Investment Services in Malta
The Malta Financial Services Authority (MFSA) is responsible for the licensing and regulation of providers of Investment Services and Collective Investment Schemes.
Background
The establishment of a legal framework for a funds and securities industry in Malta formed part of a consolidation of financial services regulation that took place in the mid nineties. This coincided with a decision to phase out the offshore regime that existed at the time and to establish a seamless framework applying to both domestic and international economic activity.
The rapid expansion of investment services business that followed was driven by local capital seeking to invest in products that provided an alternative to the ones tradi-tionally offered by banks and insurance companies. Today the funds sector has grown into a fully-fledged international industry supported by a strong number of licensed investment companies. Although most of the growth has been in the retail funds category, interest in the setting up and management of professional investment funds is clearly increasing.
Malta’s financial services legislation is today fully in line with EU standards. Anti-money laundering, professional secrecy, insider dealing and market abuse laws are at the forefront of regulatory practice. Among other things, this has ensured that every fund manager must know the identity of the beneficial owner of money being invested.
Investment Services Practioners
In terms of the Investment Services Act, a licence is required in all cases where:
- An investment service is to be provided in Malta, or
- A investment service is to be provided from Malta, or
- An investment service is to be provided through a Malta company or other form of corporate structure.
An investment service includes, among oth-ers, dealing as principal or agent, arranging deals, managing investments, acting as trustee, custodian or nominee, providing invest-ment advice and stock-broking. The service qualifies as such when carried out in relation to a number of instruments including, inter alia, securities, units in a collective invest-ment scheme, warrants, options, futures and rights under a contract for differences.
The basic criteria emphasised by the MFSA when considering an application for such licences are:
- Integrity (of applicant);
- Competence (of applicant);
- Solvency (of applicant).
The categories of investment services licence that may be applied for may be seen in the graph above. Fees for Investment Services Licences are payable in accordance with the category of the Investment Services Licence. The categorisation, which also determines the Licence Holder's Financial Resources Requirements, reflects very broadly the de-gree of risk to investors.
Fiscal Incentives
An investment services company may enjoy the fiscal benefits associated therewith.
A package of fiscal incentives in relation to investment services companies makes it attractive to choose Malta for the purpose of carrying out therefrom management and administrative services thereby enhancing the development of a funds industry in Malta. Maltese investment services companies which are licensed under the Investment Services Act enjoy a generous package of additional tax deductions which may be set off against the profits of the company and thereby reduce its taxable income. These additional allowable deductions are:
- 200% deductions on building occupancy costs (e.g. rent, heating, etc.) for the first ten years;
- 200% deductions on salaries paid to Mal-tese staff for the first ten years; and
- Tax relief on funds invested in schemes-managed by themselves.
Investment services companies may not surrender the losses arising from the additional deductions to other members of the group under the relevant group relief provisions.
Collective Investment Schemes
A licence is also required for a Collective Investment Scheme if such Collective Invest-ment Scheme:
- Shall issue or create any units or carry on any activity in or from Malta;
- Is formed in accordance with or existing under the laws of Malta and shall issue or create any units or carry on any activity in or from within a country, territory or other place outside Malta.
The Maltese Authority (MFSA) has the power to exempt schemes that are essentially “private” in nature and purpose.
As a general rule, the Custodian of a Scheme should be established in Malta, but alternative custodial arrangements may be considered by the MFSA, as long as they achieve adequate protection for Unit holders and for the Scheme’s assets.
The management company of a Scheme should have an established place of business in Malta. However, the MFSA has the power to exempt from the licensing requirements an overseas management company or adminis-trator of sufficient standing and repute.
When considering whether to grant or refuse a Licence, the MFSA has, in particular, to have regard to:
a. The protection of investors and of the general public;
b. The protection of the reputation of Malta;
c. The promotion of competition and choice;
d. The reputation and suitability of the applicant and all other parties connected with the Scheme.
There are four types of collective investment schemes. These are:
- Open Ended Investment Companies (SICAVs);
- Close Ended Investment Companies
- Mutual Funds
- Professional Investor Funds
Professional Investor Funds
These are non-retail type funds which are not subject to any restrictions on their investment or borrowing powers. PIFs may be sold solely to investors who satisfy the minimum investment threshold: ‘authorized investors’ are subject to a minimum investment thresh-old of $ 100,000 whilst experienced inves-tors are subject to a minimum threshold of $20,000. “Authorized Investors” who satisfy the;minimum investment rule may be:
- A body corporate which has net assets in excess of USD 1.0 million or which is part of a group which has net assets in excess of USD 1.0 million;
- An unincorporated bona fide body of persons or association which has net assets in excess of USD 1.0 million;
- A trust where the net value of the trust’s assets is in excess of USD 1.0 million;
- A person who has reasonable experi-ence in the acquisition and/or disposal of:
(a) Funds of a similar nature or risk profile; or
(b) Property of the same kind as the prop-erty, or a substantial part of the property, to which the PIF in question re-lates; - An individual whose net worth or joint net worth with that person’s spouse, exceeds USD 1.0 million;
- Employees and directors of service providers to the PIF;
- Relations and close friends of the pro-moters limited to a total of 10 persons per PIF; or
- Entities with (or which are part of a group with) USD 5 million or more under discretionary management or ad-vice investing on its own account or for the account of its clients.
Amendments to the regulations have ex-empted Professional Investor Funds from the requirement to obtain a licence in certain circumstances.
Where the PIF appoints functionaries (the Manager; the Custodian; the Prime Broker; the Investment Advisor and any other “per-son” carrying out functions for the PIF) and therefore does not itself carry out any in-vestment services licensable activity, the PIF is not regulated in Malta.
If the PIF carries out investment services licensable activity – for example, by acting as its own Manager – those activities will be regulated. MFSA only accepts regulatory responsibility for that part of the PIF’s activ-ity that constitutes a licensable activity in Malta.
Nominee investors will be treated on a transparent basis - that is to say the Man-ager must know the identity of the beneficial owner of the money being invested. A PIF may be incorporated outside Malta – or incorporated in Malta but operated from Malta. However, if an external Manager is appointed, either the PIF or its Manager must be established in Malta.
All fiscal provisions expounded above ap-plicable in relation to collective investment schemes, are further applicable to profes-sional investor funds, so long as the relevant conditions are satisfied.
Fiscal Provisions
The fiscal provisions relating to the taxation of funds and investment services companies are designed to complement the Investment Services Act (ISA) and to create a fiscal regime which allows for the rapid develop-ment of a funds industry in Malta, both at a domestic and international level.
Collective Investment Schemes have gener-ally taken the form of
- Funds (SICAVs);
- Unit trusts.
Investment Services Act licensed funds are exempt from tax in Malta and, as a result, are specifically excluded from benefiting under Malta’s double taxation treaty net-work. Capital gains realised by the fund remain exempt from tax in Malta. A collec-tive investment scheme that opts to pay tax is entitled to treaty relief as well as other methods of reducing the impact of double taxation.
Maltese residents may invest in ISA funds and are subject to a 15% final withholding tax on distributions received from the fund and on any gains made through the redemp-tion of shares or units in the fund. The final withholding tax regime applies to both Mal-tese individuals and Maltese companies. No further Maltese tax is payable on receipts from ISA funds and there is no requirement for individuals to disclose the income or gains received from ISA funds on their in-come tax returns. To the extent that the amounts received are disclosed in an income tax return, the tax deducted is available as a credit against the total tax liability of the Maltese investor. Non-residents receiving dividends out of a scheme’s foreign sourced income are entitled to a refund of Malta Tax paid. This refund will normally be two-thirds of the Malta tax paid by the scheme. In certain exceptional circumstances the refund may increase to 100% where the dividends being distributed by the Scheme derive from a “participating holding”. Such a holding generally exists where the Scheme has at least a 10% equity holding in a non-Maltese company but also exists in other circum-stances, for instance where the Scheme has invested more than Lm 500,000 (or its equivalent in foreign currency) in a non-Maltese company.
In addition, in respect of all Collectives In-vestment Schemes and funds, there is:
- No stamp duty on share issues or trans-fers;
- No tax on the net asset value of the scheme;
- No withholding tax on dividends paid to non-residents;
- No taxation on capital gains on the sale of shares or CIS units by non-residents;
- No taxation on capital gains on the sale of shares or CIS units by residents pro-vided such shares/units are listed on the Malta Stock Exchange (MSE).
The Malta Financial Services Authority (MFSA) is the single regulator for financial services activities in Malta. It regulates and supervises credit and financial institutions, investment, trust and insurance business and also houses the country's Companies Registry. The MFSA issues guidance notes, monitors local and international developments, works with relevant parties on legislative matters, and plays a major role in training. It encourages high standards of compliance and runs a consumer affairs unit.