Tax rules enabling tax neutrality, coupled with a flexible yet robust legal and regulatory framework, put Malta on the map of banks, insurance companies, hedge funds, and others looking for a cost-efficient way of raising capital.
Securitisation transactions and the regulatory framework
The regulatory and legal framework for securitisation transactions is non-intrusive, flexible as to the assets which may be securitised and at the same time secures the required level of investor protection.
The securitisation vehicle can take one of many legal forms, it can be constituted as a company (including an investment company, SICAV), a commercial partnership, a trust or any other commercial vehicle approved by the Malta Financial Services Authority (MFSA).
The flexibility of the securitisation regime finds its ground in the extensive range of assets which may be securitised through a Maltese vehicle. Any asset may be securitised, whether existing or future, movable or immovable, tangible or intangible, and where the context so allows includes risks. This implies that both traditional assets, such as trade receivables, mortgage loans, life insurance policies, tangible and intangible assets as well as risks relating to obligations or liabilities assumed by third parties may be the subject of a securitisation transaction.
Securitisation vehicles established in Malta will not generally need to be licensed. A mere notification is enough. Licensing will only be required when the securitisation vehicle intends issuing financial instruments to the public on a continuing basis.
Securitisation transactions include any transaction or arrangement whereby a vehicle finances, through the issue of financial instruments; effects:
- Sale transactions: whereby the originator transfers a pool of assets to the securitisation vehicle;
- Synthetic transactions: whereby the securitisation vehicle assumes the credit risk of the originator through credit derivatives;
- Loan transactions: whereby the securitisation vehicle grants secured loans or other secured facilities to the originator.
Should the securitisation vehicle become insolvent, the Securitisation Act contains rules for the protection of investors, the originator and other securitisation creditors. Investors in a securitisation vehicle enjoy a special privilege over the assets of the securitisation vehicle, and therefore rank prior to other claims.
A securitisation vehicle enjoys tax neutral status thereby optimising the investors' return and the originator's cost of funding.
Although, as a rule, securitisation vehicles are liable to tax in Malta at 35%, substantial deductions are available which effectively eliminate any taxable income in Malta.
Specifically enacted tax rules clarify that the following deductions may always be availed of by a securitisation vehicle:
- Cost of acquisition: Expenses payable to the originator for the acquisition of securitisation assets or the assumption of risk;
- Finance expenses: Premiums, interest or discounts relating to financial instruments issued, or funds borrowed, to finance the acquisition of securitisation assets or the assumption of risks;
- Operating expenses: Costs incurred in the day-to-day administration of the securitisation vehicle and the management of the securitisation assets, including the collection of any relevant claims.
After the aforementioned deductions are taken, the securitisation vehicle may opt to claim a further deduction on its remaining taxable income, thereby ensuring no taxation at the level of the securitisation vehicle.
The deductions, including the further deduction, constitute deemed income for the originator. However, no Malta tax is payable on such deemed income where the originator is not resident in Malta for tax purposes.
Malta does not impose any withholding tax on the outbound payment of dividends and interest to the non-resident investors.
In addition, securitisation vehicles set up as companies can obtain a tax residency certificate from the Maltese tax authorities in order to accede to EU Directives and Malta's extensive tax treaty network.
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.