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Navigating the changing tax landscape – Tax considerations for Malta-based asset management businesses

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Malta’s appeal as an alternative jurisdiction for asset and wealth managers is driven by a variety of factors. In particular, Malta provides start-ups and smaller/ medium-sized outfits looking to build track record or simply operate in a cost-effective environment with an attractive geographical location, EU membership, a highly educated multilingual workforce and also an efficient tax environment.  

Changing international tax landscape

The international tax landscape is evolving in an unprecedented manner, resulting in increased pressures for international tax rules to be amended with a view to multinational entities paying a “fair” amount of tax. The pace with which new measures are being introduced in this sense remains unabated. These include global initiatives such as automatic disclosure requirements (DAC6 / DAC7); the global minimum tax (Pillar 2); and the Unshell Directive (ATAD3). 

The extent and pace of this change has made navigating the international landscape more complex, meaning identifying the right way to structure one’s business and invest in foreign jurisdictions is even more critical. Nonetheless, amid such changes and challenges, Malta aims to remain an attractive jurisdiction for asset and wealth management businesses, even from a tax perspective. 

Below are some key features of the Maltese tax environment relevant to asset and wealth management businesses.

Malta as an investment holding jurisdiction

Malta relies significantly on foreign direct investment, mainly due to its size and location, and therefore strives to be an attractive investment holding jurisdiction. The following are a few key features: 

  • Malta has an extensive network of in-force double taxation treaties with over 70 countries
  • Malta has a wide participation exemption regime which covers both gains on disposal, as well as dividend income, generated from qualifying investments
  • Malta, as an EU Member State, is subject to both the EU fundamental principles, as well as the EU Directives
  • There are no withholding taxes in terms of domestic legislation (subject to certain statutory conditions) on dividends, interest and royalties paid to non-residents 
  • There is no stamp duty on transactions undertaken by (Special Purpose Vehicles) SPVs investing outside Malta (subject to certain conditions)

Maltese tax legislation also contains specific provisions for the taxation of collective investment schemes, as explained further below. 

Taxation of Maltese funds

Income generated by a collective investment scheme1 should be exempt from Maltese income tax, depending on its classification for Maltese tax purposes, as explained below.

What is a prescribed fund?

Maltese legislation classifies funds according to the percentage of value of investments situated in Malta. A fund is classified as a prescribed fund if it is a Malta-based scheme and has at least 85% of the net asset value of its underlying investments situated in Malta. A non-prescribed fund is a fund that is either a foreign based scheme or has more than 15% of the net asset value of the underlying investments situated outside of Malta.

How are funds taxed?

The income generated by a non-prescribed fund, except for income arising from immovable property situated in Malta, would be subject to a blanket tax exemption.

A prescribed fund is subject to tax in a similar manner, with one additional consideration – the blanket exemption would not apply to investment income, as defined in terms of the Investment Income Provisions of the Maltese Income Tax Act. In such a scenario, the prescribed fund would be subject to Maltese income tax by way of withholding at the rate of 10% or 15% only in the case of local bank interest, on investment income. 

This typically results in an efficient tax position. Furthermore, Malta does not impose a net wealth or similar tax. 

Dividend distributions by prescribed and non-prescribed funds

Distributions made from taxed profits, or from profits which were subject to a final tax, are not subject to further tax in the hands of all unitholders. Investors receiving dividends from taxed profits may claim a credit / refund of the tax incurred by the fund if their marginal rate of tax is lower than 35%.

On the other hand, distributions from untaxed profits to a resident non-corporate person or to a non-resident that is ultimately owned by ordinarily resident and domiciled individuals, would attract a 15% withholding tax; whilst distributions of untaxed profits to a resident or non-resident company would not attract such withholding tax.

Dividends paid by a non-resident non-prescribed fund through an authorised financial intermediary (AFI) may be subject to a final withholding tax of 15% under the Investment Income Provisions. The resident investor still has the option to receive such dividends without the deduction of the withholding tax in which case these would be chargeable in Malta at the normal progressive rates of tax.

Taxation of Malta-based asset managers

The specific tax treatment outlined above with respect to Maltese funds would not apply to a Malta-based management company (ManCo). Such ManCos would be taxable in Malta at the standard rate of 35%. 

Having said this, through application of the Maltese refund mechanism, and/or the Notional Interest Deduction Rules, the effective rate of tax may be reduced, as explained below. 

What is the Maltese refund system?

Upon a distribution of taxed profits by a Maltese company to its shareholder/s, the said shareholder/s should, subject to certain statutory conditions being satisfied, be entitled to claim a refund of a portion of the Malta tax suffered by the Maltese company on the profits so distributed – this is in terms of Malta’s system of taxation of dividends.

The extent of the tax refund depends on the type and source of income derived by the Maltese resident company and on whether foreign tax (if any) is being relieved in Malta. 

The typical tax refund amounts to 6/7ths of the Malta tax suffered by the Maltese company on the profits so distributed, thereby reducing the overall Maltese tax (post distribution and post-tax refund) to around 5%. Such effective Malta tax is subject to a number of assumptions including that all taxed profits are distributed, that there would be no non-deductible expenses, etc.  

Subject to some basic timeline planning, the 35% tax payment by the operating entity and the tax refund to the shareholder may be timed to fall within a few weeks of each other. Indeed, this tax refund system has been in place since 1994 (with certain legislative amendments occurring in 2007) and hence the system (including the timing of the payment of the tax refund by the Maltese tax authorities) has been tried and tested.

What is the Notional Interest Deduction? 

In terms of the Maltese Notional Interest Deduction Rules, an undertaking may opt to claim a notional interest deduction (“NID”) against its taxable income for a particular year.

Such NID is to be calculated on the basis of the risk capital of the company that is utilised to generate chargeable income. For this purpose, risk capital is defined in the NID Rules as including share capital, share premium, positive retained earnings, and interest-free loans. 

The interest rate is the risk-free rate set by reference to the current yield to maturity on Malta Government Stocks with a remaining term of approximately 20 year, plus a premium of 5%. 

The amount of NID that can be deducted is capped at 90% of the company’s taxable income for the year. If interest on risk capital calculated exceeds 90%, the excess cannot be taken as deduction against chargeable income for that year; however, it can be carried forward and added to the NID of the following year.

The application of the NID Rules could result in an effective Maltese tax of around 3.5% – this naturally depends, amongst other things, on the level of the risk capital of the company on which the NID is calculated. 

Building substance in Malta

Maltese income tax law does not specifically prescribe a minimum level of substance that a Maltese company is required to maintain, apart from some basic company law requirements, i.e. including having a registered office in Malta, this being the official address of the company in Malta, maintaining company records in Malta, having an annual audit of the Maltese company and filing of income tax returns, corporate returns and audited financial statements with the Maltese authorities.

Having said that, in the current international and local tax context, and with particular reference to the ATAD3 Directive being discussed at an EU level, an adequate level of physical presence and a genuine business rationale in Malta should be advisable.  In this respect, on a high-level basis, typical attention points involve, but are not restricted to, the following:

  • Holding the company’s board/ other management meetings/ annual general meeting exclusively in Malta with the proceedings and physical attendance being minuted accordingly;
  • Appointment of a number of Maltese resident directors (typically at least half of the board), who are knowledgeable on the operations of the Company;
  • The negotiation of major contracts are materially negotiated, undertaken and concluded in Malta, including the approval and authorisation of contracts for signing and execution in Malta;
  • Appropriate human and material resources allowing administration and ordinary management of the company from Malta; and
  • The Company should lease/acquire locked up office space with proper signage and should have all the telecommunications facilities to enable the Company to operate from Malta including a phone line, internet, email domain and so on. 

Malta’s place going forward

The pace of change in the international tax landscape has made investing in foreign jurisdictions more complex and burdensome. Nonetheless, while adhering to domestic and international obligations, Malta aims to be as flexible as possible in such a changing environment in order to be an attractive and efficient location for managers, funds and their investors. 

Malta’s legal, regulatory and tax landscape for asset and wealth managers aims to allow for as much flexibility as possible in terms of fund structuring solutions which is key in facing the challenges and opportunities created by the current economic context.

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