Malta has become a serious contender for cross-border and international business in a number of niche areas, the MFSA details which areas and how the island state is weathering the current financial storm.
EU membership, the development of a single European market in financial services and the adoption of the Euro have strongly influenced Malta’s emergence as a top tier financial services centre in recent years. A number of elements however have contributed to this success, among them the ongoing development in the legal and regulatory infrastructure and a reputation for efficient service delivery.
Innovation and a strong desire to provide an optimum operating environment for business are at the heart of Malta’s quest for growth. Along with other changes that have taken place in the market, key changes in its legislation have positioned Malta as a serious contender for cross-border and international business in a number of niche areas.
The Malta Financial Services Authority (MFSA) is the single regulator for all banking, investment, securities, insurance, pension and trust services provided in or from Malta. The Authority is a public, self-funded institution set up by law as an independent regulatory and supervisory agency. The MFSA is also empowered to advise the Government on matters relating to financial services, propose primary and secondary legislation and publish rules and guidelines that have the force of law.
The MFSA is also an active member of the Committee of European Banking Supervisors (CEBS), Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), Committee of European Securities Regulators (CESR), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS)
Among other things this has enabled the MFSA to push for the approval for UCITS funds to invest in hedge fund indices, and argue for the introduction of a European management company passport despite opposition from some other Member States. The MFSA is currently advising the Maltese Government on the proposed Alternative Investment Fund Management Directive better known as the AIFM.
Legal and regulatory developments
Investment Services: Malta offers a range of fund vehicles (including investment companies, mutual funds, limited partnership, foundations, unit trusts and contractual funds), which can be tailored to suit investor requirements and investment policy. Funds may be set up as UCITS or non-UCITS. Non UCITS funds include Professional Investor Funds, which are the preferred framework for hedge funds and other alternative investment funds.
Funds domiciled in Malta are distributed within the EU and outside the EU. UCITS funds domiciled in Malta are passported to various Member States particularly Germany, Spain, France, Italy and the UK. They are also distributed in Hong Kong and Singapore. Malta has a considerable number of MoUs with various non-EU jurisdictions andearlier this year the MFSA signed MoUs with the China Banking Regulatory Commission and the China Securities Regulation Commission, which will allow distribution of Malta-domiciled funds into China.
In March, the MFSA published a Guidance Note for Shariah Compliant Funds. This comprehensive document explains how the legal and regulatory framework established under the Investment Services Act would apply to Shariah-compliant funds established in Malta. It provides a principles-based regulatory regime that lays emphasis on the disclosure of all information that the investor needs to know before taking the investment decision and on the transparency of investment management process itself. This allows a high degree of freedom on the choice of investment strategies and asset allocation policies adopted by Sharia investment funds, subject to conditions that vary according to the level of experience and investment expertise of the target investor.
Insurance: Maltese insurance companies have established a market in the European Union. The ability to direct write in all EU member states does away with the need to appoint a fronting company in each market with obvious gains in efficiency and savings on costs.
Adherence to EU regulatory standards makes it relatively easy for group captives to extend into third party business and provide insurance cover to third parties such as employees, clients and the general public. Protected cell company legislation adds another measure of flexibility not found in other EU domiciles. This provides for the legal segregation of the assets and liabilities between cells while allowing greater capital management efficiency at the core. Another interesting feature of Maltese law is that the local financial reporting standard is also IFRS with obvious advantages when it comes to consolidating group accounts.
Independent research ranks Malta ahead of all the other European captive insurance domiciles in cost-efficiency, tailored regulation and PCC legislation, and second only to Dublin in accessibility.
Redomiciliation: Companies including insurance and securities firms have been using Malta’s redomiciliation legislation since it came into force in 2002, largely because the process is seamless and allows the companies to retain the same legal personality.
Due to an increase in the number of managers enquiring about the redomiciliation procedures, the MFSA has now published a set of Guidelines for the Redomiciliation of Offshore Funds to Malta. These have proved to be a success with mangers and funds seeking to redomicile operations inside the EU, particularly in view of the fact that the Malta funds regime allows funds to have external administrators and custodians in contrast to other jurisdictions which require the service providers to be present in the domicile.
Pensions: The legal framework for the setting up of cross-border pension schemes has become particularly attractive following the transposition of the European Pensions Directive. The new legislation introduces a framework for pension ‘pooling’ vehicles and allows schemes to be set up as pension trusts. Malta is therefore also well-poised to cater for the opportunities that are opening up in the wake of the European Pensions Directive.
In November 2009, following months of negotiations, the HMRC recognised Malta as a jurisdiction to which UK pensions could be transferred. This development means that Malta-domiciled pension schemes approved by the Malta Financial Services Authority (MFSA) are now eligible for QROPS status.
Meanwhile the industry continues to expand in a steady and balanced manner. The banking sector has attracted operators from, among others, the UK, Austria, Australia, Turkey, Switzerland, Portugal and The Gulf. There are now over 20 banks operating across a whole range of areas including corporate banking and project finance, custody, financial leasing and trade financing, private wealth management and retail banking.
Investment services have also grown at a steady pace as Malta gained reputation as an efficient funds domicile that can provide competitive access to the European market. This has seen a steady flow of new business and the country is now home to around 100 pan-European and other retail funds and over 300 hedge funds. As a consequence, funds under management have shot up from €1 billion to over €9 billion in recent years.
Malta’s fund administration capabilities, initially developed to cater for retail funds sold on the local market, later expanded to service other types of funds, such as hedge funds targeting international clients. The build up in funds has led a number of independent third party administrators from countries such as the UK, Ireland, Holland and Bermuda to set up shop alongside their Maltese counterparts.
During the past five years the insurance industry has averaged an annual premium growth of around 30 per cent. Taking advantage of European legislation allowing insurance companies to operate across all Member States through the single passport, 40 new captive and other insurance companies have established themselves in Malta. These are normally managed by third party insurance managers of which there are now 15. These include global leaders in insurance and risk management such as Aon, Marsh, Willis, Heritage, JLT and USA Risk.
The first four Retirement Schemes to be established in Malta were all approved by the MFSA this year. These are the MCT Malta Private Retirement Scheme (administered by MC Trustees Ltd), the Dominion Malta Retirement Plan (administered by Dominion Fiduciary Services Malta Ltd, the Expatriate Retirement Plan (administered by Blevins Franks Trustees Ltd) and the Melita International Retirement Scheme Trust (administered by Custom House Global Funds Services).
The number of trustees authorised under the Trust and Trustees Act has now reached 109 and includes some well-known trust services groups that have expanded Malta.
Taxation is based on the imputation system whereby companies pay corporate tax at 35 per cent. This tax is regarded as a prepayment for the tax due by the shareholder upon the eventual distribution of profits. Consequently on declaration of dividend, the shareholders receive a refund of 6/7 of the corporate tax paid by the company. This system of taxation is Malta’s general system of taxation for all trading companies and has been approved by the EU in 2007 under State Aid and Code of Conduct.
Funds domiciled in Malta pay no tax and non-resident investors are not subject to any withholding tax. Capital gains realised by investors who are not resident in Malta are not subject to tax in Malta. Transfers of shares in a licensed fund are exempt from stamp duty. There is no value added tax on fund management, fund administration as well as custody services.
Malta was one of a group of jurisdictions that benefited from being placed immediately (following the 2009 G20 meeting) on the OECD's 'white list' of countries and territories that had both embraced and substantially implemented the tax standards. In July this year, the US Senate approved a new tax treaty with Malta in what is considered to be a critical step in broadening Malta’s reach as a financial centre.
The World Economic Forum’s Competitiveness Index 2010-2011 ranks Malta in 11th position for financial market development (out of 137 countries). The soundness of Maltese banks has been ranked in 10th position worldwide. This also means that Malta has effectively retained its joint fitth position in this area if it is considered that there are eight countries tying in the top 10 segment. Malta also moved up from 13th to 12th position (joint sixth) in the assessment carried out on the regulation of securities exchanges and from 12th to eighth position on the strength of auditing and reporting standards.
For the fourth consecutive year, the Internal Market Scoreboard, published by the European Commission in September 2010, placed Malta in first place in the implementation of internal market directives - further evidence of the sound internal structures that are in place and confirmation of Malta’s status as one of them most integrated economies in the EU.
A European Commission Report on Trade and Foreign Investment Indicators published in2009, places Malta among the top five EU performers with respect to foreign direct investment inflows as a percentage of GDP.
Malta Financial Services Authority, Malta