Malta is an onshore high-tax jurisdiction for individuals who are both domiciled and resident in Malta. The top rate of income tax is at 35 per cent. However, British influence meant that Malta inherited the remittance basis of taxation. Under this system, non-domiciliary high net worth individuals and investors can benefit by becoming residents of Malta and being taxed only on income arising in or remitted to Malta. Capital gains arising outside of Malta even if remitted to Malta are also exempt from tax in the hands of resident permit holders.
Malta introduced a residence programme in 1988 through the adoption of the Malta Permanent Residence Scheme that was designed to attract high net worth individuals. This immediately placed Malta on the map as an attractive destination for high net worth individuals. This residence programme has evolved throughout the years into the Malta Global Residence Programme for non-EU individuals and the Malta Residence Programme for EU, EEA or Swiss individuals. These residence programmes attract, among others, retirees, authors, artists, intellectuals and international consultants, or simply persons seeking to establish an alternative residence that suits their lifestyle and tax profile. The requirements to obtain and retain residence in Malta are a minimum annual tax of €15,000 covering the main applicant and dependants on the same application, a residential address (no need to buy a property as even renting out a property is sufficient), and paying tax on a remittance basis of taxation at the advantageous tax rate of 15 per cent.
In an effort to strengthen Malta's attractiveness for high net worth individuals, the government of Malta introduced the Malta Citizenship by Investment Programme in 2014 as the first EU-approved citizenship programme. Citizenship obtained under this programme grants the rights of full citizenship for life and can be passed on to future generations by descent. Maltese citizenship grants access to all investment opportunities in Malta and throughout the European Union, which are open to Maltese and EU citizens.
Other attractive features that make Malta popular with individuals of significant wealth, both for investment purposes and personal planning, are Malta's geographical location (right in the centre of the Mediterranean), its climate and highly trained workforce. Malta enjoys a stable political climate and a bipartisan political scene that is largely convergent on issues of national and economic importance. Malta has weathered the financial crises well and shared the limelight with Germany as the only two states maintaining economic growth in the eurozone. Malta's banks have also been ranked among the top-five soundest banks in the world.
Malta has been a member of the European Union since 2004, Schengen since 2007 and the eurozone since 2008, and its economy is currently generating enticing opportunities for investors who would like to locate their interests in Malta. The country's real gross domestic product (GDP) grew by 6.6 per cent in 2017, and this significantly contributed to the notable increase in the fiscal surplus to 3.9 per cent of GDP for 2017, following a 1 per cent increase in 2016 and government deficits in previous years. This surplus can be explained by the high growth rate of current revenue, including tax revenue and proceeds from Malta's citizenship programme, which made a healthy contribution of 2.6 per cent to the country's GDP. The coming years are expected to continue this positive trend in growth, despite seeing a slight ease compared to the rates registered in 2016 and 2017. Real GDP growth is forecast at 5.8 per cent and 5.1 per cent in 2018 and 2019, respectively.
Malta provides a wide range of investment vehicles available whereby wealth management is supported by legal infrastructure and regulatory framework in that various asset management solutions can be sought for private client matters whereby the system offers individuals the possibility of minimal tax leakage both on a corporate and on a personal level. This is also backed up by a strong banking infrastructure, a solid jurisprudence on foundations and a codified trusts law based on the Jersey model. Private clients are therefore spoilt for choice in terms of what vehicles to use for their wealth- and estate-planning purposes in a pleasant and safe environment with no language barriers. Maltese and English are the two main languages; however, the use of Italian, French, Spanish and German is widespread.
Domicile and residence are the determining factors in establishing whether and in what manner a person is taxable in Malta. An individual who is resident and domiciled in Malta is taxable in Malta on a worldwide basis, that is to say on all income and capital gains wherever these are derived and whether or not these are remitted to Malta.
If a person establishes his or her residence in Malta but is not also domiciled therein, he or she would be subject to tax on a source and remittance basis and would therefore be liable to tax on:
- income and taxable capital gains arising in Malta (e.g., on local bank interest, employment income and gains made on the transfer of immovable property situated in Malta); and
- foreign-source income that is remitted to or used in Malta (e.g., on foreign investment income paid directly into a Maltese bank account or that, although not paid directly into Malta, is eventually remitted to Malta or used to pay expenses in Malta).
Capital gains arising outside Malta are exempt from tax in Malta whether or not these are remitted to or used in Malta.
The term 'resident' is not clearly defined in the Malta Income Tax Acts. However, there are indications in the law that may assist in determining who may be considered to be resident in Malta for tax purposes.
A person is considered tax resident in Malta by law if he or she is not a temporary resident, that is to say if he or she is not in Malta for some temporary purpose without any intent to establish his or her residence therein, and has not actually resided in Malta at one or more times for a period equal in the whole to six months in the preceding calendar year.
The income tax applicable to an individual taxpayer depends on his or her tax status. If an individual takes up ordinary residence in Malta, the progressive tax rates (zero to 35 per cent) would apply. If, on the other hand, an individual has been granted special tax status under one of the applicable programmes mentioned above, then the flat rate of taxation (15 per cent) would apply on foreign-source income that is remitted to or used in Malta, provided that the applicable requirements are complied with. The individual is required to own or rent property to be occupied as his or her principal place of residence worldwide and may not spend more than 183 days in any other single jurisdiction in any calendar year.
When purchasing a property, its value must be at least €275,000, and €220,000 when the property is in the south of Malta or Gozo. When renting a property, the values are set at €9,600 per annum for immovable property in Malta and €8,750 per annum for immovable property in Gozo or the south of Malta. Such property may not be let or sublet.
Malta tax legislation also caters for highly skilled individuals who are specifically covered by the Highly Qualified Persons Rules. Under these rules, non-domiciled individuals employed by a company operating in the financial services, gaming and aviation sectors that holds a licence or recognition by the Malta Financial Services Authority (MFSA), the Malta Gaming Authority or an air operator's certificate respectively, receive beneficial tax treatment. The rules entitle the individuals employed in 'eligible offices' to apply a flat rate of taxation of 15 per cent on their employment income, which should be of at least €84,016 per annum (adjusted annually in line with the Retail Price Index), up to a maximum income of €5 million. The flat rate of tax applies for a consecutive period of five years for European Economic Area and Swiss nationals and for a consecutive period of four years for third-country nationals. Individuals who already have a qualifying contract of employment in an eligible office two years before the entry into force of the scheme may benefit from the 15 per cent tax rate for the remaining years out of the total period permitted by the scheme. As of 2018, embryologists, responsible persons and lead quality managers employed in the assisted reproductive technology sector are also eligible to benefit from these rules.
The law also provides for a flat 15 per cent tax rate in respect of employment income for eligible offices in the digital games and audiovisual industry, where such income amounts to at least €45,000. This option applies for a consecutive period of no more than three years commencing from the year preceding the first year of assessment in which that person is first liable to tax under the provisions of this law, provided that Malta Enterprise may extend the option by one year for any person whose employment commences after the 31 August of a particular year.
A similar regime, Qualified Employment in Aviation, was introduced for eligible offices in the aviation industry, with effect from year of assessment 2017. Non-domiciled individuals occupying certain posts, such as flight operations manager, aviation systems developer or key aviation specialists, earning a salary of at least €45,000, annually shall be entitled to benefit from a 15 per cent flat rate of tax on such income.
i Recent developments
The Budget Implementation Measures 2018 announced in the speech for the 2018 budget contained a number of interesting fiscal changes for individuals and businesses.
These measures include the following:
- with effect from the year of assessment 2018, Maltese companies, partnerships and permanent establishments of non-resident entities may claim a 'deduction on risk capital', known as a national interest deduction, capped at 90 per cent of the chargeable income;
- the definition of a 'participating holding' has been changed: previously, one of the conditions for qualification as such holding was that a company must hold directly at least 10 per cent of the equity shares of a company. The Budget Implementation Measures 2018 reduced this threshold from 10 per cent to 5 per cent; and
- a minimum tax charge for persons ordinarily resident but not domiciled in Malta as of the year of assessment 2019 was introduced, whereby such persons are now subject to a minimum tax of €5,000 per annum regardless of the amount of foreign-source income actually remitted to Malta. This charge applies to persons subject to a remittance basis of taxation, whose annual income arising outside Malta is at least €35,000 but does not apply to those individuals who hold special tax status under any special scheme.
ii Issues relating to cross-border structuring
Double tax relief
Malta has entered into over 70 double taxation agreements and the list is always increasing. Their impact is very positive in that they encourage the growth of trade between two countries and remove the incidence of double taxation and reduce withholding taxes for payments from one country to another. The Organisation for Economic Co-operation and Development (OECD) had issued a positive peer review for the Malta tax framework in July 2013.
Before the 1994 amendments, double tax relief was only available in Malta under the domestic provisions of the Income Tax Act if the foreign tax had been suffered in a country with which Malta has a double tax treaty or in respect of British Commonwealth income tax.
Malta allows relief from double taxation on a unilateral basis where overseas tax is suffered on income received from a country with which Malta does not have a tax treaty. The overseas tax suffered is allowed as a credit against the tax chargeable in Malta on the gross amount. The credit shall not exceed the total tax liability in Malta on the receipt.
Unilateral relief for underlying tax suffered is available where the taxpayer is a Maltese company that holds more than 10 per cent of the voting power of the overseas company paying the dividend.
When claiming unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner:
- that the income arose from overseas;
- that the income suffered overseas tax; and
- the amount of that tax.
iii Regulatory issues relevant to high net worth individuals generally or that impact the general market of private wealth services
The tax regime applicable to the transfer of immovable property situated in Malta encompassed a combination of the 12 per cent final withholding tax regime levied on the property transfer value introduced in 2006 and in certain instances, income tax of 35 per cent (or progressive rates in the case of individuals) on the gain derived from the property transfer.
The Malta 2015 budget brought amendments to the applicable rate for the final withholding tax whereby 8 per cent instead of 12 per cent is being levied on the value of the property except in the following instances where the following different rates are applicable:
- 5 per cent of the transfer value in cases where the property being transferred does not form part of a project and the property is transferred within five years of the date of acquisition;
- 10 per cent of the transfer value in the case of properties acquired before 1 January 2004 and for which transfer a promise of sale has not been presented to the Commissioner before 17 November 2014;
- 2 per cent of the transfer value in the case of property transferred, which, immediately before the transfer was owned by an individual or two co-owners who had declared in the deed of acquisition that such property had been acquired for the purpose of establishing therein or constructing thereon his or her sole ordinary residence and the transfer is not made within three years of the date of acquisition; and
- 5 per cent of the transfer value for transfers of property situated in Valletta and other urban conservation areas outside Valletta, which were acquired before 31 December 2018 and where such property has been restored or rehabilitated and works are certified by the Malta Environment and Planning authority before 31 December 2018. Such transfer must not be made more than five years from 31 December 2018.
One should also give due regard to the fact that it will no longer be possible to opt out of the final tax system and therefore to be taxed on the profit. Furthermore, no deduction of expenses will be allowed when one seeks to arrive at the transfer value. The new implementations do not affect the exemptions that are already in place in relation to the sale of one's own residence, donations as prescribed, assignments during separation and divorce and intra-group transfers.
iv Issues impacting entrepreneurs as holders of active business interests at the proprietor level
The implementation of the Standard for Automatic Exchange of Financial Accounting Information will surely have an impact on entrepreneurs and their businesses. The Common Reporting Standard (CRS), which was implemented as from 1 January 2016, is a multilateral agreement aimed at preventing tax evasion and fraud through the automatic exchange of information that would occur automatically once a year. The treaties empower financial authorities to monitor bank accounts (including offshore countries) whereby the banks would be required to disclose the ultimate beneficial owner even if owned via fiduciary structures.
In an effort to increase the efficiency of tax collection, the Council of the European Union adopted EU Council Directive 2014/107/EU (DAC2), which extended the cooperation between EU tax authorities' exchange of financial accounts information. This extension effectively incorporated the CRS within EU Council Directive 2011/16/EU, particularly with regard to the administrative cooperation in the field of taxation.
Malta, as part of the early adopters group, had committed to implement the CRS in accordance to a specific time period, which led to the first automatic information exchange in September 2017.
Further, the DAC2 and CRS have been successfully incorporated into Maltese legislation by virtue of LN 384 of 2015, entitled the Cooperation with Other Jurisdiction on Tax Matters (Amendment) Regulations 2015. These regulations amend the Cooperation with Other Jurisdiction on Tax Matters Regulations, with effect from 1 January 2016.
The financial institutions that are required to report under the CRS are:
- banks and custodians;
- certain collective investment vehicles;
- certain insurance companies; and
- trustees, who fall under the category of custodians and will have the obligation to report accounts that are held through trusts that they administer.
i Introduction to succession
Maltese succession law, as in other civil law jurisdictions, entails the notion of forced heirship, whereby certain persons at law are entitled to receive the legitimate portion as a reserved portion calculated against the entirety of the estate of the deceased.
Chapter 16 of the Laws of Malta, the Maltese Civil Code, regulates testamentary succession and the drawing up of wills. Barring these rules on forced heirship, any person may bequeath any of his or her property in accordance with his or her discretion. In any case, a testator may bequeath by singular title, that is, as a legacy, or by universal title, that is, the person or persons appointed would succeed to the deceased in all capacities as heirs. By and large, wills are cumulative, provided that the testator does not expressly or tacitly revoke previous wills by drawing a further will in which certain clauses challenge previous ones.
With respect to intestate succession, the applicability of the rules on forced heirship holds that the persons entitled to receive in virtue of the law would be the heirs. Where the deceased has descendants and a surviving spouse, these persons are entitled to receive the inheritance; where the deceased dies without issue, the ascendants of the testator are entitled to receive the inheritance. The Civil Code further provides for those situations where there are no descendants, surviving spouse or ascendants to receive, in which case the inheritance shall devolve upon the government of Malta. These rules would also apply when no person entitled to receive accepts the inheritance; hence, no one to claim the right over the inheritance.
It is worth highlighting the fact that the civil legal approach prevails throughout the Maltese legal system and the rules on forced heirship apply even with respect to trusts and foundations. For this reason, rightful heirs may attack transactions made in relation to the trust and the foundation; namely, a settlement of property and an endowment respectively, where it may be proven that the effect thereof prejudices the entitlement of the reserved portion.
Under Maltese succession law (prevalent also in other civil law jurisdictions), persons entitled to receive by law may accept the inheritance conditionally. Strictly speaking, such persons would be accepting the inheritance through the benefit of inventory; the testamentary executor would draw up a list of all the assets and liabilities that belonged to the testator and the rightful heir would be given a peremptory time frame within which to decide whether to accept or refuse the inheritance.
ii Key legislative or case law changes affecting succession
Key changes affecting succession
The recent coming into force of Regulation (EU) No. 650/2012 of the European Parliament and of the Council of 4 July 2012 (the Succession Regulation) saw significant changes affecting succession – particularly cross-border succession – being introduced into the law. The Succession Regulation regulates jurisdiction, applicable law, recognition and enforcement of decisions, and acceptance and enforcement of authentic instruments in matters of succession. It also introduces the European Certificate of Succession. In this regard, a new chapter entitled 'Of Cross-Border Successions' was introduced to the Maltese Civil Code by virtue of Act No. XVI of 2015.2
New legal provisions were also enacted within the Notarial Profession and Notarial Archives Act3 governing the European Certificate of Succession.4 Amendments were also made to the Public Registry Act5 to regulate the registration within or removal of European Certificates of Succession from the Public Registry.6
Case law affecting succession
With respect to judgments delivered by Maltese law, the recurring issues are generally linked to the consent of the testator and division of property. On consent of the testator, the courts have taken a consistent approach in which invalidating a will is unequivocally the exception. Often, the court rules against the plaintiff for failing to produce sufficiently conclusive evidence that establishes the vitiation of the testator's consent on the basis of coercion or duress. Any room for doubt has always directed the court to uphold the deceased's will as valid on the basis that the testator's will and intention cannot be positively challenged.
The court has also addressed matters concerning the testamentary executor who would be appointed by the deceased by virtue of his or her will for the better execution of all his or her dispositions. The testamentary executor, upon being confirmed by the Court of Voluntary Jurisdiction, is fundamentally responsible for the administration and liquidation of the estate of the testator and ensuring that the testator's dispositions are fulfilled at law and given in full effect, while exercising any and all acts necessary for the preservation of the estate.7
iii Relevant cross-border developments
Conflict of law rules
The Civil Code contemplates situations in which wills are made outside of Malta. In these cases, a will shall have effect in Malta provided that it is made in the form prescribed by the law of the place in which the will is made.8 Having said that, the validity of any such will would have to be determined in accordance with the law the place in which the will is made.
The Succession Regulation
The Succession Regulation gave rise to the need for amendments to Malta's laws on succession.
The provisions of the Regulation that have direct effect in participating EU Member States became applicable to cross-border successions from 17 August 2015, and are intended to simplify matters post-death in instances where the assets of the testator are located in more than one jurisdiction. The Regulation attempts to provide legal certainty and enable a faster and easier resolution of cross-border succession by establishing one applicable law and one court to govern the entire estate.
In this regard, cross-border succession refers to instances where the deceased held property or assets in more than one country, the deceased had his or her last habitual residence in a country other than the country of which he or she was a national, the deceased made a disposition of property upon death in a country other than the country of which he or she was a national, or the beneficiaries of the succession are habitually resident or nationals in more than one country.9
By means of the Succession Regulation, cross-border successions may be facilitated on the basis of four grounds, namely that:
- a citizen is able to choose whether the law applicable to his or her succession should be that of his or her habitual residence or that of his or her nationality. On failure to make any decision, the law of the deceased's habitual residence would apply;
- a particular succession may be tackled under a single law and its competent authority or authorities;
- judicial proceedings and conflicting judicial decisions are avoided; and
- mutual recognition and enforcement of judgments in the EU is guaranteed.10
Essentially, the Regulation offers three possible routes to the testator:
- The Regulation introduces the principle of the last habitual residence as a default position. In this regard, the default law applicable to succession would be the law of the state where the deceased had his or her habitual residence at the time of his or her death.
- The Regulation provides an exception that in cases where circumstances are such as to show that at time of death, the deceased had a manifestly closer connection with another state, the prevailing law governing the succession will be of that state.
- The Regulation introduces an option for testators to choose to apply the law of the country of his or her nationality to regulate his or her will, either at time of making the choice or at time of death. This particular limited choice of law must be made expressly or implicitly by way of a testamentary disposition.
In practice, this would mean that any person who has Maltese nationality or has his or her habitual residence in Malta, may decide to have his or her succession regulated by Maltese law, irrespective of the fact that he or she may or will have assets in other jurisdictions, and whether the assets are movable or immovable.
The legal concept of 'habitual residence' introduced by virtue of the Regulation, as distinct from the concept of 'domicile', makes the Regulation innovative. Whereas domicile generally refers to the country intended by the individual as his or her permanent home, habitual residence is the place where the person ordinarily resides with a certain degree of continuity; for example, for professional or economic reasons. Interestingly, the Regulation leaves the interpretation of 'last habitual residence' open as it fails to provide a definition of the term. Having said this, the preamble to the Regulation stipulates that the competent authority, in Malta's case, the Civil Court (First Hall),11 shall make an overall assessment of the circumstances of the life of the deceased during the years preceding the death and at the time of death, taking into account all relevant factual elements, in particular, the duration and regularity of the deceased's presence in the state concerned and the conditions and the reasons for that presence.12 The habitual residence should reveal a close and stable connection.
The Regulation also recognises that determining the habitual residence of the testator may be difficult. In this regard, it provides that in cases where it is shown that the deceased maintained a closer and stable connection with the Member State of origin, in which the centre of interests of the family and social life are located, then the deceased would be considered to still have his or her habitual residence in said state of origin.
Notwithstanding the above, the substantive domestic rules on succession will remain unaltered. As a result, rules on entitlement over inheritance, property law and family law, as well as applicable tax in relation to succession, will continue to apply in any case.
It appears that the harmonisation of certain succession matters within a cross-border context will ease many practical issues that commonly arise by reason of the diversity of rules concerning succession matters in Member States. The idea behind this is to improve the procedure as well as facilitate the liquidation of the estate through the laws of one jurisdiction based on the principle of 'universality of succession', resulting from the ever-growing reality of free movement of persons within the EU.
iv Applicable changes affecting personal property
Under the Civil Code, the law regulates matrimonial regimes; establishing community of acquests as the default regime.13 However, this does not mean that spouses are obliged to establish the community of acquests throughout their marriage;14 prior to contracting marriage, the prospective spouses may opt out of this regime by means of a prenuptial agreement whereas after marriage, authorisation is required by the court prior to contracting a post-nuptial agreement. Maltese law allows spouses to choose from three matrimonial regimes: community of acquests; community of residue under separate administration; and separation of assets, also known as paraphernal property.
As regards the right to the reserved portion, whether spouses choose to opt for a community of acquests, as the most benevolent option, or for the separation of estate, such right remains an entitlement not only in favour of the deceased's descendants but also to the surviving spouse with whom a marriage contract has been entered into. However, disposal and alienation of assets belonging to the community of acquests would be regulated by the law as there applies such rule as requiring consent from both spouses where an act of extraordinary administration is to be carried out. By the term 'act of extraordinary administration' the law includes the giving of security; partitioning of property; alienation of immovable property or real rights thereon; certain donations and so on.
After the demise of one of the spouses, the right to the reserved portion applies indiscriminately whether the assets belonging to the deceased were paraphernal or co-owned with the surviving spouse.
The Civil Unions Act15 regulates civil unions and provides that, when registered, said civil unions shall for all intents and purposes have the corresponding effects and consequences in law of civil marriage contracted under the same Act.16 The law requires every person intending to contract into a civil union to fulfil all the requirements that would be necessary if one were to enter into marriage.17
In view of the above-mentioned considerations, the law on succession does not distinguish between a civil marriage and a civil union on the basis that Chapter 530 specifically requires that the same legal effects and consequences in civil marriage apply mutatis mutandis.
Conclusively the legal obligations and rights emerging from the Civil Code on succession are applied without distinction in the eyes of the law as to whether the spouses are of same or opposite sex. Inter vivos, all of the rules with respect to extraordinary acts of administration shall be adhered to by the spouses who have contracted a civil union inasmuch as spouses who contracted a civil marriage do. Likewise, the demise of one of the partners in a civil union will ipso jure give rise to the same legal implications, rights and obligations as the demise of one of the spouse in a civil marriage would do. Therefore, the surviving spouse or the surviving partner is deemed to be equal in the eyes of the law in terms of their rights over the deceased's inheritance; likewise, the children thereof would benefit from the same rights irrespective of whether they are the biological children or adopted children thereof because Act XIII of 2004 has already abolished any such unequal treatment.
IV WEALTH STRUCTURING and REGULATION
Malta is quickly becoming a compelling alternative in the area of wealth management thanks to the wide range of investment vehicles on offer coupled with its tax efficiency. Malta allows investors to protect their assets through the use of funds, companies, trusts and foundations in a secure EU jurisdiction that is well regulated and yet flexible at the same time, accommodating the most complex of structures. An efficient tax regime results in minimal tax leakage at both entity or structure level and the personal level. The country has an excellent legal infrastructure supported by highly qualified and experienced professionals and a track record for innovative, customised solutions. The country also has a strong banking infrastructure that can cater to all levels of wealth.
i Companies and partnerships
Companies and partnerships are the entities most commonly used in wealth structuring.
ii Trusts and foundations
Malta is unusual in that although it is a civil law jurisdiction, it caters for the setting up of both trusts and foundations. While trusts are more familiar to persons from common law jurisdictions, the concept of foundations may be more familiar to persons from civil law jurisdictions that are not familiar with the concept of a trust or have introduced it recently and therefore the concept is still in its infancy and jurisprudence minimal. Both trusts and foundations are valuable arrangements for both asset protection and succession planning.
Trusts in Malta are regulated by the Trusts and Trustees Act (the Act) that was, to a large extent, modelled on the Trust (Jersey) Law 1984. Malta has ratified the Hague Convention on Trusts and on their Recognition, and as a result, Malta distinguishes between Maltese Law Trusts that are entirely regulated by the Trusts and Trustees Act and Foreign law Trusts that may be set up and regulated by any law whatsoever and are recognised by Maltese law subject to certain conditions laid down in the Convention being satisfied.
iii Investment funds
Malta has become a well-established domicile for collective investment schemes. The jurisdiction is particularly well known for its well-developed hedge fund infrastructure, but Malta also caters for a number of private wealth-oriented fund structures. Growth in the sector has been very steady, bolstered by a dynamic and approachable regulator and a legal environment that provides a useful mixture of clarity and flexibility. The Professional Investor Fund has become a 'go-to' choice for small, relatively closely held funds that require sophisticated structural arrangements, and continues to be a popular choice even after the introduction of the new Alternative Investment Fund Managers Directive.
V TAX and REGULATORY
All companies registered in Malta are deemed to be ordinarily resident and domiciled in Malta and are thus taxable on a worldwide basis at the corporate income tax rate of 35 per cent. However, certain distributions to shareholders would entitle them to a refund of all or part of the tax paid at company level considerably lowering the effective tax rate. Income from qualifying participations may furthermore be completely exempt in Malta at the level of the company. Malta has an extensive double tax treaty network and unilateral double taxation relief mechanisms that ensure relief from double taxation in most cases.
Recent developments in relation to the taxation of partnerships means that all partnerships, whether en nom collective or en commandite, the capital of which is divided into shares or otherwise, may now elect to be treated as companies. Where they do not elect to be treated as companies, partnerships are tax transparent in that the partnership itself does not pay tax but the partners must include their share of partnership profits in their tax returns and pay tax accordingly at the applicable tax rates (progressive rates if partner is an individual, 35 per cent if a company).
Where at least one of the trustees of a trust is tax resident in Malta, income and capital gains attributable to the trust are subject to tax in Malta. However, there are situations where legislation deems all income attributable to a trust to have been derived directly by the beneficiaries of the trust and thus insofar as no income has been attributed to the trust, no tax would be due in Malta. The criteria examined for the purposes of transparency are the nature of the trust property, source of income or gains accruing to or derived by the trust and whether beneficiaries are persons who are resident, ordinarily resident or domiciled in Malta.
As a default position, foundations are treated as companies that are ordinarily resident and domiciled in Malta, thus taxable on a worldwide basis; however, the administrators of a foundation may by notice in writing to the Commissioner of Inland Revenue irrevocably elect that a foundation be treated as a trust.
The tax treatment of funds in Malta hinges upon the classification of funds as prescribed or non-prescribed funds. A non-prescribed fund is one that holds more than 15 per cent of its assets outside of Malta and such fund is only taxed upon gains made from the disposal of immovable property in Malta. A prescribed fund on the other hand is taxed in Malta on its profits at the rate of 35 per cent.
vi Applicable anti-money laundering regime and other key aspects of regulation of service providers dealing with private wealth
Malta has distinguished itself as a serious and extremely adaptable jurisdiction in the field of private client servicing. Trustees, fiduciaries, investment service providers, funds and company services providers are among the providers that offer relevant services requiring regulation.
These service providers are regulated by the MFSA. They are obliged to comply with anti-money laundering (AML) regimes and are, therefore, supervised by the Financial Intelligence Analysis Unit (FIAU). As an EU Member State, Malta has an obligation to implement all EU directives, including those relating to AML. The most salient pieces of legislation laying out AML rules applicable in Malta are:
- Chapter 373 of the Prevention of Money Laundering Act 1994;
- Subsidiary Legislation 373.01 of the Prevention of Money Laundering and Funding of Terrorism Regulations 2008 (PMLFTR); and
- Subsidiary Legislation 373.02 of the National Coordinating Committee on Combating Money Laundering and Funding of Terrorism Regulation 2018.
All these focus on the subject of AML and funding of terrorism. The main legislative authority that obliges service providers to abide by an adequate AML regime is the PMLFTR, based on the European Parliament and Council Directive 2015/849 of 20 May 2015 (the Fourth Anti-Money Laundering Directive (4 AMLD)).
Additionally, the PMLFTR allows the FIAU to lay out rules and procedures for subject persons to abide by in their ordinary course of business, namely the implementing procedures (issued on 20 May 2011), which in turn provide a supplementary outline to the various legislative acts, clarifying the applicable regime and expanding on the following issues.
On 20 December 2017, Malta transposed into its domestic laws 4 AMLD, which introduced the obligation for EU Member States to obtain and hold in official registers accurate and current beneficial ownership information.
The Register of Beneficial Owners was introduced in Malta by way of four separate legal notices:
- the Trusts and Trustees Act (Register of Beneficial Owners) Regulations 2017;
- the Companies Act (Register of Beneficial Owners) Regulations 2017;
- the Civil Code (Second Schedule) (Register of Beneficial Owners: Foundations) Regulations 2017; and
- the Civil Code (Second Schedule) (Register of Beneficial Owners: Associations) Regulations 2017.
Pursuant to the above-mentioned regulations, as of 2018, Maltese legal entities (i.e., companies, partnerships, trusts, foundations and associations) are obliged to take all reasonable steps to obtain and at all times hold in an internal register adequate, accurate and up-to-date information in respect of its beneficial owners. The information collected includes, inter alia, the name, date of birth, nationality, country of residence and official identification document number of each beneficial owner, as well as information on the nature and extent of the beneficial interest.
This information is to be subsequently reported to respective authorities and held in the Register of Beneficial Owners, and shall be accessible to:
- national authorities responsible for:
- combating money laundering and terrorist financing; and
- investigating and prosecuting money laundering;
- the FIAU;
- national tax authorities and any other national authorities under the PMLFTR; and
- persons obliged under the PMLFTR to carry out customer due diligence.
Further, access to beneficial ownership information held in the Register of Beneficial Owners may also be granted to any person who, or organisation which, in a written request, satisfactorily demonstrates and justifies a legitimate interest specifically related to the prevention of money laundering and the financing of terrorism.
Malta providers bound by AML regulations are obliged to establish adequate due diligence. The norm is to undergo normal customer due diligence, comprising various obligations, such as identification and verification of beneficial owners, acquisition of dependable information about the client in general, and ascertaining the good standing of character of same.
This can be scaled down or intensified through the implementation of simplified or enhanced due diligence in accordance with the necessity of the particular circumstances of each individual client. Explicit provisions are laid down in this regard, in all the procedures identified above. Record keeping, reporting, data protection and other measures are other requirements imposed upon service providers for transactions carried out for their clients.
Another essential requirement upon service providers is that of implementing effective systems and training in observing compliance with all the rules and regulations indicated above.
In terms of developments in the field of AML, the European Parliament and Council Directive 2018/843 of 30 May 2018 (the Fifth Anti-Money Laundering Directive (5 AMLD)) was recently published by the European Parliament and entered into force on 9 July 2018. This directive amends and repeals 4 AMLD. It aims to increase transparency as to the owners of legal entities and trusts, develop particular criteria in assessing high-risk third countries, and ensure a higher level of standard safeguards for financial transactions pertaining to high-risk countries. It also proposes the requirement for the improvement of transparency on the beneficial owners of legal entities, trusts and similar legal arrangements, as well as the set-up of a national central register of bank and payment accounts and safe-deposit box holders. Member States must transpose 5 AMLD into national legislation by 10 January 2020.
VI OUTLOOK and conclusions
Throughout Malta's history as a tax-efficient jurisdiction, it has acquired a reputation for being a well-regulated yet client-oriented country in which to do business. The tax regime is tried and tested and clients have the benefit of a jurisdiction with over 20 years of experience in this regard. Malta has sought to attract serious, responsible businesses and has moved away from the mere setting up of brass-plate companies to advising and implementing complex structures and transactions. Notwithstanding its successes, Malta constantly evolves and adapts to meet the needs of businesses and industries and to comply with international best practice and standards. It continues to present tax initiatives and regulatory flexibility to enhance Malta's reputation as the jurisdiction of choice, particularly in the financial services sector, and maintains a drive to expand its already extensive double tax treaty network.
Malta has persevered through the worst of the international financial crisis, as a result of the Maltese core banks' prudent commitment to maintaining a healthy balance sheet and robust capitalisation. The banks also fund themselves largely from the domestic retail deposit market, lend locally and hold securities issued in Malta. Growth in economic activity is being reflected in the labour market, with employment expanding and the unemployment rate declining.
This strong economic momentum should further boost employment and maintain the current low unemployment rate, which currently stands among the lowest in Europe at 3.5 per cent as of February 2018. Foreign direct investment has left its own impact on both the economy and employment, having reached a total of €165 billion in 2017. In addition, heightened activity in the services sectors has led to an intensification in exports, in the process further consolidating the country's economy and global position. A peer review carried out by the OECD found Malta to be fully compliant with the international transparency standards and exchange of information requirements for tax purposes. The Maltese authorities have taken a series of steps to deliver a fair tax system by fighting tax fraud, evasion and avoidance and are likely to follow the lead taken by the OECD and EU in this regard, particularly with reference to the Base Erosion and Profit Shifting project. Malta continues to comply with OECD standards and has joined the group of 'early adopters' of the OECD CRS.
There is no indication of taxes on wealth or property being introduced at this stage.
1 Jean-Philippe Chetcuti is the managing partner and Priscilla Mifsud Parker is a senior partner at Chetcuti Cauchi Advocates.
2 Title III, Sub-Title III, Chapter VIII of the Civil Code.
3 Chapter 55 of the Laws of Malta.
4 Articles 2(1)(2)(k), and 50(1)(p) of the Notarial Profession and Notarial Archives Act.
5 Chapter 56 of the Laws of Malta.
6 Article 34A of the Public Registry Act.
7 Francis Xavier Azzopardi pro et noe v. Kathleen Azzopardi et, 15 May 1984.
8 Ibid. Article 682.
9 Article 958A of the Civil Code.
10 See: http://ec.europa.eu/justice/civil/family-matters/successions/index_en.htm, last accessed 15 June 2015.
11 Article 958C(1) of the Civil Code.
12 EU Regulation Preamble Recital No. 23 et seq.
13 Article 1316.
14 Ibid., Article 1317.
15 Chapter 530 of the Laws of Malta.
16 Article 4(1) of the Civil Unions Act.
17 Ibid. Article 3(1).