the EU Commission and other EU Member States.
Notional interest deduction
Malta has recently introduced the concept of a notional interest deduction (NID) aimed at mitigating the differences in the tax treatment between equity and debt financing. Before the introduction of these rules, debt financed entities could claim a tax deduction equivalent to the interest however no similar deduction was available for equity financed companies. NID entitles companies to claim a tax deduction equivalent to the notional interest calculated on its equity thus making equity financing on the same level playing field as debt financing for taxation purposes.
Salient features of these rules:
NID is optional and may be claimed if all shareholders approve the claim for such a deduction.
These rules are applicable to Malta registered companies, permanent establishments situated in Malta as well as partnerships.
NID is determined by multiplying the reference rate to the invested risk capital. The reference rate is the risk-free rate set by reference to the current yield to maturity on the Malta Government Stocks with a term of approximately 20 years plus a premium of 5%, and the invested risk capital of the undertaking is the share capital, share premium, retained earnings, and non-interest-bearing loans an any contributions made by the shareholder/s. Any capital directly employed in the production of income which is exempt from tax does not fall part of the invested risk capital.
NID is limited to 90% of chargeable income. Any excess above the capped amount may be carried forward for deduction in future years.
When an undertaking claims NID, the shareholder / partner is deemed to have received income equal to the NID and the provisions relating to the taxation of interest income shall apply with the option to apply NID against the deemed interest brought to charge.
An amount equal to 110% of the profits relieved from tax through the NID shall be allocated to the undertaking’s final tax account. The amount allocated to the final tax account is limited to the total profits of the undertaking and any such excess shall be ignored for allocation of tax profits.
One of the main advantages of NID is that the COMET may be reduced and eliminates the need for the shareholder to claim tax refunds.
The salient features highlighted above are coupled with other benefits including:
No withholding taxes;
No thin cap rules or debt-to-equity ratios;
No capital duty and wealth taxes;
No stamp duty on share transfers in companies whose activities are outside Malta;
Non-resident persons are exempt from capital gains arising on certain share transfers;
Participation exemption regime applicable to branches, certain partnerships and other entities;
An extensive treaty network with over seventy treaties currently in force;
No exit taxes not even on an outward redomiciliation;
Step-up upon an inward redomiciliation.
How can we help you?
Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority and may also act as tax representative with the Inland Revenue Department. Tax advice and tax compliance remain our core focus and we ensure that clients are always in compliance with the myriad filing obligations and notifications.
Malta, being an EU Member State since 1 May 2004, has established itself as an international financial centre. The legislative framework is in conformity with EU law. The Companies Act is modelled on the UK Companies Act and provides for various types of entities such as SICAVs, INVCOs, foundations, limited partnerships, general partnerships, single member companies, limited liability companies and public companies.
The most commonly used entity is the limited liability company which can be either private or public:
A private company must include ‘Limited’ or ‘Ltd’ as the last word in its name. It may be exempt or non-exempt and it is also possible to have just one shareholder (referred to as a single member company). A private company must have less than fifty shareholders and the company must prohibit invitations to the public to subscribe to any shares or debentures.
A public company (Plc) is defined as a company that is not a private company and therefore it may offer its’ shares or debentures for subscription to the general public.
The company incorporation and registration procedure is very efficient and the following three simple steps must be followed:
Provide all the necessary information and documentation to satisfy the KYC or CDD requirements of EU Directives and the Prevention of Money Laundering and Funding of Terrorism Regulations;
Establish a banking relationship and transfer the funds representing the initial paid up share capital of the company; and
Draw up a Memorandum and Articles of Association which must include the company name, its registered address in Malta, its objects and powers, details of the share capital structure and the shareholders, details of the directors, legal and judicial representatives and company secretary. The Memorandum and Articles of Association must be signed by the promoters / shareholders and need not be executed in front of a notary.
The following are a summary of the main statutory requirements relevant to companies:
The minimum authorised and issued share capital for private companies is €1,164.69 with at least 20% of the nominal value paid up, whilst that of a public company is €46,587.47 with at least 25% of the nominal value paid up.
The company’s share capital may be denominated in any currency. The Companies Act requires that financial statements are prepared in the same currency in which the share capital is denominated whilst the Income Tax Act provides that the tax payment and any tax refunds are done in the same currency of the share capital.
A company must have a registered address in Malta.
Objects and Powers
The Company’s activities must be clearly laid down in the Memorandum of Association. A single member company must restrict its objects. Certain activities may require a license from the regulator, the Malta Financial Services Authority.
There are no restrictions with respect to shareholders. Natural persons, corporate entities and trustees may all hold shares in a Maltese company. Malta has adopted the EU Directive on the Register of Beneficial Owners (RBO) and therefore a natural person having an ownership interest or voting rights of more than 25% or exercises control must be disclosed.
Board of Directors
The Board may be composed of just one director. Directors may be natural persons or corporate entities and there are no restrictions with respect to nationality or residence. However, for substance requirements and management and control purposes, board meetings must be held in Malta, with the meetings properly minuted and decisions effectively taken in / from Malta.
Legal and Judicial Representative
Maltese legislation provides that a company must have a legal representative/s who is empowered to represent the company on agreements, contracts etc. A judicial representative is empowered to represent the company in legal proceedings at the law courts etc. The directors, or any of the directors may occupy these posts.
A company must have a natural person occupying the post of company secretary. There are no restrictions with respect to residence or nationality.
An Annual General Meeting (AGM) must be held every year to approve the audited financial statements. Such general meeting need not be held physically in Malta. In terms of the Companies Act, a resolution signed by all the shareholders is tantamount to a physical meeting.
A company may opt for a financial year end other than 31 December as long as the period is not less than six months and not more than eighteen months. Approval must be sought from the tax authorities and notification given to the Registry of Companies.
Companies must keep proper accounting records and have their accounts audited. Audited financial statements must be approved at the company’s AGM within ten months after the financial year end for private companies and within seven months after the financial year end for public companies. Licensed companies are required to submit their audited financial statements to the Malta Financial Services Authority within four months of the financial year end. All audited financial statements must be filed with the Registry of Companies and they are available online.
Form of Accounts
Malta adopts International Financial Reporting Standards as adopted by the EU. However, a qualifying company may adopt the General Accounting Principles for Small and Medium-Sized Entities (GAPSME).
All companies must submit an annual return to the Registry of Companies upon each anniversary of the company’s registration date. The annual return includes details of the capital, the shareholders, directors and company secretary and changes which took place during the year.
Upon incorporation, companies must pay a registration fee to the Registry of Companies which is calculated on the authorised share capital. The fee varies between €245 for an authorised share capital of up to €1,500 and a maximum of €2,250 for an authorised share capital of over €2.5 million. A registration fee is also payable annually together with the submission of the annual return. The annual registration fee varies between €100 for a company with an authorised share capital of up to €1,500 and a maximum of €1,400 for a company with an authorised share capital of over €2.5 million.
There are no exchange controls in place. As a result, companies may have bank accounts outside Malta.
Maltese incorporated companies are subject to tax at a standard rate of 35% on their worldwide income. Companies which are incorporated outside Malta but are tax resident in Malta are also subject to tax at a standard rate of 35% but on income arising in Malta and income remitted to Malta. Malta adopts the full imputation system of taxation and therefore the tax paid by companies is credited in full to the shareholders upon a distribution of profits. For more details refer to Corporate Taxation.
Maltese legislation allows companies to change their domicile by migrating in or out of Malta. This enables companies to move from one jurisdiction to another without the need of going through a liquidation process.
For more details on redomiciliations to and from Malta, you may wish to refer to Redomiciliation.
How can we help you?
Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority and may assist clients not only to incorporate companies but also ensure compliance with the above statutory requirements and other obligations.
Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient’s tax residence and status. However, income received from foreign sources may be subject to a withholding tax and suffer other foreign taxes and therefore Malta offers three main types of double taxation relief to ensure that any double taxation is mitigated as much as possible. Apart from the relief under Malta’s treaty network, Malta also gives relief for any double taxation on unilateral basis and allows a flat rate foreign tax credit on foreign source income and capital gains.
Any overseas tax suffered may be allowed as a credit against the tax chargeable in Malta which is levied on the gross amount. The credit shall not exceed the total tax liability in Malta on the receipt.
Unilateral relief for underlying tax is also available where the taxpayer is a person that holds more than 10% of the voting power of the overseas company paying the dividend.
To claim unilateral relief, the recipient of the income must prove:
that the income arose from overseas;
that the income suffered overseas tax; and
the amount of that tax.
Flat Rate Foreign Tax Credit
A Flat Rate Foreign Tax Credit (FRFTC) may be claimed by a Maltese company which receives income from overseas. A certificate from the auditor stating that the income arose overseas will be sufficient for this purpose.
The flat rate foreign tax credit is calculated at 25% of the amount of the overseas income or gain received by the company, before allowable expenses. The income plus the credit less allowable expenses will be subject to full Malta income tax with relief for the deemed credit (up to a maximum of 85% of the Malta Tax payable). The mechanics of the flat rate foreign tax credit are demonstrated in the following example:
Even if the company has no deductible expenses, the rate of tax is reduced from 35% to an effective rate of 18.75%. Upon a distribution of taxed profits, refunds will apply and so the net effective tax is reduced to 6.25% or lower.
Malta has an extensive double taxation treaty network with over 70 double taxation agreements most of which are based on the OECD model convention. The maximum reduced withholding tax rates on dividends, interest and royalties paid to residents of Malta are as indicated hereunder. Since Malta is an EU Member State, the Parent Subsidiary Directive and the Interest and Royalties Directive may also apply and the withholding tax rate could be reduced even further.
Redomiciliation is the process whereby a company registered in a particular jurisdiction migrates or is continued in another jurisdiction without the need to be wound up or liquidated. As a result, the main advantage of a redomiciliation is that there is continuity of the entity and there is no need to renegotiate agreements, transfer assets etc.
Malta allows both inward and outward redomiciliations and no exit taxes apply. On the other hand, a company migrating from a foreign jurisdiction to Malta may ‘step-up’ the value of the assets without any Maltese tax implications.
A foreign body corporate wishing to migrate to Malta must be similar to a Maltese company.
Migration procedure and documentation
A company wishing to migrate to Malta should make a request to the Registrar of Companies. The request must be accompanied with the following documentation:
a resolution of the foreign company authorising it to be registered as being continued in Malta;
statute of the foreign company, revised and amended to include requirements for registration in accordance with the provision of the Maltese Companies Act;
a certificate of good standing in respect of the foreign company issued by the competent authority of the country in which the foreign company was incorporated or some other documentary evidence to show that the foreign company satisfies the registration requirements of the country in which it was incorporated;
a declaration signed by the directors of the foreign company confirming:
the name of the foreign company and the name under which it proposes to be continued in Malta;
the jurisdiction under which it is incorporated;
the date of incorporation;
the decision to have the foreign company registered as continuing in Malta;
that formal notice has been given to the relevant authority of the other foreign jurisdiction of its decision to be registered as continuing in Malta and providing evidence of such notification;
that no proceedings for breach of the laws of the jurisdiction in which it was registered have been commenced.
A declaration of solvency signed by the directors or persons vested with the company’s administration or representation, confirming that the company is solvent and that they are not aware of any circumstances which may negatively affect such solvency in a material manner within the next twelve months;
A list of the directors and company secretary of the foreign company or where such company does not have these officers, a list of the persons vested with the administration or representation of the foreign company;
Any other information which the Registry of Companies may require.
A registration fee must be paid and this varies between €245 for companies with authorised share capital not exceeding €1,500 and €2,250 for companies with authorised share capital of over €2.5 million.
Should the foreign company be a public company or carry out activities which if conducted in or from Malta require licensing or authorisation such as companies providing investment advice, insurance companies, banks and financial institutions, trustees, etc., additional documentation will apply.
The Registrar of Companies shall issue a Provisional Certificate of Continuation upon being satisfied that the documents supporting the request for registration are satisfactory.
The effects of provisional registration are:
The company shall be continued as a body corporate incorporated under the Companies Act subject to all the obligations and exercising all the powers of such a company;
Its statute (as revised for the purpose of the redomiciliation) shall be considered as the company’s Memorandum and Articles of Association.
Within a period of six months from the date of the issue of the Provisional Certificate of Continuation, the company must submit documentary evidence to the Registrar that it has ceased to be a company registered in the foreign jurisdiction where it was originally incorporated. Upon presentation of such evidence and the surrender of the Provisional Certificate of Registration, the Registrar will issue a Certificate of Continuation confirming that the company has been registered as continuing in Malta.
How can we help you?
Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority. We may assist in drafting all the necessary documentation necessary for an inward and an outward redomiciliation and liaise with the relevant authorities in order to complete all the necessary formalities.
The Income Tax Act brings to charge “gains or profits from any employment or office, including the value of any benefit provided by reason of any employment or office”. The legislation does not define ‘employment’ or ‘office’ but with the introduction of the Fringe Benefits Rules in 2001 we now have a definition of ‘officer’ which means the holder of an office and includes an individual who is a director of a company, or holds directly or indirectly more than 5% of the ordinary share capital or of the voting rights in a company or is a partner in a partnership. The said rules also define ‘employee’ and ‘employer’ and therefore one can easily deduce what constitutes employment – the provision of any service under a contract, whether written or not.
Income tax implications for individuals
Subject to treaty provisions, employment income arising in Malta is subject to income tax in Malta at the following progressive rates:
Married persons may opt for a joint tax computation or a separate tax computation using either parent rates or single tax rates. No deductions are given against the gross employment income which is brought to charge to tax except for a deduction in respect of private school fees, alimony payments, childcare fees, homes for elderly fees and sports fees.
Chargeability to tax depends on the residence and domicile of the taxpayer. Domicile is not defined in Maltese legislation. The concept of domicile is a legal concept and generally refers to the place where a person was born, lives and establishes his home and intends to live indefinitely. Maltese law adopts the UK approach to domicile whereby a person previously not connected to Malta who establishes residence here will not be easily deemed to have attained a Maltese domicile. Such a Maltese domicile will only be attained if such an expatriate has, and circumstances show, that he has lost his foreign domicile and intends to indefinitely and permanently establish Malta as his home.
The Income Tax Act defines a ‘resident in Malta’ as being any individual who resides in Malta. Although not clearly defined, the Income Tax Act makes distinctions between ordinarily residence, residence and temporary residence. The distinction is primarily based on the intention to stay in Malta as well as the duration of such stay.
Resident and domiciled individuals
Persons are subject to tax in Malta on the basis of their residence and domicile. Individuals deemed to be both resident and domiciled in Malta are subject to income tax on a worldwide basis. Income earned, accrued or derived in Malta or elsewhere is subject to tax in Malta irrespective of whether the foreign source income is remitted to Malta or not.
Due to the strict interpretation of domicile it is very difficult for an expatriate to attain a Maltese domicile and hence such an expatriate will not be taxed on a worldwide basis.
Resident or domiciled individuals
Individuals who are either resident or domiciled in Malta are taxed on a source basis and remittance basis. Source basis refers to income arising in Malta mainly through employment exercised in Malta and capital gains arising in Malta. Income earned abroad and remitted to Malta is also subject to Maltese income tax. Foreign capital gains are not subject to any tax in Malta irrespective of whether they are remitted or not.
Individuals who are ordinarily residents but non-domiciled, as from year of assessment 2019 or basis year 2018, are subject to a minimum tax of €5,000 per annum before any double taxation relief. The minimum tax is applicable to individuals and married couples whose foreign income exceeds €35,000.
This minimum tax is not applicable to individuals who are tax residents under The Residence Programme, the Global Residence Programme, the Malta Retirement Programme and the Residents Scheme Regulations. Therefore, the minimum tax of €5,000 introduced earlier on this year will primarily apply to EU citizens who are tax resident in Malta and do not enjoy a special tax status under any programme.
Also, long-term residents or permanent residents who have a permanent residence certificate or a permanent residence card in terms of the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order, are not eligible to benefit from the remittance basis of taxation.
Temporary residents are exempt from paying tax on income arising outside Malta, even if this is remitted to Malta. Temporary residents are classified as such if they do not intend to establish residence in Malta and stay in Malta for an aggregate period of less than six months in one calendar year. Temporary residents are charged on income arising in Malta at the normal rates.
Individuals who are neither resident nor domiciled
Individuals who are neither resident nor domiciled in Malta are subject to tax only on income arising in Malta. The applicable rates are different from those applicable to resident persons and are as follows:
In view of the above rules and subject to Malta’s tax treaty provisions, when the income earning activity is in Malta (source basis income), then the individual is subject to income tax in Malta.
The issue of residence and domicile is not of any relevance when it comes to the taxation of an individual exercising employment in Malta. However, these may have tax implications for an individual earning other income (not employment income) during his stay in Malta.
Tax implications for work performed outside Malta
Maltese individuals who are no longer tax resident in Malta will no longer be subject to any income tax in Malta on any income arising outside Malta since they will not be subject to tax on a worldwide basis but only on any income remitted to Malta or income arising in Malta.
Income tax implications for expatriates
An individual falling under any of the following categories is deemed to be an expatriate and therefore subject to income tax in Malta:
Employees and other work permit holders for up to one or more years,
Individuals working in Malta on short term engagements, that is; holding a work permit for up to six months,
Holders of a temporary visa who are either retired or based temporarily in Malta with their family while they are working abroad.
Expatriates are subject to income tax on any income arising in Malta at the progressive resident tax rates. Exemptions from income tax in Malta may be available if a double taxation agreement exists between Malta and the country of residence of the expatriate. Most double taxation agreements are based on the OECD model which exempts the employment income from any tax in Malta if:
The recipient is present in Malta for a period or periods not exceeding in aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned;
The remuneration is paid by, or on behalf of, an employer who is not a resident of Malta; and
The remuneration is not borne by a permanent establishment or a fixed base which the employer has in Malta.
Special Tax Rates
Special tax rates for overseas employment
Maltese tax resident individuals who take up employment overseas are subject to a standard tax rate of 15% on such employment income. Employees may only qualify for the standard rate only if:
the income is deemed to be employment income, and
the contract of employment requires that the performance of work or duties are mainly outside Malta, but excludes any service on a Maltese ship or aircraft or with the Government of Malta, and
the emoluments are received in respect of work or duties carried out outside Malta or for a period spent in Malta but which is connected with such work or duties outside Malta.
The overseas emoluments are to be deemed to be the last part of the individual’s total income in computing the tax liability. This ensures that the maximum relief is available under this provision.
Special tax rates for non-residents who derive income from entertainment activities
Special provisions apply for non-residents who derive income from entertainment activities exercised in Malta for a period not exceeding fifteen days in a calendar year who are charged tax at a flat rate of 10% on the gross payment receivable in respect of the said activities.
The non-resident tax rates apply to non-resident individuals who derive income from entertainment activities exercised in Malta for a period which exceeds fifteen days in a calendar year.
Special tax rates for sportsmen
A flat rate of 7.5% applies to income received by full-time or part-time sportsmen that are registered players or athletes, or as a licenced coach.
Special rates for individuals in certain fields of excellence
A flat rate tax of 15% is applicable on employment income received by an individual who is established in a field of excellence under a qualified contract of employment. This special rate of tax is applicable to individuals who are not domiciled in Malta however opt to move to Malta and work in manufacturing and research and development sectors. The fields of excellence are determined by the Malta Enterprise Corporation and are limited to employment contracts with annual emoluments of at least €45,000 and with at least three-year of comparable experience or the necessary qualifications to perform the necessary duties as per contract of employment. The special rate applies for a consecutive period of three years with the possibility to extend the special rate for another year at the discretion of the Malta Enterprise Corporation. The current rules are active until 31 December 2018.
Highly qualified persons rules
As an incentive to attract more foreign experts in certain sectors to work from Malta, a special tax rate of 15% is applicable on employment income received from ‘Eligible office’ with a licenced company. Income exceeding €5,000,000 is not subject to any tax. The special rate is applicable for a period of 5 years for EEA nationals and 4 years for third country nationals with the possibility to apply for a one-time extension.
The targeted sectors of the economy are in the finance, aviation and gaming industry. This scheme has been in operation since 2010 with an expected termination date in 2025. Various conditions need to be met to enable the employee benefit from the special tax rate:
Employee must hold a ‘eligible office’. A list of ‘eligible office’ is made available by the tax department and include high ranking posts such as Chief Executive Officer, Chief Operational Officer, Portfolio Manager, Actuarial Professional, Aviation Flight Operations Manager and Senior Trader;
Employment income must exceed €84,016 for basis year 2018. This is adjusted annually in line with the Retail Price Index (RPI);
The employment income must be subject to tax in Malta and subject to the laws of Malta;
The employee proves that he has the necessary professional qualification and at least 5 years’ experience in the field;
The employee did not benefit from the deductions available to investment services expatriates;
The employee has sufficient resources to maintain himself and his family without recourse to social assistance in Malta. The employee should thus have an adequate accommodation, in possession of a valid travel document and in possession of a sickness insurance for himself and his family;
The employee is not a shareholder of more than 25% in the company employing him;
Third party nationals may not stay in Malta for more than four years or acquire rights over immovable property situated in Malta.
Benefits in kind and fringe benefits may be subject to income tax as part of the employment income and the fringe benefit rules apply for Maltese individuals and expatriates alike. The following is a summary of the main fringe benefits and their tax implications.
The availability of a company car for personal use is taxable on the basis of the car value, the car use value, the maintenance value, the fuel value and the private use value. The car use value, the maintenance value, the fuel value and the private use value are determined with reference to the car value. The various percentages and values to calculate the fringe benefit are given in the fringe benefits rules.
Use of assets including accommodation
The fringe benefit on the use of assets (including accommodation premises) is determined on the basis of the value of the property being made available to the employee. In the case of immovable property, the fringe benefit value is deemed to be 5% of the market value or the original cost of the immovable property whichever is the higher.
Other taxable fringe benefits include the transfer of assets at subsidised prices, low interest rate loans, reimbursement of bills of a personal nature and the provision of discounted goods and services. Share options and share award schemes are also treated as a fringe benefit once exercised and brought to charge at a flat rate of tax of 15%.
Not all amounts paid to an employee form part of the fringe benefit value. Reimbursement of expenses which are not of a personal nature are not taxable in the hands of the employees. Similarly, reimbursement to employees of expenses related to business travel, provision of canteen services, provision of health insurance, telephone service, use of computer equipment and recreational or child minding facilities are not taxable.
In some cases, it may be advisable to ask for a tax confirmation that a particular expense does not fall within the definition of a taxable fringe benefit. Such confirmation is at the discretion of the Commissioner of the Inland Revenue.
Income tax collection is done on a national basis under the Final Settlement System (FSS) which is similar to the Pay As You Earn system (PAYE). Tax is charged and collected by the Inland Revenue Department. Employers deduct the appropriate tax amount from the employee’s gross wage and remit the amount to the Inland Revenue Department on a monthly basis. No other local authority is authorised to collect taxes from residents. No municipal taxes apply in Malta.
Final withholding tax provisions
Investment income such as interest paid by a local bank may be subject to a final withholding tax of 15%. The investment income provisions contained in the Income Tax Act are extended to other specific investment income arising in Malta, including any investment income arising from shares quoted on the Maltese stock exchange and Government bonds. Income subject to the final withholding tax is not taxed any further in Malta and the withholding tax is not refundable to the taxpayer.
Capital gains tax
Capital gains or profits arising from immovable property, securities, business goodwill, and certain intellectual property rights may be subject to capital gains tax in Malta. Capital gains are considered to form part of the taxpayer’s chargeable income and brought to charge to income tax at the progressive rates.
Transfers of immovable property situated in Malta generally gives rise to a property transfer tax equivalent to 8% of the transfer value unless such property was the ordinary residence of the individual for a period of more than three years in which case any capital gain realised is exempt from capital gains tax. Other rates of tax apply in cases where the property is held for less than three years or the property is acquired causa mortis or through a donation.
Persons qualifying as non-residents may also opt to be charged on capital gains arising out of immovable property in Malta at the 35% rate on the gain instead of the final property tax of 8% on transfer value.
Payment of tax
Tax on employment income is deducted and remitted by the employer on a monthly basis under the Final Settlement System (FSS). This system is tailored so that the correct amount of income tax is deducted from the employment income. The amount paid by the employer and remitted to the Inland Revenue Department is credited to the employee. Malta adopts a self assessment system, however, the computation of the tax due on employment income is the responsibility of the employer paying such income. In most cases the amount of tax paid under the FSS should be equal to the income tax liability under the self assessment system so that no further tax is due to be paid by the tax return date.
Tax compliance issues
The income tax return of individuals under the self assessment system, must be filed within six months of the calendar year (basis year). Therefore, the tax return for a particular year is due by June of the following year. Every individual is responsible to complete the form correctly and include all income arising during the previous year, whereby the income tax due is computed. Details as to the amount of days spent in the country and the option as to whether to have income brought to charge at the single, parent or married rates are required in the tax return. Employed persons who have no other sources of income should have no outstanding tax due as this would have been paid through the final settlement system. Individuals who have various sources of income may be liable to pay the settlement tax by the end of June or else be entitled to a tax refund of any excess tax paid.
In the last few years, the tax department has started a process of simplification for persons whose income is subject to tax at source and thus all sources of income are known to the tax department. Persons falling within the definition of non-filers receive a tax statement showing their annual income, respective income tax charge and tax payments made. Any shortfall of tax or tax refund is settled based on such statement. The taxpayer is however still liable to inform the tax department if such statement is incorrect or incomplete and thus required to request a tax return to adjust the tax statement issued by the tax department.
Other compliance matters relating to employment in Malta
Employers seeking to employ a non-EU individual to work in Malta need to apply for an employment permit for such individual before the employment can be actually taken up. The envisaged period of employment is not relevant in determining the need or otherwise of an employment permit as this is required as from the first day of employment.
Individuals taking up residence in Malta as a result of their employment, are required to apply for an e-residence card and register for income tax purposes in Malta.
Employment in Malta may also expose individuals to the payment of social security contributions in Malta, unless evidence is submitted to the local authorities that social security contribution payments are being done in another EU state. To this effect a form known as the E101 would need to be produced to the local authorities. Other formalities include the submission of the relative commencement forms to Jobsplus and the registration of the individual for income tax purposes.
How can we help you?
Our tax professionals offer practical tax advice on personal tax matters related to office or employment, fringe benefits, tax treaty interpretation, double taxation relief and various other issues. We may assist with all tax compliance matters and filing obligations – acting on behalf of the employer or the employee. Avanzia Taxand may act as a tax representative and therefore be able to make electronic submissions to the Inland Revenue Department.
A report published in 2017 by the National Statistics Office shows that foreigners forming part of the population in Malta more than doubled over the last decade. Whereas in 2006 foreigners accounted for around 3% of the total population, ten years later foreigners account for more than 7% of the total population and the trend is increasing. There are several factors contributing to this increase one of which is the programmes under the remit of the International Tax Unit of the Inland Revenue Department. The current programmes are ‘The Residence Programme’ (TRP), the ‘Global Residence Programme’ (GRP) and the ‘Malta Retirement Programme’ (MRP).
The Residence Programme
The TRP is designed to attract individuals who are nationals of the EU, EEA or Switzerland and who are not permanent residents of Malta. Beneficiaries may also have household staff providing a service in their qualifying property, as long as all the requisite procedures are satisfied.
Global Residence Programme
The GRP is designed to attract individuals who are not EU, EEA or Swiss national and who are not long-term residents. Individuals benefitting from this Programme are not precluded from working in Malta, provided they satisfy the requisite conditions for obtaining a work permit.
Beneficiaries may also have household staff providing a service in their qualifying property, as long as all the requisite procedures are satisfied.
The Malta Retirement Programme
The MRP is designed to attract nationals of the EU, EEA and Switzerland who are not in an employment relationship and are in receipt of a pension as their regular and main source of income. Individuals benefitting from this Programme may hold a non-executive post on the board of a company resident in Malta. This implies that the beneficiary would be prohibited from being employed by the company in any capacity.
Such individuals may also partake in activities related to any institution, trust or foundation of a public character and any other similar organisation or body of persons, which are also of a public character, that is engaged in philanthropic, educational or research and development work in Malta.
The following is a list of incentives applicable under the programmes:
A flat rate of tax at 15% on income remitted to Malta with a minimum annual tax liability of €15,000 under the TRP and GRP whilst the minimum tax under the MRP amounts to €7,500 plus €500 for every dependant;
Remittance basis of taxation ensures that foreign source income which is not remitted to Malta is not subject to any tax in Malta;
Foreign capital gains are not subject to any tax even if they are remitted to Malta;
Access to Malta’s wide treaty network and double taxation relief. Certain income such as dividends, interest and royalties which are remitted to Malta qualify for a reduced withholding tax rate whereas other income such as pensions and capital gains may be exempt from foreign tax;
No net worth or wealth taxes;
No inheritance tax. However, it is pertinent to point out that upon transfer of real estate and shares in a property company a stamp duty of €5 on every €100 or part thereof is payable. Other shares and securities attract a stamp duty on documents of €2 on every €100 or part thereof;
No real estate tax. Also, any capital gain realised upon the transfer of one’s own residence is exempt from tax if the property has been owned and occupied for at least three consecutive years and the property is transferred within one year of being vacated;
No customs duties or VAT on household effects. Non-EU residents may be required to put a deposit or a bank guarantee for the VAT or duty in question. Upon the expiry of one year stay in Malta, such deposit or bank guarantee is either refunded or cancelled provided the duration of stay can be proved.
Any income arising in Malta is subject to tax at 35% and any household staff are precluded from benefitting from the 15% tax rate.
Who may apply?
An applicant must submit the application through an Authorised Registered Mandatory (ARM) provided the following conditions are met:
The individual is not a beneficiary in terms of any other Maltese tax programmes;
The individual must own or rent a qualifying property which the individual occupies as his principal place of residence;
The individual is in receipt of stable and regular sources of income that are sufficient to maintain himself / herself and his/her dependants without recourse to social assistance in Malta;
The individual must be in possession of a valid travel document;
The individual is in possession of sickness insurance which covers himself / herself and his / her dependants in respect of all risks across the whole of the EU normally covered for Maltese nationals. The health insurance cover must be procured by a company licensed in Malta or by an international reputable health insurance company;
The individual can adequately communicate in Maltese or English;
The individual is a fit and proper person.
What constitutes a qualifying property? A qualifying property is:
An immovable property situated in the north of Malta owned and having a value of at least €275,000. If the property is situated in Gozo then the value is lowered to €250,000 (€220,000 under the TRP and MRP) and if the property is in the south of the island, then the minimum value is lowered to €220,000; or
An immovable property whose rental value is €9,600 per annum or €8,750 per annum depending on whether the property is in the north or else in Gozo or the south.
The property must be used solely by the beneficiary and his / her dependents and may not be let or sub-let.
Documentation and Administrative fee
The application form must be accompanied by the following documents:
A curriculum vitae;
A certified copy of the photographic page of the passport;
A certified copy of a full driving licence or other official document bearing the residential name and current address;
Certified copies of two recent (preceding three months) utility bills for the applicant’s principal residential address (a mobile phone bill is not sufficient);
A statement of good standing from the applicant’s principal personal bank (i.e. the bank through which the majority of domestic financial affairs are carried out);
Documentation showing qualifying property has been bought or rented in Malta;
A certified copy of the sickness Insurance policy;
A police conduct certificate (accompanied with the Apostille Certificate), issued not earlier than six months prior to the date of submission of the application;
Any other document requested as deemed fit by the Inland Revenue Department to assess declarations made by the applicant.
The administrative fee payable to the authorities is paid with the application form. The fee for TRP and GRP amounts to €6,000 with the fee reduced to €5,500 if the qualifying property is situated in the south. The fee for the MRP is of €2,500.
Any document executed outside Malta that will be filed with the application must be accompanied by an Apostille Certificate. If the documents are not in English, a certified English translation of the documents is to be produced.
The ARM will also have to make certain declarations to the authorities on the prescribed form.
An individual may also take up residence in Malta without the need to go through the formalities of the programmes provided he obtains a residence permit and registers with the Inland Revenue Department. This may be particularly appealing to citizens who enjoy free movement within the EU.
For income tax purposes an individual is considered to be resident in Malta if his / her stay in Malta exceeds six months in a calendar year. Foreigners residing in Malta are taxed on income and capital gains arising in Malta (unless exempt) and on income remitted to Malta. Foreign source income which is not remitted to Malta is subject to Malta tax and capital gains are not taxable even if they are remitted to Malta.
The tax rates applicable to foreign residents are the rates applicable to residents depending on their status:
Avanzia Taxand is an Authorised Registered Mandatory (ARM) authorised as such by the Inland Revenue Department. We may therefore handle the application and liaise with the tax authorities. Avanzia Taxand may also act as a tax representative enabling us to deal with all compliance requirements and filing obligations with the tax authorities.
A Professional Investor Fund (PIF) is a special class of a collective investment scheme (CIS) which is subject to a much lighter and more flexible regime than UCITS, AIFs and other retail funds.
Following amendments introduced during 2016, PIFS may be promoted to a qualifying investor who is defined as an investor that invests a minimum of €100,000 in the PIF and which may not, at any time, be reduced below this minimum amount by way of a partial redemption.
A qualifying investor may be one of the following:
is a body corporate which has net assets of more than €750,000 or which is part of a group which has net assets of more than €750,000 or, in each case, the equivalent thereof;
is an unincorporated body of persons or association which has net assets of more than €750,000 or equivalent;
is a trust where the net value of the trust’s assets is more than €750,000 or equivalent;
is an individual whose net worth or joint net worth with that of the person’s spouse, exceeds €750,000 or equivalent; or
is a senior employee or director of a service provider to the PIF.
The fund is required to obtain a Declaration Form in which the qualifying investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it has satisfied the applicable requirements to be considered a qualifying investor.
It should be noted that the total amount invested may not fall below the established threshold of €100,000 unless this is the result of a fall in the NAV. Furthermore, provided that the minimum threshold is satisfied, additional investments of any size may be made. The minimum investment applies to each investor. However, in the case of an umbrella fund comprising several sub-funds, the respective thresholds are applicable on a per scheme basis rather than on a per sub-fund basis, thereby enabling the investor to spread the investment requirement across the various sub-funds.
A PIF is exempt from risk spreading and/or diversification requirements and is not subject to borrowing or leverage restrictions other than those which may be specified in the offering document. A PIF is required to issue an offering document setting out the nature, structure, objectives, risks and functionaries of the fund. The offering document must be submitted to the MFSA before being circulated to the investors.
Whilst the structuring of any fund will depend upon the promoters’ specific objectives and preferences, typical set-ups would involve the creation of voting shares issued to the fund’s promoters, providing them with the effective control over the structuring and general operation of the fund, whilst non-voting shares are issued to investors in the fund. Any changes to the rights attaching to the voting shares, redemption of such shares, and/or issue of additional voting shares will always require the prior approval of the MFSA.
A PIF may be set up as an investment company with variable share capital (“SICAV”), an investment company with fixed share capital (“INVCO”), a limited partnership, a unit trust or a common contractual fund. Usually, clients opt for the corporate form (SICAV) for various reasons, including operational flexibility.
A CIS may be structured as a multi-fund (umbrella) scheme, with a number of sub-funds thereunder, constituted by one or more different classes of shares (which may be denominated in different currencies). The assets and liabilities of each sub-fund are considered to constitute a separate patrimony distinct from the assets and liabilities of (and ring-fenced from the creditors of) the other sub-funds.
Furthermore, it is possible for a CIS in the form of a SICAV to be constituted as an incorporated cell company (“ICC”). The ICC may establish one or more funds as incorporated cells, each cell being a limited liability company (SICAV or INVCO) with separate legal personality (unlike the sub-funds of a multi-fund SICAV, which may have their assets and liabilities treated as a separate patrimony but do not have legal personality separate from that of the SICAV) and requiring a CIS licence independently from the ICC. It is also possible to set up a Recognised Incorporated Cell Company (“RICC”). The RICC is constituted as a limited liability company, which may establish incorporated cells in the form of SICAVs or INVCOs, and which purports to provide such incorporated cells with administrative services. The RICC is required to obtain recognition from the MFSA for the provision of administrative services, while each incorporated cell must obtain a CIS licence. The rules on ICCs and RICCs are designed particularly to accommodate fund platforms.
Board of Directors
The Board of Directors of a PIF must be composed of one or more directors independent from the Manager and the Custodian. In practice, however, it is typical for two or more directors having experience in the financial services industry to be appointed, in order to ensure dual control of the fund’s business. In the case of a self-managed fund, this issue of independence between the fund manager and the fund does not exist since the fund will be managed by its own directors and investment committee, if appointed.
The Scheme is required to obtain the written consent of the MFSA before the appointment or replacement of a Director. Furthermore, no Corporate Director shall be appointed unless it is regulated in a reputable jurisdiction and the name/s of the person/s who will represent the Corporate Director on the Board of Directors of the PIF are disclosed to the MFSA. In approving prospective Directors of a PIF, the MFSA will, as a matter of procedure, consider:
their collective expertise in matters relating to PIFs;
prior experience of the prospective Directors on fund boards; and
knowledge on matters relating to principles of good corporate governance and regulatory issues.
The management arrangements for a PIF may be structured in one of two ways:
Managed by an external fund manager; or
A self-managed fund.
Where an external manager is appointed, such manager may be established in Malta or outside Malta. If established in Malta, the proposed manager should be in possession of a Category 2 Investment Services Licence and be duly licensed and authorised by the MFSA to provide investment management services to collective investment schemes. On the other hand, if the manager is established outside Malta, the MFSA will conduct its “fit and proper” test in respect of the manager to ascertain whether it possesses the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as Manager.
In the event the PIF appoints an investment manager that is licensed as an Alternative Investment Fund Manager (AIFM), the PIF would be become subject to an additional layer of regulation to render it compliant with the Alternative Investment Fund Manager Directive (AIFMD). It is for this reason that the PIF regime is more suitable for managers having assets under management (AUM) of less than €100 million (leveraged) or €500 million (unleveraged).
In the interests of simplifying the structure, it is also possible that the fund is established as a self-managed fund. Doing so would effectively vest responsibility for the discretionary management of the assets of the fund in the Board of Directors. In proposing this structure, the fund will need to satisfy the MFSA that the fund is capable of organising and controlling its affairs in a responsible manner and shall have adequate operational, administrative and financial procedures and controls to ensure compliance with all regulatory requirements and shall provide the MFSA with all the information it may require from time to time.
Where the fund is self-managed, the Board of Directors may consider appointing an Investment Committee which must be composed of at least 3 persons (who shall be expected to satisfy a full “fit and proper” probity check and competence assessment by the MFSA) and which committee shall be collectively responsible for the day-to-day investment management of the assets of the scheme according to the Terms of Reference established by the Board of Directors and approved by the MFSA. One member of the investment committee should be a resident of Malta.
If the self-managed fund route is followed, the initial, paid up share capital for the scheme should be at least €125,000, or the equivalent in any other currency and the NAV of the Scheme is expected to exceed this amount on an on-going basis.
If a self-managed fund exceeds the AUM thresholds of €100 million (leveraged) or €500 million (unleveraged) it would also be required to comply with specific provisions of the AIFMD.
Other Service Providers
Both the administrator and the custodian appointed to service a PIF may be based outside Malta. PIFs are not required to appoint a custodian, although in such circumstances the fund would be expected to have adequate safekeeping arrangements in place, which must be satisfactory to the MFSA.
The following foreign services providers, appointed in respect of a PIF licensed by the MFSA, are exempt from the requirement to hold a licence or recognition certificate issued by the MFSA under the Investment Services Act:
a person resident outside Malta acting as trustee or custodian;
a person resident outside Malta providing the services of management of investments and, or investment advice;
a person resident outside Malta providing administrative services.
The above-mentioned exemptions are not automatically operative but their applicability is subject to a determination in writing by the MFSA.
PIFs are required to appoint a Compliance Officer, a Money Laundering Reporting Officer and a local auditor approved by the MFSA.
If a PIF effects its investments through one or more SPVs owned or controlled via a majority shareholding of the voting shares either directly or indirectly by the PIF, the SPV(s) must be established in Malta or in a jurisdiction which is not an FATF blacklisted country. In principle, the PIF must through its directors or general partner(s) at all times maintain the majority directorship of any SPV.
PIFs are permitted to use side pockets in order deal with situations where certain assets within the fund’s portfolio become illiquid or comparatively hard to value, subject to certain conditions.
The use of side letters is allowed, but these must be circulated and approved by the Board of Directors / General Partner / Manager prior to issue, and must be kept in Malta at the registered office and be made available to MFSA for inspection.
Drawdown arrangements, whereby investors commit themselves to subscribe for a maximum amount of units in the fund which may be issued at a discount, are also permitted subject to certain disclosure requirements and other conditions.
Application process and fees payable to MFSA
The application for a licence to operate a PIF must be made to the MFSA. The MFSA may only license a PIF if it is satisfied that the PIF will comply in all respects with the relevant legislation, regulations and rules and that its directors and officers, or in the case of a unit trust or limited partnership, its trustee(s) or general partner(s) respectively, are fit and proper persons to carry out the functions required of them in connection with the scheme.
Upon submission of all documentation relative to the licence application in draft form (to the satisfaction of MFSA) and payment of the application fee, it is usually a matter of weeks for the MFSA to issue an in-principle approval in respect of the Fund. This is then followed by a submission of all documents duly signed in original, after which the MFSA issues a licence accordingly.
The PIF may appoint any service provider (e.g. investment manager, adviser, administrator, custodian or prime broker) it deems necessary. Where all service providers are based outside Malta and the PIF has not appointed a local resident director (in the case of a scheme set up as an investment company), a local general partner (in the case of a scheme set up as a limited partnership); or a local trustee (in the case of a scheme set up as a unit trust / common contractual fund), the PIF has to appoint a Local Representative.
The fee structure for fees payable to the MFSA by PIFs and AIFs is as follows:
Application for a PIF licence
€ 1,000 (per sub-fund)
Annual Supervisory Fee
€ 600 (per sub-fund)
For income tax purposes, a distinction is made between prescribed and non-prescribed funds. Essentially, a CIS that has assets situated in Malta constituting at least 85% of its total asset value is classified as a Prescribed Fund. Other licensed funds, including funds in an overseas-based scheme, are Non-Prescribed Funds.
In the case of Prescribed Funds, the CIS qualifies for an exemption from tax on income “other than income from immovable property situated in Malta and investment income” earned by the Prescribed Fund. The withholding tax on local investment income is 15% for bank interest and 10% for other investment income. Income derived by the Prescribed Fund from immovable property situated in Malta is taxed at 35%.
There is no withholding tax on investment income received by Non-Prescribed Funds (including overseas based CISs), which enjoy an exemption from tax on income (other than income from immovable property situated in Malta) and capital gains realised on their investments. They also enjoy an exemption from stamp duty. There is no wealth tax in Malta.
Foreign investors are not subject to Maltese tax on capital gains or income when they dispose of their investment (through redemption by the Fund or disposal to a third party) or when they receive a dividend or other income from the Fund. They are also entitled to benefit from the stamp duty exemption obtained for the Fund in connection with the acquisition or disposal of their units in the Fund.
How can we help you?
Avanzia Taxand is a corporate services provider licensed by the MFSA and we may assist in the application process, the drafting of documentation in connection with the legal set-up as well as some of the ongoing compliance requirements and filing obligations.
Malta is known to have a stable and successful financial system leading to more business entities being set up in Malta. Following Malta’s accession to the EU in 2004, the financial services sector has grown exponentially and is nowadays one of the main pillars behind the country’s economic growth. Indeed, despite of the European sovereign debt crisis which at that time had led to loss of confidence in financial institutions, Malta’s financial services sector including the banking sector has remained, and still is, remarkably robust and also thriving.
The Maltese banking sector
The banking sector in Malta is composed of:
The Central Bank of Malta who is primarily responsible for maintaining price stability, promotion of a sound financial system and orderly capital markets;
The Malta Financial Services Authority (MFSA) who is the single financial services regulator in Malta and is therefore entrusted with the banking licensing, regulatory and supervisory function, and
Credit institutions whose principal business is the receipt of deposits and granting of credit facilities as well as other financial services such as retail banking, corporate banking, private banking, business banking and investment banking.
Banks in Malta are regulated by the Banking Act, 1994 which is founded on EU legislation and is compliant with Basel Core Principles.
The Basel Committee on Banking Supervision issued a set of reform measures in banking regulation known as Basel III which were transposed into EU law through the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR), together known as the CRD IV package. The CRD IV package was published in the Official Journal (OJ) of the EU on 27 June 2013. Member States, including Malta, were required to adopt these new laws and regulations with an effective implementation date of January 2014. The aim of these robust regulations was to strengthen the EU banking sector in a manner that banks would be able to absorb economic shocks whilst continue facing economic growth and activity.
As at February 2018, 24 entities held an active MFSA licence to operate as a credit institution in terms of the Banking Act, 1994.
Activities of a bank
The core banking activities are defined as the acceptance of money deposits from the public or raising of money from the public for the purpose of lending to others or otherwise investing for the account and at the risk of the bank.
Besides the business of banking, the activities of a bank may include:
Payments services as defined in the Financial Institutions Act;
Issuing and administering other means of payment;
Guarantees and commitment;
Trading for own account or for account of customers in:
(a) money market instruments (cheques, bills, certificates of deposit, and similar instruments);
(b) foreign exchange;
(c) financial futures and options;
(d) exchange and interest-rate instruments;
(e) transferable securities.
Participation in securities issues and the provision of services related to such issues;
Advice to undertakings on capital structure, industrial strategy and related questions and advice as well as services relating to mergers and the purchase of undertakings
Portfolio management and advice;
Safekeeping and administering of securities;
Credit reference services;
Safe custody services, and
Issuing electronic money.
Licensing of banks in Malta
The Banking Act states that a company will be granted a banking license if:
Its’ own funds amount to not less than €5 million;
There are at least two individuals who will effectively direct the business of the credit institution in Malta;
The Authority is notified of the identities of the shareholders or members whether direct or indirect, that have qualifying holdings and of the amounts of those holdings or, where there are no qualifying holdings, of the twenty largest shareholders. In terms of the CRR a ‘qualifying holding’ means a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking;
All qualifying shareholders, controllers and persons who will effectively direct the business of the credit institution are suitable persons to ensure its sound and prudent management, and
the Authority is satisfied that there are no close links between that company and another person/s which through any law, regulation, administrative provision or in any manner prevent the company from exercising effective supervision of the company under the provisions of the Banking Act.
In applying for a banking license with the MFSA, the following documents must be submitted:
Form 1 as annexed to Banking Rule 01 – Application for Authority to Carry Out the Business of Banking in or from Malta;
Form 2 as annexed to Banking Rule 01 – Questionnaire for Qualifying Shareholders other than Individuals;
In terms of Banking Rule 01 – Personal Questionnaire for individuals who are or propose to be Directors, Controllers or Managers;
a copy of the Memorandum and Articles of Association of the institution
audited financial statements for the last three years (if applicable);
identity of all directors, controllers and managers of the institution;
identity of all shareholders with qualifying shareholding; and
identity of the individuals who will be effectively directing the business of the prospective bank.
Following the set-up of the Single Supervisory Mechanism (SSM) in November 2014, the European Central Bank (ECB) has become the authority in charge of all banking authorisations in the Euro Area irrespective of the size of the bank. The rules emanating from the Single Supervisory Mechanism Framework (Regulation (EU) No 468/2014) state that when the National Competent Authority (NCA) receives an application for an authorisation to take up the business of a credit institution to be established in a participating Member State, it shall notify the ECB of the receipt of such application within 15 working days. The MFSA will assess whether the applicant complies with all the national laws and regulations. If the MFSA is satisfied with the application, it will prepare a draft decision proposing that the ECB grants the application. The latter notification must be performed by the MFSA to the ECB and the applicant within at least 20 working days before the end of the maximum assessment period provided by the Banking Act which stands to be six months. The ECB will take a decision on the draft authorisation decision it receives from the MFSA within 10 working days. If the MFSA concludes that the application does not satisfy the Banking Act and hence reject the application, it will notify the ECB with its decision.
An application fee of €35,000 is also required upon submission of the aforementioned application. Credit institutions licensed under the Act must also pay an annual supervision fee of 0.02% of its deposit liabilities as reported at the end of the year immediately before the year in which the fee is payable. This must not be less than €25,000 and not more than €1,200,000. Companies which are incorporated outside of Malta, but which have representative offices in Malta, shall pay the MFSA a fee of €3,600 every year.
Banking structures in Malta
The Maltese Banking Act, prescribes that no business of banking shall be transacted in or from Malta except by a company which is in possession of a licence granted under the said Act unless it is a credit institution licenced in a Member State or EEA State and is exercising its’ right under European Union Law. In essence, a bank may operate in Malta as follows:
A Bank fully licenced by the MFSA, or
An EU Bank exercising its right to passport into Malta and establish a branch. In this case, these branches are exempt from the licensing requirement, however, they are required to register the branch with the Maltese Registrar of Companies within one month from establishing a branch in Malta; or
A non-EU licensed Bank establishing a branch of the same bank in Malta. or
A representative office of a Bank licensed in another jurisdiction. The activities must be restricted to purely liaison activities and may not include financial transactions or execution of any documents. In such cases, the foreign bank must submit a notification to the MFSA that they have an intention of establishing an office.
Monitoring and supervision
Upon commencement of activities, Maltese licensed banks are required to monitor the capital adequacy of their own funds in ensuring that they hold sufficient capital against the credit risk, the market risk, the operational risk, the large exposures, and the liquidity and leverage amongst other requirements whilst ensuring that effective policies and procedures and good governance are in place. The regulations emanating from the CRD IV aim at improving the quantity and quality of capital through the introduction of additional capital buffers in addition to the minimum capital requirement of 8% of the risk weighted assets of which 4.5% of the risk weighted assets must be met with Common Equity Tier 1 Capital whilst also introducing new liquidity ratios (Liquidity Coverage Ratio and Net Stable Funding Ratio), amongst others.
Following the implementation of the SSM, which comprises of the ECB and the NCAs of the EU Member States, a new supervision system has been introduced. Credit institutions are classified as significant institutions or less-significant Institutions depending on criteria such as the total value of the assets and their economic importance. The ECB directly supervises institutions classified as significant through the supervision conducted by the Joint Supervisory Teams (JSTs) comprising of staff from both the ECB and the NCA. JSTs supervise around 1,200 entities (120 groups) which are equivalent to around 85% of the total banking assets of the Euro Area. In Malta the three largest domestic banks, namely Bank of Valletta plc, HSBC Bank Malta plc and MeDirect Group Limited are subject to supervision by JSTs. The NCAs are directly responsible for the supervision of the less significant institutions which make up to around 3,500 entities. Hence, the ECB is the direct supervisor of the biggest banks and indirect supervisor of the smaller banks. In the case of Malta, the MFSA is also directly responsible for the remaining less-significant Institutions. Banks are subject to an annual supervisory fee levied by the ECB.
Over the last decade, the Maltese banking sector has experienced a shift towards liberalisation and foreign ownership. Indeed, highly respected names have established operations in Malta and use Malta as a strategic base for further expansion. The implementation of the European Passport Rights for Credit Institutions Regulations makes Malta an ideal platform from where a credit institution may establish itself and provide banking services across the EU or EEA and therefore benefit from the EU’s Single Market. Conversely, a credit institution which is authorized by a regulatory authority in a Member State of the EU or the EEA may benefit from the European passport to establish a branch in Malta or provide cross-border services in Malta, without being required to obtain a separate licence from the MFSA.
Banks in Malta are subject to the general rules of taxation. Shareholders may avail themselves from Malta’s full imputation tax system and therefore when in receipt of dividends they are entitled to a tax credit which is equal to the tax borne on the profits out of which the dividends are paid. Shareholders may also be entitled to tax refunds upon the distribution of taxed profits. Tax refunds may be claimed on all profits excluding interest and any other income derived from the provision of loans which finance the acquisition, development or renovation of Maltese immovable property since such profits are allocated to the Immovable Property Account and no refunds may be claimed.
Malta has a wide network of tax treaties which may reduce the withholding tax rates on dividends, interest and royalties paid to Malta. On the other hand, Malta does not impose or levy any withholding taxes on outgoing dividends, interest and royalties.
Heavily capitalised banks may also avail from the recently introduced Notional Interest Deduction Rules which entitle companies to claim a tax deduction equivalent to the notional interest calculated on its equity thus making equity financing on the same level playing field as debt financing for taxation purposes. Other benefits emanating from the Maltese tax system include the ‘participation exemption’ on profits derived from participating equity holdings and no capital gains on transfer of shares in a non-property company held by non-resident shareholders.
For further details on the Maltese taxation system in Malta, please refer to Corporate Taxation.
How can we help you?
Avanzia Taxand is a corporate service provider registered with the MFSA and we may assist in the application process with the MFSA, the drafting of documentation in connection with the corporate structure set-up as well as some of the ongoing compliance requirements and filing obligations especially those related to secretarial and taxation.
The iGaming industry as well as the e-Commerce industry have significantly increased the need of payment gateways in Malta. The Maltese authorities have proactively responded to this change and now Malta become a destination of choice for the setting up of Payment Institutions (PI). Malta has developed an advanced telecommunications infrastructure and offers a highly skilled multilingual workforce making it a supreme destination to the setting up of customer care centres.
PIs are regulated by the Financial Institutions Act, 1994. In 2017, the European Union (EU) had published the Payment Services Directive 2 (PSD2) (Directive 2015/2366/EU) to be transposed by Member States, including Malta, into their laws and thereby repealing Payment Services Directive 1 (PSD 1). The transposition deadline for its implementation was set to 13 January 2018. The new directive builds on the previous directive and is designed to increase consumer protection, make payments safer and enhance innovation and competition. The regulatory and supervisory requirements for PIs are less rigid than those required for other credit or financial institutions.
As at February 2018, 38 companies held an active PI licence issued by the Malta Financial Services Authority (MFSA) which is equivalent to an increase of 36% over the number of active licenses in December 2016. Additionally, there are currently over 350 EU/EEA PIs exercising the freedom to provide services in Malta which have also been increasing year on year.
Unlike credit institutions, financial institutions cannot fund their activities through the taking of deposits or other repayable funds from the public.
Activities of PIs
PIs may engage in the following activities which are laid down in the Second Schedule to the Financial Institutions Act:
Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account;
Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account;
Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider for the execution of direct debits, including one-off direct debits, the execution of payment transactions through a payment card or a similar device and for the execution of credit transfers, including standing orders;
Execution of payment transactions where the funds are covered by a credit line for a payment service user to execute of direct debits, including one-off direct debits, execute the payment transactions through a payment card or a similar device and execute credit transfers, including standing orders;
Issuing and/or acquiring of payment instruments;
Execution of payment transactions where the consent of the payer to a payment transaction is transmitted by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting solely as an intermediary on behalf of the payment service user and the supplier of the goods and services.
PIs may also carry out the following additional activities:
The provision of operational and closely related ancillary services such as ensuring execution of payment transactions, foreign exchange services strictly in relation to payment services, safekeeping activities, and storage and processing of data;
The operation of payment systems;
Certain business activities other than the provision of payment services;
When payment institutions engage in the provision of payment services, they may only hold payment accounts used exclusively for transactions, and
Payment institutions may grant credit related to certain payment services referred to in (4), (5) or (7) above only if further requirements* are met.
* The further requirements are:
the credit is ancillary and granted exclusively in connection with the execution of a transaction; and
notwithstanding national rules on providing credit by credit cards, the credit granted in connection with a payment and executed with the act shall be repaid within a short period which shall in no case exceed twelve months; and
such credit is not granted from the funds received or held for the purpose of executing a payment transaction; and
the own funds of the payment institution are at all times, to the satisfaction of the supervisory authority, appropriate in view of the overall amount of credit granted.
Licensing of PIs in Malta
The law lays down the following statutory minimum requirements which must be satisfied and fulfilled before granting a license to a company:
Its’ initial share capital is in accordance with the principles established by the law (see below);
There are at least two individuals who will effectively direct the business of the financial institution in Malta, that is, “the four eyes” principle;
All qualifying shareholders, controllers and all persons who will effectively direct the business of the institution are suitable persons to ensure its prudent management;
The authority is satisfied that the financial institution has sound and prudent management, and has robust governance arrangement;
The authority is satisfied that there are no close links between that company and another person/s which through any law, regulation, administrative provision or in any manner prevent the company from exercising effective supervision of the company under the provisions of the Financial Institutions Act.
PIs are required that at the time of authorisation have initial capital as follows:
Activity provided by PI
Minimum initial capital requirement
From (1) to (5) above
In applying for a PIs license with the MFSA, the following documents must be submitted:
Form 1 as annexed to Financial Institutions Rule 01 – Application for Authority to Set up a Financial Institution Operating in or from Malta;
Form 2 as annexed to Financial Institutions Rule 01 – Questionnaire for Qualifying Shareholders other than Individuals;
In terms of Financial Institutions Rule 01 – Personal Questionnaire for individuals who are or propose to be Directors, Controllers or Managers;
A programme of operations setting out in particular the type of activities to be undertaken;
Proposed level of initial capital;
A business plan including the structure, organisation, management systems, governance arrangements and internal control systems of the institution and a forecast budget calculation for the first three financial years;
A description of the procedure in place to monitor, handle and follow up a security incident and security related customer complaints, including incidents reporting mechanism;
A description of the process in place to file, monitor, track or restrict access to sensitive payment data;
A description of business continuity arrangements;
A description of the principles and definitions applied for the collection of statistical data on performance, transactions and fraud;
A security policy document;
A description of the internal control mechanisms;
A description of structural organisation;
Audited financial statements for the last three years, if available;
The identity of statutory auditors and audit firms;
The applicant’s legal status;
The address of the applicant’s head office;
A description of the measures taken for safeguarding payment service users’ funds.
The authority will determine an application for a licence within three months of receipt of the formal complete application and will determine whether to grant a licence without conditions, a licence subject to certain conditions, or refuse the application for a licence.
A typical credit card payment process
The following are the parties to the payment process when using a credit card:
A consumer who uses a credit card to purchase goods and services.
A provider of goods and services who accepts credit card payments.
Payment service provider
A payment gateway which is responsible to acquire data authorisation and encryption.
The bank which holds the merchant’s bank account.
Credit card brand network
This includes brands such as VISA, Mastercard and American Express, amongst others, whose networks are used to facilitate interactions between issuers and acquirers when authorising and settling transactions.
The bank which issued a credit card to the consumer on behalf of card networks.
The payment goes through the following stages:
Authorisation of a transaction
The cardholder uses a credit card to settle a purchasing transaction.
A merchant’s POS system / e-commerce website contacts the PSP who, depending on the card brand used, contacts the designated acquirer for transaction authorisation.
The acquirer sends the payment details to the card association.
The latter then sends the payment details to the issuing bank for authorisation.
Authentication of a transaction
The issuing bank receives the request for payment authorisation from the credit card network and validates the data received including the credit card number and CVV number, confirms availability of funds and matches the billing address of the credit card and payment files received.
The issuing bank approves or declines the payment transaction.
The response is sent back to the merchant through the same channels i.e. through the credit card network, then to the acquiring bank, PSP and finally to the merchant.
For successful transactions, the issuing bank blocks the purchase amount on the cardholder’s account.
The authorisation and authentication process takes between two and three seconds.
Clearing and settlement
The merchant sends the approved authorisations on a daily basis in one batch to the PSP.
The latter directs information in batches to the credit card networks for settlement who in turn sends each of the approved transactions to the relevant issuing banks.
The issuing bank transfers the funds to the credit card network and the payment goes through the same channels with each party deducting a charge until the merchant’s account is credited by the acquiring bank.
Eventually the cardholder settles the bill with the issuing bank.
The settlement process can take anywhere from 24 hours up to 3 days.
Passporting rights for PIs
Through the implementation of the European Passport Rights for Credit Institutions Regulations, a financial institution licenced or holding equivalent authorisation in another Member State or EEA State as a payment institution, may provide the activities for which it has been authorised either through the establishment of a branch or the freedom to provide services, including by engaging an agent. The law prescribes the communication requirements for PIs that would like to passport the provision of services in Malta.
An application fee of €3,500 is also required upon submission of the aforementioned application. Financial institutions licensed under the Act must also pay an annual supervision fee of 0.02% of its total assets as reported at the end of the year immediately before the year in which the fee is payable. This must not be less than €2,500.
Financial Institutions are subject to the general rules of taxation in Malta. Shareholders may avail themselves from the full imputation tax system and therefore when in receipt of dividends they are entitled to a tax credit which is equal to the tax paid by the distributing company on the profits out of which the dividends are paid. Shareholders may also be entitled to tax refunds upon the distribution of taxed profits. Moreover, Malta has a wide network of double taxation agreements in place. Other benefits emanating from the Maltese tax system include the ‘participation exemption’ on profits derived from participating equity holdings and no capital gains on transfer of shares in a non-property company held by non-resident shareholders. For further details on the Maltese taxation system, please refer to Corporate Taxation.
How can we help you?
Avanzia Taxand is a corporate service provider registered with the Malta Financial Services Authority and we may assist in the application process with the MFSA, the drafting of documentation in connection with the legal set-up as well as some of the ongoing compliance requirements and filing obligations particularly those related to secretarial and taxation.