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Malta – Tax Exemptions for Prescribed Investment Funds

Set-Up, Management & Re-Domiciliation of Financial Services

[checklist]Non Prescribed Funds (85% of assets outside of Malta)

  • 0% taxation on income
  • 0% taxation on gains
  • 0% taxation on distributions

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For tax purposes, Investment Funds under Maltese law are collectively defined Collective Investment Scheme (CIS) and include Mutual Funds, Hedge Funds, Private Investor Funds as well as undertakings for collective investment in transferable securities (UCITS), all of which are regulated under the Investment Services Act (“ISA”) as well as a number of – and of course European law – subsidiary rules and legislation.

Utilising a number of incorporated or unincorporated structures – partnerships, INVCO, the most popular vehicle to used is the SICAV, allows for flexible structuring; particularly in the set up and ongoing management of umbrella and sub funds.

Tax Classification

Except for income derived from immovable property situated in Malta and specific investment, income arising from a CIS is exempt from tax in Malta and as such much depends on whether a fund is categorised as prescribed or a non-prescribed fund – which also applies (individually) to umbrella and sub-funds.

A prescribed fund is a Malta fund scheme, for which an express declaration has been made to the Director General of Inland Revenue that the value of its assets held in Malta, at a particular date represents at least 85% of the fund’s total assets value; all other remaining funds comprise of non-prescribed funds.

All other funds, not defined as a prescribed fund (including Malta located and non Malta located assets) that do not comprise of 85% Malta located assets are deemed to be prescribed funds

Prescribed Funds – Non Tax Exempt

Income of prescribed funds do not enjoy Malta’s fund tax exemption and therefore income is subject to tax at source.

The relevant rate of withholding tax is dependent upon the prescribed fund’s type of income. A withholding tax of (i) 15% in respect of local bank interest and (2) 10% in respect of any other form of investment income is levied when payment of investment income is made to a CIS.

Normal Malta corporate income tax rates apply to income arising from real estate located in Malta. All other gains or income, not being investment income do not give rise to any Maltese tax obligations.

Unlike non prescribed funds, prescribed funds set up in a corporate form are taxable at the standard rate of 35%- depending on the type of income arising at fund level.

Non-Prescribed Funds – Tax Exempt

Non-prescribed funds benefit from a tax exemption on income and gains received including investment income – with the exception of income arising from real estate situated in Malta.

Malta Taxation of Funds
  Prescribed – 15% of assets located in Malta Non – Prescribed – 85% of assets outside of Malta & Overseas UCITS
Fund 15% – Bank interest10% – certain investment income35% – Malta real estate income0% – all other income 0% tax on income or gains(Malta real estate income taxed)
Non-Resident Investors No tax if withheld at source. Can opt not to have any source deductions. 0% on distribution
Resident Investors No tax if withheld at source or deducted in line with personal circumstances. 15% on distribution

Reclassification of a Fund

Due to the different categories of funds for tax purposes, ongoing management and reporting obligations are imposed should the asset allocation result in the reclassification of a fund – or of any sub fund from that of a non – prescribed fund to a prescribed fund or the other way around.

Reclassification may give rise to tax implications when the disposal of fund units occurs. The relevant date for disposal purposes being the date of the reclassification and affects the calculation of capitals gain or losses on the transfer of the units held in the fund – the disposal value being the last quoted price prior to the reclassification date of the fund.

Tax on any capital gains will only fall due upon disposal of the units.

Units which are disposed of in a fund and which have been reclassified from a prescribed to a non-prescribed fund, are for tax purposes treated as units in a non-prescribed fund for the entire holding period; irrespective of whether the gains – in whole or part – may have arisen during the prescribed classification period. No exemption is applied to new gains arising during the time the fund was classified as a prescribed fund. Notification to the recipients of investment income as to funds re-classified as prescribed funds must occur, in order to ensure appropriate levy of withholding tax