Malta Offshore Business Sectors:

In the late 1980s, and spurred on by the high unemployment and other financial woes that followed the departure of the British, the Maltese Government set about creating an offshore sector and becoming more welcoming to external investment by passing the International Business Activities Act 1988 under which the Malta International Business Authority was set up to develop offshore business sectors.

Alongside this initiative, the Malta Development Corporation began to offer a range of very attractive investment incentives. Initially the accent was mostly on employment creation in manufacturing and shipping rather than the development of a financial services centre; but this has gradually changed, and there is now a modern legislative structure for most of the main financial sector activities.

In April 2001, the government amended the Industrial Development Act to incorporate new incentive packages to boost existing and new investment, primarily in the manufacturing sector which employs over 30,000 people and which, together with tourism and the services sector, is a key element of Malta's economy.

The incentives on offer no longer depend on whether a company exports or not. They are meant to promote productivity growth regardless of where the product is sold. The new package contains not only new tax incentives, with reduced rates of corporate tax which start from 5 per cent and move up to 15 per cent over a 15-year period, but also investment tax credits, a value added incentive scheme, special provisions for small businesses, and other incentives related to training and job creation.

These incentives will not only be available to prospective investors, but also to existing ones ensuring that all companies can retain and increase their investment in Malta.

Following Malta's acceptance into the EU in 2004, the European Commission described seven 'harmful' tax measures that it wants the Maltese government to abolish as part of its attack on tax measures in the ten acceding nations that it fears will distort the single market.

The first three measures identified by the Commission concerned offshore trading and non-trading companies, offshore insurance firms and offshore banking companies. In fact, Malta acted to abolish 'offshore' companies as such in 1996, although a transition period allowed the continance of existing companies until 2004.

Other measures singled out by the Commission as harmful include International Trading Companies, which create an effective tax rate of 4.2% for non-residents, the beneficial tax treatment of dividends from companies with foreign income, the tax treatment of Investment Service Companies, and the deferral of tax on foreign income for non-resident companies.

In August, 2003, after Malta had already signed its accession treaty to the EU, the European Commission attacked a number of other features of Malta's tax regime, including International Trading and Holding Companies, as part of the EU's Harmful Tax Practices campaign. It is unclear whether the Commission will be successful in its attack; the Maltese government has indicated that it does not agree with the Commission's position.

In March, 2006, the European Commission formally requested Malta under EC Treaty state aid rules to abolish the tax regime for Maltese Companies with Foreign Income (CFI) and the International Trading Companies’ (ITC) regime by the end of 2010 at the latest.

Competition Commissioner Neelie Kroes observed that: “The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy”.

In May, the Maltese government formally decided to gradually abolish the existing aid schemes.

Due to its extensive network of double tax treaties with almost all the important OECD countries, Malta is often chosen as a base by firms needing to set up an offshore holding or investment company, or trading subsidiary.

Malta’s financial services sector continued to expand throughout 2004, attracting considerable interest from international sources. During 2004, the MFSA issued around 50 new licences for financial services operators, while the Registry of Companies had registered over 2,000 new companies in the first 11 months of the year, around 500 of which have a foreign shareholding.

This section of the site describes the most important types of offshore business activity carried out from Malta.

Malta Trade Marketing and Distribution:

Malta's offshore taxation regime doesn't stand out particularly among its competitors, even before the EU attacked it, but the island does have some considerable advantages, including its geographical location, its extremely well-equipped ports and Freeport, its quite well-developed manufacturing infrastructure, its network of double tax treaties, and its relatively sophisticated, European business environment.

Thus, a substantial number of companies involved in the trading or distribution of FMCG and other physical goods use Malta as a trading base for the Mediterranean, Southern European and North African region. Although offshore enterprises may not trade within Malta itself, they are allowed a wide range of storage, processing, procurement and sub-manufacturing activities whether inside or outside the Freeport.

Malta does not suit everyone as a physical supply base, but that does not prevent companies from establishing marketing or holding companies in Malta, and very many do so. The combination of Malta's double tax treaties with the 4% effective tax rate on International Trading Company profits is very attractive, as long as the regime remains in force (until 2010). See below, Financial Holding and Investment Activities.

Along with other offshore jurisdictions, Malta is a suitable place in which to base e-commerce services for retail or wholesale distribution of material or non-material goods: see Offshore-e-com.com for extended descriptions of how such businesses can take advantage of the combination of offshore and e-commerce.

Malta Licensing Royalties and Franchising:

A frequent feature of international trade and investment, particularly as between advanced and less advanced countries, is the transfer of technology or 'brand' or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties and favourable offshore taxation regime, Malta is a suitable place in which to locate an intermediary International Holding Company company to handle payment streams which might otherwise be highly-taxed in the receiving country.

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low withholding tax. The income received in Malta will be taxed after deduction of expenses at 12% or less, and where there is a 10% participation, possibly at a nil rate (see Offshore Legal and Tax Regimes and below under Financial Holding and Investment Activities for comments on the tax treatment of repatriated Maltese profits in Western countries).

Malta Financial Holding and Investment activities:

Many international investors choose Malta as the location for financial holding and investment companies, using the International Holding Company form, due to the jurisdiction's combination of tax treaties and low-tax offshore regime.

Investment into most of the leading OECD economies benefits from low treaty withholding tax rates. Often it would be best for the investment to have a high debt component, since the interest is normally a charge against profit in the destination country, and the treaty rates of withholding tax on interest payments are normally lower than the withholding rate on dividends, except in some cases where there is a major (usually means 25%) participation.

Whatever the mix of interest and dividends, the income once in Malta will be taxed after deduction of expenses at an effective rate of 12% or less, and if there is a 10% participation by the Maltese company the rate will be zero as long as the profits are distributed onwards to non-resident persons. Distributions to some countries will benefit from tax-sparing credits. US investors will be able to mix low-tax Malta income with high-tax income, avoiding wastage of tax credits; and even for countries like the UK which have rules on the attribution of profits from Controlled Foreign Corporations there are benefits to be got from careful planning of international financing structures.

Malta Banking:

Maltese banking is now conducted according to the Banking Act 1994 (for credit institutions aka commercial banks) and the Financial Institutions Act 1994 (for non-lending institutions, mostly meaning foreign exchange bureaux). This legislation conforms to current EU banking directives.

'International Banking Institutions', seven of which were licensed as offshore companies under the Malta International Business Activities Act 1988 now have to convert to 'credit institution' status under the Banking Act. Incoming banks are now licensed only under the Banking Act. With the gradual abolition of exchange controls, there now remains little distinction between 'international' and 'local' banks, or between 'offshore' or 'onshore' banks.

Maltese and foreign banks are supervised by the Malta Financial Services Centre; minimum capital for a new bank is 5 million euros. Foreign banks may operate through branches, but are still subject to supervision by the MFSC.

The Maltese banking sector has remained largely a domestic affair, with only a small number of foreign banks establishing themselves on the island, for a combination of reasons. Given Malta's EU application, the arrival of HSBC and the growth of mutual fund listings on the Stock Exchange, it would not be surprising to see more international banking activity in Malta in the near future.

The powers of the Malta Financial Services Centre could be extended in the near future to enable it to become Malta's first single financial services regulator. Preliminary discussions have taken place on the Island involving the government, Malta Stock Exchange, Central Bank and the Financial Services Centre.

In November, 2002, the Bank of Valletta launched a range of Internet banking services. Chairman Joseph Zahra said that the new channels were the result of more than two years of hard work, and they would provide more convenient ways to access BoV accounts, using the latest technology and security.

"These new channels empower customers to such a high degree that, over time, they will revolutionise the way customers conduct their banking transactions," he said.

Malta Investment Fund Management:

Investment Funds in Malta are licensed by the Malta Financial Services Centre under the Investment Services Act 1994. Licensed funds are exempt from taxation, although they can choose to pay tax at 25%, in which case generous deductions can be claimed against income and the fund has access to Malta's network of double taxation treaties (see Offshore Legal and Tax Regime.and Double Taxation Treaties.)

The investment fund sector in Malta is quite small. However, the growing success of the stock exchange in attracting mutual fund listings may well lead to an increase in the number of funds actually based in Malta.

In January, 2006, the Malta Financial Services Authority licensed its two largest hedge funds to date, reinforcing the jurisdiction's emergence as a well-regulated financial services jurisdiction of international stature.

The MFSA granted licences to Altma Fund SICAV plc, which has 29 sub-funds, and NBCG Fund SICAV plc, which has 7 sub-funds, to operate as Professional Investor Funds promoting to Qualifying Investors.

Both schemes have been set up as investment companies with variable share capital in terms of the relevant provisions of the Companies Act.

The newly-licensed funds bring the total of Malta-based, Professional Investor Funds (including sub-funds) to 58, and the MFSA has said that it is currently considering licence applications from a number of other funds.

The regulator is also working on new Professional Investor Fund Guidelines in an effort to improve the existing legislative framework.

Malta Ship Management and Maritime Operations:

Malta is one of the top ten shipping registries worldwide. The original Merchant Shipping Act 1973 based on English law has been adapted and modernised in 1986, 1988 and 1990; and further improvements are planned. The Merchant Shipping Directorate of the Malta Maritime Authority supervises the sector and has developed a world-wide network of surveyors and inspectors. Malta adheres to all the major international maritime conventions.

The Maltese registry accepts all types of vessel, from pleasure yachts to oil rigs. Bareboat charter registration is allowed both of foreign ships under the Maltese flag and of Maltese ships under a foreign flag. There are no restrictions on the nationality of crew in Maltese law, and no age limit for ships. The shipping laws are flexible with regard to sale or mortgaging of ships.

In 2005 the Maltese registry contained a total of 1,148 ships (1,000 GRT or over) of 22,791,072 GRT (36,951,514 DWT). By type the ships consisted of: 420 bulk carriers, 311 cargo vessels, 93 chemical tankers, 8 combination bulk, 8 combination ore/oil, 57 container ships, 8 liquefied gas carriers, 2 livestock carriers 2, 1 multi-functional large load carriers, 9 passenger ships, 1 passenger/cargo vessel, 144 petroleum tankers, 40 refrigerated cargo vessels, 32 roll on/roll ferries, 6 short-sea/passenger vessels, and 15 vehicle carriers.

In January, 2006, Malta was one of four flag states that attained the highest quality ranking following the Paris Memorandum on Port State Control's latest inspections.

The Paris MoU “White List” represents quality flags with a consistently low detention record. Finland, France, Isle of Man, and the United Kingdom, are placed highest in terms of performance. Azerbaijan, Belgium, Cyprus, Gibraltar, Malta, Saudi Arabia and Spain are new to the White List. In all, the White List includes 34 flag states, 3 more than last year.

In order to register a ship in Malta, it must be owned by a company incorporated in Malta. In most circumstances, Maltese shipping companies are exempt from taxes. See Offshore Legal and Tax Regimes and Law of Offshore for further details.

updated: 16.07.07.