Incentives for business in Malta
Malta Enterprise Corporation has launched a new set of incentives which came into force on 1st January 2008 and is currently working on the development of other incentives. Such incentives are developed to promote SMEs as well as investment by local and foreign companies in industries such as IT, biotechnology, manufacturing and innovative start-ups among others.
- Investment Aid Regulations
- Assistance to Small and Medium-Sized Business
- Enterprise Support Incentives Regulations
Malta Enterprise Corporation, Maltas exclusive agency for promoting investment and the development of enterprise in Malta is amongst other things entrusted with the development and administration of fiscal and non-fiscal incentives. Until recently, the Business Promotion Act (BPA), and the Business Promotion Regulations (BPR) enacted with the aim of encouraging the establishment of new and the expansion of existing businesses, provide the main legislative back-bone for tax incentives to enterprises in targeted sectors carrying out their business operations in Malta. The BPA and BPR granted generous tax credits and in certain circumstances, even, tax holidays to qualifying enterprises carrying out qualifying activities. Persons carrying out certain activities may also avail themselves from tax credits under subsidiary legislation of the Income Tax Act. Such benefits are available to enterprises investing and carrying out pre-defined operations such as research and development, re-investment of profits and the sponsorship of employees undertaking post graduate education in science, technology and IT. Most of the incentives granted by the BPA and the BPR will cease to apply, thus becoming redundant in a few years time.
So far, Malta Enterprise Corporation has published three regulations - Investment Aid Regulations, Assistance to Small and Medium-Sized Undertakings Regulations and Enterprise Support Incentives Regulations, 2008. The details of assistance and details of the schemes granted under these regulations are found in the Incentives Guidelines. The Incentive Guidelines are a set of rules issued by the Corporation containing details on the definition, application, administration, grant and revocation of schemes.
(L. N. 68 of 2008)
The Investment Aid Regulations include tax incentives which are aimed to stimulate investment and job creation by attracting new investment projects and promoting the expansion or diversification of existing enterprises into certain targeted fields of business defined in these regulations as ‘qualifying activities’. In order to qualify for tax credits under the Investment Aid Regulations, undertakings solely carrying out a qualifying activity may organise themselves in the following legal forms:
- a partnership constituted under the Companies Act, or
- a body of persons constituted, incorporated or registered outside Malta and of a nature similar to a partnership set up under the Companies Act; or
- an oversea company registered in accordance with the Companies Act; or
- a co-operative society duly registered under the Co-operative Societies Act.
The regulations provide an exhaustive list of activities which may be eligible to receive tax incentives. In general, qualifying activities are those related to:
- Information and Communications Technology (I.C.T.),
- Research and development and innovative start-ups
- Eco-innovations, waste treatment and environmental solutions
- The provision of facilities directly required in the development or production of feature films
- Science and technology private tertiary educational services
- Private health-care services
- Logistics services
- Activities set out in Article 11 of the Malta Freeports Act
These activities listed above are more clearly defined in the Incentive Guidelines (pdf).
In general, the tax incentives under these regulations take the form of an investment tax credit. The regulations provide two bases over which the tax credit may be calculated. The tax credit may be calculated either as:
- A percentage of the capital expenditure on the qualifying activity; or
- A percentage of the wage costs for wages paid in connection with the jobs created as a result of the qualifying project.
The amount of credit varies in accordance with the size of the undertaking and is capped at the percentages prescribed in the Incentive Guidelines. Further, given that the regulations do not impose any conditions on the choice of basis over which the tax credit may be calculated, this implies that an undertaking is free to use the most favourable basis to maximise its tax credit.
(L.N. 69 of 2008)
The incentives prescribed by these Regulations aim to provide financial aid by way of cash grants to small and medium sized undertakings carrying on the specific types of business activities listed therein. It follows that large undertakings will not qualify for this incentive. In line with the preceding regulations, reference should be made to Commission Recommendation 2003/361/EC7 which defines the parameters as to what will constitutes a small, medium-sized or large undertaking.
The term ’undertaking‘, is also broadly defined implying that enterprises wishing to avail themselves of these incentives may carry out their qualified activities through a wide range of legal forms. The term ‘undertaking’ also includes an association or other body of persons which promotes the goals or objectives of an undertaking carrying out a qualifying activity.
Regulation 3 provides an exhaustive list of the business activities which may be entitled to receive financial aid under these regulations. The qualifying activities are equivalent to those which may receive an investment tax credit under the Investment Aid Regulations, excluding those activities in connection with the provision of logistical services and those activities set out in Article 11 of the Malta Freeports Act.
Regulation 3 also lists down certain undertakings which are disqualified from obtaining financial assistance under these regulations. Such undertakings include those selling by retail, undertakings whose trade or business includes dividing, sorting, packaging, mixing of goods which are acquired in bulk and undertakings carrying out business activities in connection with the preparation and the production of food in the course of catering.
The Malta Enterprise Corporation promises a wide range of assistance for:
- The development of new businesses
- Small sized start-ups
- The use of experts
- The participation in fairs and exhibitions
- The preparation and submission of proposals for the participation in projects funded through the initiatives promoted by the European Union such as the FP7 and the CIP
- The use of ICT and e-business
(L. N. 70 of 2008)
The Enterprise Support Incentives Regulations (ESIR) have been introduced by virtue of Legal Notice 70 of 2008. These regulations provide the necessary legal basis by which Malta Enterprise Corporation may provide cash grants to those undertakings which carry on or intend to carry on an activity which may contribute to the economic development of Malta. Details as regards to the assistance provided may found in the Incentive Guidelines. This gives a certain degree of flexibility to the Malta Enterprise Corporation to apply its discretion as to the type undertakings or business activities qualifying for these incentives.
In line with the above, the ESIR only lists down the undertakings to which these incentives do not apply. Such undertakings include those operating in the fishery and aquaculture sectors and those operating in the primary production of agricultural products (excluding undertakings that operate in the processing or marketing of agricultural products as described in Annex 1 to the EC Treaty under certain conditions).
Rules 4 to 8 of the Regulations provide the various types of assistance which may be granted. It should be noted that the amount of assistance under each rule is capped to a percentage of eligible costs. The nature of assistance includes assistance for participation in trade fairs, assistance for collaboration with other undertakings, assistance for business development projects, assistance in the engagement of advisors and assistance for the development of international competitiveness.
It should be stressed that in terms of Article 6(1) of the Malta Enterprise Act, any incentives, benefits or grants received by virtue of these regulations are exempt from income tax in the hands of the relevant beneficiaries. Further, where such benefits are received by a partnership which is a transparent entity for tax purposes, the partners or members of the partnership will also be exempt from income tax. The tax-sparing provisions in Maltas double tax treaties should also ensure that any benefits received in accordance with these regulations are ultimately enjoyed by the foreign investors.
We would like to thank Michael Pullicino from the Malta Enterprise Corporation for his support in writing this article.