23 Dec 2010, Joseph Ghio, Fenech & Fenech Advocates, Hedge Funds Review
The challenges brought about by the international financial crisis have continued to create unprecedented opportunities for Malta. The troubles of the banking sectors in other longer-established European jurisdictions, talk of possible hikes in the unsustainable corporate tax rates of bailed-out economies and the introduction of the European Union (EU) directive on alternative investment fund managers (AIFM) are creating more questions on where best to set up funds or management outfits.
With demand for Ucits products witnessing unprecedented growth and the expected wide-ranging effect of new European regulation on the hedge fund industry, Malta’s appeal as a cost-effective gateway to the EU offering unrivalled opportunities will increase.
Approval by the EU parliament of the final text of the AIFM directive brought a sigh of relief to those concerned about how an uncertain regulatory environment was affecting the industry in a post-financial crises world.
Although the directive is here to stay, Level II details still have to be worked out by the new European Securities and Markets Authority (Esma) before implementation by member states by 2013.
The regulatory landscape is, therefore, set to remain in a state of flux for some time to come as EU authorities transpose the AIFM framework into domestic laws. Taxation, however, will remain dependant on the jurisdictions from where and in which one decides to do business and will be unaffected by the passporting mechanisms contemplated by the AIFM rules.
Fund managers set up and licensed in Malta are subject to a standard rate of corporate tax of 35%.
While management fees and other sources of income for the fund manager will be taxed at this rate, when the fund manager distributes dividend out of profits on which it has paid tax no further Malta tax is due by the shareholder.
Through a full imputation system – the only one adopted throughout the EU – shareholders can benefit from a tax credit paid by the company distributing the dividend. Shareholders can claim a refund of tax paid in Malta by the Maltese company, reducing the effective tax rate after the refund to roughly 5%.
The standard refund, such as for general business profits, is 6/7th of the Malta tax at the corporate rate of 35% charged to the company grossed up with any relieved foreign tax, subject to certain conditions. The refund would be of 5/7th in the case of profits derived from passive interest and royalties, going up to 100% in the case of profits derived from a participating holding. Tax refunds are tax exempt and are payable by the Maltese authorities within a statutory period of 14 days.
Income derived from a participating holding, normally a 10% or more equity holding or partnership interest, in a non-resident entity or the disposal thereof is exempt from tax subject to anti-abuse provisions being satisfied.
Malta has a wide network of double tax treaties, mostly based on the Organisation for Economic Co-operation and Development (OECD) Model Convention with around 60 countries including the major European trading nations, Canada and China. A revised treaty with the US is effective from January 1, 2011.
Transparency of the fiscal environment is also reflected in the ability to obtain advanced revenue rulings from the Maltese tax authorities in specified circumstances to confirm certain anti-avoidance provisions would not apply to a particular transaction entered into for bona fide commercial purposes and to confirm the tax treatment of transactions involving financial instruments and international business activities.
Investment funds licensed in Malta with over 15% of their assets outside Malta are tax neutral and are not subject to tax in Malta on income and capital gains (other than in the case of income from immovable property in Malta).
Distributions made to non-resident investors in Maltese funds and capital gains made on redemption of holdings by non-resident investors are not subject to tax in Malta. Transfers of units in Maltese funds also benefit from an exemption from stamp duty.
Fund management, fund administration and custody services are not subject to value added tax.
Persons who are resident or domiciled, but not ordinarily resident and domiciled in Malta, are liable to tax in Malta on income and chargeable gains arising in Malta and income arising outside Malta but remitted to the island.
Individuals are charged tax at progressive rates ranging from 0% to 35%. A reduced flat 15% rate on remitted foreign sourced income (capital gains being exempt) is available to certain residence permit holders.
Perhaps never before was there such a flurry of funds and managers pondering whether to move onshore. With investors reconsidering the regulation of funds in traditional offshore centres and managers uncertain about how EU rules will affect their cross-border business models, many have relocating to another jurisdiction high on the agenda.
As early as 2002 Malta introduced legislation allowing the redomiciliation or continuation of corporate bodies to Malta. This provided a fast and easy option for shifting jurisdictions while maintaining the same continued, legal personality and in the case of funds without losing the performance track-record. In the case of funds structured as professional investor funds, Malta can offer the added advantage of not requiring the service providers of the fund such as the manager, administrator, custodian or prime broker to be established in Malta as is required in some other European jurisdictions.
Redomiciliation to Malta can, therefore, be easier than to other European jurisdictions that have only recently allowed redomiciliation and still require some service providers such as the custodian to be replaced with one established in the same jurisdiction.
Another attraction for offshore hedge funds redomiciling to Malta is the possibility of converting into Ucits IV platforms, introducing the possibility of merging numerous smaller funds, consolidating operations and reducing expense ratios.
Redomiciliation to Malta is possible under the Continuation of Companies Regulations, 2002, as amended. It is available to unregulated and regulated entities established in a jurisdiction that specifically allows redomiciliation out and has a corporate form similar to that under Maltese laws, typically a limited liability company which broadly follows the Anglo-Saxon model.
The redomiciled company, open or closed-ended investment company, would then be continued in Malta under the Companies Act, 1995 – a law based on its English law equivalent which transposes the EU company law directives.
The procedure to redomicile to Malta is straight forward and inexpensive. A foreign fund, manager, administrator or custodian would first submit an application in draft form for the relative licence to the authorisations unit of the Malta Financial Services Authority (MFSA) together with the necessary documents, such as an offering memorandum in line with Maltese requirements in the case of a fund. While the draft licence application is being processed and due diligence checks are done by the MFSA, including enquires with any existing regulator of the foreign fund or service provider, a request for continuation in Malta is submitted to the registrar of companies.
Certain formalities in the foreign jurisdiction from where the entity is redomiciling would also have to be complied with. These normally include the serving of notices to secured creditors and publishing notices on national newspapers before the entity can be discontinued or de-registered from its original jurisdiction.
Malta’s reputation for hospitality is first recorded in Classical times. Malta has been a safe haven for traders and travellers since time immemorial. In a globalised economy Malta is emulating its age old traditions and instead of sea farers Malta is today welcoming financial services businesses looking to move to a jurisdiction that is strongly regulated but can offer compelling advantages. The 300-plus days of sunshine every year which Ulysses may have experienced during his mythical Homeric stay on the island have remained unchanged.