Setting Up in Malta – A Business Guide

Why set up in Malta

The concept of an island paradise is often a radiant wonder for most travellers; the thought of winding away the weekend on the beach as the sun descends under the horizon is the making of sublime memories. However such concept is often also intertwined with the stigma of high taxation, poor economy and narrow industrial portfolios.

Malta is an anomaly to this rule.

Taking advantage of a strong geographic position between three thriving economies; the possibilities and security of membership to the European Union; and a strong growth of GDP amid a time of global recession, Malta offers a cost effective jurisdiction to conduct business affairs.

Legal Implications of Setting up in Malta

Maltas legal system is primarily based on Roman law but has evolved through interactions with Common Law nations – Malta has a liberal spirit and a strong rule of law. As a member of the European Union, Malta has synchronised its laws to the European Aquis and offers the protection of the European system to all its settlers.   In addition to the free movement for EU members, Malta is party to the Schengen Agreement which allows free movement of persons to its members – Malta can include two-thirds of the European Economic Area and European Free Trade Association freely into its borders. This culminates in a wider number of countries enjoying visa free travel to Malta.

For those nations outside of these agreements the visa process in Malta is not burdensome with a liberal visa process and residence permit.   Maltas industry benefits from the business planning and expansion plans of the EU with the protection of a multi-national regional system with incentive payments to industry through the cohesion fund, and through multi-national opportunities through research grants and projects which share the burden of research projects between partners and increase links and cohesion between states.    Malta joined the single European currency in 2008 making inter-European transactions easier and cheaper. Through the Euro the commission charges which used to delay transactions are nullified between two Euro adopting countries, this benefit has been estimated at a 1% GDP saving. The savings can be increased through the greater security with the removal of fluctuations in the exchange rate which maintains the profitability of exports and increases trust between trade partners for regularly maintain fair price structures and for investor confidence in the market.

Maltas national regulations and legislation are based on market liberalism and through the Investment Services Act, the Companies Act and the Competition Act the legal framework to ensure fair practice and competition whilst promoting investment has been achieved.

The Investment Services Act regulates investment business in Malta including the management, advice and administration. To protect the industry and hence the consumer the Malta Financial Services Authority provides licences for companies to operate in this sector.

The Companies Act and Competition Act provide the legal framework to administer mergers and the transposition of EC Directive 2005/56/EC cross-border mergers are administered by setting up the conditions to test the fairness of the merger on a European level. The taxation of the merger is defined by the Directive on a common system of taxation on mergers, transfers of assets and exchanges and so eliminates tax obstacles which may arise through the different tax systems. These protections may be the influence behind Maltas high performance on inward FDI flows performance.

Although largely dependent on FDI Malta has a positive track record of its efficient use. The legislative framework provides the protection for potential investors through anti-money laundering legislation and high professional secrecy. However the most intriguing aspect of Maltas FDI inflows are based on the varying portfolio of industries that are investing – from simple manufacturing operations to high value outputs in pharmaceuticals, ICT and electronic goods.

Tax Implications of Setting up in Malta

Malta offers a liberal tax regime and recent enactments have provided greater flexibility for (specific) sectors to benefit form a more favourable tax regime. Maltas corporate tax rate is at a very competitive 35% of worldwide income, and shareholders can claim a refund of six-sevenths of the tax the company paid to Malta. (vide Malta Company Tax System).

The main national Acts which benefit business are the Malta Enterprise Act, the Business Promotions Act and the Income Tax Act.

The Malta Enterprise Act encourages investment in Malta through a number of schemes, including investment tax credits which provide a credit on the companies expenditure on tangible fixed assets and development of intangible assets or as a percentage of wage costs of the first two years of any job created through an investment scheme, that can then be deducted from the tax due.

The Business Promotion Act promotes foreign investment by widening the range of qualifying sectors than its predecessor and increasing the amount of incentives, specifically for sectors demonstrating growth and employment potential. The industries that are benefiting the most are manufacturing and software development, repairs, and maintenance works.   The Business Promotion Regulations provides sector specific tax incentives for businesses in pharmaceuticals, plastics, biotechnology, electronic and electrical equipment, including reductions in income tax which are staggered based on duration of operation, starting at 5% for the first seven years and can increase up to 15%. Profits that are utilised for financing approved projects can get a lower tax rate of 15.75%, a saving of over half the usually 35% corporate tax rate.   Expanding companies can benefit from the Business Promotions Act with a 50% tax deduction on the purchase of certain machinery and a further 20% of qualifying buildings and premises, and also where an employee falls within the criteria they can have a deduction from the chargeable income over 100% of the relative wage cost.

The Income Tax Act also provides reduced tax rates for foreign business and investors. Malta is party to over 60 Double Taxation Agreements in all geopolitical regions and includes agreements with nations like Australia, Canada, China, Egypt, France, Germany, India, Libya, UAE, UK, and the USA.   The Flat Rate Foreign Tax Credit is available for tax that was paid outside Malta and where the foreign income is deemed to have suffered foreign tax equivalent to 25% of the income received in Malta. The Income allocated to the foreign account is grossed up to 25% and taxed at 35%, and from the sum of which 20% is given as a credit against their tax liability.

Taking up Residence in Malta

The Malta Permanent Residence Scheme is probably the most attractive residence scheme currently available to individuals seeking to transfer their tax residence overseas to more attractive jurisdictions that are warmer in climate, enjoy a high standard of living, provide a safe environment for younger and older members of the family and a provide a scheme for permanent residence that is selective, affordable and tax friendly.  Malta ticks all the boxes for an attractive permanent residence jurisdiction and occupies the highest positions in respected international indexes  for quality living and retirement.

The financial qualifications are easy to satisfy and permanent residents are entitled to the various benefits, including no minimum stay requirements; a low annual tax liability of a mere EUR4,230 (approx. US$4,900) [more]; no world-wide income/wealth tax – tax only paid on income remitted to and kept in Malta; no need to purchase property – only a minimum annual rent of EUR4,230; no minimum investment requirements and no Inheritance/Wealth Taxes.

Settling in Malta is highly beneficial with an advanced healthcare system, simple relocation prospects and lower tax rate. Malta is categorised as Very High in Human Development by the Human Development Index and the New Economics Foundation rates Malta as the 40th best country in the nexus of environmental sustainability and human well-being.

The Malta Permanent Residence Scheme was passed with the aim to attract high net worth people to Malta by transferring their tax residence to a venue more conducive to their needs coupled with the natural enticements of the Mediterranean. The attractiveness of this scheme is down to a wide plateau of benefits, including no minimum stay requirements, low annual tax liability of 4,230, no world-wide income or wealth tax, no minimum investment requirements, and no inheritance taxes.

However, an entrant to Malta can also apply under the Ordinary Residence Permit which has low financial qualifications and bestows its own bill of benefits for people wishing to transfer their tax residence from a high-tax one to Malta, including no minimum stay requirements, no requirement to purchase property, no world-wide income or wealth tax, no minimum investment requirements, and no inheritance taxes.    Maltas property costs are relativity low in comparison to the rest of Europe and buying property in Malta is a fairly simple and swift process for non-residents and is based on a permit system based on the minimum value and description of the property, as follows: Minimum value 113,000 villa or house Minimum value 67,800 Apartment, flat or maisonette In addition the non-resident can apply for a mortgage in the Maltese Islands.   It is becoming also very popular for historical buildings to be renovated and restored to their former glories. Historical properties in Valletta, Senglea, Cospicua and Vittoriosa are amongst the most prestigious on the island.

On the other hand, a non-resident of Malta can only be taxed on chargeable income and capital gains which arise in Malta and is exempt from tax on world-wide gains.

Malta’s Business Environment

The Maltese business environment is one that has been marked by change and diversification. From an agrarian base Malta has expanded into bio-technology, pharmaceutical, healthcare, engineering, logistics, aviation, maritime, electronics, hospitality, ICT and software development, and financial services.   Intense infrastructural development and educational investment has provided Malta with a strong core for business development and progress. Good communications through air connections and maritime ports strategic position in the Mediterranean coupled with a modern transportation system with a Freeport and frequent air link to Europe, North Africa and the Middle East, right in the centre of a strong localised hub of activity coupled with a modern developed telecommunications system with wireless internet connections, VOIP,

WiMax and 3G.   To do business in Malta numerous types of company set-ups are permitted. The liberal legal system permits the definition of a company to include overseas branches of a foreign company set up in Malta and also companies that are neither incorporated nor resident in Malta if they register with the local tax authorities.   Outside of serious health risks most imports are unrestricted and companies that require raw materials are free to access. Nor are there many volume based quotas, however clearance is required for certain products such as pharmaceuticals and livestock, as similarly found in other European Countries. Where goods are imported from non-EU countries a duty may be levied on top of VAT and is based on the transaction value, transport cost, handling charge, and insurance to the place of importation. However goods that enter through the Freeport or goods under custom control are not subject to duty.   There are also tax incentives and subsidies for some actions of job creation, especially when disadvantaged groups are employed, such as registered disabled, single parents with a dependent, and those who have been long unemployed. And through the Income Tax Act electronic commerce can also benefit from tax credits on the value of their capital expenditure for developing e-Business. [Our ICT Law Practice]

Malta merges the line between business and pleasure. The strong and liberal legal and tax frameworks have provided the necessary support and protection of the industries without impeding the financial incentives they have to offer. through the Schengen Agreement, serious licensing regimes, various physical and monetary incentives attributed to business, the favourable taxation environment and the proficient and hardworking workforce, it is no wonder that so many international business are relocating their international businesses within our shores.

[1] The Schengen Agreement also includes one member of the EU Customs Union, Monaco, to the same privileges.

For more information about the Malta Residence Scheme, click on the links on the left hand menu of this page.