Internationalisation and Business Continuation through a Strategic Location Reuben M Buttigieg...

Internationalisation and Business Continuationthrough a Strategic Location

Reuben M Buttigieg

Erremme Business Advisors113B Paola Road Tarxien Malta EuropeT: (+356) 2166 1273 | F: (+356) 2166 3253| E: [email protected]

Unlocking the Potential Regional B2B Networking Event for SMEs

Thursday 19 May 2011

2Erremme Business Advisors 113B Paola Road Tarxien Malta Europe T: (+356) 2166 1273 | F: (+356) 2166 3253 | E: [email protected]

AGENDAAGENDA

oEconomic Factors

oMalta as a Historic Trading Hub

oUse of Malta by Companies – Types

oMain Reasons for Setting up in Malta

oMalta as a Financial Services Centre

oTax Regime Overview



Main HighlightsMain Highlights

Economic Factors

Gross Domestic Product (GDP)“After having contracted by 3.4% in real terms in 2009, the economy expanded at a faster rate of 3.7% in 2010. After having rebounded strongly in 2010, real GDP growth is projected to ease in 2011, before picking up again in 2012. In both years growth is expected to be driven mainly by final domestic demand, though net exports are also set to contribute positively.” Central Bank of Malta Annual Report 2010

GDP for 2010 was €6,245.8 million.

Inflation Rates

March 2011 Retail Price Index: 1.99% (National Statistics Office)March 2011 Harmonised Index of Consumer Prices: 2.5% (National Statistics Office)

Unemployment Rate

In March 2011, there was a total of registered unemployed of 6,662 (National Statistics Office). In November 2009, the unemployment rate was of 5%, and in November 2010, this figure decreased to 4.3%.



Some of Malta’s CredentialsSome of Malta’s Credentials

Global Financial Services Index, City of London, 2008:oFourth place as the Centre most likely to increase in importance in the next few yearsoFifth place as the Centre where most organisations are likely to begin new operations

World Economic Forum’s Global Competitiveness Report 2009-2010oThirteenth soundest banking sectoroFifteenth most effective stock market regulationoTwelfth strongest auditing and reporting standardsoThirteenth position with respect to market sophistication



Historically a Trade HubHistorically a Trade HuboMalta’s strategic location made it a trading point from the arrival of the Phoenicians in c.1000 BC, through the Roman and Byzantine Empire, the Arabs and Spanish, the Knights of St. John, French and English up to nowadays. Throughout this time span, several ports and trading settlements were founded.

oHaving been a British colony for 160 years, during this era Malta relied on the services offered to British armed and naval forces. For this reason, the Maltese economy became to be called a ‘fortress economy.’ Almost the entire Maltese population depended on the British for employment, during times of war employment would boom. Times of peace led to a rise in unemployment.

oMalta’s reputation as a trading point grew with the opening of the Suez Canal, used by ships refueling en route to British India. The importance of Malta as a trading hub grew substantially particularly under British rule. Malta gained independence in 1964.

oFollowing this, Malta established itself as a low-cost manufacturing open economy. Privatisation of Government-owed enterprises defined the dawning of a new era. In 1989, Malta embarked upon a project to establish a financial services sector.

oMalta became a member of the European Economic Area and in subsequent years of the European Union. Malta’s modern economy has become sustainable, depending mostly on tourism and financial services. Malta has become an attraction for high-value services, among others, in maritime, aviation and ICT industries.

oPresently, given the North African situation, Malta has become a humanitarian hub.



Malta - Used by Large to Small CompaniesMalta - Used by Large to Small Companies

oST Microelectronics

oHSBC

oLufthansa Tecknik

oCarlo Gavazzi

oTekom Investments

oPalumbo Malta Shipyard (Family company)

oVarious German small companies (test base economy)

oComponents industry



Main Reasons for Setting up in MaltaMain Reasons for Setting up in Malta

Internationalisation: Internationalisation: Malta is a gateway to Europe, North Africa and the Middle East.

International Tax Planning HubInternational Tax Planning Hub

International Financial Service CentreInternational Financial Service Centre

Cost Effective Reputable CentreCost Effective Reputable Centre

Can do AttitudeCan do Attitude




Malta as a Financial Services Centre



“Our tried-and-tested methods of doing business, coupled with our high standards of vigilance and robust regulatory framework have been key to keeping the Maltese financial system and the wider economy as a whole on a steady course.”

The Hon. Mr Tonio Fenech, Minister of Finance, the Economy and InvestmentKey note speaker during the Malta Islamic Finance Conference 2010


Malta as a Financial Services CentreMalta as a Financial Services Centre

oFinancial Services currently contribute approximately 12% to Malta’s Gross Domestic Product. Government’s ‘Vision 2015’ is aimed at increasing this figure to 25%.’

oMalta boasts of highly-qualified professionals, hard-working and ambitious, in the financial services industry. Most have sought international experience in a specialised field of financial services, therefore bringing together an array of multicultural business ideals.

oMalta has now established itself as an onshore financial centre in line with EU legislation and Directives.

oMalta reached an advanced accord with the Organisation for Economic Cooperation and Development (OECD) on fiscal matters. This means that Malta is no longer regarded as a tax haven.

oMalta has a network of over fifty Double Tax Treaties with countries in its attempt to encourage business with these other countries.



The Regulatory FrameworkThe Regulatory Framework

oThe Malta Financial Services Authority (MFSA) is the sole regulatory body monitoring and supervising the financial services industry in Malta. The MFSA regulates banking, insurance, securities, retirement funds and trusts. It works to prevent money laundering and market abuse. It has also established a Consumer Complaints Unit.

oWithin the MFSA is housed the Registry of Companies. This Authority was established by means of the Companies Act (1995) and is charged with the duty of ensuring that companies comply with the provisions of this Act. It also maintains a public registry of these entities where all related documents are kept and are available to the general public.

oPrior to establishment of the MFSA, the Central Bank of Malta (CBM) was the financial regulator, established in 1967. Today, the CBM’s main responsibility is to maintain price stability. It is also a participant in the decision-making process of the Eurosystem’s monetary policy.



BankingBanking

oMalta was classified in the thirteenth place for financial market sophistication by the World Economic Forum’s Global Competitive Report 2009-2010. Its banking system was also ranked as thirteenth soundest in the world.

oThere are currently twenty-three credit institutions with assets of over 40 billion Euro in 2009 (MFSA Annual Report 2009). Twenty are foreign-owned whilst three are majority Maltese-owned. Thirteen credit institutions are from EU countries.

oMalta-based banks are in possession of state-of-the-art technology.

oThe MFSA strongly encourages e-money institutions.

oPassporting to other EU countries is also available to banks registered in Malta.



Collective Investment Schemes (1) Collective Investment Schemes (1)

oMalta has rapidly established itself as a fund jurisdiction, with the required legislative and regulatory framework, to provide for an efficient and effective way of registering and administering the operations of funds.

oDespite the economic slowdown, the fund industry in Malta has experienced an increase in funds during 2009.

oFunds in Malta may be established as:

1.Retail collective investment schemes (CISs), which are further divided into UCITS and non-UCITS2.Professional Investor Funds (PIFs)

Fund schemes registered in Malta (MFSA Annual Report 2009):


Type of Fund 2009

PIF 285

UCITS (including sub-funds) 45

Non-UCITS (including sub-funds) 36

Foreign Schemes 26

Total 392


Collective Investment Schemes (2)Collective Investment Schemes (2)

oThe Investment Services Act (ISA) in Malta provides the statutory basis for the licensing and regulation of persons and companies wishing to set up investment services undertaking and collective investment schemes.

oThe MFSA enforces ISA by requiring persons and companies interested of undertaking such business to acquire a licence.

oCIS structures include SICAVs, non-prescribed mutual funds, unit trusts and limited partnerships.

oFor tax purposes, CISs are divided into two: prescribed and non-prescribed funds.

oPrescribed funds are Malta-based, having assets invested wholly (85% or more) in Malta. These schemes are subject to the standard corporate tax rate of 35%.

oNon-prescribed funds are funds which do not hold more than 15% of total assets in Malta. These type of funds are tax exempt.



Professional Investor FundsProfessional Investor Funds

Benefits of setting up a professional investor fund (PIF) in Malta:o Efficient and less regulated financial services regime; o Low cost to set-up;o Non-bureaucratic licensing process;o Professional management; ando Advantageous and competitive tax regime.

PIFs are targeted at three categories of investors:1.Experienced investors – requiring minimum investment of 10,000 EUR2.Qualifying investors – requiring minimum investment of 75,000 EUR3.Extraordinary investors – requiring minimum investment of 750,000 EUR

As shown in the table on page y, there is a larger amount of PIFs when compared with CISs, this is particularly due to the unregulated environment in which they operate.



Redomiciliation of Offshore Funds to Malta (1)Redomiciliation of Offshore Funds to Malta (1)

oThe Continuation of Companies is the law by which funds can be redomiciled to Malta. The word ‘continuation’ has been used by the MFSA to emphasise the fact that companies need not liquidate their assets in order to re-domicile to Malta.

oThe ISA is the applicable law by which investment services providers align their conduct and the products they sell.

oA CIS licence application is required to be submitted to the MFSA, with all documentation and the applicable licence fees.

oThe MFSA will conduct due diligence with the regulator of the foreign company.

oThe MFSA will examine draft documentation and comments are passed on to the promoter of the foreign company.

oIf any pending issues are resolved, if all documentation required is in order and if a sufficient receipt from its due diligence satisfies the MFSA, an ‘in principle’ authorisation is granted.



Redomiciliation of Offshore Funds to Malta (2)Redomiciliation of Offshore Funds to Malta (2)

oFollowing this in principle approval, the promoters of the foreign company can begin finalising the documentation required by the MFSA and the Registrar of Companies.

oOnce the Registrar verifies that documents submitted in order, the company is given a provisional certificate of registration.

oThe Authorisations Unit of the MFSA liaises with the Registrar of Companies, if both are satisfied with the receipt, the scheme is licenced on the date of redomicilation to Malta.

oThe company can start operation in Malta.

oWithin six months of the issue of the provisional certificate, the company must submit documentary evidence to the satisfaction of the Registrar that it has been struck off the home registrar.

oThe registrar will then issue a certificate of continuation.



Capital MarketsCapital Markets

oThe Malta Stock Exchange (MSE), established in 1992, has seen an increase in listings over the past 18 years.

oThe MSE has sought to take full advantage of all opportunities being offered by the Markets in Financial Instruments Directive (MiFID).

oPotential untapped market for generation of funds. All listings over subscribed even in crisis moment.

oPotential market for tapping larger markets



Maltese Trusts (1)Maltese Trusts (1)

oMalta has well-enacted trusts law that is mainly based on Jersey trusts law. Being mainly a predominantly civil law jurisdiction, Malta also has a civil code which regulates fiduciary obligations.

oThe types of trusts that can be set up in Malta include:•Discretionary and fixed interest trusts;•Accumulation and maintenance trusts;•Oral trusts;•Resulting trusts;•Unilateral trusts; and•Charitable trusts.

oTrusts are taxed at the standard rate of 35%.

oTrusts in Malta are mainly being used for estate and tax planning, asset protection and risk management.

oTrusts have also been used in Malta for commercially, e.g. CIS unit trust.



Maltese Trusts (2): BenefitsMaltese Trusts (2): Benefits

o Confidentiality• Trusts are not registered with any public authority… unlike a will, contract or company statute.

o Continuity• A Trust can be created during the lifetime of the settlor and continue to exist after the settlor’s death… long

term planning.

o Longevity• Trust may continue for up to 100 years from date of existence… wealth protection.

o Flexibility• Ways of arranging property for the benefit of other people without giving them full control … and structured

to meet clients’ specific needs.



Maltese Trusts (3): UsesMaltese Trusts (3): UsesoEstate Planning

oInheritance and succession tax planning

oWealth preservation and asset protection from third parties

oConsolidating ownership of assets owned in various countries in one jurisdiction

oHigh level of flexibility and confidentiality

oCharitable trusts



Maltese Trusts (4): Why choose a Maltese trust?Maltese Trusts (4): Why choose a Maltese trust?

Apart from:

oSound domestic legislation based on Anglo-Saxon principles and legislation on trusts and equity;

oRecognition by Maltese Courts of Private Law and recognition by Hague Convention; and

oHighly regulated services regime supervised by the Malta Financial Services Authority.

Malta also offers:

oPolitical and economic stability;

oGeographic position and multi-lingual officials;

oMalta’s high degree of professional, licensed Trustee Services providers, legal and support services; and

oCost incurred in settling and administering a Trust in Malta is significantly lower than in other countries.



InsuranceInsurance

oAccording to the MFSA Annual Report 2009, the number of insurance companies increased from eight in 2004, servicing the local market, to forty-five insurance companies servicing twenty-seven EU countries, in 2009.

oThere is a large number of insurance agents, brokers and managers in Malta. Therefore, it is possible to subcontract management to locally authorised professionals.

oThe MFSA has made necessary arrangements required to prepare insurance companies to be ready for Solvency II implementation. This was done through the issuance of a series guidance papers highlighting and explaining the key elements on Solvency II.



Reinsurance, Captives, Protected and Incorporated Cell CompaniesReinsurance, Captives, Protected and Incorporated Cell Companies

oMalta is an attractive domicile for companies intending on setting up their insurance subsidiary in Malta to insure against their risks originating with shareholders or connected undertakings or entities. Reinsuring insuring companies may also take follow this form.

oCaptives, referred to as Affiliated Insurance Companies, are allowed to benefit from Malta’s double tax treaties: unilateral relief, the flat-rate foreign tax credit and the two-thirds tax refund to non-resident shareholders.

oMalta is the only EU member state with enacted protected cell company (PCC ) legislation. This is convenient for insurance companies wishing to operate in Malta, under the PCC’s management and within the PCC’s capital requirements.

oEach cell has assets and liabilities which are ring-fenced from one another. Only recently, Malta has enacted Incorporated Cell Company legislation (ICC). The structure is very similar to that of the PCC, with the significant difference that the cells of the ICC are legal persons.

oSetting up a captive in Malta through a cell is also possible and cost-effective.



Shipping, Maritime and AviationShipping, Maritime and Aviation

oMalta is one of the world’s largest shipping registries. Insofar that at the end of 2009, there were over 5,200 ships registered under the Maltese flag.

oMalta has developed legislation which is both in line with EU Directives, as well as tighter registration criteria. This, with the intent of enhancing Malta’s reputation as an international ship register.

oMalta has also become an attractive register of superyachts, as superyacht owners may benefit from the favourable tax regime (such as VAT for those used commercially), Malta’s favourable location, as well as the cost-effective services offered to such vessels.

oMalta is also attempting to replicate its aviation sector as its shipping. The Aircraft Registration Act, which came into force in October 2010, provides major incentives for owners of private and commercial aircraft.

oThe presence of international maintenance, repair and overhaul companies, Lufthansa Technik and SR Technic, allows aircraft to receive cost-effective services.




Tax Regime Overview


Malta CompaniesMalta Companies

oAny Malta Company registered on or after 1 January 2007 may carry out international activities whether ‘trading’ or ‘holding’ in nature.

oTax treatment would depend on the allocation of income to the different tax accounts depending on its nature and source.

oThe fixed tax accounts are the:

1.Final Tax Account; 2.Immovable Property Account; 3.Foreign Income Account; 4.Maltese Taxed Account; and the5.Untaxed Account.

oThe current income tax rate applicable to Malta Companies is 35%.



Dividend Income and Capital Gains (1) Dividend Income and Capital Gains (1)

oA Malta Company in receipt of dividends deriving from a participating holding or capital gains from the disposal of such holding may, at its option, have this income treated in any one of the following manners:

•Apply the participation exemption whereby the dividends or capital gains received by the Malta Company are exempt from tax in Malta;

OR

•Declare the income or gains as part of its chargeable income and pay tax thereon, at the rate of 35%. Upon a distribution of a dividend by the Malta Company, its shareholder may claim a full refund (100%) of the Malta tax suffered on such dividends.



Dividend Income and Capital Gains (2) Dividend Income and Capital Gains (2) Definition of Participating HoldingDefinition of Participating Holding

1.A holding of at least 10% of the equity; or

2.Shareholder entitled to call for and acquire balance of equity; or

3.Shareholder entitled to “first refusal” in case of disposal of shares by others; or

4.A holding which entitles shareholders to a seat on the Board of Directors; or

5.Minimum investment of Euro 1,165,000 – but holding for uninterrupted period of 183 days; or

6.Any shareholding in furtherance of “own business” – not held as trading stock.



Dividend Income and Capital Gains (3) Dividend Income and Capital Gains (3)

A participating holding may also exist where the Malta Company has a holding in a body of persons constituted, incorporated or registered outside Malta, which is not resident in Malta, and is of a nature similar to partnership en commandite, the capital of which is not divided into shares.



Dividend Income and Capital Gains (4)Dividend Income and Capital Gains (4)


Participation Full Refund

Exemption

Company Level Euro Euro

Dividends/Capital Gains from Participating Holding 1,000 1,000

Malta Tax Suffered 0 350

Profits Distributed as Dividends 1,000 650

Shareholder Level

Gross Dividends Received 1,000 1,000

Malta Tax Suffered at Company Level 0 350

Refund of Malta Tax Suffered at Company Level 0 350


Anti-Abuse Provisions (1)Anti-Abuse Provisions (1)

In order for a Malta Company to apply the participation exemption or for the shareholder to claim a full refund of tax, in respect of dividends received from a participating holding acquired on or after 1 January 2007, further conditions may need to be satisfied as set out below. This means that where a Malta Company holds a participating holding in a ‘foreign body of persons,’ in order to apply the participation exemption/full refund, one of the following three criteria should be met:

1.The ‘foreign body of persons’ is resident or incorporated within EU territory; or

2.The ‘foreign body of persons’ is subject to any foreign tax at a rate of at least 15%; or

3.Less than 50% of the income of the ‘foreign body of persons’ is derived from passive interest or royalties.




Where none of the threeaforesaid criteria are met:

Two further conditions would need to be satisfied for the participation exemption/full refund system to apply:-




The holding by the Malta Company must NOT be a portfolio investment;

AND

The foreign body of persons or its passive interest or royalties must have been subject to any foreign tax at the rate of at least 5%.



Passive Interest or Royalty Income (1)Passive Interest or Royalty Income (1)

“Passive interest or royalties” is defined as:

oInterest or royalty income which is not derived, directly or indirectly, from a trade or business;

oWhere such interest or royalties have not suffered, or suffered any foreign tax, directly, by way of withholding or otherwise, at a rate of tax which is less than 5%.




Where the Malta Company’s income constitute “passive interest or royalties,” the shareholder(s) of the Malta Company may:

Claim a refund of 5/7ths of the Malta tax suffered at company level on this income.

Applicable dividends distributed from the Foreign Income Account only where the Malta Company has not claimed double taxation relief.





Euro

Profit before Tax 1,000

Malta Tax Suffered at 35% 350

Profits Distributed as Dividends 650

Shareholder Level

Gross Dividends Received 1,000

Malta Tax Suffered at Company Level 350

Refund (5/7ths) of Malta Tax Suffered at Company Level 250


Trading IncomeTrading Income

Where the Malta Company’s income arises from trading activities (where trade is widely interpreted to include both actual buying and selling of goods, and also the provision of services), the shareholder(s) of the Malta Company may:

oClaim a refund of 6/7ths of the Malta tax suffered at company level on this income.



Elimination of Double Taxation (1)Elimination of Double Taxation (1)

1.Malta has over 50 Double Taxation Treaties (DTTs) with countries•Mainly follow the OECD model; •New DTT’s are continuously sought.

2.Unilateral Relief – virtual DTT with the entire world•Any overseas taxes allowed as credit against the income tax chargeable in Malta subject to proof of tax at source.

3. Flat Rate Foreign Tax Credit (FRFTC) •25% “deemed” tax allowed as credit against Malta tax.



Elimination of Double Taxation (2): List of DTTsElimination of Double Taxation (2): List of DTTs

List of DTTs:


Albania India QatarAustralia Ireland RomaniaAustria Isle of Man San MarinoBarbados Italy SerbiaBelgium Jersey SlovakiaBulgaria Jordan Slovenia

Canada Korea South AfricaChina Kuwait SpainCroatia Latvia SwedenCyprus Lebanon SwitzerlandCzech Republic Libya SyriaDenmark Lithuania TunisiaEgypt Luxembourg United Arab Emirates

Estonia Malaysia United KingdomFinland Montenegro United States of AmericaFrance Morocco Georgia The Netherlands Germany Norway Greece Pakistan Hungary Poland Iceland Portugal


Elimination of Double Taxation (3): the Flat Rate Foreign Tax CreditElimination of Double Taxation (3): the Flat Rate Foreign Tax Credit

oIn the absence of evidence of tax at source…oMalta will deem all income to have suffered tax at source…o… and allows a credit for such deemed tax against Malta tax.


FRFTC Company Level EuroNet Foreign Income 800Deemed Tax - 25% of Net Foreign Income 200Gross Income 1,000 Tax Rate at 35% 350Credit for Deemed Foreign Tax (200)Tax Payable in Malta 150 Profits Distributed at Dividends 650 Shareholder Level Gross Dividends Received 800 Malta Tax Suffered at Company Level 150 Refund (2/3rds) of Malta Tax Suffered at Company Level 100


Elimination of Double Taxation (4)Elimination of Double Taxation (4)

oWhere double taxation relief is claimed by the Malta Company on income allocated to the Foreign Income Account (FIA), then…oThe shareholder may, following receipt of dividends from the FIA, claim a refund of 2/3rds(*) of the tax suffered at company level.


(*) Where the participation exemption/full refund (100%) system does not apply.

Treaty Unilateral FRFTCRelief Relief

Company Level Euro Euro EuroNet Tax Paid by the Malta Company 30 50 150

Shareholder Level Refund of tax suffered at company level 20 33.33 100


SUMMARYSUMMARY


EUROPE

N. AFRICA

MIDDLE EASTShipping HubBUSINESS

Access to qualityFinancial Services

Banking

Investment Services

Capital Markets

Trusts

Insurance

Pro-business environment and economic factors

International Tax Planning Possibilities

Maltese Tax Regime Incentives and Opportunities

Robust regulatory framework

Reuben M Buttigieg M.B.A. (Warwick), F.C.C.A., M.I.M.Managing Director

E-mail address: [email protected]

Office telephone number: +356 2166 1273

Mobile phone number: +356 7929 7389

Contact Details

Erremme Business Advisors 113B Paola Road Tarxien Malta Europe T: (+356) 2166 1273 | F: (+356) 2166 3253 | E: [email protected]


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