Malta Investment Services

Malta has cemented its position as one of the most interesting investment services jurisdictions in Europe, attracting rapid growth in a relatively short time frame. Investment services have now cemented their position as the greatest growth area in Malta, and is de facto, once of the greatest contributors to GDP growth.

Licensing Regime

At the outset, the provision of investment services is a licensable one, which requires the application, assessment and possession of a valid licence, issued by the Malta Financial Services Authority (“the MFSA”). There are six types of investment service licences which may be provided by the MFSA, summarized below in the following table:

Category
1a Licence Holders authorised to receive and transmit orders in relation to one or more instruments and/or provide investment advice and/or place instruments without a firm commitment basis but not to hold or control Clients’ Money or Customers’ Assets. (This Category does not include managers of Collective Investment Schemes.)
1b Licence Holders authorised to receive and transmit orders in relation to one or more instruments and/or provide investment advice and/or place instruments without a firm commitment basis solely for Professional Clients and/or Eligible Counterparties but not to hold or control Clients’ Money or Customers’ Assets.
2 Licence Holders authorised to provide any Investment Service, and to hold or control Clients’ Money or Customers’ Assets, but not to operate a multilateral trading facility or deal for their own account or underwrite or place instruments on a firm commitment basis.This Category includes fund managers of Collective Investment Schemes as well as online FOREX traders acting as a riskless principal (white label partner).
3 Licence Holders authorised to provide any Investment Service and to hold and control Clients’ Money or Customers’ Assets.This Category includes FOREX Companies dealing on own account.
4(a) Licence Holders authorised to act as trustees or custodians of Collective Investment Schemes.
4(b) Licence holders authorised to act as custodians to Alternative Investment Funds.

 

Investment Services Instruments

Having set the parameters of the licence, a licensed entity may only provide investment services in relation to a series of investment services instruments. The applicable law, the Investment Services Act, enlists such instruments as consisting of the following:

  • Transferable securities;
  • Money Market Securities;
  • Units in Collective Investment Schemes;
  • Options, Futures, Swaps, Forward Rate Agreements and other derivative contracts relating to securities, currencies, interest rates, yields, or other derivative instruments, financial indices or financial measures;
  • Options, Futures, Swaps, Forward Rate Agreements and other derivative contracts relating to commodities;
  • Options, Futures, Swaps, Forward Rate Agreements and other derivative contracts relating to commodities that can be settled provided they are traded on a regulated market;
  • Options, Futures, Swaps, Forward Rate Agreements and other derivative contracts relating commodities that can be settled through recognised clearing houses;
  • Derivative instruments for the transfer of credit risk;
  • Rights under a contract of difference intended to secure a profit or avoid a loss;
  • Options, Futures, Swaps, Forward Rate Agreements and other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates that must be settled in cash and which are traded on a regulated market;
  • Certificate or other instruments which confer property rights in respect of any of the aforesaid instruments;
  • Foreign exchange acquired or held for investment purposes.

Licensing Process

Clients are well advised to seek advice from one of our representatives to correctly identity the applicable licence category to which they may be classified. The correct identification of the licence also brings with it minimum presence and share capital requirements, as every class licence must satisfy its ‘own funds’ criteria. Whilst every licence application is unique, the process may be summarized in a three-pronged approach

Preliminary

After an initial internal discussion, whereby the promoters discuss the nuances of their application with our directors, it is strongly advisable that the promoters, or their representatives, schedule a preliminary meeting with the MFSA to discuss their proposal. In our experience, it is strongly advisable that such meeting be preceded by the circulation of a business plan, albeit in draft format, outlining the most salient aspect of the proposed operation.

Once the MFSA has confirmed the licence classification to be undertaken by the applicant, the latter is required to submit a series of documents to the MFSA, in draft format, thereby allowing for future amendments thereto.

The following are a list of documents which shall be requested by the MFSA, albeit, the Authority retains the faculty to request additional information at any given time. The list of documents therefore include the following:

  • A comprehensive business plan outlining the local presence requirements, scope of the application, investment services to be used, types of clients to be solicited, as well as three year financial projections
  • the completed form “Application for an Investment Services Licence”;
  • a personal questionnaire for all directors, officers and shareholders in the licensed form which shall have than 10% equity participation or voting rights;
  • covering letter (template included in the Application form);
  • Auditor’s Confirmation (template included in the Application form);
  • supporting Board Resolution in draft, or its equivalent if a different body corporate form is requested;
  • a completed financial resources statement form;
  • projected profit and loss account and balance sheet for the three years after the licence is issued;
  • where appropriate, copies of the last three years audited accounts of the applicant and other relevant related companies;
  • Memorandum and Articles of Association (or Partnership Agreement) of applicant;
  • specimen copies of the insurance policies and draft schedule/cover note (where applicable), and ‘Insurance Checklist’;
  • completed Personal Questionnaire forms for each shareholder, director, and senior officer
  • Memorandum and Articles of Association of corporate shareholders of the applicant;
  • An organigram clearly illustrating the internal operational structure of the applicant’s business (this should show names, reporting lines and roles);
  • where the applicant Company/Partnership forms part of a Group, a diagram showing the relationships between the applicant and other members of the Group.  The “family tree” submitted should give details up to the ultimate beneficial owner(s), showing percentage sizes of holdings in each entity; unless (a) the entity has one ultimate beneficial owner with a holding of over 50% of the voting rights or (b) no less than fifty ultimate beneficial owners who between them account for over 50% of the voting rights.  If (a) or (b) apply, it will only be necessary to give details of the ultimate beneficial owners with holdings of 10% or more.

In our experience, it is highly recommended that adequate time be spent in preparing the business plan, as this is the key document that shall be subject to the greatest form of scrutiny by the MFSA. It would be also advisable to recommend the auditors in the preparation of the financial projections, primarily because the Authority would need to have the necessary comfort that the projections being proposed have been vetted by an independent assessor.

It is important to note that whilst in unlicensed companies, auditors may be chosen by the general meeting or by the directors, post incorporation, and any time prior to the annual general meeting, the identification of auditors, in the case of licensed entities, must be undertaken prior to the submission of the application form.

At the outset, it is also important to note that the MFSA will not allow the use of brassplate operations. The licensing of an investment service company is therefore condition to the continued retention of a minimum local presence. Whilst some degree of flexibility is allowed at set-up stage, with some functions being outsourced to third parties (e.g. the holding company), the responsibility must always lie with the licensed entity. Moreover, it is the Authority’s firm policy that the local presence requirements be intensified as volumes increase.

This is by far the more time consuming part of the application process. It is therefore important that comprehensive information be compiled and provided as much as possible. The Authority shall reserve the right to request all additional information it deems fit. Furthermore, it is absolutely paramount that all information be disclosed in the personal questionnaire. The non-disclosure of information or the provision of inaccurate, incorrect or incomplete information may be fatal to the application process. Transparency is therefore key.

Pre Licensing

Following the review and acceptance of the documentation, the MFSA will issue an ‘in principle’ approval for the issuance of the Licence. The MFSA is empowered to attach whichever conditions it deems fit with the licence, however, the issuance of an ‘in principal’ approval is a very important milestone, effectively signally the acceptance of the Authority to the issuance of the investment service licence, provided that the necessary conditions preceding initiation of activities are met. Such conditions include for example, the incorporation of the company which shall be the recipient of the licence, the issuance of a valid insurance cover, the entering of a rental agreement with regard to the premises, from which the investment service licence shall be provided from.

Post Licensing

Once the pre-licensing conditions have been met, the licence holder must clearly identify the date in which it shall commence its trading activity. A licence is issued with a ‘best-before’ date – in the sense that dormant licence holders may have their licence retracted by the Authority. The rationale behind this is that the Authority has approved the licence holder after a thorough due diligence, and the passage of a considerable amount of time, may render the rendition of such due diligence redundant.

Once the licence holder has commenced its trading activity it must ensure strict adherence to the licence conditions which may be incumbent in its licence, as well as the standard licence conditions which apply to all licence holders. These standard licence conditions, include, amongst the most salient points, a description on the following:

  • general organisational requirements;
  • conduct of business rules (such as client classification and profiling, client reporting, retail client agreement, best execution requirements, client order handling rules, record keeping, safeguarding of clients’ assets, conflicts of interests, staff dealing, provision of information, complaints handling);
  • disclosure requirements for information to clients (transparency), including marketing communications;
  • outsourcing restrictions;
  • financial reporting, accounting and record keeping;
  • transaction reporting; etc

Licence Holders are also required to comply with statutory disclosures, such as interim financial reporting strandards, compliance reports, and any other statutory requirements.

Minimum Presence Requirements

The applicant is required to maintain an adequate level of staffing in the premises from which the investment service is undertaken. For the purposes of achieving and maintaining a licence, the Authority must be satisfied that the ‘mind and management’ is undertaken in and from Malta. Therefore, the licence holder must ensure that this adequate staffing is retained at all times, and more importantly that the effective decision making is always carried out in and from Malta. This is possible by ensuring that the key personnel is relocated to Malta, or where this is not possible, that the key personnel undertake such decisions in and from Malta.

In addition to these mind and management, the licence holder must always maintain a minimum presence requirement in the form of the anti-money laundering reporting officer (MLRO) and the compliance officer. These two offices, which may be vested in one and one the same individual, ensures the licence holder’s adherence to the standard licence conditions and to have correct anti-money laundering procedures installed at all times.

Passporting Rights

The attainment of a Maltese investment service licence is a certificate of excellence, which allows the licence holder access to passporting rights, under the Markets in Financial Instruments Directive (‘MiFID’) in other EU/EEA States, through the provision of cross-border services or through the establishment of a branch. This effectively ensures that there is no need to apply for multiple licences across EU/EEA states. The issuance of a Maltese licence is therefore evidence of the acceptance and hallmark of quality attributed to the licence holder, who may therefore, ply its trade on the wider European market.

Licence holders wishing to apply for such passporting rights, should file a bespoke application to the Authority. The Authority shall then, via official channels, signal the request to its counterpart established in the EU/EEA jurisidiction. The request to exercise passporting rights under cross-border services is typically permissible within a short time-frame from the commencement of operations of the Company.

However, the request for freedom of establishment will in practice only be entertained insofar that the licence holder has maintained a pristine level of service, is compliant with its statutory filings and more importantly after a historical track record backed by at least one (1) year full sets of account.

Albeit passporting is possible, licence holders are well advised that in terms of MiFID, the promotion rules as well as the conduct of business and transaction reporting rules are the sole privilege of the EU/EEA Member state, and the latter is therefore requested to seek bespoke advice on how to comply with the aforesaid ongoing requirements.

Naturally, the passporting rights may only be availed of, insofar that they are within the parameters of MiFID and insofar that they are exercised in an EU/EEA context. Where the licence holder wishes to avail itself of provision of services or of establishment outside the aforesaid parameters, it must comply with and submit to the laws and rules in that particular jurisdiction.

Licensing and Supervisory Fees

Licence Category Application Fee Licence Fee Supervisory Fee
Category 1a €2,500 €2,000 €2,000 (for revenue up to €50,000.Further tranches of €50,000 up to a maximum of €1,000,000 chargeable at €350 per tranche or part thereof
Category 1b €3,000 €2,750 €2,750(for revenue up to €50,000.Further tranches of €50,000 up to a maximum of €1,000,000 chargeable at €350 per tranche or part thereof
Category 2 €5,000 €4,500 €4,500 (for revenue up to €250,000.Further tranches of €250,000 up to a maximum of €5,000,000 chargeable at €400 per tranche or part thereof
Category 3 €7,000 €6,000 €6,000 (for revenue up to €250,000.Further tranches of €250,000 up to a maximum of €5,000,000 chargeable at €400 per tranche or part thereof
Category 4(a) €17,000 €15,000
Category 4(b) €7,500 €5,000

 

Taxation

Licensed investment service companies are subject to a corporate tax rate of 35%. However, upon a final distribution of dividends, the immediate shareholders are entitled, to a tax refund of 6/7ths of the 35% corporate income tax, thereby leaving a tax leakage of just 5%.

Furthermore, any foreign tax which may have been suffered by the Maltese company, may be compounded in the income tax computation, as a tax credit, thereby resulting potentially, in tax leakages which are inferior to the aforesaid 5%.

The following is a concise illustration, of how the tax refund system works

Maltese Company No Foreign Tax With Foreign Tax
Net Foreign Income 20000 20000
Grossing up with Foreign Tax 0 1050
Chargeable Income 20000 21050
Tax at 35% 7000 7370
Credit- Double Tax Relief 0 1050
Malta Tax Payable
(tax at 35% less tax credit)		 7000 6320
Shareholder of Maltese Company
Refund on distribution
(6/7 of Malta Tax Payable)		 6000 6320
Effective Tax Paid in Malta 1000 0
Effective Tax leakage in Malta on Net Income 5% 0%

 

Incentives to Key Directors and Officers

Further complementing the aforesaid corporate tax efficiencies, are a series of measures aimed at incentivizing favourable personal tax regimes for the high ranking officers within a number of highly valued and regulated industries, one of which includes investment services. This is in line with the proposition to promote Malta as a serious destination with substance, and also adds as an incentive facilitating the adequate staffing of licensed entities. Through the inclusion of the Highly Qualified Rules (“the Rules”), very effective tax benefits are now permissible to the following offices:

  • Chief Executive Officer;
  • Chief Risk Officer;
  • Chief Financial Officer;
  • Chief Technology Officer;
  • Portfolio Managers;
  • Chief Investment Officer;
  • Senior Traders;
  • Senior Analysts;
  • Actuarial Professionals;
  • Chief Underwriting Officers;
  • Head of marketing;
  • Head of Investor Relations

Eligibility Criteria

The main allure of the Rules is that they allow eligible employees to be taxable at a highly appealing rate of just 15% on their taxable income, as opposed to the taxable brackets that would otherwise be applicable to income derived by resident officers.

In order to be eligible, the following cumulative conditions must all be met.

  • The officers must all have a qualifying contract of employment in excess of EUR 75,000.
  • The applicant must be an employee with a valid contract of employment.
  • The applicant must be in a senior position, underpinned with a minimum five year experience;
  • The applicant must fully disclose all emoluments received in respect of income arising from an employment in Malta;
  • The applicant must also be able to adequately support his immediate family and provide adequate healthcare and accommodation;
  • Lastly, but very importantly, the applicant must not be domiciled in Malta.

Applicants wishing to avail themselves of the Rules, must have a written declaration to the Authority, which is then submitted to the Maltese Commissioner of Inland Revenue and accompanied by a number of supporting documents.