The Guide has been prepared for the assistance of those interested in doing business in Malta. It does not cover exhaustively the subjects it treats but is intended to answer in a broad manner some of the key questions that may arise. Before taking specific decision or in dealing with specific problems it will often be necessary to refer to the relevant laws, regulations and decisions and to obtain appropriate advice.
The material contained in this guide was compiled on the basis of information available at 30 September 2012.
CHAPTER 1: MALTA - A PROFILE
Geography and climate
Malta lies in the centre of the Mediterranean Sea, 93 kilometres south of Sicily and 290 kilometres north of the nearest point on the African coast.
The total area of the Maltese Islands is 316 square kilometres. Malta is the larger Island, occupying 95 square miles. Gozo lies to the north-west, less than half an hour away by ferry. The topography of the islands is low-lying to the south-east and hilly toward the north-west. At various points the 192-kilometre shoreline is deeply indented, providing excellent natural harbours. Although it has some sandy beaches, the coast of Malta is predominantly rocky, including some spectacular hills. Valletta, the capital and a UNESCO world heritage city, lies on a promontory between the two main natural harbours.
Malta has a mild climate. The hottest summer month is August, having an average maximum temperature of 31°C (87°F). The coldest winter month is February, with an average minimum temperature of 9°C (49°F). The average annual rainfall is 520 millimetres (21 inches). There are about 300 days of sunshine each year.
The population of the Maltese Islands as at the end of 2010 is just under 418,000, with a density of over 1,300 persons per square kilometre, the highest in the EU.
Malta was inhabited even in prehistoric times, as is evidenced by its numerous megalithic temples and other sites, which are among the oldest free-standing buildings in existence and, of these, among the finest. In recorded history the Phoenicians were the first foreigners to occupy the islands, and they were followed by the Carthaginians. Following the destruction of Carthage, Malta was absorbed into the Roman Empire. St. Paul the Apostle was shipwrecked on the islands in A.D. 60, and the country has been Christian ever since. In the later years of the Roman Empire, Malta formed part of the Byzantine bloc.
The Arab expansion reached Malta in A.D. 870. The country remained under Arab domination until 1090, when Count Roger of Normandy added Malta to his conquest of Sicily. Malta shared in the fortunes of Sicily until 1530, when, in an attempt to strengthen the southern frontiers of his domains against Islam, Charles V of Spain offered Malta to the Knights of St. John of Jerusalem, an international order of chivalry founded in the early years of the Crusades. For the next three centuries the destinies of Malta and the Knights of St. John were linked.
The Knights of St. John were driven out of Malta by Napoleon in 1798, and the French ruled for two years. Malta became a British Crown Colony in the early nineteenth century and remained so until September 21, 1964, when it became an independent sovereign state. In 1974 Malta was declared a republic. Malta is a member of the Commonwealth and of the United Nations. Soon after independence Malta was admitted to the Council of Europe.
In 1990 Malta applied for European Union membership. Accession negotiations were concluded in December 2002 and the accession treaty signed in April 2003. Malta became an EU Member State in May 2004.
Malta is a parliamentary democracy. The head of state is the President, who is appointed by the House of Representatives and whose role is mainly ceremonial. The House of Representatives is elected by universal suffrage for a five-year term. The Prime Minister is usually the leader of the party commanding the greatest measure of support in the House. Ministers are nominated to the Cabinet by the Prime Minister from among the elected members. Various local administrative matters are delegated by specific legislation to local councils.
The legal structure is based on the civil-law pattern of continental Europe, but most administrative, financial and fiscal legislation is based on British laws. There are three principal jurisdictions— civil (including commercial), criminal and voluntary. There is one Court of Appeal for all jurisdictions. The Constitutional Court, however, is the ultimate competent court for judgements on the conformity of laws and administrative action with the Constitution. There are a number of administrative tribunals from whose decision an appeal can be made (usually on a point of law only) to the Court of Appeal.
Malta recognises the right of individual petition to the European Courts of Justice, and the European Convention on Human Rights forms part of Malta's domestic law.
Judges are appointed by the government. They cannot be removed before retirement age, except for proved inability to exercise their functions properly and following a two-thirds vote in the House of Representatives.
The official languages in Malta are Maltese and English.
Maltese is a Semitic language in structure. Today, however, it contains many European words (mostly Italian and English). The language has its own distinct characteristics and its own literature. It is written in Latin script.
Practically all Maltese people are bilingual. Official publications, including laws, are issued in both English and Maltese. Legal documents may be drawn up in Maltese or in English. Most commercial and banking documents are drawn up in English, and most correspondence, official or otherwise, is in English.
Maltese and English are taught at primary school level. Subjects at secondary school level include at least another language, with Italian, French and German being the most widespread.
A large majority of Maltese residents are Roman Catholics. However, there are several other
religious denominations, both Christian and non-Christian, many of whom have their own places of worship.
School attendance is compulsory up to the age of 16. Education is provided by a number of government and private schools. A substantial majority of secondary school leavers continue with their education in the university and in a number of technical and vocational institutes. At present, over 10,000 students attend the University of Malta, including some 750 students from 80 different countries.
State schools are free while a number of schemes provide for financial assistance to University and other tertiary school students. A large number of university graduates follow specialisation courses abroad.
The Maltese economy has grown in recent years with GDP at constant prices growing at an average of over 4.3 percent per annum during the years 2007 – 2010 (based on estimates), except for 2009 when the economy contracted. The annual rate of inflation was 1.51% in 2010. Unemployment in February 2011 stood at 4.5%. Gainfully employed persons include a relatively high percentage in the public sector (27.6 percent as at March 2011). The government maintains an ongoing review of human-resources development in the public sector, aimed at improving systems and efficiency in public service. The Employment and Training Corporation (ETC) provides specialised training in various employment sectors in addition to its primary function as a recruitment agency.
The Maltese economy is based on the free-enterprise system. While a major part of the economy is privately controlled, public utilities are mostly provided through government-controlled entities.
The manufacturing sector accounts for 17% percent of GDP. Following the strong growth registered during 2007, total manufacturing turnover increased further in 2008. As expected, value added dipped in 2009, but recovered again in 2010. Average full-time employment in the manufacturing sector was 20,803 in 2010, a decline of 1.2 per cent over 2009. The local manufacturing industry continues to be characterised by a large number of small firms (those with less than 10 employees). The larger firms, however, account for over 90 percent of total manufacturing output. Apart from ship repair and aircraft maintenance, the contributing manufacturing industries produce light consumer goods and electronic and engineering components. Electronics and high-tech industries are the fastest growing sector.
Over 200 export-oriented foreign companies operate profitable manufacturing subsidiaries in Malta, benefiting from attractive incentives.
In May 2004, with Malta's accession to the European Union, goods produced in the EU, or goods that are already in free circulation in the EU, are exempt from the payment of customs duties, and only goods exported to non-EU countries are subject to the payment of export duties.
The tourist industry is a major source of foreign-currency earnings. Overall, some 12 percent of employed persons are involved in tourism-related activities.
Since the early 1990's the number of tourist arrivals has exceeded one million per annum. Arrivals are predominantly from the United Kingdom, followed by Germany and Italy. Cruise liner passengers have increased by an average of 18.3% per annum over the past 10 years. Malta projects itself as both a holiday and a cultural resort. It is also becoming increasingly popular as a venue for conferences and English-language study. A number of leading hotel chains in the five-star category are represented in Malta.
Malta has strengthened and modernised the legislative framework regulating financial services. Over the past years Parliament has revised existing legislation and enacted new laws on banking and financial institutions, insurance, companies, trusts, financial services, shipping and taxation. Complemented by an efficient regulatory regime, including laws against money laundering, and supported by highly qualified human resources, ideal geographical location and efficient infrastructure, these measures have contributed towards the development of a modern and successful financial services centre.
Malta is also a competitive yachting centre and a popular cruise-liner hub.
Transport and communications
Roads: Towns and villages, industrial and business centres, and holiday and leisure resorts are linked by an adequate road network. There are no highways, railroads or internal waterways. Malta boasts some of the finest natural harbours in the world. Extensive conventional and roll-on/ roll-off services by national and international shipping lines carry freight and cargo from Malta directly to Mediterranean, north European, Middle Eastern and Asian ports. All factories are located within 30 minutes of a harbour and the airport.
The Freeport: The Malta Freeport Corporation embraces three prime activities namely, container handling, industrial storage and oil products handling. The corporation is recognised as a high profile transhipment hub and presently enjoys third place amongst all Mediterranean transhipment ports. It handles over one million TEUs per annum and has network connections to over 95 ports world-wide.
Air transport: Air connections with major European destinations are efficient and frequent. Twelve legacy carriers operate scheduled air services to 37 destinations. The national airline, Air Malta, operates regular scheduled flights to the major European cities—a total of over 45 direct destinations with 200 flights a week. Low-cost carriers are gaining in popularity, accounting for over 25 per cent of all departures. The Malta International Airport, which handles some 2.5 million passengers annually, is a modern, spacious and efficient terminal.
Postal services: Postal services are efficient and reliable. Letters to Europe normally take two days to reach their destination. For faster service the major international courier service companies operate to and from Malta. The Malta Post Office operates an Expedited Mail Service (EMS Datapost) with guaranteed delivery times.
Mineral and energy resources
Malta has few natural resources other than its geographical position, climate and adaptable labour force. Most of its industrial inputs and consumer goods are imported.
Following seismic and geological analyses and studies, several onshore and offshore oil wells have been drilled but the quantities found were not deemed commercially viable so far.
Agriculture and fishery
Agriculture and fishery contribute only about 2% to national GDP, although the share is higher in Gozo. Agriculture is beset by inherent constraints such as land fragmentation and scarcity of rainwater for irrigation purposes. Schemes are in place to improve the income of farmers and fishermen and thus preserve these traditional, indigenous activities. The development of fish farming for export is of recent origin.
The telecommunications system has been upgraded according to plans drawn up by the International Telecommunications Union. International connections have been significantly expanded through satellite technology and a high-capacity fibre-optic cable linking Malta with Europe. A mobile cellular telephone service including GSM and a pager system are in place. Internet usage by enterprises stood at 94 per cent in 2010, while 70 per cent of households had access to internet at home.
Foreign trade and balance of payments
In a small island economy like that of Malta, increased export and domestic economic activity are automatically reflected in the level of imports. International trade activity results in visible trade imbalances. However, as a result of surpluses arising from services, principally tourism, and from net investment income from overseas, Malta generally ends up with a surplus on current account. Similarly, net capital inflows have been invariably positive. Malta has a strong external reserves position, representing about eight months' imports.
Malta's main trading partners are the members of the EU, which account for more than 50 percent of exports and 69 percent of imports of goods and services.
Since 1 January 2008, the unit of currency is the euro (€).
Hints for the business visitor
Citizens from a number of countries do not require a visa to enter Malta provided that their stay does not exceed three months. These countries include all western European states, Australia, Canada, Japan, New Zealand, Singapore, and the United States. Citizens of other countries may apply for an entry visa at a Maltese embassy or consulate before proceeding to Malta. Where no embassy or consulate is available, a written request should be made to the Commissioner of Police. Since 2008 Malta's requirements on visas are in line with EU policy and Malta became part of the Schengen area in January 2008. For people from outside the EU, details of visa-exempt countries and visa application procedures are available on the website of the Ministry for Justice and Home Affairs at www.mjha.gov.mt
Maltese time is the Central European Time (CET), which is one hour ahead of Greenwich Mean Time (GMT) and six hours ahead of U.S. Eastern Standard Time (EST). In line with the CET, Malta switches to Summer Time, which is one hour ahead of normal time, from the last week of March to the last week of October.
With few exceptions, employees in private industry generally work a 5-day, 40-hour week. Normal working hours are as follows.
Industry: 7:00 a.m. to 4:30 p.m., with various arrangements for the midday breaks.
Commerce (retail): Shop opening hours are from 9:00 a.m. to 7:00 p.m. At the option of the shop licensee, hours may be extended to 10:00 p.m. on any day. Many shops close for a lunch break. Government departments: Public hours vary, but staff works as follows: 7:45 a.m. to 5:15 p.m. with a 45 minutes' break.
From June 16 to September 30,
7:30 a.m. to 1:30 p.m. with no break.
Banks: HSBC Bank
Bank of Valletta
Most banks make exchange bureaux for foreign-currency transactions available from 4:00 to 7:00p.m. Monday through Saturday. Automated exchange bureaux operate on a 24-hour basis.
The statutory holidays are as follows:
New Year's Day
Weights and measures
Weights and measures are calculated under the metric system.
Dates and numbers
Dates are written in the sequence of day, month and year: 30 September 1997; 30/09/97 is a common abbreviation.
In writing numbers, commas denote thousands and points denote fractions, thus 100,000.79.
CHAPTER 2: BUSINESS AND INVESTMENT ENVIRONMENT
Malta is an attractive destination for industrial investment. Its geographical location, modern infrastructure, adequate and flexible labour supply, and political stability are some of its key advantages.
The manufacturing industry is still strong and currently contributes approximately 17% of GDP. Government's economic policy focuses on assisting industrial players in tapping foreign markets and in restructuring their operations, while targeting new foreign direct investment in high quality, export orientated activities. Target sectors include electronics, pharmaceuticals, healthcare, plastics, rubber, aircraft maintenance and other similar relatively capital-intensive areas generating a higher value added per employee.
As a member of the EU, all products Malta exports to the EU have tariff free access. Malta also benefits from the trade agreements with an extensive network of non-member countries and trading blocs.
The importance of the services sector in the Maltese economy has grown significantly in recent years. One of government's key objectives remains to continue developing Malta into a centre for financial intermediation services with emphasis on insurance, administrative operations for investment services, software development, e-commerce, call centres, distance learning, international reservation systems and electronic exchanges. The financial services sector contributes about 7% of Malta's GDP and the Government is committed to double its contribution by 2015. (Note: software development, e-commerce, call centres are not statistically classified as financial services).
Tourism is another mainstay of the Maltese economy, contributing approximately 20% of GDP. Saturation point in the number of summer months' visitors may possibly already have been reached, and the emphasis is on the diversification and improvement of the tourist product. This trend is supported by the proliferation of new luxury hotels and conference facilities in recent years, the investment in the Grand Harbour cruise liner terminal project and the large scale residential and commercial developments at the Portomaso, Tigne Point, Manoel Island and Cottonera.
During recent years Malta has seen a steep growth in the on-line betting industry, serving foreign markets. Over 300 international remote gaming companies have set up shop in Malta representing about 10% of all online gaming websites. The ICT sector is also experiencing growth, with the Smart City Project promising to develop an IT village making Malta a centre for ICT excellence in the Mediterranean that should generate over 5,000 new jobs. The project's investors are estimated to be investing about USD300 million.
Framework of industry
The industrial sector consists of a mixture of large enterprises and numerous smaller family-run companies, as well as subsidiaries of mainly European companies that account for most of Malta's export earnings. ST Microelectronics accounts for about half of Malta's merchandise exports, te-sector employer.
The industrial sector benefits from a wide-ranging and competitive fiscal incentives package (see Chapter 3). In addition, Malta Industrial Parks provides modern factories in its ten public industrial estates at commercially attractive rents.
Public share ownership in industrial activities has grown in recent years. 2008 saw around 14 new listings, including three new equities and three new corporate bonds, as well as over 60 government securities. The Exchange now lists 40 companies, counting both equity and corporate debt-listings, on both the main List and the second tier Alternative Companies List. Some of those companies have more than one instrument listed, bringing the total number of listings up to 53, eighteen of which are equities.
Aims of government policy
The Ministry of Finance, the Economy and Investment issued the National Strategic Reference Framework in December 2006 for the years 2007 - 2013. The report refers to the need to sustain Malta's competitiveness and economic growth prospects. Also the need to further invest in the physical infrastructure of the country, especially in terms of energy, environment and transport and the need to promote further human resource development and raise employment levels. Malta's vision is to promote a competitive, high value adding economy and to achieve sustainable socioeconomic development earmarked for a better quality of life.
The Government is committed to address Malta's needs and challenges which include:
- The promotion of indigenous investment and the attraction and consolidation of foreign direct investment, the diversification of the tourism industry market segments as well as the development of the knowledge intensive economic activity in existing and new economic sectors.
- Addressing existing deficiencies in Malta's physical infrastructure in particular those related to the environment, energy, transport and ICT.
- Ensuring quality education and training for all and providing a knowledge and skill development environment which targets the responsive identification of future labour market requirements.
The Malta Tourism Authority (MTA) was set up for the licensing, control and monitoring of accommodation and catering establishments, travel agencies, incoming tourism agencies, and destination management as well as organised excursion operators and tourist guides. The MTA is also responsible for marketing the Maltese Islands as a tourist destination and has embarked on a number of marketing campaigns outside Malta and has various representative offices in the major cities throughout Europe.
The marketing focus is discarding the longstanding tag line of Malta being a "sun and sea destination" and is branding Malta as a holiday destination all year round concentrating on attracting tourists for the islands' culture and history. Malta is also increasing in popularity for Meetings, Incentives, Conferences and Events (MICE) facilities and enjoying increases in various niche markets such as religious, sports, English Language tuition and medical tourism.
Malta has recently recorded an arrival of over 1.3 million tourists annually, excluding the half a million day-trippers arriving on cruise liners. Accessibility to Malta and Gozo has improved with the introduction of low cost airlines and the services of a sea plane connecting Malta and Gozo.
Research and Development
Through the Malta Council for Science and Technology (MCST), Malta promotes investment in Innovation Relay Centres (IRCs) under the EU's Sixth Framework Programme for Research and Technical Development. The MCST also encourages scientific research and development through its science popularisation programme, which encourages the pursuit of careers in the fields of pure science and its applications.
Government's policy during recent years is to continue boosting the role of the private sector in economic development. It has substantially reduced state intervention and extended private initiative in most spheres of activity. Privatisation started in the banking sector with the partial disposal and the floatation of the two major banks, which together enjoyed 80% of the retail banking market. Past privatisations include the telecommunications operator, the airport, public lotto, the post office, and the petroleum division of Enemalta including an oil bunkering facility.
Public/private sector cooperation
The principal form of public/private sector co-operation is in the assistance given by specially constituted government bodies to promote industrial investment and the export of goods made in Malta.
Malta Enterprise (ME) was established in 2003 in order to promote optimal enterprise growth in manufacturing and related services, excluding retail, tourism and financial services. It amalgamates the activities of three former specially constituted government bodies namely the Malta Development Corporation (MDC) that was responsible for the promotion of industrial investment in Malta, the Malta External Trade Corporation (METCO) responsible for the promotion of exports and the Institute for the Promotion of Small Enterprise (IPSE).
Government carries on a dialogue on matters of vital economic importance with the trade unions and the various private-sector representative organisations through the Malta Council for Economic and Social Development (MCESD).
Initiatives have also been taken to carry forward the process of change in the public sector and to improve government services to the public. One of the Government's key initiatives in this respect was the implementation of Malta's e-government program aimed at promoting efficiency and utilising information and communication technology to the widest possible extent. The programme effectively places all government information and services on-line.
CHAPTER 3: INVESTMENT INCENTIVES
Tax and other incentives to promote industrial activity in Malta have existed under various laws and schemes since the late 1950s. They were essential for creating a new basis for Malta's economic activity once it no longer served as a British and NATO naval base. The main attractions were tax holidays and low labour costs, complemented by a favourable double taxation treaty network. The type and the focus of the incentives have changed along the years to be in line with local and international developments.
The main industrial incentives are today contained in the Malta Enterprise Act, including various subsidiary legislation issued thereunder, which intend to encourage and promote investment in Malta. Other incentives are available under other legislation, including the Income Tax Act and Business Promotion Act.The incentives are targeted principally towards companies carrying on manufacturing and other industrial activities or services of an industrial nature but also apply to various other sectors. These sectors are listed in Appendix I and include, apart from a number of manufacturing activities, services related to computer software, electronic and electronic access systems, research and development, waste treatment, biotechnology, Freeport activities and film production.
The main industrial incentives are subject to the approval of the Malta Enterprise Corporation (MEC), which is an autonomous government agency. In appraising a project proposal the MEC takes into account various factors including its viability, the processes involved, the size of the capital investment, the sources of finance and the employment to be generated.
While some incentives currently have no date set for their termination, other incentives are definite and should only be available for applications reaching MEC by a specific date.
For the purposes of industrial incentives, Malta and Gozo are considered as one region but industry in Gozo is given added benefits to help neutralize the extra costs incurred because of freight and accommodation expenses. Factories are concentrated in a number of industrial estates. Investment opportunities are also available in other sectors including shipping, aviation, and financial services. This chapter shall also discuss some of the main incentives currently provided to these other industries.
Tax incentives under the Malta Enterprise Act
Investment tax credits
The main tax incentives provided in terms of the Malta Enterprise Act, which are targeted primarily towards manufacturing industries but are also made available to certain other sectors upon preapproval by the MEC, consist of investment tax credits (ITCRs). These are credits that can be deducted by the company from the tax due on chargeable income. Two types of ITCRs are available:
- ITCRs calculated as a percentage of a company's expenditure on qualifying tangible fixed assets or in the acquisition or development of intangible assets.
- ITCRs calculated as a percentage of wage costs for the first two years of employment of any person for whom a job is created in Malta as a result of an investment project.
The percentage at which the ITCRs are calculated varies depending on the size of the company and the amount of qualifying expenditure. When the credits for any year cannot be fully utilised, the excess may be carried forward to subsequent years. Amounts carried forward are increased by a prescribed percentage per annum.
For projects that provide a significant contribution to the development of the Maltese economy, the entitlement to ITCRs may be converted to other forms of aid such as cash grants. This possibility is however at the discretion of the MEC and only exists in exceptional circumstances.
Dividends distributed out of profits relieved from tax by ITCRs do not attract any further tax at any shareholding level up to and including the ultimate individual shareholders.
Research and Development Tax Credits
Enterprises investing in research and development activities leading to the development of new or significantly improved products, processes or services may also qualify for tax credits calculated on the basis of qualifying research and development expenditure, subject to conditions. Tax credits may also be available to certain companies upon registering intellectual property attained through their research and development projects.
Tax credits for enterprises carrying out a creative activity
Enterprises carrying out a creative activity that would contribute to the economic development of Malta can benefit from a tax credit calculated at a prescribed percentage of eligible costs incurred during a specific period, subject to a prescribed maximum..
Tax credits for the micro enterprises and self-employed
Very small enterprises qualifying as micro enterprises and which require assistance to expand, innovate or invest in their business in Malta may be granted a tax credit on various eligible costs, including wages, refurbishing of premises, machinery, etc. Various criteria and conditions are applicable, including the requirement for pre-approval by MEC.
Tax incentives under the Business Promotion Act
Reduced tax on approved projects
Profits set aside and utilised specifically for financing a project approved by the MEC may be taxed at a reduced rate of 15.75% (instead of the standard corporate tax rate of 35%). This benefit is available to companies carrying on any qualifying activity, saving certain exceptions. The qualifying profits must be kept in a non-distributable reserve for a minimum period of 8 years. A similar benefit applies to profits set aside and utilised specifically for upgrading or renovating a hotel, but the tax rate in this case is reduced to 17.5%.
Incentives for job creation
When an enterprise offers employment to individuals falling within the criteria specified in the applicable legislation it may be entitled to a deduction from its chargeable income of more than 100 percent of the relative wage cost. The jobs that qualify for this incentive are typically jobs for individuals who are otherwise unlikely to find suitable work opportunities.
Training cost allowance
When a qualifying company enters into a training programme approved by the MEC for its employees, it may be entitled to a deduction from its chargeable income of more than 100 percent of the expenditure incurred in organising the training, subject to certain limitations.
Tax incentives under the Income Tax Act
Reduced tax rate in terms of double taxation treaties
The net tax implications on foreign investment depend also on the general income tax provisions contained in the Income Tax Acts, which are discussed in other chapters. In general, it may be said that the Income Tax Acts and the provisions on double taxation relief offer foreign investors opportunities to structure their business in Malta in a tax efficient manner.
Reference may be made in this chapter to one particular provision that is closely linked to industrial activities. A number of tax treaties concluded by Malta allow a reduced rate of tax, usually 15%, to foreign shareholders of companies that are eligible for benefits, including non-tax benefits, under industrial incentive legislation. Distributions out of profits that had been taxed in the company's hands at a higher rate would entitle the shareholders to a tax refund. However, in terms of the Income Tax Act, profits that would qualify for the reduced rate on distribution in terms of tax treaties, are taxable at the reduced treaty rate in the hands of the company even before they are actually distributed. The proper application of this incentive depends on the terms of the relevant provisions of the applicable treaty.
Tax credits for electronic commerce
A system of tax credits is provided to encourage the development or hosting of an electronic business environment. It provides different tax credits on the value of capital expenditure related to the acquisition of information technology hardware and software and other capital expenditure that are incurred both by the developer that is responsible for the development and upgrading of the necessary systems, as well as the user for the introduction or improvement of electronic business facilities. Eligibility for this scheme is dependent on a number of conditions, including preapproval by the MEC.
Expenditure on scientific research
Companies incurring expenditure on scientific research may be entitled to a deduction from their chargeable income of more than 100% of such expenditure, limited to a prescribed percentage of the company's annual turnover for that particular year. Where the deduction cannot be fully set off against the income of the qualifying company for the year during which the expenditure was incurred, the excess deduction is carried forward and set off against income generated in subsequent years.
Exemption on income derived from certain intellectual property
The Income Tax Act exempts from tax royalties, advances and similar income derived from patents in respect of certain qualifying inventions, subject to the satisfaction of certain criteria and conditions. Distributions of the exempt profits remain exempt from tax in Malta for each level of distribution up the shareholding chain. Further details on this exemption can be found in Chapter 11.
A similar tax exemption also applies on royalties, advances and similar income derived from copyrights.
Tax deductions on certain capital costs relating to the workplace
The Income Tax Act provides for the deductibility, for Maltese income tax purposes, of certain capital costs that would otherwise not be considered as deductible in terms of the general rule of deductibility of expenses. These include costs incurred in the construction of childcare facilities at the workplace, and costs incurred to increase workplace accessibility particularly in the context of disabled persons.
Non-tax incentives under the Malta Enterprise Act
Subsidiary legislation issued in terms of the Malta Enterprise Act provide a system of different cash grants for undertakings that carry on or intend to carry on an activity that the MEC deems may contribute to the economic development of Malta. These grants may be provided to part-finance expenditure in circumstances where the qualifying company or undertaking requires assistance, including:
- to undertake research and development activities;
- to participate in trade fairs, trade missions, and other events;
- to set up business development projects;
- to engage advisors in a particular field;
- to support or develop international competitiveness.
Cash grants may also be provided to certain small undertakings for the acquisition of tangible or intangible assets or the procurement of certain services. These incentives are mainly granted to SMEs operating in the manufacturing sector, but are also made available to other sectors upon preapproval by the MEC.
Financial support for the hospitality sector
Companies whose activity consists of the operation or management of a guest house, hostel, hotel, farmhouse or restaurant, can benefit from an interest rate subsidy on loans taken out to finance eligible costs. The interest rate charged on the loan granted is between one and three percentage points lower than the rate of interest charged by financial institutions.
The assistance is granted in respect of a percentage of eligible costs depending on the size of the company, and is subject to other conditions and criteria.
The Malta Enterprise Act empowers the Minister responsible for MEC to lay down other promotional measures subject to conditions that may be deemed appropriate. This gives scope for the introduction of new incentives by way of legal notices (subsidiary legislation).
Non-tax incentives under the Business Promotion Act
Companies whose activities are treated as qualifying activities under the Business Promotion Act (BPA) may also qualify for the following non-tax incentives:
Child day care centres
Companies may benefit from subsidised rent on premises used to house child day care centres and assistance in financing the costs to set up and operate such centres.
Financial support: soft loans, interest rate subsidies, loan guarantees
Soft loans, typically amounting to 33% of an approved project but in any case not greater than 75% of certain investment costs, may be granted by the MEC to a manufacturing company to part-finance investment in qualifying expenditure. This benefit is subject to pre-approval by MEC. Depending on the circumstances, the rate of interest charged by the MEC may be 2.5 percent lower than the official Central Bank of Malta interest rate. Certain conditions as to the security required and repayment programme apply.
The MEC may also subsidise the interest rate payable by the company or provide guarantee on loans taken out from financial institutions to finance qualifying expenditure.
Companies carrying on qualifying activities may also qualify for training grants. These range from 35 to 80 percent of the eligible costs incurred depending on the training programme.
The MEC will assist prospective investors in finding suitable factories in Malta's industrial estates and in structural works required to customise a factory to the investor's needs.
Assistance to exporters
The MEC also serves as the national focal point for trade promotion and export development. In this capacity, it has the role of acting as adviser to the government on international trade matters, negotiating and managing international trade agreements, carrying out trade research, product and market development, and assisting firms in export promotions.
The Freeport is a customs-free zone located around a developed harbour in the southern part of the island.
International financial centre operations
Maltese law provides for a favourable fiscal framework for the provision of financial services, and endeavours to establish Malta as an attractive, regulated international business centre. Details on the tax provisions applicable to Maltese companies carrying on international operations are provided in Chapter 13.
The regulator of financial services in Malta is the Malta Financial Services Authority (MFSA). The Authority provides a "one-stop shop" for all financial-services matters.
The Investment Services Act (ISA) regulates the carrying on of the entire range of investment business in Malta, particularly Collective Investment Schemes (CISs). The regulatory structure is comprehensive, covering dealing, management, administration, custody, and investment advice. A license from the MFSA is necessary in order to provide investment services and to operate a CIS in or from Malta or as an entity set up under Maltese law. Persons dealing in securities quoted on the Malta Stock Exchange are also subject to the rules and bylaws of the Exchange. An attractive tax regime exists for CISs licensed by the MFSA.
The Special Funds (Regulation) Act is intended to facilitate the establishment of retirement arrangements. It provides a regulatory framework for:
- The arrangement pursuant to which an employer promises the employee retirement benefits (Retirement Scheme);
- The types of funds (Retirement Funds) required to be used as investment vehicles by a Retirement Scheme and which require registration under the Law;
- The types of service providers that may provide services in connection with a registered Retirement Scheme and/or Retirement Fund (e.g. Asset Manager).
Under Maltese law, a Retirement Scheme is a contract between the Contributors (employer) and the Beneficiaries (members of the scheme eligible for benefits after retirement, permanent invalidity or death). Such scheme has to be registered in terms of law.
A Retirement Fund is a collective investment company with fixed or variable share capital incorporated under the Companies Act, 1995, set up for the principal purpose of holding and investing the Contributions made to one or more Retirement Schemes.
The Law also makes reference to Overseas Retirement Plans, which are bona fide schemes or arrangements organised under the laws of a country outside Malta, and which govern the rights and responsibilities of the parties related thereto, and under which payments are made to Beneficiaries for the principal purpose of providing retirement Benefits. An Overseas Retirement Plan does not require registration under the Law. However, it may either decide to establish a Retirement Fund registered under the Law or else invest its Contributions in an already established Retirement Fund registered under the Law.
The Companies Act provides for, amongst other matters, the setting up of investment companies with variable share capital (SICAVs) and companies with share capital denominated in a foreign currency. It allows the possibility of nominee shareholding in Maltese companies, provided that the nominee functions are exercised by an entity licensed by the MFSA.
Other laws relevant to financial and investment services include the Trusts and Trustees Act, Banking Act, the Insurance Business Act, the Professional Secrecy Act, the Insider Dealing Act and the Money Laundering Act.
The Merchant Shipping Act, 1973 sought to consolidate Malta's maritime tradition by capitalizing on Malta's advantageous geographic position and natural resources. The Act introduced a tonnage tax regime which enabled the Maltese flag to flourish by granting shipping companies the opportunity to elect whether to remain in the standard corporation tax regime or whether to participate in the special tonnage tax regime.
On 1 May 2004, the date of Malta's accession to the European Union (EU), in the light of the Community guidelines on state aid to maritime transport, new regulations governing the fiscal treatment of shipping companies came into force.
The Maltese Tonnage Tax System
The Maltese tonnage tax model imposes on the ship owner the obligation to pay an amount of tax that is linked directly to the tonnage operated.
The Merchant Shipping (Taxation and Other Matters Relating to Shipping Organisations) Regulations, 2004 (the "Tonnage Tax Regulations") exempt from income tax in Malta:
- Income derived from shipping activities by a licensed shipping organisation; and
- Income derived by a ship manager from 'ship management activities'
Shipping organisations may renounce (irrevocably) to the benefits and privileges of the Maltese tonnage tax system and instead be subject to the standard corporate tax rate. The Maltese tonnage tax fees would still however be mandatory in that the registration fee and the annual tonnage tax are payable irrespective of whether or not the shipping organisation makes use of the benefits and concessions contained in the Maltese tonnage tax system. Furthermore, no obligation is imposed on Maltese ship owners to subject all 'tonnage tax vessels' in the same company or group of companies to the same tax regime.
For the Maltese Tonnage Tax Regulations to apply to shipping organisations, the following preliminary conditions must be satisfied:
- The company must qualify as a 'Shipping Organisation' as defined in the Maltese Merchant Shipping Act;
- The company must be licensed as a shipping organisation;
- The ship must qualify as a 'tonnage tax ship'. A 'tonnage tax ship' is defined as either a ship declared to be a tonnage tax ship by the Minister, or a Community ship of not less than 1,000 net tonnage which is owned entirely, chartered, managed, administered or operated by a shipping organisation.
If all of the above conditions are satisfied, then the income derived by a licensed shipping organisation from shipping activities should be exempt from income tax in Malta provided that: (i) all registration fees and tonnage taxes have been duly paid and (ii) separate accounts have been kept clearly distinguishing the payments and receipts related to shipping activities from payments and receipts in respect of any other business.
The exemption from income tax is however limited to that income derived by a licensed shipping organisation from 'shipping activities'.
The term 'shipping activities' is defined in the Tonnage Tax Regulations as "the international carriage of goods or passengers by sea or the provision of other services to or by a ship as may be ancillary thereto or associated therewith including the ownership, chartering or any other operation of a ship engaged in all or any of the above activities or as otherwise may be prescribed".
Ship Management activities
Any income derived by a ship manager from ship management activities can also qualify for tax exemption under the Maltese tonnage tax system.
'Ship management activities' is defined as those activities carried out by a ship manager consisting in, but not limited to, the entire crewing of a tonnage tax ship and/or the provision of technical management thereto.
A 'Ship manager' must:
- be a licensed shipping organisation which is established in the EU / European Economic Area (EEA),
- have assumed responsibility for either or both of the technical or crew management of a ship,
- comply with international standards and fulfil requirements established under EU law,
- specifically include such activities among the objects contained in its Memorandum of Association, and
- adhere to other administrative conditions
The tax exemption applies subject to the following conditions:
- a ship manager must have settled all applicable registration fees and tonnage taxes,
- maintain separate accounts distinguishing receipts and payments relating to ship management activities from those relating to any other business,
- at least two-thirds of the tonnage of the ships to which the ship manager provides ship ` management activities is managed from the territory of the EU / EEA,
- the tonnage of the ships in respect of which the ship manager provides ship management activities meets one of a number of conditions (e.g. at least 60% of the managed tonnage is registered under a Community flag, ship manager does not decrease or provides a commitment to increase the tonnage of Community managed ships over a specific period)
Recent amendments have removed the Malta flag requirement. To ensure that Malta grants the maximum level of benefits and concessions envisaged in the Community guidelines, the tonnage tax system extends itself to ship management companies and licensed shipping organisations which own vessels registered outside Malta, subject to the satisfaction of certain parameters and conditions set out in the particular regulations and in line with EU law.
As described previously and in terms of the extension of the tonnage tax system, a ship of not less than 1000 net tonnage should qualify as a tonnage tax ship if:
- it is registered under the Maltese Merchant Shipping Act; or
- it is registered in another EU/ EEA State and has paid the applicable Maltese tonnage tax.
- the Minister declares a third country ship to be a tonnage tax ship provided certain conditions (similar to those found in the Community Guidelines) are satisfied (e.g. where the shipping organisation owns, charters or operates at least 60% of its total tonnage under an EU/ EEA flag, or where the % tonnage operated under an EU/EEA flag is not decreased or there is a commitment to increase the said percentage over a specific period of time).
Other benefits of the tonnage tax system
A licensed shipping organisation which has no income or no income other than income derived from shipping activities is entitled to submit a declaration in lieu of a tax return required in terms of the Income Tax Management Act.
Interest income derived by a licensed bank, credit or financial institution shall be exempt from income tax in Malta provided it relates to the financing of the operations of a licensed shipping organisation or the financing of a tonnage tax vessel.
Disposal of vessel
Any income, gains or profits derived upon the sale or disposal of a tonnage tax ship or from the disposal of any rights to acquire a ship which would eventually qualify as a tonnage tax ship, should not be subject to tax on capital gains and stamp duty in Malta. A balancing statement would however be required if capital allowances had been claimed in respect of the particular vessel.
Distribution of profits
Distribution of exempt shipping profits from a Maltese shipping company should not be subject to any further tax in Malta at any shareholding level up to and including the ultimate individual shareholders.
Transfer of shares in a Shipping Company
The transfer of any shares, securities or any other interest, including goodwill, held in any licensed shipping organisation that owns, charters, operates, administers or manages a tonnage tax ship is exempt from tax on capital gains and stamp duty in Malta under the Tonnage Tax Regulations.
Income tax regime benefits
In the event that the shipping company opts out of the Tonnage Tax Regulations, any income derived by the said shipping company should be subject to tax in Malta at the standard corporate rate of 35%, subject to the possibility of claiming double taxation relief.
Nevertheless, upon a distribution of the said shipping profits, the shipping company's shareholders should be entitled to claim a refund of six-sevenths of the Malta tax suffered by the shipping company on the taxed profits distributed to the shareholders. As a result, a tax efficient regime should possibly still be available in respect of the said shipping operations even if the exemption contemplated under the Tonnage Tax Regulations is not availed of.
Malta's attraction as a location for aircraft activities is not so much based on tax considerations but mainly on the collective service-offering that Malta offers most of which has been in place for a number of years. However, ensuring tax neutrality and removing undue tax burdens is part of Malta's commitment towards providing the best possible deal and service to investors.
In terms of a recent amendment to the Income Tax Act, income derived from the ownership, operation or leasing of an aircraft used in international aviation business is deemed to arise outside Malta irrespective of whether the aircraft calls at or operates from Malta and the country of registration of the aircraft or engines.
This means that income derived by a company from the said aviation activities should not be subject to tax in Malta in terms of domestic law unless such company is incorporated in Malta or managed and controlled in Malta and receives the income in Malta.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.