New tax rules on the treatment of structured finance transactions confirm Malta’s tax neutrality and maximise the efficiency of securitisation transactions done in and through the jurisdiction. While tax matters may sometimes make eyes glaze over, Malta’s new securitisation tax rules covering the treatment of structured finance transactions confirm the principle of tax neutrality applying to Maltese securitisation vehicles, says Richard Ambery, a partner at Ganado & Associates. “In our view the effect of the new rules maximises the efficiency of securitisation transactions undertaken in and through Malta by eliminating tax leakage in vehicles established there.” In general Malta’s securitisation laws are good news for hedge funds. The laws should help establish Malta as a “domicile of choice” for the structuring of securitisation transactions, according to Ambery, who specialises in practice areas, investment services, investment funds capital markets and derivatives banking. The Securitisation Act protects securitisation creditors’ supremacy if there is an insolvency. Other European Union fund jurisdictions are not making it simple for hedge funds. “One of the restrictions in Ireland,” says Ambery, “is that you need to establish your vehicle under section 110 of the tax code.” Section 110 companies are restricted to buying financial assets in limited categories. The Malta Financial Services Authority (MFSA) does not require vehicles aimed at qualified investors to be pre-approved. A fund is not required to get a pre-ruling by the MFSA if it does not offer the securities to the public and only to certain classes of investors. “We believe the effect of the new rules on securitisation transactions, coupled with the flexible regime offered by the Securitisation Act, underlines Malta’s competitiveness in the field of structured finance,” says Ambery. The Securitisation Act, which came into force in 2006, provides what Ambery says is a comprehensive statutory framework for a wide variety of securitisation, including asset, synthetic and life settlements securitisation as well as insurance risk and whole business securitisation. The act was designed to facilitate domestic and cross-border securitisation transactions. Previously a number of provisions in Malta’s Civil Code had created barriers to creating efficient securitisations, particularly compared with other jurisdictions. The act also applies a special statutory regime for bankruptcy remoteness, true sale, creditor protection and debtor notification in securitisation transactions to remove most, if not all, of the uncertainties that have doffed structured financings in many other jurisdictions, according to Ambery. He also thinks the rules represent the “final piece in Malta’s legislative jigsaw” for structured finance. A ‘securitisation asset’ is defined as “any asset, whether existing or future, whether movable or immovable, and whether tangible or intangible, and where the context so allows includes risks”. Keeping it simple There are only two principal aspects of regulation: the constitutive documents of the securitisation vehicle must include a statement that it is established subject to the provisions of the act; and the MFSA must be notified if a securities vehicle is going to be used in one or more transactions in or from Malta. The act enables securitisation vehicles to be established either as a company, including an investment company, a commercial partnership, a trust (created via a written instrument) or any other legal structure the MFSA considers appropriate. The most logical form of securitisation vehicle to use in Malta is probably a private limited company owned by a purposed foundation. Malta wanted to avoid as far as possible the legal uncertainty inherent in common-law jurisdictions surrounding the treatment of a sale of receivables into a securitisation on a subsequent insolvency of the originator. A provision of the act provides that no insolvency proceedings attributable to an originator are capable of impinging on the securitisation assets transferred to the securitisation vehicle. Any action taken to consolidate the assets of one of the vehicle’s affiliates with those of the securitisation vehicle itself is specifically excluded by the act. Legal reform also extended to transfers of financial assets. The act allows for a number of possibilities: novation, sale, assignment or a declaration of trust. The rules also make securitisation vehicles tax efficient. Under rule four a securitisation vehicle can deduct other expenses, according to Ambery. These consist of sums payable by the securitisation vehicle to the originator or assignor of the securitised risk or assets, premium, interest or discounts in relation to the financial instruments issued or funds borrowed by the securitisation vehicle as well as any expenditure insured by the vehicle for its operations and collection of receivables. The fees of third-party service providers, including the originator, are also deductible. If any income remains after the expenses are deducted the vehicle can opt to deduct the resulting profit, if this is brought into account by the originator. Using this option is subject to the irrevocable written consent of the originator or assignor in terms that are satisfactory to the Malta Inland Revenue. The cost of acquisition of the securitisation assets or the cost of the assumption of risk and any optional additional deduction for income are also considered as income. The rule provides that the originator’s income, if arising in Malta, can be considered as profit and will be subject to the usual tax rules, unless the management and control of the business of the originator is not in Malta....
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