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Malta implements ATAD

Malta implemented the EU Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD) by means of Legal Notice 411 of 2018 EU ATAD Implementation Regulations, 2018.  The below provides an overview of the different new tax measures which will become applicable as from 1 January 2019, except for the exit taxation rule which will become applicable as from 1 January 2020.

 

Introduction

 

The aim of ATAD is to implement at EU level the BEPS (Base Erosion and Profit Shifting) recommendations made by the OECD and the G20 in October 2015. ATAD lays down anti-tax avoidance rules in the following fields:

  • Deductibility of interest payments,
  • General anti-abuse rule (“GAAR”),
  • Controlled foreign companies (“CFCs”), and
  • Exit taxation.

 

The regulations apply to taxpayers including companies as well as other entities such as trusts and similar arrangements that are subject to tax in Malta in the same manner as companies.  The definition also applies to entities that are not resident in Malta but have a permanent establishment (PE) in Malta provided these are subject to tax in Malta as companies.

 

Limitation to the Tax Deductibility of Interest Payments (Rule 4)

 

Regulation 4 of L.N. 411 aims at limiting the deductibility of interest payments as it was recommended in the Final Report on BEPS Action 4 (interest deductions and other financial payments) and included as a minimum standard in ATAD. The objective of this rule is to discourage multinational groups from reducing their overall tax base through financing group companies in high-tax jurisdictions with debt. Notably, the scope of the interest limitation rule encompasses both related party borrowing and third party borrowing.

 

As from 1 January 2019, subject to certain conditions and limitations, “exceeding borrowing costs” shall be deductible only up to 30% of the corporate taxpayers’ earnings before interest, tax and amortization (“EBITDA”) or up to an amount of EUR 3 million, whichever is higher. Corporate taxpayers who can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can fully deduct their exceeding borrowing costs (so called “escape clause”).

 

“Exceeding borrowing costs” correspond to the amount by which the deductible “borrowing costs” of a taxpayer exceed taxable “interest revenues and other economically equivalent taxable revenues” that the taxpayer receives. Thus, in order to determine the amount of exceeding borrowing costs, it is necessary to understand which costs fall within the scope of borrowing costs and what is considered as interest revenues and other economically equivalent taxable revenues.

 

Borrowing costs to take into account are interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance, including, without being limited to:

 

  • payments under profit participating loans,
  • imputed interest on instruments such as convertible bonds and zero coupon bonds,
  • amounts under alternative financing arrangements, such as Islamic finance,
  • the finance cost element of finance lease payments,
  • capitalised interest included in the balance sheet value of a related asset, or the amortisation of capitalised interest,
  • amounts measured by reference to a funding return under transfer pricing rules where applicable,
  • notional interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings,
  • certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance,
  • guarantee fees for financing arrangements, and
  • arrangement fees and similar costs related to the borrowing of funds.

 

As far as interest revenues and other economically equivalent taxable revenues are concerned, neither ATAD nor the LN 411 of 2018 clarifies what is to be considered as revenues which are economically equivalent to interest. However, since the definition of borrowing costs also refers to “other costs economically equivalent to interest”, there should be a symmetry in the interpretation of the two concepts.

 

The optional provision of ATAD according to which EBITDA and exceeding borrowing costs can be determined at the level of the consolidated group (in case of tax consolidation) has also been introduced in this regulation.

 

Entities which are out of the scope of the rule

 

Financial undertakings are out of the scope of the interest limitation rule. Financial undertakings are the ones regulated by the EU Directives and Regulations and include among others credit institutions, investments firms, insurance and reinsurance companies, certain pension institutions, alternative investment funds (“AIF”), undertakings for collective investment in transferable securities (“UCITS”), as well as central counterparties and central securities depositories.

 

In addition, standalone entities, i.e. entities that are not part of a consolidated group for financial accounting purposes and have no associated enterprise or PE are able to fully deduct their exceeding borrowing costs. In other words, these entities are not subject to the new interest limitation rule.

 

Loans which are out of the scope of the rule 

 

Malta chose to limit the scope of the new rule through the inclusion of the following two optional provisions under ATAD:

 

  • loans which were concluded before 17 June 2016 (i.e. a grandfathering rule) are excluded. However, the exclusion does not apply to any subsequent modification of such loans. Accordingly, when the nominal amount of a loan granted before 17 June 2016 is increased after this date, the interest in relation to the increased amount would be subject to the interest deduction limitation rule. Likewise, when the interest rate applicable on a loan granted before 17 June 2016 is increased thereafter, only the original interest rate would benefit from the grandfathering rule. Nevertheless, when companies are financed by a loan facility that determines a maximum loan amount and an interest rate, the entire loan amount should be excluded from the scope of the interest deduction limitation rule, irrespective of when the drawdowns have been made;
  • loans used to fund long-term public infrastructure projects (where the project operator, borrowing costs, assets and income are all in the EU) are also excluded.

 

Carry forward of unused exceeding borrowing costs and unused interest capacity 

 

Exceeding borrowing costs which cannot be deducted in one tax period because they exceed the limit set in the rule, can be carried forward in whole or in part without any time limitation.

In addition, unused interest capacity can be carried forward over 5 tax years.  The regulations do not define what falls under unused interest capacity.

 

Exit Taxation Rules (Rule 5)

 

As from 1 January 2020, re-domiciliation’s and shift of tax residency to other jurisdictions will trigger exit taxes.  The aim is to even out discrepancies in the valuation of assets in the country of origin and the valuation of assets in the country of destination.

 

The exit rules transposed through rule 5 of L.N. 411, provide for tax on capital gains which are triggered when a taxpayer:

  • transfers assets from its head office in Malta to a PE in another country;
  • transfers assets from its PE in Malta to its head office or another PE in another country;
  • transfers its tax residence from Malta to another country, or
  • transfers its activities made through a PE in Malta to another country.

 

The capital gain will be equivalent to the difference between the market value of the assets at the time of the exit and their value for tax purposes.  The capital gain will be subject to the provisions of the Income Tax Act.    The income tax on the capital gain becomes payable by not later than the taxpayer’s subsequent tax return date.  In case of transfers within the EU or European Economic Area (“EEA”), the taxpayer may request to defer the payment of exit tax by paying in equal installments over 5 years.

 

Exit taxes do not apply if the assets are set to revert back to Malta within a period of 12 months and the assets relate to the financing of securities, assets posted as collateral or an asset transfer that takes place in order to meet prudential capital requirements or for the purpose of liquidity management.

 

General Anti-Abuse Rule (Rule 6)

 

Any arrangements put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law shall be disregarded. Arrangements are considered as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

 

Article 51 of the Income Tax Act already includes general anti abuse provisions which explicitly states that any series of arrangements which are put up solely for taking benefit of any tax advantage is ignored for tax purposes.  The GAAR transposed in regulation 6 of L.N. 411 prescribes that, for the purposes of calculating the corporate tax liability, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series thereof is regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

 

CFC Rule (Rule 7)

 

ATAD provides for CFC rules to discourage the attribution of income in a low-taxed jurisdiction.  Malta opted to adopt the non -genuine arrangement CFC rule, thus, as from 1 January 2019, Malta will tax the non-distributed income of an entity or PE which qualifies as a CFC.

 

The income of a CFC will be taxed in Malta if, and to the extent that, the activities of the CFC that generate this income are managed by the Maltese corporate taxpayer as the people functions in relation to the activities of the CFC are performed by the Maltese corporate taxpayer.

 

An entity or a PE will qualify as a CFC if the following conditions are met:

  • The taxpayer by itself, or together with its associated enterprises, holds directly or indirectly more than 50% in the entity.  Holding includes equity holding, voting rights and right to profit; and
  • The actual corporate tax paid by the entity or PE is lower than the difference between the tax that would have been charged on the entity or PE computed in accordance with the Maltese Income Tax Act and the actual corporate tax paid on its profits.

 

If an entity or PE is deemed to be a CFC, then the non-distributed income arising from non-genuine arrangements of a CFC which are put in place for the purpose of gaining a tax advantage shall be included in the tax base of the taxpayer and hence will be brought to charge in Malta.    The CFC rule applies only if:

  • The CFC’s accounting profits exceed €750,000 and non-trading income exceeds €75,000, or
  • The CFC’s accounting profits amount to more than 10% of its’ operating costs.

 

Allocation rules and methods to avoid double taxation

 

The income of the CFC to be included in the tax base of the Maltese taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling Maltese corporate taxpayer. The attribution of CFC income shall be calculated in accordance with the arm’s length principle.   The income to be included in the tax base shall be computed in proportion to the taxpayer’s participation in the CFC and is included in the tax period of the Maltese taxpayer in which the tax year of the CFC ends.   Any tax paid by the CFC is allowed as a tax credit to the taxpayer in accordance with the provisions of articles 77 and 82 of the Act.  Whilst the legislation provides for general guidelines as to how the income to be brought to charge will be calculated, in practice, various issues may arise which may require further clarifications from the tax department.

 

Conclusion

 

Following the launch of the BEPS recommendations by the OECD and the G20 in 2015,  Malta has now implemented the EU directive to address tax avoidance schemes though ATAD.  This follows the implementation of the MLI and the end of the single malt structures.

 

Most measures introduced through ATAD are new concepts to the Maltese tax framework.  For the first time, Malta has interest deduction limitations, CFC rules and within two years, exit taxes.  Being a new tax framework, various clarifications will be necessary to ensure that the rules are properly adhered to.  It is indeed unfortunate that these rules have been released only a few days before these enter into effect as this gives very little time to taxpayers to assess the impact of these rules on current structures and assess whether changes are needed to mitigate the impact of these rules.

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Anti-Tax Avoidance Directive (ATAD)

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.

  

Interest Limitation

 

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.

 

Exit Tax

 

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.

 

Conclusion

 

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.

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Corporate Taxation

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.

 

Tax accounting

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:

wdt_ID Tax Account Allocation Refund
1 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.
2 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.
3 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
4 Final Tax Account (FTA) Profits subject to a final withholding tax and income exempt from tax (e.g. participation exemption). None. No tax refunds.
5 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:

  1. A right to vote;
  2. A right to profits available for distribution, and
  3. 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:

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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:

  1. it is resident or incorporated in the EU; or
  2. it is subject to foreign tax of at least 15%; or
  3. 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:

  1. the equity holding in the non-resident company is not a portfolio investment, and
  2. 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:

wdt_ID At Shareholder Level Participating Holding (PH) PH + FRFTC No PH and claims FRFTC Passive Interest and Royalties Trading Income
1 Gross dividend 1,000.00 1,250.00 1,250.00 1,000.00 1,000.00
2 Tax @ 35% 350.00 437.50 437.50 350.00 350.00
3 Credit for TAS -350.00 -437.50 -437.50 -350.00 -350.00
5 Refund amount 350.00 187.50 125.00 250.00 300.00

COMET % wdt_ID refund Participating Holding (PH) PH + FRFTC No PH and claims FRFTC Passive Interest and Royalties Trading Income
COMET % 2 COMET % 0% 0% 6.25% 10% 5%

PH: Participating Holding

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

In 2018 Malta 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.

Other benefits

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;
  • 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.

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Corporate Matters

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:

Requirements Description
Share CapitalThe 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.
CurrencyThe 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.
Registered AddressA company must have a registered address in Malta.
Objects and PowersThe 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.
ShareholdersThere 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 DirectorsThe 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 RepresentativeMaltese 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.
Company SecretaryA company must have a natural person occupying the post of company secretary. There are no restrictions with respect to residence or nationality.
General MeetingsAn 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.
Financial Year 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.
Annual AccountsCompanies 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 AccountsMalta 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).
Annual ReturnAll 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.
Registration FeesUpon 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.
Exchange Control There are no exchange controls in place. As a result, companies may have bank accounts outside Malta.
TaxationMaltese 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.
RedomiciliationMaltese 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.

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Double Taxation Relief

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.

 

Unilateral Relief

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.

 

Tax Treaties

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.

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Redomiciliation

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.

 

Additional Documentation

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.

 

Provisional Registration

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.

 

Final Registration

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.

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Employment Income

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:

Resident and domiciled individuals

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. 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.  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.

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Residence in Malta

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.

 

Incentives

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.

 

Other Residents

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:

How can we help you?

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.

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PIFs

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.

 

Qualifying Investor

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.

 

Legal Structure

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:

  1. their collective expertise in matters relating to PIFs;
  2. prior experience of the prospective Directors on fund boards; and
  3. knowledge on matters relating to principles of good corporate governance and regulatory issues.

 

Fund Management

The management arrangements for a PIF may be structured in one of two ways:

  1. Managed by an external fund manager; or
  2. A self-managed fund.

 

External Manager

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).

 

Self-Managed Fund

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.

 

Enhanced Flexibility

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:

SchemeSub-funds
Application for a PIF licence€ 2,000€ 1,000 (per sub-fund)
Annual Supervisory Fee€ 2,000€ 600 (per sub-fund)

Taxation

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.

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Credit Institutions

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 June 2019, 23 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:

  • Financial leasing;
  • 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
  • Money broking;
  • 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.

 

Fees

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.

 

Passporting rights

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.  

 

Taxation

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 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.

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