Malta: International Law

Malta stayed off the OECD list of jurisdictions with harmful tax practices by making an advance commitment to the OECD to toe the line. And the FATF raised only one issue with Malta over money laundering - in respect of nominee companies. Under the guidance of Malta's regulators, every finance business in Malta took action to remedy the situation.

In May 2001, a meeting took place in Malta between officials from the OECD, the Maltese government and the Malta Financial Services Centre (which was subsequently superceded by the Malta Financial Services Authority, or MFSA) to discuss the island's advance commitment to the multilateral organisation to eliminate harmful tax practices.

In an address to the OECD delegation, Chairman of the MFSC at the time, Joe Bannister, assured his audience that legislation proposed by the MFSC governing international trading companies was compliant with the requirements set out by the OECD.

The OECD officials emphasized that the organisation's focus was on enhancing the channels for greater exchange of information.

Following the OECD's comment, the Maltese Finance Ministry clarified its position regarding withholding tax on investment income (foreshadowing the EU Savings Tax Directive). Saying that, because of international developments, every country would in the near future be obliged to provide information to other countries on interest and dividends paid in that country to foreign investors, the Ministry said the government wanted to explain that individuals who had money invested abroad and would like to bring it back to Malta could deposit the money in local banks and authorised funds.

It stated at the time that interest received by investors would be reported to the tax authorities only if investors decided not to allow the deduction of a 15% withholding tax on the interest paid. Investors who opted to have 15% deducted do not need to declare the interest or dividend in their income tax return. Most importantly, the bank or fund manager in this case could not by law pass on any information about the deposits of such investors.

In June of that year, the MFSC reached an agreement with the United State's Inland Revenue Service (IRS) enabling Maltese financial institutions to acquire Qualified Intermediary (QI) status, allowing them to avoid imposing the normal rate of withholding tax on US source income for properly documented clients, or to deduct reduced rates under tax treaties applying in particular cases.

They were also allowed to keep the identify of their non-US clients confidential when dealing with the IRS.

Of course, after September 11th, the emphasis of policy switched to money laundering. Speaking at a seminar organised by the MFSC, then Finance Minister John Dalli reiterated the jurisdiction's commitment to the fight against money laundering.

'Malta is establishing itself as a serious and reputable financial centre,' he said, 'and the ingredients of success are mainly a good reputation for integrity.' He observed that a strong anti-money laundering approach and supporting legislation was necessary to ensure that Maltese institutions did not facilitate the transformation of illegal assets into legitimate property or cash.

'By curtailing access to the financial benefits of crime, criminality is thwarted in its designs,' he observed. He also called attention to the fact that Malta had enacted anti-money laundering legislation as early as 1994.

Mr Dalli announced that the government would set up a Financial Intelligence Unit (FIU), to act as a buffer between financial institutions and the police. Previously, suspicious transactions had been reported directly to the country's law enforcement agency.

Mr Dalli confirmed that: 'The financial intelligence unit will be the recipient of suspicious transaction reports...and will be empowered to request any information it may deem necessary in order to supplement reports and to transmit such reports to the police where it has reasonable grounds to suspect money laundering.'

In 2002, the Malta Financial Services Authority (MFSA) began the process which would leave it as the overall regulator for the jurisdiction's financial services sector, marking the culmination of nearly eight years of preparation, and the beginning of a new era.

Although the framework for the creation of a single regulator for the entire financial sector was first put in place in 1994, control over the banking sector remained with the Central Bank until the proper regulatory structure to deal with it was in place.

However, as the result of an especially intensive year of preparation, the regulatory and supervisory functions had been consolidated, and the MFSA was ready to assume overall responsibility.

The Malta Financial Services Authority (MFSA) was established by law on 23 July 2002.

It took over supervisory functions previously carried out by the Central Bank of Malta, the Malta Stock Exchange and the Malta Financial Services Centre and is, as previously stated, the single regulator for financial services. The MFSA also manages the Registry of Companies and has also taken over responsibility as the Listing Authority.

With regard to tax matters, as was the case with Cyprus, the long-drawn out process of installing the EU's acquis communautaire into Maltese law brought the jurisdiction into close conformity with international standards of financial regulation.

The European Commission had identified a number of harmful tax measures within the new intake of countries due to join the EU in 2004, seven of which were found in Malta. Whilst the Maltese government accepted the Commission's decision, it pointed out that a number of the measures in question had been repealed in 1996, and were in the last phases of a transitional period due to terminate in September 2004.

'Harmful' measures identified by the Commission pre-accession included:

• International Trading Companies - These were considered harmful by the Commission as they created an effective tax rate of 4.2% for non-residents (the standard rate at that time being 35%);
• Dividends from (other) Maltese companies with foreign income - This was deemed to establish a favourable holding regime for non-residents, providing for a tax exemption on income derived from a subsidiary based in a country with significantly lower taxes than Malta without the appropriate anti evasion measures in place;
• Investment Service Companies - This measure gave deductions not available to other resident firms, and the Commission claimed that this could seriously affect the location of business activity, especially in the financial services sector;
• Non-resident Companies - This measure allowed the taxation of foreign income to be delayed, in some cases indefinitely.

In March, 2006, the European Commission formally requested Malta under EC Treaty state aid rules to abolish the tax regime for Maltese Companies with Foreign Income (CFI) and the International Trading Companies’ (ITC) regime, by the end of 2010 at the latest.

Competition Commissioner Neelie Kroes observed that: “The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy”.

In May of that year, the Maltese government formally decided to gradually abolish the existing aid schemes.

Malta’s acceptance of the EC recommendation meant that:

• The existing ITC and CFI schemes would be effectively abolished by 1st January 2007 at the latest, to be replaced by a refundable tax credit system;
• The tax status of ITC was prohibited to any new company registered in Malta after 31st December 2006; and
• The existing ITCs would benefit from the current system only until 31st December 2010.

In May, 2004, the respective chairmen of the Maltese and United Kingdom financial regulators signed a memorandum of understanding, facilitating the exchange of information and investigative assistance.

The agreement laid down a “formal basis for cooperation” between the two bodies.

“The MFSA and the FSA believe such co-operation will enable them to more effectively perform their functions," stated the text of the MOU.

In June 2007, in a measure affecting Malta in its role as an EU member, it was announced that travellers entering or leaving the European Union would have to declare cash movements of more than EUR10,000, as new customs laws designed to thwart money laundering and terrorist financing took effect.

Under the new rules customs authorities were empowered to undertake controls on people and their luggage and detain cash that has not been declared. They are required to initiate proceedings against people who fail to declare cash of an amount of EUR10,000 or more. The rules also required the declaration of the equivalent amount in other currencies or easily convertible assets such as non crossed cheques.

In July, 2010, the Maltese government announced that it had concluded negotiations with China towards revising the convention for the avoidance of double taxation and fiscal evasion the two countries share. The government said the agreement, and another double tax treaty with Uruguay, would be signed during 2010 as part of the territory’s efforts to expand its network of such agreements.

The agreement with China has been negotiated to reflect internationally accepted standards. The text is based on the OECD Model Tax Convention on Income and on Capital and also recent tax treaties concluded by both countries. When ratified the agreement will supersede the existing treaty dating back to February 1993.

Welcoming the prospect of a revised agreement with China, Malta’s Minister for Finance, the Economy and Investment, Tonio Fenech stated: “This agreement will provide investors from both countries with more attractive conditions for investment in Malta or China. Such conditions may also help Chinese investors to tap in a more efficient way into the European market. China is a country which is still growing strongly and offers significant investment potential.”

Alongside provisions to improve the environment for prospective investors, the agreement also contains provisions for the exchange of tax information, in accordance with the internationally agreed standard on transparency and information exchange. The government said the pact would establish better channels for the exchange of information, which would be instrumental in the territories' mutual efforts to prevent fiscal evasion.

As is stipulated in the agreement with China, the text agreed with Uruguay will provide beneficial conditions for Uruguayan and Maltese investors, and will similarly include tax information exchange provisions to aid the two countries’ tax authorities in civil tax matters and in investigations into fiscal crime.

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