During the course of discussions with fund promoters, many different queries are posed on how alternative investment funds; referred to as Professional Investor Funds (PIFs) in Malta, may be set-up and structured. Such queries usually revolve around the financial services regulator Malta Financial Services Authority (MFSA), time to licence, the need of service providers (including Directors) to be established/based in Malta and their availability on the island, taxation issues, and obviously cost. Malta has been building its reputation as a flexible yet onshore EU domicile and is competing well with its larger and more established European competitors, which begs the question - why are fund promoters choosing Malta?
Malta distinguishes itself from its European counterparts competing for alternative investment funds and their managers. With an open-door policy adopted by the MFSA, fund promoters and service providers alike have on numerous occasions enquired on whether their strategy can fit into Malta's regulated environment.
A case in point was when a promoter wanted to assess the possibility of setting up a fund which would invest solely or principally into structured investments with only one type of underlying instrument, and to a limited extent in cash and money market instruments for cash management purposes. While emphasising the need for, and rigorously requesting and imposing the requirement of adequate risk diversification, the local regulator is flexible and minded to accept such proposals to the extent that diversification can be sufficiently achieved through other means, such as the diversification at the level of issuers of the structured instruments or in the basic components of the underlying - be it currency rates, interest rates, etc.. The promoter in such case was inter alia surprised by the MFSA's time response, as in other jurisdictions it would have taken him a number of weeks, possibly months to get a response from the regulator.
In another situation, a fund promoter indicated that the fund which he intended to set-up would need to make use of multiple custodians/prime brokers. The reason behind such request was two-fold: (i) to minimise the inherent institutional risks that the fund may face by entrusting all of its assets to one entity, and (ii) his preferred custodian was reluctant to provide custody services in respect of one type of instrument in the fund's proposed portfolio. This was indeed possible within the current domestic regulatory framework for PIFs.
Many promoters familiar with the Irish and Luxembourgian regulatory regimes are accustomed to the imposition of the requirement to appoint specified service providers established in that jurisdiction if they decide to establish their fund there. In Malta, there is no requirement for PIFs' to have any of its service providers; Investment Manager, Custodian, Fund Administrators and Investment Advisors, based in Malta so long as these are based in a recognised jurisdiction in which they are adequately regulated/supervised. Furthermore as a general rule, there is no Maltese law requirement for Directors to be resident in Malta except in the case of self-managed funds where at least one of the Directors must be so resident, although this is usually requested by the structure designed by the fund promoters themselves to ensure that the operation and effective management and control of the fund is in fact carried out in and from Malta.
This non-protectionist approach taken by Maltese rules in respect of service providers gives promoters the added flexibility to work with those institutions/individuals with whom they already have established a business relationship, although many promoters are increasingly making use of the services provided by local firms and entities and local directors and of the local infrastructure which are indeed available, and this for various reasons, including that of gaining access to highly professional services of equal quality to that found in the notorious fund domiciles but at a substantially reduced cost.
Another query which fund promoters have been addressing is whether there are any taxes to be paid by a fund in Malta, such as a tax similar to the ‘taxe d'abonnement' (subscription tax) applicable to funds in Luxembourg. Fund promoters are ever becoming cost-conscious and are also ensuring that they have adequate tax planning in place, in order to provide investors with an investment which generates the highest profitable returns which are not eaten away by taxes to the extent possible and lawful. In Malta there is no such thing as a subscription tax. Funds domiciled in Malta and which are classified as non-prescribed funds (namely those with more than 15% of its assets invested outside Malta, like almost all hedge funds and other alternative investment funds established in Malta by foreign fund promoters are) enjoy total tax neutrality through a tax exemption on their income and capital gains generated from their investments (except investments consisting of immovable property situated in Malta), as well as a full exemption from stamp duty on otherwise chargeable transactions.
Similarly, non-resident investors in Maltese are not subject to tax on income or gains derived from their investment in the Fund not to stamp duty on their transactions in units of the Fund. Apart from the tax neutrality at the level of the Fund and its investors, fund service providers establishing themselves in Malta are subject to a very efficient tax regime based on tax refunds upon distribution of taxed profits to their respective shareholders, leaving a low tax leakage in Malta unmatched by other European and onshore fund domiciles. All this makes Malta even more attractive and favourably looked upon by promoters and fund industry operators.
While some of the above-mentioned benefits may be subject to some re-shaping in the light of upcoming EU legislative initiatives, the Maltese regulator and fund industry are gearing themselves up to meet the challenges posed by such initiatives and to ensure the greatest possible preservation of the existing benefits and the identification and exploitation of new advantages deriving from such new EU laws in the quest of enhancing Malta's attraction as a fund domicile.
Nicholas Warren is a Financial Services Consultant at Mamo TCV Advocates and forms part of the Financial Services Department. He has been with the firm since 2009 and has started his career in financial services as a manager in the Securities Unit of MFSA. He holds an honours degree in Banking and Finance from the University of Malta and a degree in Accountancy from the Association of Chartered Certified Accountants (ACCA) and is currently reading a Diploma in Islamic Finance with the Chartered Institute of Management Accountants (CIMA); his areas of specialisation include financial services and accountancy. For more information, please visit www.mamotcv.com.
This article first appeared on the website of FinanceMalta; the agency responsible for promoting Malta as an International Financial Centre. For more information, please visit www.financemalta.org.