1. INTRODUCTION

A substantial legislative package was pushed through Parliament during 1994 as the next step in the process of evolving Malta into an international financial and trading centre.

The objectives of this legislative package are:

(i) To evolve the Malta International Business Authority into the more centralised role of the principal financial services regulator in Malta as the Malta Financial Services Centre;

(ii) To provide a regulatory and legislative framework for the licensing of investment services and the formation and licensing of collective investment schemes;

(iii) To introduce EU standards in a number of important fields including company law, investment services, banking, prevention of money laundering, insider dealing, and professional secrecy;

(iv) To introduce a new tax regime.

2. THE MALTA FINANCIAL SERVICES CENTRE (MFSC)

The Malta International Business Authority (MIBA) has evolved into the Malta Financial Services Centre. Acting through a number of units (for instance, the Investments Unit, the Insurance Business Unit), the MFSC's main functions include:

(i) To promote Malta as a centre for financial services;

(ii) To exercise regulatory functions in the insurance, investment services and banking fields;

(iii) To co-ordinate the financial services sector in Malta;

(iv) To monitor the ongoing activities of offshore companies; and

(v) To advise Government on any of the above.

This centralisation of the functions of the Malta Financial Services Centre will ensure the provision of a 'one stop shop' service, thereby promoting efficiency in the financial services sector.

3. COMPANIES ACT, 1995

The new Companies Act (operative as from 1 January 1996) incorporates several new concepts, including: (i) the SICAV (variable share capital) and the INVCO (fixed share capital), two types of investment companies; (ii) the possibility of having onshore companies whose share capital is denominated in a convertible foreign currency; (iii) nominee shareholding, through the 'licensed nominee', namely persons licensed by the MFSC to act as nominee ( in contrast with the nominee company holding a warrant issued by the MFSC under the offshore regime).

This Act introduced a number of new features, bringing Maltese company law very much in line with EU company law. Cases in point refer to the company secretary, group accounting, directors' responsibilities, preservation of share capital, dissolution and winding up, mergers and divisions of companies, creditor protection, and so forth.

4. INVESTMENT SERVICES ACT, 1994

This Act lays down a comprehensive regulatory framework for the provision of investment services generally and for the setting up and operation of collective investment schemes specifically. Indeed, the Act requires persons providing investment services in or from Malta, and in case of persons formed in Malta also when providing investment services outside Malta, and collective investment schemes operating in or from Malta, and outside Malta if set up in Malta, to be licensed in terms of this Act.

The emphasis on extra territorial application is intended to ensure that Malta's legal persons are not made use of for disreputable or illegal activities elsewhere in the world.

5. FINANCIAL INSTITUTIONS ACT, 1994

This Act may almost be said to apply by default, or rather it is likely that a person carrying on financial business who does not, however, fall to be regulated by the Investment Services Act, 1994, or by the Banking Act, 1994 (which Act is in line with EU regulatory and supervisory practice) may, however, fall to be regulated by the Financial Institutions Act.

A person carrying on any of the activities outlined in a Schedule to this Act (e.g. finance leasing, trading for one's own account in transferable instruments) is required to be in possession of the requisite licence issued in terms of the Act.

6. PREVENTION OF MONEY LAUNDERING ACT, 1994

The Prevention of Money Laundering Act introduced the notion of the crime of money laundering into our system. This Act is directed towards all persons involved in money laundering, whether directly or as accessories to the crime. It imposes a general duty to report suspected money laundering; to this end, an express statutory exception has been made to the principle of professional secrecy. It also imposes heavy obligations on persons carrying on "relevant financial business" in terms of items such as identification, record keeping and internal reporting procedures.

7. INSIDER DEALING ACT, 1994

Although the Malta Stock Exchange Act already made provisions for the offence of insider dealing, the need was felt to bring the concept of insider dealing in line with EU standards by way of an Act of general application. The Act prohibits, inter alia, stock exchange and off-market insider dealing as well as the abuse of insider information.

8. PROFESSIONAL SECRECY ACT, 1994

The Act sets down a standard of professional secrecy of general application. It builds on provisions already in existence in several laws by imposing a general duty of professional secrecy on government officials and professionals, but also on their officers, employees, agents, and so forth. Very limited exceptions are made to the duty of professional secrecy. A person convicted of an offence in terms of this Act is liable to severe penalties.

9. THE OFFSHORE REGIME

9.1 TRADING AND NON-TRADING OFFSHORE COMPANIES

This regime was introduced by the Malta International Business Activities Act, 1988 (now the Malta Financial Services Centre Act). An "offshore activity" is defined as any business or other activity carried on from Malta in a foreign currency by persons who are not resident in Malta with other non-resident persons. The setting up of an offshore company is required for the carrying on of offshore activities.

Taking a cursory look at this regime, the general rules to be satisfied by both trading and non-trading companies are:

(i) It must be a private company, owned by non-residents;

(ii) Its objects must be expressly limited to offshore activities and to those acts as are necessary for its operations from Malta;

(iii) It may not own property in Malta except for leased office premises, bank accounts and other movables as may be necessary for its operations;

(iv) It must have a nominee company holding a warrant issued by the MFSC as its secretary or sole director; and

(v) The said nominee company may act as nominee shareholder.

As far as the holding of property is concerned, an offshore company which is exclusively a holding company may hold shares in or debentures of a subsidiary company which is a wholly non-resident owned manufacturing or processing company, or a company involved in agriculture, horticulture or fish farming, or a company concerned with the ownership, management, administration or operation of ships.

A trading offshore company may have any trade or business as its object (e.g. reinvoicing, transfer pricing, leasing, administration). Some of the incentives accorded to trading offshore companies for a ten year period include:

(i) Anonymity, achieved through the use of nominee shareholding and/or non trading offshore companies;

(ii) Non-refundable tax is payable at a flat rate of 5%; no further tax is payable on distributions to the non-resident shareholders;

(iii) An automatic right to the issue of a work permit for at least one non-resident; tax is payable by these individuals at a maximum rate of 30%; and

(iv) Exemption from customs duty and exchange control provisions.

Non-trading offshore companies are companies the objects of which are expressly limited to the ownership, management and administration of any kind of property (subject to the above mentioned restrictions), including intellectual property and ships. These companies may be utilised for various purposes (e.g. holding of immovables, intermediate holding company).

As far as the ten year package of incentives accorded to non-trading offshore companies is concerned, these include:

(i) Anonymity, as in the case of the trading company;

(ii) Exemption from the filing of documents and returns for registration and income tax purposes;

(iii) No tax is payable on the company's profits and on distributions to shareholders; and

(iv) Audited accounts need not be prepared.

9.2 TRADING AND NON-TRADING OFFSHORE COMPANIES: THE 1994 AMENDMENTS

This set of amendments is in the nature of provision for a transitional regime in relation to the move from offshore companies to onshore companies, namely from trading and non-trading offshore companies to international trading companies and international holding companies (discussed below).

The most salient points of these amendments include:

(i) Privileges granted to existing offshore companies will continue to apply. The exemptions from certain statutory requirements imposed on onshore banks and insurance companies (e.g. relating to liquidity ratios, reserve funds) accorded to offshore banks and insurance companies will also continue to apply.

(ii) Offshore companies may continue to be registered until 31 December 1996;

(iii) In the case of offshore companies registered after 23 September 1994, the confidentiality provisions will no longer apply, having been substituted by the general Professional Secrecy Act regulating 'inter alia' all professionals involved in the financial services business.

(iv) The incentives package will not apply beyond September 2004 in relation to companies registered after 23 September 1994.

(v) Offshore companies may apply to be converted to the new onshore regime till the year 2003.

9.3 OFFSHORE TRUSTS

The Offshore Trusts Act, 1988 introduced the concept of trusts. An offshore trust was required to satisfy a number of requirements, namely (i) both settlors and beneficiaries must be non residents, and (ii) it cannot own immovable property situated in Malta.

A number of incentives accorded to offshore trusts included:

(i) Tax payable on the income of a trust and on the income of a beneficiary of the trust is a flat rate of Lm200 (c.US$600) per annum; tax returns need not be filed;

(ii) Exemption from stamp duty, customs duty and exchange control provisions; and

(iii) Exemption from death duties and capital taxes in respect of the assets held in trust.

9.4 TRUSTS: THE 1994 AMENDMENTS

The amendments to the Trusts Act, 1988, were twofold: (i) it introduced a general concept of trusts and (ii) it gave the force of law to the Hague Convention on the Law applicable to Trusts and on their Recognition by virtue of which recognition is granted to trusts governed by foreign law.

The Trusts Act now distinguishes between Maltese trusts (the proper law of which is Maltese Law) and foreign trusts (governed by a foreign law). Foreign trusts may opt for registration with the MFSC, provided they satisfy a number of restrictions concerning Maltese settlors, beneficiaries, and immovable property. Registered trusts may benefit from the fiscal package described above.

Reference is made in this context to the fact that collective investment schemes may be set up as unit trusts governed by a foreign law and be registered with the Malta Financial Services Centre. As far as the tax regime of such collective investment schemes is concerned, this will be regulated by a special regime set up under the Income Tax Acts (see 11.7 below)

10. SHIPPING

The attractive regime laid down by the Merchant Shipping Act, 1973 in relation to the registration of vessels under the Maltese flag has remained intact. Included therein are:

(i) Low company formation and registration costs;

(ii) Exemption from income tax, stamp duty and exchange control provisions;

(iii) No restriction on nationality of master, officers, crew;

(iv) Bareboat charter registration;

(v) High priority ranking for ship mortgages.

Reference is made to non-trading offshore companies which may be used to:

- Hold shares in local or foreign registered shipping companies;

- Own, operate or manage ships registered in Malta or abroad.

In so far as the new regime is concerned, anonymity as to holdings in shipping companies may now be achieved through the use of the licensed nominee (see 3.)

11. THE NEW TAX REGIME

11.1 INTRODUCTION

The new tax regime has been introduced principally by the enactment of the Income Tax Management Act, 1994 and by amendments to the Income Tax Act, 1948 and to the Duty on Documents and Transfers Act, 1993. This regime refers to:

- Distributable profits allocated to the Foreign Income Account;

- Two new forms of double taxation relief;

- International holding companies and "participating holdings";

- International trading companies;

- 'Qualifying' banks;

- Collective investment schemes;

- Investment services companies and expatriates;

- Advance revenue rulings; and

- Ancillary matters.

11.2 THE FOREIGN INCOME ACCOUNT

As from the year of assessment 1996, the distributable profits of a Maltese resident company are to be allocated to three accounts: a Foreign Income Account, a Maltese Taxed Account and an Untaxed Account.

Distributable profits are to be allocated to the Foreign Income Account insofar as they are derived from foreign sources, including:

- Dividends, royalties, interest, rents, capital gains, and any other income derived from foreign investments;

- Profits and gains taxable in Malta and attributable to a permanent establishment situated outside Malta; and

- Profits resulting from dividends paid out of other companies' Foreign Income Account.

The tax treatment of distributions to non-residents from profits allocated to the Foreign Income Account is particularly interesting. Distributions from the Foreign Income Account are accorded favourable tax treatment through a "Tax Refund Regime": in so far as the distribution is made (i) to non-resident persons, or (ii) to a Maltese company wholly owned by non-residents, the shareholder will receive a refund equal to two thirds of the Malta tax paid by the company in respect of those profits.

Reference is made, in this context, to "participating holdings" and 'qualifying' banks' ( see 11.4 and 11.6 below)

This refund is payable within a maximum of one and a half months from the date of distribution of the dividends in question. However, with a view to minimising cash flow problems as much as possible, provisional tax due on the said company profits will not be collected until the earlier of the date of distribution of the profits or eighteen months from the end of the relative accounting period.

11.3 DOUBLE TAXATION RELIEF

Malta has a substantial double tax treaty network. Its over twenty treaty partners include many European countries, U.S.A. and Canada, Eastern European and Asian countries. Most of these agreements are based on the OECD Model, many of which also make provision for tax sparing provisions, in addition to lower rates of withholding taxes for dividends, interest and royalties.

Persons which may avail themselves of this double taxation treaty network include normal onshore companies, onshore banks, international trading companies, international holding companies, and collective investment schemes opting to be taxed at 25%.

The 1994 amendments have introduced two new systems of double taxation relief to complement the two forms already in operation (i.e. relief from Commonwealth tax and relief through Malta's double taxation treaty network).

The two new forms of relief are:

- Unilateral Relief; and
- Flat-Rate Foreign Tax Credit.

UNILATERAL RELIEF

Unilateral Relief is granted where Commonwealth Relief and Double Taxation Relief are not available. A person claiming Unilateral Relief is required to prove that the income arose overseas, that it suffered foreign tax and the amount of foreign tax suffered. The foreign tax suffered will be allowed as a credit against the Malta tax chargeable on the gross income.

Unilateral Relief is also given for underlying tax suffered on dividends received by a company in Malta, provided the company holds a minimum of 10% of the voting shares of the distributing company.

FLAT-RATE FOREIGN TAX CREDIT

Relief by way of the Flat-Rate Foreign Tax Credit is granted where Commonwealth Tax Relief, Double Taxation Relief and Unilateral Relief are not available. The Flat-Rate Foreign Tax Credit is only available to Maltese resident companies which have income which falls to be allocated to the Foreign Income Account, with the exception of profits received from the Foreign Income Account of another company. The only proof required by the authorities for this relief to be accorded is an auditor's certificate stating that the income in question arose overseas.

The Flat-Rate Foreign Tax Credit is calculated at 25% of the overseas income in question, before deductions. The income is grossed up with the credit (less deductions), the resulting amount being charged to Malta tax, with relief for the deemed credit.

It is important to note that it is possible to have one type of income benefiting from one type of relief (e.g. Double Taxation Relief), and another type of income which benefits from a different type of relief (e.g. Flat-Rate Foreign Tax Credit).

11.4 INTERNATIONAL HOLDING COMPANIES AND "PARTICIPATING HOLDINGS"

International holding companies, or rather Maltese resident companies owned by non-residents which have a "participating holding" in a non-resident company are accorded a more advantageous refund regime.

In the case of distributions from the Foreign Income Account of such a company out of profits deriving from a participating holding, the non-resident shareholder (as defined in 11.2 above) will qualify for a 100% refund of the Malta tax paid by the company in respect of those profits.

A participating holding for tax purposes is a holding of 10% or more of the equity shares of the non-resident company. If the holding is less than 10%, a participating holding exists when any of the following conditions are satisfied:

(i) The Maltese corporate shareholder has an option to purchase or has the right of first refusal on a disposal, redemption or cancellation of the balance of the equity shares of the foreign company; or

(ii) The Maltese corporate shareholder is entitled to be represented on the Board of the foreign company; or

(iii) It invests a minimum of Lm500,000 in the foreign company; or

(iv) The shares are held for the furtherance of the Maltese corporate shareholder's own business.

11.5 INTERNATIONAL TRADING COMPANIES (ITCs)

An international trading company is a company engaged solely in carrying on trading activities from Malta but not in Malta, with non- residents, and which has its objects expressly limited to such trading activities as well as to such acts as are necessary for its operations from Malta. These companies are accorded blanket exemptions from Exchange Control regulations and certain exemptions from stamp duty.

An ITC may:

- Purchase for export goods manufactured, assembled or processed in Malta;

- Trade with offshore companies; and

- Trade with other ITCs.

An international trading company's profits are taxable at the normal company tax rate of 35%.

Tax on dividends distributed to (i) a non-resident individual shareholder, or to (ii) a Maltese company wholly owned by non-residents is payable at the rate of 27.5%. The shareholder will be accorded a refund equal to:

- The difference between the tax paid by the company (on his behalf) and the tax paid by him i.e. 35% less 27.5%, namely 7.5%, and

- Two thirds of the Malta tax paid by the company.

This refund is also due within maximum of one and a half months from distribution of the dividends in question and, with a view to minimising cash flow problems as much as possible, provisional tax due on the said company profits will not be collected until the earlier of the date of distribution of the profits or eighteen months from the end of the relative accounting period.

11.6 'QUALIFYING' BANKS

The mechanism concerning the Foreign Income Account and the Flat-Rate Foreign Tax Credit is of significant importance in relation to banks with non-resident shareholders.

Additionally to the types of income to be allocated to the Foreign Income Account (see 11.2), a bank's profits resulting from investments, assets or liabilities situated abroad are also to be allocated to the Foreign Income Account.

This regime is available to Maltese licensed banks which receive in excess of 95% of their average daily deposits throughout the financial year from non-residents. It is important to note that this condition must be satisfied on a consolidated basis in the case of banking groups.

Accordingly, 'qualifying' banks may opt for the Flat-Rate Foreign Tax Credit, where applicable. Moreover, non-resident shareholders will receive a refund of two thirds of the Malta tax paid on any profits distributed from the Foreign Income Account, as outlined in 11.2 and 11.3 above.

11.7 COLLECTIVE INVESTMENT SCHEMES (CIS)

Collective investment schemes may be set up as SICAVs, INVCOs, limited partnerships, unit trusts, or as mutual funds. The income (including capital gains) of CISs is exempt from Malta tax; exempt CISs may not however avail themselves of Malta's double tax treaty network.

Collective investment schemes which are not constituted as unit trusts may waive the exemption from tax, in which case they will be liable to tax on their income at a flat rate of 25%; capital gains realised on disposal of investments, assets or liabilities held by the scheme remain exempt.

In all cases, gains or profits realised by non-residents on a disposal of any units or shares in a collective investment scheme are exempt from tax.

11.8 INVESTMENT SERVICES COMPANIES AND EXPATRIATES

INVESTMENT SERVICES COMPANIES

Investment Services companies licensed under the Investment Services Act, whose activities are restricted to the provision of management, administration, safekeeping or investment advice to licensed collective investment schemes, benefit from a substantial package of tax deductions, including:

- 200% deductions on building occupancy costs (e.g. rent, heating) for the first ten years;

- 200% deductions on salaries paid to Maltese resident employees for the first ten years; and

- Deductions for amounts invested in schemes managed by that company.

These companies are exempt from exchange control requirements.

INVESTMENT SERVICES EXPATRIATES

An investment services expatriate is an individual who is either not domiciled and not ordinarily resident in Malta, or is a Maltese national who occupied a similar position abroad for a minimum period of three years prior to returning to Malta, and who is employed by an investment services company.

Investment services expatriates are not taxed on a substantial amount of benefits in kind (e.g. removal costs, accommodation, schooling) for a ten year period. They are also exempt from paying social security contributions and from customs duty on the importation of their personal belongings.

11.9 ADVANCE REVENUE RULINGS

Acting through the International Tax Unit, the Commissioner of Inland Revenue is empowered to give rulings on the fiscal implications relating to international transactions. Applications for advance revenue rulings are to be made in writing; the relative ruling will be given within thirty days of application for same.

Rulings will be given on a number of issues, including:

- Confirmation that a shareholding is a "participating holding" (see 11. 4);

- Confirmation that a company is an international trading company (see 11.5);

- The tax treatment of transactions concerning financial instruments or other securities; and on

- The tax treatment of transactions involving international business.

Advance revenue rulings are binding for a period of five years, or for two years from the date of any legislative change, whichever is the earlier, renewable for a further period of five years. The introduction of this system will guarantee predictability of the tax treatment of international transactions.

11.10 ANCILLARY MATTERS

Other amendments include:

NON-RESIDENTS

Subject to certain exceptions, non-residents are exempt from Malta tax on:

- Interest and royalties derived in Malta; and

- Capital gains on disposals of shares or securities in Maltese companies (excluding companies the assets of which are principally immovables situated in Malta).

DUTY ON DOCUMENTS AND TRANSFERS (STAMP DUTY)

Acquisitions and disposals of marketable securities (including shares) are exempt from Malta duty when made by collective investment schemes, certain investment services companies, international trading companies, and by companies which satisfy the following conditions, namely (i) in excess of 50% of the company is owned by non-residents, and (ii) in excess of 50% of its profits are allocated to the Foreign Income Account, or (iii) all its assets are situated overseas.

Transfers of securities in any of the above are also exempt from stamp duty.

THE CONTENTS OF THIS ARTICLE ARE INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.