Collective Investment Schemes: Tax implications
By Laragh Cassar (pictured), Partner, Camilleri Preziosi – Collective Investment Schemes (CIS) offer various benefits and enable participants to pool in their investments under the principle of risk spreading. Furthermore, CIS enable the individual investor to benefit from investment opportunities which are generally not viable or available to them, due to cost, regulatory and licensing restrictions.
The number of CIS licensed in Malta has grown significantly over the past decade and, due to various factors (including a favourable fiscal regime), is continuing to increase at a steady rate. CIS generally take the form of investment companies with variable share capital or limited liability partnerships. Other vehicles that are also used include common contractual funds and units trusts.
The beneficial fiscal regime
The taxation of a CIS depends on whether the CIS and its sub-funds are each classified as a prescribed fund or a non-prescribed fund. A prescribed fund is defined as a fund of a Malta-based scheme where its assets situated in Malta are equal to at least 85% of its total assets. A non-prescribed fund is a fund which is not a prescribed fund.
Generally, the income of prescribed and non-prescribed CIS is exempt from tax in Malta, unless the income is derived from immovable property situated in Malta. Investment income received by a prescribed fund is subject to a withholding tax of either 15% (if such income is domestic bank interest) or 10% (with respect to any other investment income, including certain interest, premium or discounts received, certain profits distributed by a foreign CIS).
Investors participating in a CIS
Any distribution to any person, whether resident in Malta or otherwise, is not subject to further tax in Malta. However, certain distributions made to a resident person (whether directly or indirectly as beneficial owner of such income) would generally be subject to withholding tax at the rate of 15%.
Capital Gains for non-residents
Capital Gains derived by a non-resident person from the transfer of units in any fund are exempt from tax in Malta whilst a transfer of units in a CIS by a resident person is generally subject to tax, subject to certain exemptions.
Switching of funds
Should an investor switch any units from one sub-fund to another sub-fund within the same CIS, no gain or loss is deemed to arise for income tax purposes and therefore no tax will be charged. However, upon disposal of the final securities, tax will be charged on any capital gains. Conversely, if such disposal relates to a disposal of units held in a non-prescribed fund, the capital gains may be calculated by deducting the original cost of acquisition from the proceeds derived on disposal, provided that no units were switched from a prescribed fund. On any other disposal of final securities, any chargeable gains or losses arising throughout the switches of units are aggregated when calculating the capital gain or loss.
Securities may also be switched from a sub-fund of a CIS to a sub-fund of another CIS. However for such a transaction to qualify as a switch and benefit from the above treatment, various conditions are satisfied. For instance, the latter sub-fund must have investment objectives, which are identical to those of the first-mentioned sub-fund.
Value Added Tax (VAT)
Activities involving the management of a CIS are exempt from VAT. Furthermore, a CIS is not required to be registered for VAT purposes.
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