Malta Offshore Business Sectors

In the late 1980s, and spurred on by the high unemployment and other financial woes that followed the departure of the British, the Maltese Government set about creating an offshore sector and becoming more welcoming to external investment by passing the International Business Activities Act 1988 under which the Malta International Business Authority was set up to develop offshore business sectors.

Alongside this initiative, the Malta Development Corporation began to offer a range of very attractive investment incentives. Initially the accent was mostly on employment creation in manufacturing and shipping rather than the development of a financial services centre; but this has gradually changed, and there is now a modern legislative structure for most of the main financial sector activities.

In April 2001, the government amended the Industrial Development Act to incorporate new incentive packages 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.

Following Malta's acceptance into the EU in 2004, the European Commission described seven 'harmful' tax measures that it wanted the Maltese government to abolish as part of its attack on tax measures in the ten acceding nations that it fears will distort the single market.

The first three measures identified by the Commission concerned offshore trading and non-trading companies, offshore insurance firms and offshore banking companies. In fact, Malta acted to abolish 'offshore' companies as such in 1996, although a transition period allowed the continuance of existing companies until 2004.

Other measures singled out by the Commission as harmful included International Trading Companies, which create an effective tax rate of 4.2% for non-residents, the beneficial tax treatment of dividends from companies with foreign income, the tax treatment of Investment Service Companies, and the deferral of tax on foreign income for non-resident companies.

In March, 2006, the European Commission formally requested Malta under EC Treaty state aid rules to abolish the tax regime for Maltese Companies with Foreign Income (CFI) and the International Trading Companies’ (ITC) regime by the end of 2010 at the latest.

Competition Commissioner Neelie Kroes observed that: “The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy”.

In May, the Maltese government formally decided to gradually abolish the existing aid schemes.

Due to its extensive network of double tax treaties with almost all the important OECD countries, Malta is often chosen as a base by firms needing to set up an offshore holding or investment company, or trading subsidiary.

Malta’s financial services sector has continued to expand, attracting considerable interest from international sources. The globally difficult economic situation during 2008 did not affect the sector as much as in most other countries. Malta was ranked 34th (out of 134 countries) by the World Economic Forum’s Competitiveness Index 2008-2009 for financial market sophistication, while the banking system was reported to be the 10th soundest in the world. In 2009, Malta's ranking for financial market sophistication had climbed to 13th.

During 2009, the Authority issued new licences in all areas of financial services activity. The MFSA's Supervisory Council met 34 times and granted a total of 168 new licences, authorisations, enrolments and registrations to conduct financial services business.

This section of the site describes the most important types of offshore business activity carried out from Malta.

Malta Trade Marketing and Distribution

Malta's offshore taxation regime doesn't stand out particularly among its competitors, but the island does have some considerable advantages, including its geographical location, its extremely well-equipped ports and Freeport, its quite well-developed manufacturing infrastructure, its network of double tax treaties, and its relatively sophisticated, European business environment.

Thus, a substantial number of companies involved in the trading or distribution of FMCG and other physical goods use Malta as a trading base for the Mediterranean, Southern European and North African region.

The European Commission announced in November 2006 that it will allow Malta to grant start-up aid for new air routes from Malta International Airport. The measure will last until September 2011 and provides for a total of Lm25 million (EUR58 million) to be paid to airlines in order to finance new routes. The primary objective of the aid is to improve connectivity by enhancing access to air transport services, which are of basic importance for the economic and social development of Malta.

The measure approved by the Commission provides for public funding of new services departing from Malta International Airport. The aid is designed to help airlines wishing to establish new routes to/from the airport by meeting part of their start-up costs and route-specific marketing aid.

The Commission found that the proposed scheme is in line with the Community rules adopted in 2005 in order to favour the development of regional airports and the mobility of EU citizens, as:

Malta does not suit everyone as a physical supply base, but that does not prevent companies from establishing marketing or holding companies in Malta, and very many do so. The combination of Malta's double tax treaties with the 4% effective tax rate on International Trading Company profits is very attractive, as long as the regime remains in force (until 2010). See below, Financial Holding and Investment Activities.

Along with other offshore jurisdictions, Malta is a suitable place in which to base e-commerce services for retail or wholesale distribution of material or non-material goods: see Offshore-e-com.com for extended descriptions of how such businesses can take advantage of the combination of offshore and e-commerce.

Malta Licensing Royalties and Franchising

A frequent feature of international trade and investment, particularly as between advanced and less advanced countries, is the transfer of technology or 'brand' or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties and favourable taxation regime, Malta is a suitable place in which to locate an intermediary International Holding Company company to handle payment streams which might otherwise be highly-taxed in the receiving country.

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low withholding tax. The income received in Malta will be taxed after deduction of expenses at 12% or less, and where there is a 10% participation, possibly at a nil rate (see Offshore Legal and Tax Regimes and below under Financial Holding and Investment Activities for comments on the tax treatment of repatriated Maltese profits in Western countries).

On December 1, 2006, the Maltese government, deposited its instrument of accession to the Patent Cooperation Treaty (PCT) with the World Intellectual Property Organisation (WIPO).

The Treaty entered into force, with respect to the Republic of Malta, on March 1, 2007.

Malta Financial Holding and Investment Activities

Many international investors choose Malta as the location for financial holding and investment companies, using the International Holding Company form, due to the jurisdiction's combination of tax treaties and low-tax offshore regime.

Investment into most of the leading OECD economies benefits from low treaty withholding tax rates. Often it would be best for the investment to have a high debt component, since the interest is normally a charge against profit in the destination country, and the treaty rates of withholding tax on interest payments are normally lower than the withholding rate on dividends, except in some cases where there is a major (usually means 25%) participation.

Whatever the mix of interest and dividends, the income once in Malta will be taxed after deduction of expenses at an effective rate of 12% or less, and if there is a 10% participation by the Maltese company the rate will be zero as long as the profits are distributed onwards to non-resident persons. Distributions to some countries will benefit from tax-sparing credits. US investors will be able to mix low-tax Malta income with high-tax income, avoiding wastage of tax credits; and even for countries like the UK which have rules on the attribution of profits from Controlled Foreign Corporations there are benefits to be got from careful planning of international financing structures.

Malta Banking

Maltese banking is now conducted according to the Banking Act 1994 (for credit institutions aka commercial banks) and the Financial Institutions Act 1994 (for non-lending institutions, mostly meaning foreign exchange bureaux). This legislation conforms to current EU banking directives.

'International Banking Institutions', seven of which were licensed as offshore companies under the Malta International Business Activities Act 1988 now have to convert to 'credit institution' status under the Banking Act. Incoming banks are now licensed only under the Banking Act. With the gradual abolition of exchange controls, there now remains little distinction between 'international' and 'local' banks, or between 'offshore' or 'onshore' banks.

Maltese and foreign banks are supervised by the Malta Financial Services Centre; minimum capital for a new bank is EUR5 million. Foreign banks may operate through branches, but are still subject to supervision by the MFSC.

A new organisation to promote Malta's financial services sector to international investors was officially launched by the government in May 2007.

The new non-profit body, branded Finance Malta, centralises promotional activities previously carried out by the Malta Financial Services Authority and private sector organisations.

Parliamentary Secretary Tonio Fenech noted that financial services were playing an increasingly important role in the Maltese economy, accounting for about 12% of the country's gross domestic product. The financial sector’s gross added value component reached EUR208 million by the end of 2006, representing added value to the tune of EUR40,000 per employee, Fenech added. Meanwhile, the industry's productivity grew by 37% in 2006, he revealed.

In June 2008, the IMF highlighted that Malta's banking system was well-placed to weather the global financial turmoil. The IMF report said that banks have healthy liquidity positions and a good funding profile rooted in domestic retail deposits, according to the report. Additionally, they appear to have no direct exposure to US subprime mortgage-based assets.

As a member of the EU, Malta is actively strengthening its national and cross-border crisis management framework in the light of lessons from the recent international financial turmoil, the IMF found.

By the end of 2009, the Maltese banking sector had grown considerably, consisting of 23 credit institutions (with a total of 133 offices and branches) with three of these being majority Maltese-owned. The other 20 are foreign credit institutions with a physical presence in Malta. Of these, 13 are from EU countries, five from non-EU countries and another two are branches from non-EU countries.

The Maltese government has set a target of 2015 for the jurisdiction to become one of the most important financial centres in the region.

The Commonwealth Bank of Australia was one of the first Australian banks to take advantage of the opportunities presented by Malta, with its CommBank Europe Ltd unit, holder of a Maltese banking licence since August 2005, becoming one of the island's largest financial institutions. CommBank Europe had $1.3 billion in capital and had $4.7 billion in assets in 2006.

For the Australian banks, it is the existence of the favourable double tax treaty between Malta and Australia that is a major cause of their interest in the jurisdiction. The Australian reported that CommBank Europe's Maltese operation, in combination with lower tax rates in New Zealand, Singapore and Britain, contributed to a 150 basis-point reduction in the effective tax rate for CBA's banking operations to 26.7%. Tax paid in Malta was $2.3 million - equivalent to a rate of 7.3%, although top-up tax was paid in Australia under that country's controlled foreign country rules, the report stated. The criticism levied at the bank for its Malta operation appeared to be taking its toll and by May 2010, there was widespread speculation that the the bank's Maltese activities would be wound down.

While Malta is supposedly designated a "tax haven" by the Australian tax authorities, its rules and regulations have changed substantially with entry into the EU, and with the drive to 'clean up' offshore financial centres by the OECD in the early part of the decade. Incoming banks are now licensed only under the Banking Act 1994, and with abolition of exchange controls, there now remains little distinction between 'international' and 'local' banks, or between 'offshore' or 'onshore' banks. Foreign banks, which may operate through branches, remain subject to supervision by the Malta Financial Services Authority.

Legislation regarding the supervision of banks and other financial institutions was expected to be passed by parliament in July 2010. The new legislation, according to the MFSA "represents an integrated approach to regulation and supervision being provided through a single Authorisation
Unit, specialist Supervision Units for Banking, Insurance and Occupational Pensions and Securities and Markets, and a Regulatory Development Unit."

Malta Investment Fund Management

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 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.

In January, 2006, the Malta Financial Services Authority licensed its two largest hedge funds up to that point, reinforcing the jurisdiction's emergence as a well-regulated financial services jurisdiction of international stature.

The MFSA granted licences to Altma Fund SICAV plc, which has 29 sub-funds, and NBCG Fund SICAV plc, which has 7 sub-funds, to operate as Professional Investor Funds promoting to Qualifying Investors.

Both schemes have been set up as investment companies with variable share capital in terms of the relevant provisions of the Companies Act.

The newly-licensed funds brought the total of Malta-based, Professional Investor Funds (including sub-funds) to 58, and the MFSA has said that it was considering licence applications from a number of other funds.

The regulator said it was also working on new Professional Investor Fund Guidelines in an effort to improve the existing legislative framework.

In January 2008, Bermuda-based fund administrator, Apex Group announced the launch of a new fund administration subsidiary in Malta.

Apex Fund Services (Malta) was to provide a platform for developing the Group's business in the European Union and surrounding markets, and was expected to begin business shortly after the announcement.

The Apex Group was established in Bermuda in 2003, but now has a presence on three continents, USD5 billion in assets under management, and has been named the second-fastest growing fund administrator in a recent global survey of fund administrators.

The Malta subsidiary is regulated as a recognised fund administrator by the Malta Financial Services Authority under the Investment Services Act.

"Malta is the perfect fit for independent fund administrators," observed managing director Peter Hughes. "It has good quality people, embraces technology and, as a jurisdiction, has proved to be quick to respond to the challenges and opportunities in the market."

"Establishing Apex Malta as a regulated entity will enhance the reputation of Apex globally," he added.

Apex Malta will provides a wide range of fund administration services to traditional funds, fund of funds, hedge funds and private equity funds, with online web reporting access for investors and fund managers through the ApexFundsNet platform, the first of its kind in Malta.

In December 2008, the Maltese Financial Services Authority revealed that newly licensed hedge funds were increasing two-fold on the island, thanks to the jurisdiction's competitive set up costs and recently implemented regulatory measures.

MFSA Chairman Joe Bannister spoke about the increase in funds at a roundtable debate on the subject, where he noted that the Undertakings for Collective Investment in Transferable Securities (UCITS) sector in Malta is also showing signs of further expansion, alongside the fund-servicing and fund administration sectors. The MFSA Chairman also emphasized that Malta’s first priority when it comes to licensing new funds remained quality rather than the quantity.

Among the reasons given for this growth in the investment funds sector was that being part of the European Union has allowed Malta to develop into a fully fledged funds domicile that provides competitive access to the European and international markets.

Bannister stated that the recent updates in legislation have been mainly inspired by developments at EU level and included the implementation of the EU Markets in Financial Instruments Directive (MiFID), the Capital Requirements Directive (CRD), UCITS III, and the new eligible assets regime. This legislation is directed at providing for a more integrated European financial market by allowing EU-based funds and their providers the freedom to compete on a level playing field.

Kenneth Farrugia, Vice-Chairman of FinanceMalta, who also spoke at the meeting, attributed Malta’s success in attracting funds to its high level of cost competitiveness. Citing recent research on the subject, he said: "on a comparative basis Malta is very cost competitive both at the set up stage in terms of setting up costs of a Scheme, as well as regards ongoing servicing costs such as custody and fund administration costs."

By the end of 2009, the total number of licenses stood at 88, up 13 from the previous year.

Malta Ship Management and Maritime Operations

See Offshore Business Review – Shipping for a more general treatment of offshore shipping registries.

Malta is one of the top ten shipping registries worldwide. The original Merchant Shipping Act 1973 based on English law has been adapted and modernised in 1986, 1988 and 1990; and further improvements are planned. The Merchant Shipping Directorate of the Malta Maritime Authority supervises the sector and has developed a world-wide network of surveyors and inspectors. Malta adheres to all the major international maritime conventions.

The Maltese registry accepts all types of vessel, from pleasure yachts to oil rigs. Bareboat charter registration is allowed both of foreign ships under the Maltese flag and of Maltese ships under a foreign flag. There are no restrictions on the nationality of crew in Maltese law, and no age limit for ships. The shipping laws are flexible with regard to sale or mortgaging of ships.

By the end of 2008, a total of 5,015 ships, 2311 of which were pleasure yachts were registered under the Maltese Merchant Shipping Act.

In January, 2006, Malta was one of four flag states that attained the highest quality ranking following the Paris Memorandum on Port State Control's latest inspections.

The Paris MoU “White List” represents quality flags with a consistently low detention record. Finland, France, Isle of Man, and the United Kingdom, are placed highest in terms of performance. Azerbaijan, Belgium, Cyprus, Gibraltar, Malta, Saudi Arabia and Spain are new to the White List. In all, the White List includes 34 flag states, 3 more than the previous year. By the end of 2009, the White List included 41 flag states.

In order to register a ship in Malta, it must be owned by a company incorporated in Malta. In most circumstances, Maltese shipping companies are exempt from taxes. See Offshore Legal and Tax Regimes and Law of Offshore for further details.