MALTA: COUNTRY AND FOREIGN INVESTMENT REGIME

Malta Geography

Malta Population, Language and Culture

The total population of the islands is estimated to be 406,700 (July 2010). The official languages are Maltese and English; Italian is also widely spoken. The civilisation is one of the oldest in the Mediterranean dating back to circa 5,000 years BC. St Paul is believed to have been shipwrecked on Malta, whose strategic position in the Mediterranean has made it an important cultural and commercial centre. The crusading order of the Knights of St John established their base in Malta, where in the 16th century they famously withstood a siege by 30,000 soldiers of Suleyman the Magnificent's Ottoman Empire. The islanders' stout defence against the Germans in the Second World War is an equally famous chapter in history, and gained the island a collective George Cross from the British.

The islands' architecture, language and culture are an intriguing and unique blend of Mediterranean and Arabic influences. The catholic religion is dominant, and a plethora of churches built from local stone, and accompanying fiestas with loud fireworks, is a marked feature of Maltese life.

After almost 150 years as a British colony, the Maltese islands declared independence in 1964. Ten years afterwards Malta became a republic within the British Commonwealth. The economy slumped after the withdrawal of the British military in 1979, and for a while local political conditions were not propitious for business development. Tourism however continued to thrive, and in the last ten years Malta has made an effort to become more business-friendly, making use of the institutions, infrastructure and public administration left behind by the British.

Malta was one of the ten countries that joined the EU in May, 2004.

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Malta Government

Malta is a politically stable parliamentary democracy on the Westminster model, based on the Constitution of 1964 (modified in 1974). The President is the Head of State, but executive power lies with the Prime Minister and Cabinet; Ministers are appointed from among elected MPs. Malta has declared itself neutral territory.

There is a single House of Representatives, with 65 members elected on a single, transferable vote system. The pro-European Nationalist Party was confirmed in power in elections in April, 2003. The PN gained a majority of over 51% from a very high turnout of 96%, in what was seen as the most crucial election in the country's history. The result was interpreted as a confirmation of a yes vote in an EU referendum in March, bringing to an end months of emotional and often bitter debate on the subject of EU membership. The status quo was maintained after the March 2008 election. The next election is due to be held by March 2013.

Malta's judiciary is independent. The chief justice and seventeen judges are appointed by the president on the advice of the prime minister after consultation with the leader of the opposition. The senior court is the Constitutional Court, which has limited jurisdiction; there is a Court of Appeal which handles most appeals from lower courts. The legal system is based on of civil (Roman) law, but with a strong admixture of English law as would be expected, particularly in commercial and some financial law.

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Malta Economy and Currency

Malta is less affluent than its European neighbours. The economy is heavily dependent on tourism, which accounts for 35% of GDP; there are about 1.2 million visitors a year. Manufacturing industry represents about 25% of GDP. GDP per head is about $24,200 (2008 est), at the lower end of the range of EU figures, but roughly equivalent to Cyprus, and above those of the other new EU member states. GDP growth in 2008 was estimated at 3%, but it fell 2.2% in 2009.

Unemployment had fallen to 4.8% in 2009 after 6.8% and 6.4% in 2007 and 2008 respectively. It is estimated that it will rise to around 6.9% in 2010. In 2007, inflation stood at 2.6% and dropped to 1.3% in 2008. 2009 saw a sharp rise to 3.5% and current estimates show a rate of 1.8% for 2010. Public debt rose quickly to 95% (including nationalised industries) in 1997 due to lax public finances. The labour government in 1996/98 adopted prudent fiscal policies, restraining public expenditure and improving Malta's structural trade deficit. The government deficit was still running at nearly 7% of GDP by 2004, but by 2006 had been reduced to less than 3% of GDP and dropped to just over 2% in 2007. 2008 saw a doubling of the deficit to 4.5% with a drop to 3.8% recorded in 2009.

Exports are rising, but with limited agricultural land and wholly lacking in energy resources, Malta inevitably imports a great deal. The new PN administration has continued with sound financial policies, and has begun liberalisation and privatisation of various parts of the economy in line with EU requirements.

With GDP below 75% of the Community average, the Commission said in 2006 that the entire territory of Malta will continue to be eligible for regional investment aid at a maximum aid intensity of 30% of the eligible costs. For the period 2007-2013, Malta expects to receive EUR840 million regional aid to deliver growth and jobs.

The Central Bank of Malta used to apply exchange controls under the terms of the Exchange Control Act 1972. Current transactions were freed from exchange controls in 1994; capital controls were removed in 2004 as part of EU entry. The Maltese corporate forms likely to be used as offshore or non-resident entities were in any case all exempt from exchange controls. See Offshore Legal and Tax Regimes for further details.

In May, 2005, Malta was accepted into the EU's ERMII (Exchange Rate Mechanism), setting the country on a path towards full adoption of the Euro as from January, 2008. The Council fixed the equivalent rate for the Maltese lira at 0.429300 for one euro.

Interest rates used to be controlled in Malta, but were effectively liberalised in 1995 when the Central Bank increased the ceiling on lending rates to 10% above the discount rate. There remain some controls on interest rates on loans for the purchase of residential property.

In a 2008 report, the IMF statement said that the Maltese authorities must be commended for the successful adoption of the euro on January 1, 2008, calling it "a crucial landmark in their growth-oriented reform agenda".

This agenda appropriately aims at leveraging Malta's strengths and income-generating potential through closer integration in the European and global economies, the IMF suggested.

The Maltese economy was buoyed by significant growth in the island’s financial services sector during 2009, which grew by 22% in 2009 despite the difficult situation in the sector internationally.

Malta Stock Exchange

The Malta Stock Exchange Act 1990 led to the opening of a stock exchange towards the end of 1992. Management of the exchange is in the hands of a Council, headed by the Chairman. The Council is responsible for approval of applications for listing and for supervising performance of the ongoing obligations of listed companies. Prospectus and listing requirements are in line with EU standards.

Trading on the Exchange, which had a rather slow start, was on a weekly basis until 1998, when the listing of Maltacom led to daily trading.

In 2001 the Exchange saw the introduction of remote trading and the relocation to new premises. The trading floor disappeared and stockbrokers now trade directly from their offices, enabling them to provide a better and more immediate service to their clients. There was a considerable increase in the number of primary listings of Collective Investment Funds, while secondary listings rose steadily throughout the year. The number of licensed stockbrokers increased from 15 up to 20 with another four financial intermediaries being authorised by the Council for a total of 14 by the end of the year.

During 2001 the Exchange obtained Associate Membership of the Federation of European Securities Exchanges after undergoing a rigorous evaluation process by the Federation itself covering, in particular, regulatory and trading operations as well as compliance with EU Directives.

The number of equity listings and corporate bond listings on the Exchange has risen steadily over the years and numbered nineteen and forty-three respectively by the end of 2009.

Despite a sharp decline in 2008, market capitalization at the end of 2009 stood at EUR7.5bn.

The inclusion of Malta’s equity market within FTSE’s Global Equity Index Series (GEIS) in 2008 was an important step for the sector.

The Exchange is careful to monitor activity for possible money-laundering, and submitted itself to inspection by the Financial Action Task Force in 1998, with positive results.

Amendments made to the Malta Stock Exchange Act in 2002 provided for virtually the complete removal of the Exchange’s regulatory functions in particular those concerning admission to listing and licensing of stockbrokers; these functions are now the responsibility of the Financial Services Authority.

The investment fund sector in Malta is quite small. However, the growing success of the stock exchange in attracting mutual fund listings may well lead to an increase in the number of funds actually based in Malta. Investment Funds in Malta are licensed by the Malta Financial Services Centre under the Investment Services Act 1994. Licensed funds are exempt from taxation, although they can choose to pay tax at 25%, in which case generous deductions can be claimed against income and the fund has access to Malta's network of double taxation treaties (see Offshore Legal and Tax Regime and Double Taxation Treaties.)

The Prevention of Financial Markets Abuse Act, 2005, repealed the Insider Dealing and Market Abuse Offences Act and updated rules regarding inside information and disclosure.

The new laws put in place more detailed provisions against market manipulation, and lay down rules concerning the dissemination of information by journalists and researchers pertaining to financial instruments, in addition to stating that all interests and conflicts of interests must be fully declared.

The Act also covers issuers and their managers, ordinary investors, national statistics bodies, competent authorities in Malta and abroad, operators of recognised investment exchanges and other insiders.

The new provisions legislate for administrative sanctions by the competent authority as well as criminal sanctions imposed by the courts, and introduce the concept of the freezing of funds, which may be carried out upon the request of the Attorney General in a written statement known as a ‘freezing order’.

With effect from December 29, 2005 the UK HM Revenue and Customs designated the Exchange as a Recognised Stock Exchange under Section 841(10(b) – Income and Corporation Taxes Act of 1998. With effect from the same date the Exchange was also regarded as a recognised stock exchange for Inheritance Tax purposes.

The Malta Stock Exchange was accepted as a full member of the Association of National Numbering Agencies, or ANNA in November 2006.

The objective of ANNA is to make available to its members and the securities industry as a whole, a standardised and uniform structure for use in any application for the trading and administration of securities in the international securities industry.

The Malta Stock Exchange’s relationship with ANNA originally started in 1992, when the ISO Standard for International Securities Identification Number (ISIN) was adopted for all securities listed and traded on the Malta Stock Exchange.

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Malta Entry and Residence

As a member state of the European Union from May, 2004, Malta no longer applies restrictions to the movements of nationals of other EU member states.

As of December 21, 2007, Malta became part of the Schengen area. European Commission President José Manuel Barroso announced ahead of the enlargement of the area that:

"As from this week, people can travel hassle-free between 24 countries of the Schengen area without internal land and sea border controls- from Portugal to Poland and from Greece to Finland. I wish to congratulate the nine new Schengen members, the Portuguese presidency and all EU Member States for their efforts. Together we have overcome border controls as man-made obstacles to peace, freedom and unity in Europe, while creating the conditions for increased security".

Following enlargement, all citizens of the enlarged Schengen space will benefit from quicker and easier travelling. From December 21, 2007 onwards, a citizen can travel from the Iberian Peninsula to the Baltic States and from Greece to Finland without border checks

At the time of writing, eight Visa Facilitation Agreements (VFAs) are in force between the European Union and certain third countries on the facilitation of the issuance of visas. The VFA sets the cost of a visa at EUR35 and shortens the processing period. The current VFAs cover Albania, Bosnia and Herzegovina, Moldova, Montenegro, Macedonia/FYROM, Russian Federation, Serbia and Ukraine. For other countries, a single-entry and transit visa charge of EUR60 applies. Visas are valid for 90 days.

Anyone who wishes to reside permanently in Malta must apply for a residency permit under the 1988 Residence Scheme. An applicant must provide evidence of a minimum annual income of EUR13,976, rising to EUR16,305 for married persons plus an additional EUR2,329 for each child. These amounts do not include the cost of accommodation and a permit holder must buy or rent property on the island, but benefits from tax and import duty incentives.

Under a new law providing for dual citizenship, enacted in February 2000, 1,064 individuals who were Maltese citizens by birth but then lost their citizenship by emigrating were re-awarded their Maltese status in May 2001 after satisfying certain conditions.

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Malta Business Environment

Malta has an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language and a reasonably open and efficient public administration makes the island a very convenient and effective business base. Valletta, the administrative capital, is also the chief business centre.

The Government, after a bad period in the 70's, is welcoming to external investment, and foreigners are permitted 100% ownership of enterprises in almost all sectors. There are extensive investment incentive schemes (see below). More than 200 foreign companies have set up manufacturing operations in Malta.

There are a number of local banks, but foreign banking activity was heavily controlled in Malta until quite recently. Business legislation has created special offshore regimes for a variety of types of business , including shipping companies, mutual funds and banks. There is also legislation for Trusts modelled on English trust law, which was updated in 2004.

Taxation for offshore entities is very light, and Malta is unusual among low-tax countries in having tax treaties with 46 other countries, including most OECD countries.

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Malta Marsaxlokk Bay Freeport

The Malta Freeports Act 1989 offers a number of fiscal and other incentives to companies licensed by the Freeport Authority, guaranteed against claw-back for 15 years. They include exemption from customs duties, income tax, stamp duty, withholding tax (except for distributions to Maltese residents), exchange control and death duties. Employees of Freeport companies have a (small) income tax reduction, and may import personal items duty and tax free for the fist six months of their stay.

The Freeport, at Marsaxlokk Bay, has extensive storage facilities, including a container terminal. There is a ship repair facility, and a number of other support services are available.

In order to gain a Freeport license, a company must be incorporated in Malta and must operate under one of the following headings:

• (i) the labelling, packaging, sorting, warehousing, storage, exhibition or assembly of any goods, materials, commodities, equipment, plant or machinery; or
• (ii) any activity concerned solely with the conduct of a Freeport including, but not limited to stevedoring, wharfage, operation of terminals and container handling; or
• (iii) the rendering of services analogous or complementary to the activities mentioned in (i) above.

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Malta Investments by Foreigners

The Maltese government actively promotes foreign investment, particularly into the high technology sector. The Industrial Development Act 1988 introduced incentives and benefits for foreign investors, which were administered by the Malta Development Corporation. Some incentives were automatic, others were at the discretion of the Malta Development Corporation. Incentives included tax holidays, exemption from withholding tax, accelerated capital allowances, export promotion allowances, subsidised factories, customs duty relief, training grants, reduced tax rates, soft loans, etc.

In April 2001, the government amended the Industrial Development Act to incorporate a new incentive package to boost existing and new investment, primarily in the manufacturing sector which employs over 30,000 people and which, together with tourism and the services sector, is a key element of Malta's economy.

The incentives on offer no longer depend on whether a company exports or not. They are meant to promote productivity growth regardless of where the product is sold. The new package contains not only new tax incentives, with reduced rates of corporate tax which start from 5 per cent and move up to 15 per cent over a 15-year period, but also investment tax credits, a value added incentive scheme, special provisions for small businesses, and other incentives related to training and job creation.

These incentives will not only be available to prospective investors, but also to existing ones ensuring that all companies can retain and increase their investment in Malta.

It is possible for foreign companies to employ expatriates subject to approval; normally the company would have to provide training or an understudy situation in order to bring Maltese nationals up to speed in the jobs occupied.

As part of Malta's preparations for EU entry, the Government replaced the IDA in 2001 with a Business Promotion Act which removed discriminatory treatment of certain types of company, giving all companies access to a more modest range of fiscal benefits. These are described in detail here.

In January, 2004, the government launched Malta Enterprise, a new body tasked with attracting more foreign direct investment (FDI) to the island. The umbrella body's mission is to sustains Malta's competitiveness and to offer assistance to those seeking to invest in Malta. Malta Enterprise consists of separate units, the first of which is responsible for business development and includes attracting FDI, trade promotion, marketing strategies, knowledge management, and foreign offices. The second unit is primarily responsible for client relationship management, whilst the third deals with corporate services.

Malta Enterprise has overseas offices in Germany, Dubai and Libya. Detailed information can be found on their website: www.maltaenterprise.com.

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