This is not only because it is difficult to find a viable solution to protect the European markets, but also because it is still very uncertain what the possible effects on these markets will be.
In a study conducted by Global Counsel in the UK in 2015, the member states most likely to be affected by Brexit were ranked as shown in Table 1.
Malta was ranked fifth in this survey, which was based on multiple metrics, including exports to the UK, UK bank links, foreign direct investment into the UK, residents in the UK and others. It concluded that Malta has significant exposure as a result of Brexit.
Over the past few years, Malta has performed remarkably well, even in times of global distress. This article explores the opportunities that are available in Malta for companies wishing to relocate investment from the UK.
The analysis starts off with a general overview of the Maltese tax system following which we provide an analysis of industry-specific tax incentives. We also look at tax incentives for UK individuals looking into working in Malta post-Brexit and, finally, at the citizenship by investment programme which continues to attract many UK residents.
|Table 1: Member states most likely to be affected by Brexit|
|Source: Global Counsel survey 2015|
Malta has been welcoming investors into the country since the early 1950s. The process of setting up on the island is a straightforward and transparent one, in which the investor is always kept updated as to what is required. Prospective investors often make use of a service provider from the private sector capable of seeing to all their legal and logistical requirements from company registration and access to banking facilities to recruitment of staff.
The Maltese economy
Malta has had one of the Eurozone's fastest-growing economies in 2017, recording a 6.6% increase in GDP growth, closing 2017 with a GDP of €11.1 billion ($13.7 billion). Results in the labour market were particularly positive – there was a growth in employment of 6.1%, and the unemployment rate fell to 3.6%. Economists expect the labour market to continue to grow, since 12,500 new workers are needed in 2018. Retail sales continue to expand indicating a strong momentum in private consumption supported by a declining inflation rate of 1.3%.
Re-domiciliation of companies
The Maltese Income Tax Act provides for 'step-up' provisions which allows a company being re-domiciled to Malta to claim a step up in the tax base costs of any assets held outside Malta. Effectively, this enables the company to revalue its overseas assets to fair market value at the time the re-domiciliation process is undertaken. The re-valued cost, of which companies should notify the Maltese tax authorities, will constitute the new acquisition cost of the assets when calculating any subsequent gain. Furthermore, wear and tear allowances available under the Maltese Income Tax Act will henceforth be calculated on the stepped-up value of the assets.
Although the country is well known as a tourist destination and, increasingly, as a financial services hub, the manufacturing industry still has a very important role to play with a contribution of more than 13% to the country's GDP.
In keeping with the country's policy of diversification of economic sectors, the manufacturing sector is itself further diversified with important operators in the fields of:
- Automotive components;
- Electronic components;
- Medical devices;
- Precision engineering;
- Pharmaceuticals; and
- Injection moulding.
A special dedicated unit, known as Malta Enterprise, was set up by the Government of Malta. Malta Enterprise provides a wide range of incentives in order to ensure that the setting-up process and ongoing operations of a plant in Malta are as cost-effective as possible. The support measures include:
- Allocation of industrial space;
- Access to finance such as soft loans, loan interest subsidies and loan guarantees; and
- Investment aid.
Qualifying companies are entitled to a tax credit based on an initial investment project which is calculated as a percentage of expenditure in tangible and intangible assets, or of the wage cost for the first 24 months of the newly created job in relation to the supported investment project.
Research and development schemes
Employment in innovation and creativity (personal tax)
Facilitates employment of non-residents in roles which are currently not addressed by the Maltese labour market by temporarily easing the tax expenses incurred by such persons through a fiscal incentive.
R&D feasibility studies
This incentive supports undertaking industrial research and experimental development projects in carrying out R&D feasibility studies in preparation for these projects.
Research & Development 2014 – 2020
Supports industrial research or experimental development carried out for the acquisition of knowledge leading to the development of innovative products and solutions.
Brexit has significantly reduced the UK's reputation as the most sought-after financial centre in Europe since several non-EU and UK-based financial institutions can no longer take access to EU markets as a given.
Non-EU financial institutions using the UK as a hub to access markets across the EU through the highly advantageous passporting rights must now look for an alternative jurisdiction.
Malta is now considered as a European domicile of choice for hedge fund managers. In 2017, it was awarded the International Finance Centre editor's award at the Wealth Briefing Swiss Awards.
Maltese funds are generally not taxable unless they are investing more than a certain percentage of assets in Malta. They are also exempt from capital gains on shares and withholding taxes.
Funds that do not meet the requirements to claim the general exemption would still be entitled to benefit from the Maltese tax refund system explained below.
Tax refund system
The standard corporate tax rate in Malta is 35% of the chargeable income for the fiscal year. Upon a dividend distribution from a Maltese company, shareholders receiving such distributions become entitled to claim a refund of the Malta tax paid by the company on those profits out of which distributions are made. Tax refunds also apply where a company operates through an oversea branch in Malta.
Refunds available are:
- 6/7ths refund: This type of refund is generally due on those profits earned from trading activities. When taking into account such a refund, the effective Maltese tax leakage works out at 5%.
- 5/7ths refunds: This type of refund is generally on income derived from passive interest and royalties and income from participating holdings which do not qualify for the participation exemption. In this case, the effective Maltese tax leakage post-refund tax works out at 10%.
- 2/3rds refund: This is available in those instances where the company has claimed double taxation relief. The refund depends on the type of double taxation relief availed of and is limited to the tax paid in Malta.
- 100% refund: This applies when profits are derived from a participating holding which qualifies for the participation exemption.
Malta is an ideal jurisdiction in which to locate intellectual property. It offers a number of incentives, fiscal and non-fiscal, which make Malta an attractive IP jurisdiction.
The tax treatment of royalties and similar income derived from intellectual property depends on whether such income would be considered to be passive or active in nature.
On royalties derived from a trading activity, the effective tax leakage post-refund would be 5%, whereas for passive royalties, the effective tax leakage post-refund would be 10%.
There are a range of concerns across Europe linked to changes in the movement of people as a result of Brexit, including managing migration, coping with reduced tourism and dealing with citizens returning home from the UK.
Malta has several opportunities for expatriates, in particular the highly qualified persons rules (HQP rules).
The Maltese government launched the HQP rules in 2011 to attract experts from EU and non-EU countries to fill specific roles within the aviation, gaming and financial services sectors. Through the HQP rules, the applicant is entitled to benefit from a tax incentive of 15% flat rate on the employment income generated in Malta for the specific role. The special tax rate applies for a consecutive period of five years for an EU/EEA national and for a period of four years for a non-EU national.
The individual investor programme
The Maltese government consents the acquisition of citizenship status through several channels. In 2014, the authorities introduced the individual investor programme – thanks to this initiative, foreign nationals of good repute who invest in Malta will, after taking up residence on the island for one year, be entitled to be naturalised as Maltese citizens.
The programme, being the first of its kind to have European Commission approval, has been extremely successful since its launch in 2014, in particular with UK residents.
As a member of the EU and Schengen area, a Maltese passport offers a number of benefits to successful applicants in terms of significantly improved mobility for them and their families. This is further enhanced by the ability of passport holders to avail themselves of visa-free travel to 167 countries, including the US and Canada. Table 2 provides a summary of the benefits of this programme.
|Table 2: Benefits of a Maltese passport|
|Visa-free access||167 countries|
|Residence required||1 year’s legal residence and minimum physical presence of 14 days|
|Nature of contribution||Investments, real estate, insurance, and residence|
|Minimum contribution||€ 880,000|
|Time to citizenship||12 months|
As years of uncertainty and the potential loss of EU passporting rights, which could affect the UK's status as Europe's number one destination for foreign direct investment, Malta is positioning itself as an attractive alternative for businesses seeking an address in the EU.
Ewropa Business Centre, Level 3 - 701
Nicky Gouder, tax partner of ARQ Group, completed his Association of Chartered and Certified Accountants (ACCA) course in 2010. Following that, he specialised in taxation and completed a diploma in taxation offered by the Malta Institute of Taxation in 2011 and read for an advanced diploma in international taxation provided by the Malta Institute of Management. He also graduated in business management from the University of Malta in 2007.
He is one of the three founding partners of the Capstone Group, which was set up in 2010 and specialises in accountancy, tax, audit and advisory.
Nicky is specialised in international taxation with a focus on domestic legislation and has significant experience in handling a wide portfolio of local and international clients operating in various industry sectors. He also lectured the advanced taxation module for the ACCA course provided through the Malta Institute of Accountants and participates in a number of tax conferences both on a domestic and international level.
Luana Scicluna, tax manager at ARQ Group, is specialised in international taxation and has considerable experience in corporate restructuring projects and succession planning. She assists several local and international clients with handling their tax affairs in Malta and provides advice on the tax implications of a wide range of transactions.
Luana is an accountant by profession, concluding her bachelor of accountancy (hons) at the University of Malta in 2009, following which she furthered her studies in taxation through a diploma in taxation offered by the Malta Institute of Taxation and an advanced diploma in international taxation offered by the UK's Chartered Institute of Taxation.