People wishing to establish an individual portfolio management and/or a collective portfolio management require a Category 2 licence in terms of the Investment Services Act, but there are a number of regulatory and tax benefits tied to the establishing of an asset manager or setting up funds in Malta. Malta has become the jurisdiction of choice for asset managers, as well as the setting up of funds thanks to its solid reputation as a European hub for financial services as well as its high standard of living.
An open-minded regulator operating within a robust regulatory framework
The MFSA remains the sole regulator of financial services in Malta. Malta’s success as a flourishing financial services industry is the fruit of the MFSA’s efficient approach to business. While maintaining very high standards of compliance and dutifully running a consumer affairs unit which safeguards the reputability and credibility of Maltese licences, the MFSA has managed to find the perfect balance that allows business to be carried on without needless complications by keeping an open-minded approach and providing for flexible vehicles which create a business-friendly environment and attract more business to Malta.
A Maltese Category 2 licence offers the benefit of passporting to any or all EU Member State countries in accordance with the Markets in Financial Instruments Directive (MiFID). Thus, a Malta-licensed asset manager will have full access to the EU market and will be able to provide its services either through the establishment of a branch or on the basis of a cross-border provision of services. The licence may be passported upon notifying the Malta Financial Services Authority.
Flexible structures for asset managers
An asset manager may be in charge of an individual portfolio management or a collective portfolio management. An individual portfolio management – also referred to as managed accounts – grants discretionary management of third party assets to an asset manager in charge and allows him or her to invest such assets. Similarly, a collective portfolio management of assets grants discretionary management of assets belonging to a collective investment scheme.
The management of a collective investment scheme is vast since it can either refer to:
1. UCITS management companies which are licensed in virtue of the UCITS Directive and provide discretionary management to UCITS funds. Additionally, these can also passport their services to any EU Member State as per the Directive. One should note that UCITS may also be self-managed.
2. Alternative Investment Fund Managers (AIFMs) also benefit from passporting in terms of the Alternative Investment Fund Directive. A passport will only be valid where the target market is an EU country, irrespective of whether one is dealing with a non-EU AIF or a non-EU AIFM. Therefore a connection with the EU is crucial. AIFMs may provide discretionary management to AIFs as per the aforementioned directive.
Malta’s attractive tax regime is extended to UCITS and AIFs
3. De Minimis AIFMs which do not fall under the scope of the AIFMD. These are managers which, whether directly or indirectly, manage portfolios of AIFs whose assets under management collectively do not exceed the following amounts:
• €100m or;
• €500m for AIFMs managing only unleveraged AIFs with no redemption rights exercisable within five years from the date of initial investment in each AIF.
A de minimis AIFM will be exempt from complying with certain provisions of the AIFMD but is not able to make use of the EU passporting rights.
Competitive regulatory fees and set-up requirements for Malta funds
Malta UCITS are highly flexible vehicles that may be structured in a number of ways. They have low set up and ongoing costs, with self-managed UCITS requiring a minimum capital of €300,000.
AIFs also vaunt competitive regulatory fees, with a capital and own funds requirement of €125,000. If the portfolio value of the AIFs managed by the AIFM exceeds €250 million, 0.02 per cent of the amount exceeding €250 million is required. However, this amount shall not exceed €10 million and either 0.01 per cent of the portfolio value of the AIF or professional indemnity insurance cover.
Competitive corporate tax rates for Malta asset managers and Malta funds
Malta’s attractive tax regime is extended to UCITS and AIFs as well and has helped to attract several investors and entrepreneurs to our shores.
A UCITS fund is exempt from income and capital gains tax (excluding investment in immovable property). It is also exempt from income and capital gains tax (excluding investment in immovable property).
Malta-Domiciled AIFs benefit from a number of benefits, including:
• an exemption from income tax and capital gains tax at both the fund level and at a non-resident investor level as long as more than 85 per cent of the value of its assets is situated outside Malta;
• investment income received by the Fund is not subject to any withholding tax;
• no withholding tax is due on dividends paid out to non-residents;
• no tax is payable by non-resident investors when they dispose of their investment;
• no stamp duty charged on share issues or transfers;
• no tax on the net asset value of the scheme.
Asset managers are also afforded a number of tax benefits. Individuals, including asset managers, who hold senior positions within MFSA-licensed financial services operators will benefit from a favourable tax rate of 15 per cent on their employment income earned through this position. Under the Highly Qualified Persons Rules, asset managers must satisfy the minimum investment threshold (exclusive of the annual value of any fringe benefits) in terms of a contract of employment. This 15 per cent personal tax rate is furthermore reduced to zero per cent for any income in excess of €5m per annum.
Malta Funds: Professional investor funds (PIFs)
The Malta Hedge Fund, also known as the Professional Investor Fund, is still highly relevant to the Financial Services Sector even after the advent of the AIFs. PIFs are collective investment scheme designed for professional and HNW and offered to people with a certain degree of expertise, experience and knowledge in their respective positions. For more information about the benefits of this highly successful product, we encourage you to take a look at our factsheet.
Nicholas Warren is a senior manager within the Financial Services Practice Group at Chetcuti Cauchi Advocates.