The Private Hedge Fund Industry in Malta
Malta is fast becoming a significantly important financial centre within the European Union. A long history of fiscal and investment incentives for foreigners wishing to set up shop in Malta have led to a very attractive package for both investors as well as for non-residents wishing to use Malta in their international tax planning structures.
One area which is seeing an increase in popularity in recent months is the use of Malta’s Private investment fund legislation. Especially with Investors looking for alternative vehicles to their current Swiss investments.
Professional Investor Funds (PIFs) are regulated under the Investment Services Act (ISA) – Chapter 370 of the Laws of Malta. The ISA establishes the regulatory framework for investment services providers and for Collective Investment Schemes (CIS) – which include PIFs.
Collective Investment Scheme means any scheme or arrangement which has as its object or as one of its object the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:-
• The scheme or arrangement operates according to the principle of risk spreading; and either
• The contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
• At the request of the holders, units are or are to be re-purchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at shout intervals; or
• Units are, or have been, or will be issued continuously or in blocks at short intervals.
PIFs Set Up In Malta – Advantages
• Unlike the retail UCITS Fund, the PIF does not have investment restrictions and can invest in practically an unlimited variety of movable and immovable assets, from financial securities and instruments, to immovable property and more ‘exotic’, such as art collections, vintage cars and watches etc.;
• PlFs are therefore typically adaptable to the traditional private equity fund structures to the more innovative and complex hedge funds;
• No leverage restrictions, except for (i) PIFs targeted to Experienced Investors; and (ii) PIFs targeted to Experienced or Qualifying Investors which are property funds. The leverage restrictions may be further relaxed by using a special investment vehicle;
• The Maltese regulator is very approachable and adopts a pro-active and flexible approach to new business proposals (subject to the primary objective of adequate investor protection). Pursuant to this flexible approach, legislative amendment proposals are considered and processed as and when the need arises to keep abreast with new products in the industry and to address the needs of promoters and investors in a timely fashion;
• In most cases no external service providers need be appointed (subject to the Fund having suitable internal or other alternative resources and arrangements as may be necessary to protect the interests of investors). Thus it is possible to set up self-managed funds without appointing an external Manager, as well as to set up a fund which does not appoint a custodian but adopts alternative adequate safe-keeping arrangements;
• Even where service providers are appointed, it is not mandatory to appoint service providers established in Malta; thus promoters could set up the Fund in Malta (and benefit from the various advantages this entails) and continue to use the services of foreign service providers with whom they are accustomed to act;
• Set-up and on-going costs are relatively cheaper than in other jurisdictions;
• The use of Special Purpose Vehicles can:
(i) increase tax efficiency of the structure (and, in particular, may make it possible to benefit from favourable double tax treaty provisions. which may not otherwise be available);
(ii) provide structuring efficiencies, such as containing some high or undesirable risks at the SPV level (through the distinct personality the latter is vested with);
(iii) prove efficient to relax leverage restrictions otherwise applicable at Fund level.
A PIF may appoint any functionaries it may deem necessary and which may include the following:-
• Investment Advisor and
• Custodian/Prime Broker
Any functionary appointed by the PIF which is located outside Malta and which provides services to PIFs in Malta must satisfy the MFSA’s criteria of sufficient standing, repute and of regulatory status abroad.
The appointed functionary need not be based in Malta. If a PlF is located outside Malta, a judicial representative must be appointed.
In the case of PIFs promoted to Experienced Investors, the appointment of a Custodian is a requirement.
The service provider should be either:
• established and regulated in a jurisdiction (EU/EEA/Jurisdiction with which the MFSA has bilateral/multilateral MOUs covering the relevant financial service sector); or
• a subsidiary of a firm established and regulated in a recognised jurisdiction which controls the subsidiary and undertakes to provide the necessary information to the MFSA;
• considered by MFSA to be subject to equal or comparable level of regulation in its jurisdiction.
In the latter cases, it is recommended to apply for preliminary indications of acceptability by the MFSA.
PIFs – Fee Structure and Listing
A fee is payable when the licence application (even if in draft) is submitted (€1,500 for the scheme and €1,000 per sub-fund). An annual fee (€1,500 for the scheme and €500 per sub-fund) is payable on the day a licence is issued and on each subsequent anniversary thereafter.
The provisions of Maltese tax legislation relating to the taxation of CISs are intended to create a fiscal framework that supports the development of the fund industry in Malta at the domestic and international levels.
Tax exemptions and withholding tax
For tax purposes, a fund or a sub-fund of an umbrella collective investment scheme may be classified as a prescribed or a non-prescribed fund. Essentially, a fund in a locally-based scheme is classified as a prescribed fund if the value of the assets situated in Malta is at least 85% of the value of the total assets. Other licensed funds, including all funds in overseas-based schemes, are classified as non-prescribed funds.
All income of collective investment schemes is exempt from tax in Malta except for the withholding tax applicable to local investment income in the case of prescribed funds. Thus local investment income (excluding dividends) derived by prescribed funds is subject to a final withholding tax of 15% in the case of bank interest and 10% in the case of other investment income.
No tax is withheld on investment income received by non-prescribed funds.
No tax is payable by non-resident investors on capital gains realised on the disposal of their investment or when they receive a dividend from a fund (whether prescribed or non-prescribed).
Tax is, however, payable by the Maltese resident investors in such funds when they dispose of their investment or when they receive a dividend. This tax qualifies, subject to certain conditions, for a 15% rate under the final withholding tax system.
CISs – Exemption from other taxes
In addition, in respect of Collective Investment Schemes, there is:
• no stamp duty on share issues or transfers;
• no wealth or other tax on the net asset value of the scheme;
• no taxation on capital gains on the sale of shares or CIS units held in prescribed funds by residents provided such shares/units are listed on the MSE.
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