Donald Vella & Adrian Galea examine the main factors which make Malta attractive to financial services, and cement its place as a successful IFC.
Malta’s financial services sector currently accounts for about 12 per cent of the island’s GDP and it is planned that by 2015 this sector will contribute up to 25 per cent of the island’s GDP. Malta is ranked 52nd among 133 economies in the global competitiveness table with the 13th soundest banking sector and is 13th in the financial sophistication category. Malta has also been ranked number one by the European Commission with respect to e-government services. Moreover, the Global Financial Services Index published by the City of London has ranked Malta in fourth place as the financial centre which is most likely to gain importance in the next few years.
These statistics are a direct result of the attitude and environment offered by Malta’s financial services. Dr Lawrence Gonzi, Malta’s Prime Minister, whilst addressing the FinanceMalta Conference told delegates: “Our strength as a financial services centre is based on innovation and on our will to provide a top-notch operating environment for business.”
The main factors which make Malta attractive to financial services business include a competitive fiscal regime, a low-cost base, an excellent IT infrastructure, a legislative framework fully compliant with EU regulations and Malta’s strategic location, its record of security and stability together with a warm Mediterranean climate and a well-trained workforce, highly proficient in the English language.
Other key factors behind Malta’s recent success are clear; the MFSA, the single regulator of all to do with financial services has been universally praised as business friendly and industry orientated, whilst providing the necessary protection to consumers and investors it allows for a flexible and innovative market place. High standards of living as well as comparatively low daily running costs offer a refreshing change from other busy, chaotic and high-cost, business centres. The diverse range of shopping, cultural events and leisure activities, together with well-equipped public and private hospitals and clinics, as well as high quality homes and apartments, satisfy the most demanding requirements. Moreover, excellent office space is offered at reasonable rents.
The funds sector is the fastest growing financial sector in Malta. There are a total of 410 funds registered in Malta worth €8 billion and 108 new fund licenses were issued in 2010. The reason for the current success and the increasing appetite to further develop this area of financial services in Malta is simply because Malta’s domicile proposition ticks all the right boxes and this will be further enhanced following the full integration of the UCITS IV and AIFM Directive.
Malta is well placed and prepared to increase its share in the EU market, which until now has largely been enjoyed by Luxembourg and Ireland. The expected re-domiciliation of funds arriving from outside EU jurisdictions (which is capital gains tax free and allows for the assets and service providers to remain untouched) and new funds for European investors as a result of the new regulation, should consolidate Malta’s attraction as an important base for investment funds.
Funds can be set up under the following types of legal structure:
The SICAV is probably the most popular structure for funds, particularly in the non-retail sector and it can be structured to include master feeder funds and umbrella funds with each sub-fund having fully segregated portfolios. It should be noted that, as already stated, the cost of establishing and running a straightforward Maltese non-retail fund is usually noticeably lower than other EU countries and is a very attractive vehicle for the international investment manager wishing to market their funds into Europe.
The income tax treatment of funds licensed in Malta is based upon the classification of such funds into prescribed and non-prescribed funds. A prescribed fund is generally a Maltese resident fund having declared that the total value of its assets situated in Malta amount to at least 85 per cent of the value of the total assets of the fund and the applicable rate of withholding tax is 15 per cent on local bank interest and 10 per cent on other investment income as enlisted in the Maltese Income Tax Act, however exemptions apply when these are derived by any person not resident in Malta. Furthermore a blanket exemption applies to all income and gains derived by non-prescribed funds. Thus with the exception of income from immovable property situated in Malta earned by the fund which is to be taxed at the normal rates of tax, the tax incidence suffered by non-resident investors in funds is effectively nil provided that such persons are not owned and controlled by, directly or indirectly, nor act on behalf of any individual who is ordinarily resident in Malta.
New regulations introduced in 2011 provide for the establishment of incorporated cell structures specifically adapted to funds, thus extending the Maltese legislation applicable to cell companies, first introduced in the insurance sector, to the funds sector. The new Incorporated Cell Regulations go a step further allowing the registration and licensing of ‘Incorporated Cells’ structured with different ‘patrimonies’ under the umbrella of the Incorporated Cell Company (ICC). While under the SICAV Regulations a fund and its segregated sub-funds form one single legal entity and the sub-fund has no separate legal identity (albeit constituting a ring-fenced separate patrimony), each incorporated cell of an Incorporated Cell Company has separate legal personality and is treated as a separate company forming part of the ICC Scheme. The ICC regulations were drawn up and implemented following clear market indicators favoring these structures. This can be particularly useful for the purposes of establishing platforms in Malta.
Malta boasts a competitive fiscal regime with an extensive network of 65 double taxation agreements and has recently benefitted 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. As from the 1 January 2011 a new tax treaty between the US and Malta has come into place in what is considered to be a critical step in broadening Malta’s reach as a financial centre. It aims to remove barriers to trade and investment while discouraging offshore tax evasion.
Maltese tax law provides for wide provisions for cross-border double taxation relief, which ensures that relief is provided in respect of any foreign tax incurred on income derived by a Malta taxable person and irrespective of whether or not such income is derived from a jurisdiction with which Malta has a double taxation treaty in force. Double taxation agreements entered into by Malta are largely based in the OECD’s model and relief in most circumstances may be claimed by way of a credit. Unilateral relief is also available by way of a credit against the Malta income tax liability of the Malta resident company in receipt of foreign-source income. Additionally, a claim may be made on a multi-tier basis for any foreign taxes suffered on the underlying source income of the dividend distribution derived by the claimant. The amount allowed as a credit cannot exceed the amount of tax payable in Malta on the double taxed income. The Flat Rate Foreign Tax Credit is equivalent to a notional 25 per cent of the net foreign-source income before deductions and may be credited against the Malta tax due on the said income.
As a further incentive aimed at attracting foreign investment to Malta, income earned by eligible individuals as from 1 January 2010, as part of the the Highly Qualified Persons Rules, received in terms of a ‘qualifying contract of employment’ in respect of activities carried out in Malta, may opt to be subject to tax on such income at a flat rate of 15 per cent. A ‘qualifying contract of employment’ is considered to be such if it gives rise to a minimum income of €75,000 (excluding the annual value of any fringe benefits) in respect of a year of assessment. The employment activity contemplated is an employment with companies licensed and/or recognised by the MFSA in specified senior positions deemed as an ‘eligible office’.
Other Features of International taxation in Malta include:
One of Malta’s key features as a growing financial centre includes the ability of the industry and the regulator to retain Malta’s corporate, financial and fiscal legislative framework attuned to the demands of market operators whilst maintaining a high level of market integrity and managing the fine balance between investor protection and the need for operating flexibility in the market. Anyone who has ever been on a business trip to Malta with a view to understanding why it has been so successful in attracting international business can bear witness to the ‘open to do business’ mentality of Maltese professionals and operators supporting the industry. It is expected that the exposure and experience which industry professionals have attained over the last few years will now assist the island to significantly enhance the rate of growth sustained so far in this area.
Donald Vella and Adrian Galea, Camilleri Preziosi, Valletta, Malta