|15 July, 2019

Malta: An island of untapped opportunities

The island nation boasts of EU-compliant regulatory framework

Apartment balconies are seen in Valletta, Malta October 6, 2018. Picture taken October 6, 2018.

Apartment balconies are seen in Valletta, Malta October 6, 2018. Picture taken October 6, 2018.

Reuters/Darrin Zammit Lupi

Malta’s geographical location in the centre of the Mediterranean Sea, between Europe and Africa, makes the tiny island nation of strategic interest to foreign investors. Foreign direct investment (FDI) in Malta is being driven by several factors such as the island republic political stability, excellent government regulations and incentives.

Malta joined the European Union in 2004 and became part of the Euro zone Monetary Union in 2008, these benefits are reflected by S&P’s A-, Fitch A+ as well as Moody’s A3 investment grade ratings.

The island nation boasts of EU-compliant regulatory framework, a diversified economic ecosystem and deep talent pool which provides financial services companies from around the world with an easy to do business environment. More importantly, particularly for Middle East investors is the cultural similarities that Malta has with the Arab world.

“Phonetically our language is very much Arabic, and there is usually good chemistry when I go for meetings in Arabic countries. The personal connection and relationship one has with the person he’s doing business with, is very important, particularly in these parts of the world,” explained Kenneth Farrugia, Chairman of FinanceMalta.

Financial hub

Malta’s financial system has become a key pillar of the economy. Retail banks in Malta have separate organisational structures, in some cases on a joint venture basis with reputable international financial institutions, to provide specialised financial services such as life insurance, equity participation as well as fund management, brokerage and underwriting of securities issues.

According to Farrugia, financial institutions used to contribute about three per cent to the country’s GDP in the 1980s, and now currently it’s 12 per cent of the GDP. Malta’s banking sector hosts some of the major players in the sector such as Bank of Valletta (BOV) as well as international lenders like HSBC, Turkish lenders such as Akbank and Garanti Bank also has subsidiaries serving the island nation.

Malta has a total of 76 credit and financial institutions as of June 2019, of which 41 are authorised to provide payment services and 16 authorised to issue electronic money. The island republic’s lenders have substantial liquidity, adequate capital and prudent lending policies as well as prudential oversight and a robust regulatory regime will continue to play a key role.

“The level of ease for fund managers to set up funds in Malta is one of the key indicators that demonstrate the sophistication of our soft infrastructure as well as the accessibility to regulators and ministerial bodies,” highlighted Farrugia.

Get with the times

Malta is also generating considerable interest from non-banking finance companies and fintech start-ups and the authorities are moving with impressive agility to develop a framework that embraces progressive fintech and digital currencies.

The Government of Malta has recognised the revolutionary potential of blockchain and virtual financial assets and has enacted a legal and regulatory framework that enables operators to set up their businesses in Malta. This framework is underpinned by a number of principles to include investor protection, market integrity and financial stability.

The Maltese Financial Service Authority (MFSA) recently published a consultation document proposing the establishment of a regulatory sandbox to encourage fintech innovation.

Fintech start-ups in the country have access to a technology business incubator based at the University of Malta, in addition to an innovation hub run by the Malta Information Technology Agency. The government is also in the process of building a technology park which is expected to be completed in 2021.

Islamic finance

According to PwC, Malta’s Islamic finance sector is also doing well, Global Islamic Finance Assets in 2014 posted an annual expansion rate of 15 to 20 per cent and had an estimated value of $2 trillion.

The country’s centralised location offers access to 230 million Muslims in Europe and North Africa, providing a massive client base for Islamic finance practitioners. Malta has an extensive network of tax treaties with countries such as Malaysia, Singapore, Egypt, Morocco, and the UAE making the country a springboard into the wider Islamic finance sector markets, says EY.

According to FinanceMalta, funds that comply with Islamic law can be set up either as undertakings for collective investment in transferable securities (UCITS), as alternative investment funds (AIFs) or as professional investor funds (PIFs), which are non-retail funds targeting the more experienced investor.

Easy of doing business

Due to a lack of natural resources, Malta strives to attract foreign direct investment by developing the right legislation concentrated on attracting a variety of industry sectors. “Legislation is written in both Maltese and English, and the English version prevails in court. This provides an exceptional level of comfort in terms of translational issues,” explained Farrugia.

Malta offers a number of fiscal and financial incentives such as investment aid, access to financing in the form of soft loans, interest rate subsidies, and loan guarantees as tax refunds upon distribution of dividends to shareholders, double taxation agreements in force with more than 70 countries and support for enhancement and training of the workforce.

The main industrial incentives in the country are enshrined in the Malta Enterprise Act, which seeks to encourage and promote investment, other incentives are also contained in the Business Promotion Act (BPA) and subsidiary legislations. Industrial incentives are targeted towards companies carrying on manufacturing and other industrial activities and services of an industrial nature, but they also apply to various other sectors.

Additionally, the main tax incentives provided in terms of the Malta Enterprise Act consist of investment tax credits (ITCRs) and these are credits that can be deducted by the company from the tax due on chargeable income.

EY stated that under the Malta Enterprise Act, when the credits for any year cannot be fully utilised, the excess may be carried forward to subsequent years. Similarly, Malta Enterprise Act’s investment allowance stipulates that deduction of 50 per cent of the cost of qualifying plant and machinery, as well as 20 per cent of the cost of qualifying industrial buildings and structures, may be available to companies carrying on any qualifying activity.

Malta’s taxation system also offers a lot of opportunities for foreign entities to invest and operate within the island nation. Malta has double taxation treaties with more than 70 countries and these treaties ensure that the profits that companies make in Malta are exempt from taxes in their resident countries.

Foreign investment is at the core of the Maltese government’s economic prosperity and this is manifested in the numerous incentives the authorities have implemented to foster an investment friendly environment.

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