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Doing Business in Malta

Better, Faster, Stronger


Foreword This guide has been prepared to assist those interested in doing business in Malta. It is intended as a general guide to answer certain key questions that may arise. As legislation and business practices are subject to change and reinterpretations, it is sensible to seek local advice from appropriately qualified professional sources to deal with specific matters. The material included in this guide was compiled on the basis of data and information available at 31 August 2009. RSM Malta is the Maltese member firm of RSM International (RSMi) and may be contacted through any of the member and correspondent RSMi firms around the world. The firm’s main service lines include: assurance and business advisory, tax and corporate services and back office and IT.

RSM International RSM International is one of the largest network of independent accounting and consulting firms each of which is independently owned and managed and practices in its own right. Member firms of RSM International are driven by a common vision of providing high quality professional services, both in their domestic markets and in serving the international professional service needs of their client base. Member firms have a common work ethic of innovative thinking to develop and deliver high quality and timely results for their clients, backed by high skills and world class standards. RSM International has member firms in over 72 countries and is represented in each of the top 40 major business centres throughout the world. The combined organisation has more than 30,000 staff in more than 700 offices, placing it amongst the Top Seven international accounting organisations world-wide. RSM International member firms serve clients involved in virtually every industry, from manufacturing, wholesaling and retailing, transport and mining, financial services to health and legal professions, service firms of all types and government agencies. RSM International does not exist in any jurisdiction as a separate legal entity. The network is administered by RSM International Limited, a company registered in England and Wales whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

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“Trust, discretion, performance and continuity are the foundations of our relationship with our clients.� 2


Contents General 4 Business entities 10 Taxation of companies 15 Taxation of individuals 22 Tax treaties 31 Indirect taxation 34 Investing in Malta 35 Employment 37 Accounting and audit requirements 40 RSM Malta 43

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General Geography and climate The Maltese Islands are located in the centre of the Mediterranean Sea, 93 kilometres from the southern coast of Sicily and 290 kilometers from the shores of North Africa. The Maltese archipelago consists of three islands – Malta, Gozo and Comino- covering a total area of 316 square kilometers. Malta is the main island in the archipelago and is approximately 15 kilometers wide and 27 kilometers long. Gozo lies to the north-west, less than half an hour away by ferry. Comino, which lies between Malta and Gozo is semi-uninhabited. The Maltese coastline alternates between sheltering inlets and cliffs. The coast of Malta is predominantly rocky. Malta’s Grand Harbour is one of the largest inlet on the Maltese shoreline. Valletta, the capital city, lies on a promontory between the Grand Harbour and Marsamxett Harbour, Malta’s two main harbours. Malta’s climate is mild with an average of 500 millimetres of rain expected each year, mainly during October to February. Temperatures may vary from an average maximum of 30 C, in the peak summer months of July and August to an average minimum of 9 C in January and February. There are about 300 days of sunshine each year.

History Malta has been populated since Neolithic times, over 8.000 years ago. Around 2,000 BC, the island was conquered by the Phoenicians and subsequently Carthaginians and Romans. In 60 AD, St Paul the Apostle, was shipwrecked in Malta and introduced the Christian Faith to the islands. Malta has since remained predominantly a Christian (Roman Catholic) island. In 870 AD the Arabs invaded Malta and ruled until 1090 AD when Count Roger of Normandy seized the island and made Malta part of the Kingdom of Sicily. The Order of Knights of St John (also known as the Knights of Malta) came to Malta in 1530, when Charles V of Spain offered Malta to them in an attempt to strengthen the southern frontiers of his domain against Islam. The Knights improved living conditions across the Island, stimulated trade and commerce and erected strong fortifications. In 1798 Napoleon’s army drove out the Knights of St John and conquered the island. The British Crown took over Malta in the early nineteenth century and ruled the islands for the next 160 years. Malta became an independent sovereign state on 21st September 1964. In 1974 Malta was declared a republic. Malta became a European Union (EU) Member State in May 2004. The island is a member of the Commonwealth and of the United Nations. 4


Population and language Malta is one of the most densely populated countries in Europe. Malta’s population in 2008 amounted to 413,000 with a population density of 1310 per square kilometer. Population growth in 2008 was fairly modest at 0.2 %. Maltese and English are the two official languages in Malta. Maltese is a Semitic language in structure, written in Latin script. Maltese and English are compulsory subjects taught at both the primary and secondary school levels. Most Maltese are bilingual and fluent in both languages. Italian is also widely spoken. Official publications, including laws, are published in both Maltese and English. Most business and commercial related correspondence, official or otherwise, is in English.

Political and legal systems Malta is a parliamentary democracy with general elections held every five years. Maltese citizens aged 18 years or over have the right to vote. The head of state is the President, who is appointed by Parliament. The President of Malta’s role is mainly ceremonial. The Maltese Parliament (House of Representatives) has the power to legislate. The Prime Minister is the leader of the party that obtains the majority of votes in an election. The Prime Minister selects and appoints cabinet Ministers from amongst elected representatives. The Maltese Constitution establishes the structures and powers of the court and lists the fundamental human rights and freedoms of individuals. Malta recognizes the right of individual petition to the European Courts of Justice. The legal system in Malta is firmly based on the rule of law and independence of the Judiciary. Judges are appointed by the Government and cannot be removed before retirement age, except for proven inability to exercise their duties properly. Removal requires a two-thirds vote in Parliament. Most financial, fiscal and commercial legislation is based on British laws.

Economy The Maltese economy, which is based on the free enterprise system, has expanded in particular during these past five years, following Malta’s accession to the European Union. Membership in the EU provides for the freedom of movement of goods, services, citizens and capital between Malta and the other 5


EU member states, thus creating a single market of continental dimensions. In January 2008 Malta adopted the Euro as its official currency. Malta’s record of political, economic and social stability over the years has resulted in a steady increase in foreign investment. The Maltese Government encourages free enterprise with no restrictions on foreign ownership of business and repatriation of capital and income. Malta has a diversified economy which relies mainly on tourism, manufacturing and financial services that collectively accounted for around 60 % of the GDP in 2008. In 2008 Malta’s GDP per capita in real terms stood at 312,000. The GDP in real terms grew at an average of 4.3% during the period 2006 to 2008 and contracted by 2.6% in the first six months of 2009. The inflation rate at April 2009 stood at 4.36% whereas unemployment stood at 4.7 % of labour supply. Around 28% of the gainfully occupied persons are in the public sector. The greater part of the economy is privately controlled however public utilities are provided by state controlled enterprises.

Industrial climate Malta’s modern infrastructure, flexible and educated labour supply, good work ethics, political and industrial stability and geographical location are but some of the factors that make Malta a very attractive location for industrial investment. Malta’s sectors contributing to the GDP include: services (80.6%), industry (18%) and agriculture (1.4%). The manufacturing sector consists of a mixture of large, foreign owned enterprises and numerous, smaller family run companies. Target sectors in the manufacturing industry include pharmaceuticals, electronics, light engineering, healthcare and other areas generating high value added per employee. A Government owned entity, Malta Industrial Parks, provides modern factory buildings in public industrial estates, at commercially attractive rates. All products exported to the EU have full tariff free access. Malta also benefits from trade agreements with an extensive network of non-member countries and trading blocs. The industrial sector benefits from a wide ranging fiscal incentives package. Tourism is another important sector in the local economy and accounts for around 30% of the GDP. Recent years were marked with improvements in tourist numbers and quality following the investment made in new, up market hotel properties and conference facilities mainly managed by international five star chains. In these last years annual tourist visitor levels hovered around 6


one million mark. Recent Government policy in this sector concentrated on diversification of the tourist product from the typical ‘sun and sea’ destination to the more cultural and historical destination and the establishment of niche markets. The advent of low cost carriers in these past years has helped to boost the passenger seat capacity to Malta and open up new markets. The Financial Services sector has grown significantly since it was established in the early 1990’s and today accounts for around 12% of the GDP. Government is committed to double this sector by 2015 by placing emphasis on insurance, investment services, call centers, e-commerce and others. The on-line betting industry is a new sector established a few years ago which has experienced steep growth in these last three years. Malta is estimated to host around 10% of the worlds’ on line gaming websites. Through a successful combination of various factors including a well established regulatory framework, good communications infrastructure and a skilled labor force the island is today regarded as a premier on-line gaming jurisdiction within the EU.

Transport, communications and the media Entry to Malta is either by sea or air. Malta’s international airport had a total of 3 million people passing through it in 2008. The Grand Harbour cruise liner terminal in Valletta regularly accommodates large passenger cruise liners. Malta has a Freeport terminal in the south which handles around 1.5 million TEUs annually. The island’s geographic position in the centre of the Mediterranean makes it a key player in the global warehousing and logistics chain. Malta Freeport is the third largest transshipment and logistics centre in the Mediterranean and is currently run by Marseille based CMA CGM. Public transport services include buses, mini-buses, taxis and ferries. Malta boasts an excellent communication system. Communication by post, telephone, fax and internet is of a standard comparable with the best in Europe. The island has a sophisticated telecoms infrastructure with large bandwidth networks providing high capacity to and from the country. Networks are completely digital and international connections have been expanded through satellite technology and high capacity fibre optic cables linking Malta to Europe. Malta’s mass media in 2009 included over three daily and seven weekly local newspapers, some of which are published in English. There are a number of electronic newspapers, radio stations and TV stations.

Malta stock exchange In Malta there is currently one small stock exchange operated by Malta Stock Exchange plc (MSE) which is a public limited company incorporated in Malta and licensed by the Malta Financial Services Authority to provide the services of a regulated market and a central securities depository. 7


The exchange manages the trading of a handful of important stocks of Maltese registered companies and is the marketplace for Malta’s bond market. Malta Stock Exchange Index at 30 December 2008 stood at 3208.215. The MSE currently lists 19 equities, 34 corporate bonds and 34 government bonds. There are also a number of hedge funds listed. The MSE recently received recognised exchange status from the Inland Revenue in the United Kingdom which has sparked interest in listings from foreign and local companies because of the tax relief that such status offers investors.

Entry visas and work permits Since 2008 Malta’s requirements on visas fall in line with EU policy and Schengen regulations. Malta joined the Schengen area in January 2008. Details of visaexempt countries and visa application procedures for citizens outside of the EU are available on the Ministry of Justice and Home Affairs website at: www.mjha.gov.mt. Work permits are issued in Malta by the Department of Citizenship and Expatriate Affairs and are usually granted to those who are able to contribute skills or expertise not available in the local market. Employers interested in engaging foreigners (whether EU citizens or otherwise) have to make an application to obtain the permit in respect of the prospective employee. Applications relating to EU citizens are usually fast tracked and processed in an efficient manner. Applications in all other cases are considered on a case-by-case basis. Work permits are generally valid for one year and renewable thereafter. Applications for work permits must be submitted using the appropriate form supplied by the Employment and Training Corporation (ETC), together with three passport size photos and detailed curriculum vitae.

International time Maltese time is the Central European Time (CET) which is one hour ahead of the Greenwich Mean Time (GMT). In line with the CET, Malta goes on Summer Time, which is one hour ahead of normal time, during the last week of March to the last week of October.

Miscellaneous information Weights and measures are based on the metric system. Dates are written in the sequence of day, month and year. In writing numbers, commas denote thousands and points denote fractions. 8


Business hours and statutory holidays With few exceptions, employees generally work a 5-day, 40 hour week. There are 14 public holidays in Malta which include:

New Year’s Day Feast of St. Paul’s Shipwreck

January 1 February 10

Feast of St. Joseph

March 19

Freedom Day

March 31

Good Friday

Variable

Workers’ Day

May 1

Sette Giugno

June 7

Feast St .Peter and St Paul Feast of the Assumption

June 29 August 15

Feast of Our Lady of Victories

September 8

Independence Day

September 21

Feast of the Immaculate Conception

December 8

Republic Day

December 13

Christmas Day

December 25

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Business entities Types of business entities Malta’s Company Act of 1995 is principally based on English company law and is in conformity with EU Directives. The law contemplates the following types of business entities, which under Maltese Law acquire a distinct legal personality as soon as they are incorporated and registered under the Companies Act: Limited Liability Company, which is the most preferred vehicle for doing business in Malta due to its separate legal personality and limited liability. The limited liability company can either be of a public nature (Plc) or of a private nature (Limited or Ltd). The minimum number of shareholders for a Plc and Ltd is two, however an Ltd may also be formed as a single member firm. This is allowed as long as the sole shareholder and sole director are not themselves corporate entities and the objects clause is restricted to one main activity. The Ltd company cannot have more than 50 shareholders. The Limited Liability company is formed by means of capital divided into shares. The liability of the shareholders is limited to the amount of unpaid share capital. ‘Partnership en commandite’, which is a partnership with at least one unlimited (general) partner and other limited partners. This entity has its obligations guaranteed by the unlimited and joint and several liability of its general partners and by the liability limited to the contribution of the limited partners. ‘Partnership en nom collectif’ which is an unlimited partnership where its obligations are guaranteed by the unlimited and joint and several liability of all its partners. The Companies Act also contemplates a joint venture (association en participation) which is not required to be registered and is not vested with a separate legal personality. The Companies Act provides for 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 a nominee shareholding in Maltese companies, as long as the nominee functions are exercised by an entity licensed by the Malta Financial Services Authority. A foreign entity can carry on its business in Malta through a branch that must be registered under the Companies Act. The branch is not considered as a separate entity and is not incorporated as such. The branch must be registered within

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one month of establishing the place of business in Malta and must submit the following documentation to the Registrar of Companies: • Copy of the charter of the company; • List of officers of the company; • Names and addresses of one or more individuals resident in Malta who are authorized to represent the overseas company locally; • Return with details of the branch including name, address and activities.

Share capital The minimum authorised and issued share capital in a Limited Liability Company under Maltese law is as follows: •

Private companies - 31,165 with at least 20% thereof paid up upon subscription;

Public companies - 346,587 with at least 25% thereof paid up upon subscription.

It is necessary to deposit the amount of the paid-up capital in a bank account entitled ‘Company Name – Company in Formation’ before registering the company with the Registrar of Companies. The company’s share capital may be denominated in any currency. Malta does not impose any exchange control restrictions and this facilitates the use of Maltese corporate vehicles for international business. Exchange risk is further minimised by the fact that the company’s income tax is paid in the same currency of the share capital. Any tax refunds are also given in the same currency.

Company registration The registration of a company is done by submitting the necessary documentation to the Registrar of Companies. The documentation includes the Memorandum and Articles of Association (M&A) together with an identification document of the subscribers, and proof that initial share capital has been paid up. The M&A must be signed by the subscribers or their attorneys, but need not be executed in front of a notary public. This enables subscribers to set up a company without actually having to physically come to Malta; however, due diligence documentation with respect to Know Your Client (KYC) procedures is required. The Registrar of Companies usually completes the company incorporation or registration of entities within 24 hours of receipt of all the documentation required. A registration fee is payable to the Registrar of Companies and depends on the amount of authorised share capital. The fee ranges between a minimum of 3350 and a maximum of 31,747. 11


Malta has a fully fledged trustee regime and shares in Maltese companies may be held by licensed trustees in a fiduciary capacity for and on behalf of subscribers.

Directors and company secretary The business of a Limited Liability Company is conducted by its directors, who are appointed by the shareholders. Companies must have at least one director and one company secretary. The director may be a corporate entity but the company secretary must be an individual. As a rule, a sole director cannot occupy the post of company secretary as well unless the company is a single member company. The director and company secretary, both of whom are officers of the company, need not be resident in Malta. In general, a director may not carry on any business in competition with the company and may not receive loans from the company. The Companies Act assigns various duties, responsibilities and obligations on directors who are normally jointly and severally liable for damages arising from any breach of these duties.

Shareholders meetings The general meetings of the shareholders, which must be held each year and not later than 15 months from the date of the previous annual general meeting, need not be held in Malta but may be done via a telephone or video conference. The business of an annual general meeting would normally include the consideration of the directors’ and auditors’ reports, approval of the financial statements of the company, confirmation of any dividends proposed by the directors, election of the auditors and directors (where latter hold a periodical term) and the fixing of the auditors and directors remuneration.

Financial statements Every company has to prepare financial statements which are to be audited in accordance with the provisions of the Companies Act. The directors are required to present these audited financial statements, that are to include an income statement, a statement of financial position, a statement of cashflows and any other statement and notes as required in terms of the appropriate reporting framework to the shareholders at the general meeting. Audited financial statements must be laid before, and approved by, the general meeting of the company and eventually submitted to the Registrar of Companies. A company may opt for a financial year end other than 31 December as long as the first period is not less than six months and not more than eighteen months. The time allowed for the submission of accounts before the general meeting is ten months after the financial year end for private companies and seven months after the financial year end for public companies.

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Annual statutory filing Companies must submit an annual return upon each anniversary of the company’s registration date. The annual return, which must be signed by one of the directors or company secretary, includes the following information: registered office of the company, summary of share capital and debentures, list of shareholders and particulars of directors. An annual fee which depends on the level of authorised share capital and varies from 385 to 32,000 per annum is payable, and this together with the annual return are to be submitted within 42 days from the anniversary of the registration date of the company.

Continuation of companies Continuation of companies or Redomiciliation is the process whereby a company registered in a foreign jurisdiction may opt to migrate to or be continued in Malta without the need to be wound up. Redomiciliation does not create a new entity or affect the property of the company which shall retain all its rights, assets and liabilities. In order to qualify for redomiciliation into Malta, the entity must be a “body corporate” which is similar to a company in terms of Maltese law and must be incorporated in an approved jurisdiction as may be established from time to time by the local Registrar of Companies. Furthermore the laws of the jurisdiction must allow for the migration of companies and the company must be authorised to migrate in terms of its statute or constitutive document. A company wishing to migrate should make a request to the Registrar of Companies presenting the following documents together with the appropriate registration fee: • resolution whereby the decision is taken for the Foreign Company to be continued in Malta; • statute of the Foreign Company, revised and amended to include the requirements for registration in accordance with the provisions of the Companies Act 1995; • a certificate of good standing in respect of the Foreign Company or some other documentary evidence to show that the Foreign Company satisfies the registration requirements of the country in which it was incorporated; • a declaration of solvency signed by at least two directors or two persons vested with the company’s administration or representation; • a list of the directors and company secretary (or alternatively list of persons vested with administration) of the Foreign Company; 13


• a declaration signed by at least two directors or two persons vested with the company’s administration or representation of the Foreign Company confirming certain details about the Foreign Company; • such material as the Registrar may require to ascertain that the request for migration is permitted by the laws of the jurisdiction where the company is incorporated. Should the Foreign Company be a public company or carry out activities which if conducted in or from Malta require licensing or authorisation such as companies providing Investment Services, Insurance or Credit Institutions, additional documentary and licensing requirements will apply.

Liquidation A company resolution or order of the Court is necessary to initiate liquidation procedures and dissolve the company. A liquidator is appointed by the shareholders of the company or by application to the court. Liquidation may take the form of a shareholders’ or creditors’ winding up. The former is only possible in the case of a solvent company. A company may also be wound up by the court. The Companies Act also includes provisions on company reconstructions and recovery procedures.

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Taxation of companies As a member of the EU, Malta has adopted all EU tax directives which include the parent subsidiary directive, the mergers directive and the interest and royalties’ directive.

Basis of taxation Companies incorporated under Maltese laws are automatically deemed to be resident and domiciled in Malta for tax purposes. Such companies are taxed on their worldwide income. Companies incorporated under foreign laws are regarded as resident in Malta in those cases where their control and management are exercised in Malta. These companies are subject to tax on a source and remittance basis ie. subject to tax on Malta source income (including capital gains) and on income arising outside Malta (excluding capital gains) and remitted to Malta. Companies that are not resident in Malta are taxable on chargeable income and capital gains arising in Malta, although a number of exemptions may apply in respect of certain income. Companies that are redomiciled to Malta from another jurisdiction should be considered incorporated in Malta from the date of redomiciliation and should be deemed to be resident and domiciled in Malta with effect from such date. The chargeable income of a company, which includes its taxable income and capital gains, is taxed at 35%.

Taxable income Taxable income of a company is the profit reported in the company’s audited financial statements subject to certain adjustments necessary to arrive at taxable profits. Adjustments would typically include the write back of depreciation and a deduction for statutory capital allowances, the write back of expenses that are not deductible for income tax purposes such as: amortisation including amortisation of goodwill, provision for bad debts, donations, pre-trading expenses and unrealised differences on exchange. The general rule for the deductibility of expenses for tax purposes is that expenses are only deductible when they are incurred wholly and exclusively in the production of the income. Trading tax losses incurred by the company may be carried forward indefinitely until offset against taxable profits. Capital losses may not offset trading profits; however capital losses may be carried forward and offset against future capital gains. Trading losses may be offset against capital gains.

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In the case of a group of companies, the trading losses incurred by one company may be surrendered to another company or companies within the same group. For income tax purposes companies belong to the same group when: each is resident in Malta and not resident in any other country; and one is a subsidiary of the other or both are subsidiaries of the same parent company resident in Malta. The company surrendering the losses and the company receiving the losses (claimant) must have accounting periods that begin and end on the same dates. Group relief for a particular year may only be claimed with respect to losses incurred in that same year; however once losses are surrendered, the claimant company can continue to carry them forward indefinitely or until fully absorbed. Capital losses do not qualify for group relief.

Capital gains Tax on capital gains is levied on gains arising from the transfer of securities, business, goodwill, a beneficial interest in a trust and intellectual property rights. Capital gains are added to the taxpayer’s income for the year and tax is charged on the total amount. Provisional tax is payable at the time of such transfers at the rate of 7% of the consideration. Transfers of immovable property situated in Malta are subject to a final withholding tax of 12% of the transfer value (or of the gain with respect to certain transfers). However, a transferor of immovable property may, in certain circumstances, opt to be taxed at the standard rates on the gain arising on the transfer rather than be subject to the final withholding tax. The provisional tax paid will be allowed as a credit against the tax due. A refund is paid by the Inland Revenue in the case of excess credit. Provisional tax paid on transfer of immovable property is not final except when immovable property was acquired by the transferor by inheritance prior to 25th November 1992. The capital gains are to be included in the tax return and subject to tax at the normal rates applicable. There is an exemption from capital gains tax in the case of transfers made between companies in the same group or companies controlled and beneficially owned directly or indirectly as to more than 50% by the same shareholders. Moreover, there is an exemption from tax on capital gains accruing to persons not resident in Malta (where such persons are not owned and controlled by, directly or indirectly, nor acts on behalf of individuals who are ordinarily resident and domiciled in Malta) arising from the transfer of shares in a company which is not deemed to be a property company.

Full imputation system Malta operates a full imputation system in respect of the taxation of dividends thereby avoiding economic double taxation. Under the full imputation system 16


dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profit out of which the dividends are paid. Shareholders are taxed on the gross dividend at the regular rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability. As a result no further Maltese tax is due by the shareholder on a distribution of dividends made by a company registered in Malta.

Tax accounting and tax refunds Companies are subject to tax in every year of assessment on the income derived in the preceding calendar or financial year. A company may opt to have a financial year end that is not 31 December however the approval of the Inland Revenue is required in such cases. The Maltese income tax system utilises different tax accounts for different sources of income, namely the Final Tax Account (FTA), the Immovable Property Account (IPA), the Foreign Income Account (FIA), the Maltese Taxed Account (MTA) and the Untaxed Account (UA). The attribution of chargeable income to the different tax accounts is an important aspect of the Maltese tax system as this determines the possibility of tax refunds upon a distribution of profits. Distributions from the FTA, the IPA and the UA do not give rise to any tax refunds in the hands of the shareholders; however, a distribution from the FIA and MTA entitles the shareholder to claim a refund which is equivalent to 2/3rds, 5/7ths, 6/7ths, or 100% of the company income tax. Profits attributed to the FTA include income that has been subject to a final withholding tax, profits arising from capital gains on immovable property which has suffered the property transfers tax, certain investment income and certain tax free profits. Profits attributed to the IPA are those profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, profits from the rent, accommodation revenue by hotels and similar establishments, management fees and annual rental value of immovable property in Malta. A company’s trading or passive income which is not attributable to the FTA and IPA, is allocated to the FIA or the MTA depending on the source of such income. A distribution from the FIA or MTA enables the shareholder to apply for a tax refund of the Malta tax paid at the level of the company. Shareholders are required to be registered to receive such refunds, and the extent of tax so refunded depends on the type and source of income derived by the Maltese operating company. The standard refund is equivalent to 6/7ths of the Malta tax paid in the case of income allocated to the FIA and MTA, resulting in a Malta effective rate of tax of 5%. 17


The 6/7ths refund may not be availed of in the following circumstances: a) when the dividend is paid out of profits that qualify as passive interest or royalties the refund due will be 5/7ths of the tax paid in Malta (gross of any double taxation relief claimed in Malta in respect of tax paid outside Malta on the taxed profits). The term passive interest or royalties includes interest or royalties which are not derived, directly or indirectly, from a trade or business and on which no foreign tax was suffered or any foreign tax suffered thereon is less than 5%. b) if the dividend is paid out of profits allocated to the FIA and in respect of which the company had claimed double taxation relief, the refund should amount to 2/3rds of the tax paid in Malta (gross of any double taxation relief claimed in Malta in respect of tax paid outside Malta on the taxed profits). The refund increases to 100% when the profits distributed are derived from a participating holding, A participation holding is defined as a shareholding by a Maltese company in a non-resident company or a qualifying body of persons and where it: • has at least 10% of the equity shares in the non-resident company; or • is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident company, • is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or • is an equity shareholder which invests a minimum in the non-resident company of 31,164,000 (or the equivalent in a foreign currency) and such investment is held for a minimum interrupted period of 183 days; or • holds the shares in the non-resident company for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade. Furthermore the non-resident company in question must either satisfy any one of the following three conditions: • it is resident or incorporated in the EU, • it is subject to foreign tax of a minimum of 15%, • it does not derive more than 50% of its income from passive interest and royalties;

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or, if none of the above conditions are met, the holding must satisfy both of the following conditions: •

the shares in the non-resident company must not be held as a portfolio investment; and

the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

A ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company. It is important to note that the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment. At the option of the Maltese holding company, any dividends derived from a participating holding may be omitted from the chargeable income of the company (subject to the anti-abuse provisions mentioned above) in terms of the participation exemption. In most cases, the participation exemption or 100% tax refund referred to above also apply to gains on a disposal of a participating holding even when such gains are of a trading nature. However, the anti-abuse conditions referred to above do not apply to gains on the disposal of a participating holding.

Relief of double taxation Malta grants relief for double taxation by way of treaty relief, unilateral relief (in cases where tax is suffered on income received from a country with which Malta does not have a treaty), commonwealth relief and the flat-rate foreign tax credit (FRFTC). Double taxation relief applies on the basis of the ordinary credit method on a source-by-source and country-by-country basis. The FRFTC takes the form of a notional tax credit equivalent to 25% of the income, for foreign taxes deemed to have been paid on income which is allocated to the Foreign Income Account. The income with respect to which the FRFTC is claimed is grossed up by the amount of the available credit. The grossed up income less any allowable expenses is subjected to 35% tax and the taxpayer is then entitled to a credit against the tax so determined, amounting to the amount by which the income was grossed up, but the credit shall in no case exceed 85% of the tax payable.

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The examples below illustrate the mechanics of the full imputation system applicable in Malta and the related tax refunds:

Passive Income

Having

PH

Having

No PH

Passive

PH

Interest

Trading

and

Income

claims

claims

FRFTC

FRFTC Royalties

EUR

EUR

Company Profit before tax Gross up for the FRFTC Tax thereon at 35% Credit for FRFTC Tax Payable

1,000.0 - 1,000.0

EUR

EUR

EUR

1,000.0 1,000.0

1,000.0

1,000.0

250.0

-

-

1,250.0 1,250.0

1,000.0

1,000.0

250.0

350.0

437.5

437.5

350.0

350.0

-

250.0

250.0

-

-

350.0

187.5

187.5

350.0

350.0

Shareholder Gross dividend received

1.000.0

1000.0

1000.0

1000.0

1000.0

Tax charged at 35%

350.0

350.0

350.0

350.0

350.0

Credit for tax at source

350.0

350.0

350.0

350.0

350.0

full

full

2/3rds

5/7ths

6/7ths

350.0

187.5

125.0

250.0

300.0

0%

0%

6.25%

10%

5%

Refund to shareholders Effective tax rate

Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements. The tax refund is also paid in the same currency, thus eliminating any currency exchange risks. In terms of the provisions of the income tax legislation, a tax refund must be paid by the Inland Revenue Department within 14 days from the end of the month in which it falls due. A tax refund is considered to fall due when the company’s audited financial statements (showing the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on a prescribed form, together with the dividend certificate, is submitted by the shareholder or his attorney or representative. 20


The tax refund system and the application of the tax accounting is applicable to both companies incorporated in Malta as well as foreign companies resident in Malta and registered as such with the tax authorities.

Advance revenue rulings Certainty can be sought on important aspects through the request of an Advance Revenue Ruling from the International Tax Unit of the Inland Revenue Department. Such ruling is valid for a period of five years and is renewable for a further five-year period. The ruling is not mandatory however it not only confirms the tax authorities’ interpretation but also serves to preserve the same tax treatment for two years should there be a change in legislation which may affect the company or its tax treatment.

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Taxation of individuals An individual who is both ordinarily resident and domiciled in Malta is subject to tax on worldwide income, that is, on income and capital gains arising in Malta or abroad, whether or not received in Malta. An individual, who is either resident in Malta or domiciled in Malta, but not both, is subject to tax on income arising in Malta, on income arising abroad but received in Malta, and on capital gains arising in Malta. Individuals who are neither resident in Malta nor domiciled in Malta (temporary residents) are subject to tax only on income and capital gains arising in Malta. In general, individuals are considered to be resident in Malta if they spend more than 183 days in a calendar year in Malta. Individuals are considered ordinarily resident if Malta is their habitual place of residence. A resident individual of Malta means an individual who resides in Malta, except for such temporary absences that the Commissioner of Inland Revenue believes are reasonable and not inconsistent with the claim to be resident in Malta. Residence in a foreign country does not establish non residence in Malta because an individual may be resident in more than one country simultaneously. An individual physically present in Malta for 183 days (not necessarily consecutive) in a calendar year is generally considered to be resident in that particular year, regardless of the individual’s nationality. The concept of domicile is not defined in local legislation but is a term of private international law. Individuals are normally regarded as domiciled in that country that they regard as their permanent home and to which they intend to return one day. An individual may not have more than one domicile at a time. Domicile of origin is acquired at birth and is the strongest type of domicile an individual may have. Domicile of origin may be replaced by domicile of choice if an individual has spent extensive time in another country and if it can be proved the individual has the intention to live and settle permanently in that country.

Income subject to tax An individual’s chargeable income is composed of an individual’s aggregate income from all sources, after omitting exempt items and deducting allowable expenses. Employment income Income tax is imposed on earnings from employment of office, including pensions. Employment income includes the value of any fringe benefits, determined in accordance with the Fringe Benefit Rules. Such rules contemplate that any benefit provided by reason of employment by an employer or related company to an employee or to a member of his family is deemed to constitute a fringe benefit. Some of the fringe benefits regulated by the said rules include: use of 22


a company car or car allowance, use of company property, provision of free or subsidised board and free non-business travel. No deductions are allowed against employment income. The gross amount of income (inclusive of social security contributions) earned from full-time employment and from part-time employment that is not subject to the final withholding tax of 15% (see Part-Time Income further on) is taxed at the normal income tax rates. Employment income, including the value of fringe benefits, is subject to deduction at source under the final settlement system. Self- Employment and business income Business income includes any gains or profits from a trade, business, profession, or vocation, including profits arising from the sale of any property acquired by an individual for the purpose of making a profit through a sale, undertaking or scheme. Trading profits are calculated in accordance with generally accepted accounting principles, and are adjusted to arrive at chargeable income. For details regarding allowable deductible business expenses, see Business deductions further on. Taxable self- employment and business income is aggregated with other income and taxed at the rates set out in Rates section further on. Rental income Rental income is taxed with other income at the rates set forth in Rates section below. Bank interest, license fees and rents payable may be deducted if incurred in the production of rental income. Each property is treated as a separate source of income. Losses from one property may not be offset against income from another. Allowable deductions against rental income include interest, license fees and ground rents payable. An additional 20 % maintenance allowance, calculated on the difference between rents receivable less license fees and ground rents payable, is also allowed. Investment income Investment income includes the following items: •

bank interest;

interest, discounts or premiums payable by the Maltese government;

interest, discounts or premiums payable by a corporation or authority established by law;

interest, discounts or premiums payable in respect of a public issue in Malta by a company, entity or other legal person, whether resident in Malta or otherwise; 23


capital gains arising on the disposal of shares or units in a collective investment scheme licensed under the Investment Services Act , if the collective investment scheme redeems, liquidates or cancels such shares or units; and

capital gains arising on the surrender or maturity of units and similar instruments relating to the long- term business of insurance.

Resident individuals may opt to pay 15% final withholding tax on investment income. This may be treated as a final tax at the recipient’s option, and need not be disclosed in the individual’s personal income tax return. However, the recipient may declare such investment income, and apply the normal tax rates. The recipient of investment income may inform the payor not to withhold tax. In such circumstances, the recipient must declare the investment income in his or her personal tax return and apply the normal tax rates. Interest and royalties paid to non-residents are exempt from tax in Malta, unless they are effectively connected to a permanent establishment in Malta through which the non-residents engage in a trade or business. Dividends Dividends include the following: • bonus shares; • distributions made by a partnership en commandite, whose capital is divided into shares, or by a limited liability company, to its partners or shareholders, respectively, and any amount credited to them as partners or shareholders; and • distributions made by a cooperative society to its members and any amount credited to them as members, including any patronage refund, bonus certificate or bonus shares, made, paid or allotted. Malta operates a full imputation system under which dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profit out of which the dividends are paid. Shareholders are taxed on the gross dividend at the regular rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability. The full imputation system applies to both resident and non-resident shareholders. If a dividend is paid to resident individuals out of the untaxed account (the difference between tax and accounting profits), a 15% withholding tax is imposed. This withholding tax does not apply to non-residents. Dividends paid out of profits exempt from tax under the terms of the Business Promotion Act are not taxable in the hands of the shareholders.

24


Directors’ fees Fees and remuneration received by individuals for serving on the board of directors of a corporate body are taxed at the regular rates of tax as set forth in Rates section. Part-time income Employees, pensioners and students engaged in part-time work earning up to 37,000 annually may benefit from a special rate of tax. For details, see Rates section. Taxation of employer provided share option When a company grants an option to its employees to acquire shares, such share options become taxable when the option is exercised. In this respect, the value of the said share option would be 42.85% of the excess of the price which the shares would fetch in the open market on the date of the exercise of the option over the option price of the same shares, subject to the conditions contained in the Fringe Benefit Rules. Any gain realised from the transfer of shares acquired through the exercise of a share option constitutes a capital gain and should be taxable. A number of specified benefits are exempt under certain conditions, such as health insurance and the use of a computer and related equipment. Capital gains and losses Capital gains derived from the transfer of ownership of the following assets are taxable: real property; securities; business goodwill; copyrights; patents; trademarks and trade names; or the assignment or conveyance of any rights over such property. Capital gains arising from transfers of inherited property by heirs are exempt. Taxable capital gains are included with other income and taxed at the rates set out in Rates section. Capital losses may not offset trading profits; however, capital losses may be carried forward and offset against future capital gains. Trading losses may offset capital gains. Non residents are exempt from tax on gains derived from the disposal of shares in a Maltese Company that is not primarily engaged in holding real estate property located in Malta.

Deductions Personal deductions and allowances No personal deductions or allowances are allowed against taxable employment income, except for certain deductions by expatriates employed by investment service companies and insurance companies.

25


Business deductions Self-employed individuals may deduct all expenses incurred wholly and exclusively in the production of income, including capital allowances (tax depreciation) at specified rates. To be deductible for tax purposes, expenses must be wholly and exclusively incurred in the production of the income to which they relate. Adjustments must be made to arrive at chargeable income, including the addition of disallowable expenses such as accounting depreciation, amortisation of goodwill, provisions, donations, stamp duty expenses and start-up expenses. Unabsorbed capital allowances and trading losses may be carried forward indefinitely. The rules that apply to companies also apply to individuals carrying on a business, profession or vocation.

Rates Residents The following tables present the 2009 tax rates for married persons filing jointly and single persons and married persons filing separately:

Married Persons Filing Jointly Taxable Income

Exceeding

Not Exceeding

Rate

Deduct

3

3

%

3

0

11,900

0

0

11,901

21,200

15

1,785

21,201

28,700

25

3,905

28,701

-

35

6,775

Single Persons and Married Persons Filing Separately Taxable Income

Exceeding

26

3

Not Exceeding

Rate

Deduct

3

%

3

0

8,500

0

0

8,501

14,500

15

1,275

14,501

19,500

25

2,725

19,501

-

35

4,675


The income of married persons filing jointly is taxed at the rates listed in the first table. Income tax is charged in the name of the responsible spouse, who is selected by the spouses or by the Commissioner of Inland Revenue. Both spouses must sign the tax return and both remain jointly and severally responsible. Married persons may opt to be taxed separately at the rates listed in the second table if both the husband and wife earn taxable income that is derived from a trade, business, profession, vocation, employment, office or pension. Other income, such as interest, dividends and rents, must be added to the income of the spouse with the highest earned income. Single and separated persons are taxed at the rates listed in the second table. However, if a single parent maintains a child, does not receive financial assistance from the other parent, and does not live or reside at the same house with the other parent , such person may opt to be taxed at the rates applicable to married persons. Employees, pensioners and students engaged in part-time work earning up to 37,000 annually may benefit from a special rate of tax. Income up to 37,000 derived from part-time employment is taxed at a flat rate 15% and is withheld at source by the employer. Part-time self-employed persons may also benefit from this reduced rate of tax. Recipients need not declare such income in their personal income tax return. Any part-time income earned in excess of 37,000 must be declared in the individual’s income tax return and is taxed at the normal rates of tax. Permanent residents The Permanent Residence Scheme is a scheme applicable to foreigners wishing to retire, settle or stay indefinitely in Malta. To qualify for the permanent residence scheme, individuals must meet the following requirements: • the permanent resident must have a proven net worldwide capital of 3349,000, or an annual income of 323,000. The capital need not be brought into Malta; • an applicant for permanent residency must either own a residence valued at not less than 3116,000 for a house or 369,000 for an apartment. Alternatively, the permanent resident may lease or rent immovable property at not less than 34,150 per annum; • the permanent resident must produce a certificate of conduct from his or her last place of residence; • the permanent resident may not work or otherwise engage in business and political activities in Malta; • the minimum annual income to be remitted to Malta is 313,950 per person, plus 32,300 for each dependent. 27


Permanent residents are taxed at a rate of 15% on all income received or remitted to Malta, whether from foreign or Maltese source. Such income is subject to a minimum tax liability of 34,193 after allowing for any double taxation relief that the permanent resident may be entitled to. The permit holder should not be engaged in a gainful occupation in Malta, but if he derives earned income in Malta this would be taxed separately at the standard rates applicable to other residents without a tax free portion. This is usually allowed by special permission from the Minister. Foreign employees Foreign individuals may be employed in Malta if the employer is in possession of a work permit. Such individuals are taxed on income and capital gains arising in Malta (unless exempt) and on income remitted to Malta. Foreign source income which is not remitted to Malta is not subject to Malta tax and capital gains are not taxable even if they are remitted to Malta. Returned migrants An individual born in Malta who, after emigrating, returns as a resident in Malta after an aggregate period of not less than 20 years is subject to a special tax regime similar to that of resident permit holders. An individual who takes the option is taxed on income and capital gains arising in Malta and on foreign source income (excluding capital gains) which is remitted to Malta. A returned migrant is taxed at a flat rate of 15%, with a tax free portion of 35,900 in case of a married computation and 34,200 in case of a single computation. This special regime applies if the returned migrant has received in Malta at one or more times during the year immediately preceding the year of assessment an amount of income of not less 314,000 arising outside Malta (an additional 32,400 for every dependant relative including a spouse is required) and chargeable to tax subject to a minimum annual tax liability of 32,325 after double taxation relief. Any income from a trade or business or employment income arising in Malta is taxed separately at the standard rates applicable to other Maltese residents without a tax free portion.

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Non-residents Non-residents, regardless of whether married or single are subject to tax at the following rates on income arising or received in Malta:

Taxable Income Not Exceeding

Rate

Deduct

Exceeding 3

3

%

3

0

700

0

0

701

3,100

20

140

3,101

7,800

30

450

7,801

-

35

840

If taxable income is paid to a non-resident, a 25% withholding tax must be deducted at source and remitted to the Inland Revenue Department within 30 days. Any tax withheld is credited to non resident tax payers in full against their final tax liability for the year. This withholding tax does not apply to dividends paid out of previously taxed profits (see Investment income section), to income previously subject to withholding tax under the Final Settlement System (FSS, see Tax filing and payment procedures section further on), or to interest and royalties.

Other taxes Wealth or net worth tax Malta does not impose wealth or net worth tax. Inheritance and gift taxes Stamp duty is imposed on heirs who inherit immovable property and shares. The rate of duty is 5% for immovable property and 2% for shares. Malta does not impose gift tax.

Tax filing and payment procedures The assessment year (tax year) is the calendar year. For an assessment year, income tax is imposed on income earned in the preceding calendar year (basis year). Individuals whose annual income has all been subject to tax at source, such as employment income, dividend income, and investment income, need not file an income tax return but the Commissioner of Inland Revenue will issue a statement containing the tax due, if any, based on the information available to him. 29


Individuals who have earned income not subject to tax at source must submit an income tax return together with the self-assessment and calculation of tax due by 30 June of the assessment year. Any tax due must also be paid by 30 June of the assessment year. Tax liability for employees is paid through the Final Settlement System (FSS) of withholding on salaries and wages. Self-employed individuals must make advance payments of tax, known as provisional tax, in three instalments on 30 April, 31 August and 21 December. The amount paid in the three instalments collectively must equal the total tax liability reported in the last return submitted to the Commissioner of Inland Revenue. The Provisional tax payments are credited against the total tax liability for the year in which they are paid. Heavy penalties are imposed for late submission of income tax returns and for omissions of income on which Malta tax is due. Interest at a monthly rate of 0.75% is imposed on late payments of tax.

Double taxation relief Individuals resident in Malta may benefit from other forms of double tax relief, including Commonwealth income tax relief and Unilateral relief. The flat rate foreign tax credit applies only to companies.

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Tax treaties Malta has double tax treaties with the following countries: Country

Country

Albania

Latvia

Australia

Lebanon

Austria

Libya

Barbados

Lithuania

Belgium

Luxembourg

Bulgaria

Malaysia

Canada

Montenegro

China, P.R.

Morocco

Croatia

Netherlands

Cyprus

Norway

Czech Republic

Pakistan

Denmark

Poland

Egypt

Portugal

Estonia

Romania

Finland

San Marino

France

Singapore

Germany

Slovakia

Greece

Slovenia

Hungary

South Africa

Iceland

Spain

India

Sweden

Ireland

Syrian Arab Rep.

Italy

Tunisia

Korea, Rep. of

UAE

Kuwait

United Kingdom

31


Tax treaties initialed/signed but not yet in force include the following: Country Bosnia & Herzegovina Georgia Isla of Man Jordan Oman Qatar Russia

Country Saudi Arabia Serbia Switzerland Thailand Turkey Ukraine United States of America

Most of Malta’s treaties are based on the OECD model. Once concluded, a tax treaty becomes law by Ministerial order and overrides any provisions to the contrary under Maltese domestic tax legislation. Double taxation relief is available in the terms of the relative tax treaty. Taxpayers satisfying the relevant conditions are entitled to double tax relief on income arising outside of Malta that is included in their taxable income. Relief is granted in the form of a credit. In the absence of the tax treaty double taxation relief is still available under the unilateral relief provisions for foreign tax incurred on income arising outside of Malta. Companies may, subject to certain conditions, claim double taxation relief under the flat rate foreign tax credit instead of other forms of double tax relief. This may be especially beneficial in those cases where the foreign income has been exempt from tax or taxed at a reduced rate.

Withholding taxes The normal treaty rate on dividends paid by Maltese companies is the company rate of tax of 35%. Malta operates a full imputation system on the dividends paid which means that the shareholder is eligible to a credit in respect of the tax paid by the company. As a result company profits are taxed only once and no further tax is payable by the shareholder on distributions. Under Maltese law dividends paid to non-residents are not subject to withholding tax. Interest and royalties paid to non-residents are exempt from tax in Malta if they are not effectively connected with a permanent establishment in Malta through which the non-residents engage in a trade or business. As a result of these rules, the withholding tax on dividends, interest and royalties paid to residents of treaty and non treaty countries is 0%.

32


No tax is payable by non-residents on capital gains tax arising on transfers of company shares or securities except where such gains result from the transfer of shares and securities of companies whose assets consist primarily of immovable property situated in Malta.

33


Indirect taxation Indirect taxes in Malta include the following: • Value added Tax (VAT) chargeable on supplies of goods and services made in Malta for a consideration in the course of business. The Maltese VAT system is fully harmonised with the EU VAT regime except for certain derogations negotiated by Malta during its accession process and which are included in the Treaty of Accession. VAT is charged at the standard rate of 18%. Reduced rates of 5% or 0% apply in respect of certain supplies; • Import duty levied on imports coming from outside the EU. The rate of duty varies and depends on the type of product imported. Exemptions apply including exemptions on temporary importations; • Excise duty charged on manufactured tobacco, mineral oils and alcohol produced or imported in Malta; • Stamp duty which is a duty on documents and transfer chargeable on a number of transfers and transactions including transfers of property, marketable securities, insurance policies and auction sales. Exemptions apply in the case of transfer of immovable property between group companies and transfer of shares in a restructuring process within a group; • Eco contribution tax levied on certain imported and/or manufactured goods that result in waste. The contribution is calculated at different rates depending on the type of product and is payable by the importer or manufacturer of the goods concerned; • An oil bunkering tax at a flat rate per metric tonne is charged on the bunkering of certain fuel oils used for ships and their machinery and supplied free from customs and other duties; • Motor vehicle registration tax charged upon the vehicles first registration in Malta. Rates of tax depend on a number of factors relating to the vehicle including the amount of CO2 emissions, particulate matter, age and value. Winnings from gaming are not subject to tax in the hands of the recipient. A gaming tax however is chargeable on gaming operators which require a licence from the Lotteries and Gaming Authority (LGA).

34


Investing in Malta Malta is a prime location for foreign direct investment (FDI). The island’s accessibility, advanced communication systems, adequate and flexible labour supply, high work ethics, tax and fiscal incentives and political stability are but some of the main advantages. The World Investment Report 2008 lists Malta as 3rd worldwide on its inward performance index and considers the country a front runner on inward FDI performance and potential. Malta offers a highly competitive investment location for niche manufacturing and services, particularly in the following industries: generic pharmaceuticals (Malta adopted the Roche Bolar provisions in its patent legislation), medical, biotech, automotive, film, maritime services, contact centers, aviation services, ebusiness and iGaming, back office services, electronics and software. Malta offers investors a comprehensive package of incentives under the new Malta Enterprise Act (MEA) and the Business Promotion Act. Incentives include soft loans, investment allowances, training grants, tax incentives and the provision of ready built specialized factory space. There are specific incentives aimed at encouraging activities in the growth targeted sectors that include: pharmaceuticals, plastics, biotechnology, electronics, electrical equipment and ICT enabled. Special incentives have recently been launched for firms engaging in research and development (R&D) activities. The granting of these incentives is subject to the approval of the Malta Enterprise Corporation, an autonomous government agency. In appraising a proposal the following factors are considered: viability, processes, amount of capital investment, sources of finance and employment to be generated. The island is committed to bolster its financial services sector and has a declared target for the sector to contribute 25% (from the current 12%) of the GDP by 2015. In summary Malta’s main fiscal advantages include the following: •

does not levy any withholding taxes;

has no thin capitalisation rules or debt-to-equity ratios;

has no specific transfer pricing rules;

has no capital duty and wealth taxes;

has no stamp duty on share transfers in companies owned by nonresidents;

35


36

non residents are exempt from any capital gains on certain share transfers;

has an extensive treaty network with fifty treaties in force and a number of other treaties in the process of ratification;

as an EU Member State Malta has adopted the EU’s Parent-Subsidiary Directive and the Interest and Royalties Directive;

under the continuation (re-domiciliation) provisions it is possible to migrate companies into and out of Malta without the need of winding up;

no exchange control regulations and business may be conducted freely in any currency;

Malta’s financial services legislation and tax laws are compliant with EU directives;

has strong and effective anti-Money Laundering Laws and Regulations in line with the pertinent EU directives;

Malta’s legislation offers regulated professional trustees which may provide fiduciary and trust services;

provides local companies with passporting rights to other EU and EEA areas making it an attractive location for captive insurance and fund management firms.


Employment Malta’s greatest asset is its resourceful, competent and energetic workforce. The island’s labour force that amounts to around 165,000, is renowned for its marked ability to learn and adapt itself to new techniques. Education is compulsory in Malta up to the age of 16 years.

Labour legislation The Employment and Industrial Relations Act is the main law that regulates employer and employee relations and deals with conditions of employment, contracts of employment or service and organisation of workers and employers. The Act contemplates two main types of contract of employment or service namely indefinite and definite contracts. The latter would stipulate employment for a defined period of time. If an employee with a definite contract of employment remains in employment in the same position for more than four years than his/ her contract of employment automatically becomes an indefinite contract of employment. The first six months of every contract of employment or service is deemed to be a probationary period unless the parties concerned agree on a shorter period. In the case of technical, executive and managerial grades where salaries are more than double the minimum wage the probationary period is of 12 months unless agreed otherwise. The law provides for 24 days of vacation leave. Maternity leave for female employees on full time employment is of 14 weeks. The law also provides for up to three months unpaid parental leave in the case of birth, adoption or legal custody of a minor. As from 1st January 2010 the national minimum wage per week is 3152.30. Employers must also pay annual statutory bonuses amounting to 3512.46 to every full time employee or a pro rata amount in the case of part time employees that work at least 20 hours per week. Every employer is obliged to increase wages and salaries by an annual cost of living increase (COLA) as determined by Government on the basis of movement in the retail price index. There are Fringe Benefit rules regulating the taxation of fringe benefits and other perks that may be given to employees. Fringe benefits would normally include free or subsidised meals, transport, health insurance, lodgings, telephone bills and use of a company car. The rules provide for the valuation of the taxable amounts arising from these benefits. Other labour related legislation includes The Employment and Training Services Act which regulates training schemes and apprenticeship and The Occupational Health and Safety Authority Act which deals with health and safety at the 37


workplace and holds the employers responsible to grant protection against risks and accidents at work. EU Directives related to employment have been transposed into Maltese Law.

Unions Workers are not obliged to join a trade union; nevertheless more than a third of Malta’s total work force is unionised. Local legislation gives unions wide latitude of immunity for industrial action resulting out of trade disputes. Despite this industrial disputes are not common in Malta. When the majority of a company’s workforce joins a union collective bargaining is done and agreements reached between employers and unions are binding at law. Professional and managerial grades are normally not unionised and are regulated by individual contracts of service.

Social security Contributions All employees qualify for a retirement pension under the Social Security Act based on their individual social security contributions. All employed and selfemployed individuals must pay social security contributions. Employers pay social security contribution at a rate of 10% of the basic wage paid to their employees, subject to a maximum amount of 332.91 per week per employee. Employees pay another 10% of basic wages, subject to the same maximum. The employer deducts this amount before providing the net payment to the employee. The maximum contribution for persons under 18 years of age earning the minimum wage is 36.62 per week. The employer must remit the amount due to the Commissioner of Inland Revenue by the end of the following month in which the wages or salaries are paid. For self-employed individuals, the contribution payable is 15% of their earnings or income subject to minimum and maximum rates of 326.37 and 349.37 per week respectively. Coverage Maltese citizens receive free hospitalisation services and financial aid benefits for unemployment, illness, work injury, disability, old age, early retirement, marriage, maternity, children, widowhood and medical care. All employees who pay a minimum level of social security contributions are entitled to a basic pension on retirement. At present the Maltese pensions system is being reformed through the pensions Reform Act XIX of 2006 to make the system more sustainable in view of the increasingly aged population. Pensionable age has increased from 61 (60 in case of females) to 65 for all those born after 1st January 1962. The reform Act 38


provides for the establishment of second and third pillar pension systems, that is, a mandatory second pension and a voluntary third pension. However the rules governing the application of these pensions have still not been made out.

Termination of employment If a definite contract of employment is terminated by either the employer or employee before the term of the contract without good and sufficient cause then the terminating party is liable to pay the other party half of the salaries that would have been due in respect of the unexpired period. In the case of an indefinite contract of employment an employee may terminate the contract at any time without providing any reason; however he/she must give a notice of termination ranging from 1 to 12 weeks depending on how long the person has been in employment. An employer can only terminate an indefinite contract of employment if it is still in the probationary period or in cases of redundancy or a good and sufficient cause. Notice periods apply in all cases and depend on the duration of the employment. If the employer fails to give the required notice period, than the employer is liable to pay the employee the full wages for the notice period.

Employment of foreigners Foreigners, whether EU citizens or otherwise, require a work permit. These are normally issued in those cases where the skills, qualifications and experience required could not be sourced locally. Applications for work permits are made by the prospective employer. In the case of EU citizen the work permit is normally a formality and is processed within a couple of weeks. Work permits in other cases usually take longer to process. Each application is considered on a case by case basis.

39


Accounting and audit requirements The Companies Act requires every company to keep proper accounting records that explain its transactions and facilitate the preparation of financial statements. The records of accounts are usually kept at the registered office or some other office as decided by the directors of the company. If accounting records are kept outside of Malta than financial statements and returns must be sent and kept at a place in Malta. These financial statements and returns must disclose with reasonable accuracy the financial position of the company at intervals not exceeding six months. The directors of the company are obliged to furnish the shareholders with a set of financial statements on an annual basis. These financial statements are to comprise the balance sheet as at the last day of the accounting period to which they refer, the profit and loss account for that period, the notes to the accounts and any other financial statements which may be required by generally accepted accounting principles. Generally accepted accounting principles and practice mean: (a) for financial reporting periods commencing on or before 31 December 2007, adherence to International Financial Reporting Standards (IFRS); and (b) for financial reporting periods commencing on or after 1 January 2008, adherence to IFRS as adopted by the European Commission in accordance with the provisions set out in Article 3 of Accounting Regulation 1606/2002; and (c) for entities that meet the relevant eligibility criteria, compliance may also be achieved by adherence to General Accounting Principles for Smaller Entities (GAPSE), which may be applied by a qualifying entity for financial reporting periods ending on or after 1 January 2009. GAPSE may be applied by entities not exceeding any one of the following for a consecutive two-year rolling period: •

Revenue (annualised):

•

Total assets:

•

Average number of employees:

335 million 317.5 million 250.

A different set of thresholds apply to state-owned entities. The GAPSE accounting framework provides for a number of measurement simplifications and disclosure relaxations when compared to IFRS as adopted by the EU.

40


Audit of financial statements Every company incorporated in Malta is required to appoint independent auditors that are registered with the local Accountancy Board and hold a certificate to practice as auditors. Auditors in Malta must follow the International Standards of Auditing (ISA) issued by the International Federation of Accountants (IFAC). Auditors are required to report to the shareholders on every set of financial statements furnished at a company’s annual general meeting. The auditor’s report must state whether, in the auditor’s opinion, the accounts have been properly prepared in accordance with the Companies Act and IFRSs as adopted by the EU, or GAPSE, as applicable, and whether these accounts give a true and fair view of the affairs and results of the company. With the exception of the company’s initial auditors who may be appointed by the directors, auditors are appointed at the Annual General Meeting (AGM) to serve until the next AGM. Auditors are entitled to attend all general meetings of the shareholders and to receive all notices of and other communications relating to any general meeting that a shareholder is entitled to receive. Companies are required to file with the Registrar of Companies a copy of the annual financial statements presented at the AGM and of the directors’ and auditors’ reports thereon within 42 days from the end of the period for submitting annual financial statements to the general meeting. Such periods are normally ten months after the end of the relevant accounting reference period for private companies, and seven months after the end of that period for public companies.

Abridged accounts Companies that qualify as small according to provisions included in the Companies Act may also opt to fulfil the requirement to file annual financial statements to the Registrar by filing abridged accounts. Such accounts are prepared by the directors from the full set of financial statements described above, and must be accompanied by a special auditor’s report to the directors stating whether in their opinion the company is entitled to those exemptions as claimed in the directors’ statements, and whether the documents to be proposed to be delivered are properly prepared. The original auditor’s report to the members must also be included. Abridged accounts do not signify adherence to a separate reporting framework. Nonetheless, the disclosures required, which are specified in the Companies’ Act, are much less onerous, particularly with regard to the profit and loss account, the explanatory notes and the dispensation from the requirement to present a statement of cash flows. 41


Generally, abridged accounts may be drawn up by small companies that on their balance sheet date do not exceed the limits of two of the following three criteria:

42

Total assets:

32.56 million

Turnover:

Average number of employees:

35.12 million 50.


About RSM Malta Our vision “To be the partner for success to active growing enterprises” We want to help our clients and staff fulfill their aspirations. Achieving our vision requires the highest levels of passion, performance and professionalism. Our vision for the future is supported by an integrated set of core values and business principles.

Our values Integrity – We call it as we see it. We strive to give straightforward advice based solely on our desire to see the client succeed Trust – We commit ourselves to establish long – term relationships by earning our client’s firm belief in our honesty Caring – We understand our clients concerns and the relationship that leads to their success Competence - We seek to achieve and maintain abilities to provide solutions by having in – depth knowledge Continual Learning – We work hard to keep our knowledge current and to keep abreast of developments

Our staff The difference is our people Our people have a certain energy and noticeable enthusiasm for what they do. The firm employs professionals with backgrounds in finance, taxation, corporate law and information technology. Our staff knows how to build strong working relationships with clients and is trained and experienced to provide objective guidance and help clients to succeed.

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We value and reward the sharing of knowledge in the firm, giving our staff the opportunity to leverage their skills in a successful way. In turn, our clients benefit, as we help them harness the power of knowledge in their own entities – driving towards performance improvement.

Our services We have specialists in the different service lines that we provide to ensure that our clients are getting the best possible advice and practical solutions to enable them to succeed. Our firm provides the following services : Assurance • Financial Statements Audit • IFRS Reporting • Internal Audit • Reviews and Agreed Upon Procedures • Financial Due Diligence • IT Audit Business advisory • Business Valuations • Merger and Acquisitions • Project and Corporate Finance • Modelling and Business Planning • Feasibility Studies Tax and corporate • International Tax Planning and Restructuring • Compliance and Consulting • Tax Litigation • Company Formation and Fiduciary Services • Company Management and Administration • Company Secretarial Services • Liquidation Back office and IT • Accounting • Payroll • Completion of Statutory Returns • IT Strategic Planning • IT Effectiveness

INTEGRITY • TRUST • CARING • COMPETENCE • CONTINUAL LEARNING

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RSM Malta Cobalt House, Level 2, Notabile Road, Mriehel BKR 3000, Malta. T (+356) 2149 3313 F (+356) 2149 3318 E info@rsmmalta.com.mt www.rsmmalta.com.mt International contact partner: Maria Micallef E maria.micallef@rsmmalta.com.mt The firm is a member of RSM International one of the largest network of independent accounting and consulting firms each of which is independently owned and managed and practices in its own right. RSM International does not exist in any jurisdiction as a separate legal entity. The network is administered by RSM International Limited, a company registered in England and Wales whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

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