1. INTRODUCTION

The business environment in Malta operates on a smaller scale than many other European countries, but it is certainly not less sophisticated, progressive or dynamic.

Malta's industrial strategy is based on encouraging foreign direct investment in advanced technologies. The emphasis is on a progressive shift from high volume/low value to low volume/high value manufacturing activities.

The island's industrial drive has been successful in attracting a considerable number of high technology industries. Electronic consumer products are the main exports. Over 75% of the country's manufactured exports are directed to the European Union.

Malta's industrial base is well diversified. A strong emphasis is laid on the manufacturing of products that require specialized personnel, high production skills and meticulous quality control.

Among the sectors that are actively being pursued and developed are electronics, particularly component manufacturing and assembly operations; automotive components; light engineering products; biomedical equipment; plastic products and high value clothing and footwear.

Over 200 international companies have established manufacturing operations on the island.

In order to achieve its industrial strategy and encourage export oriented industries, Malta has introduced legislation; the Industrial Development Act 1988. Furthermore Government created the Malta Development Corporation (MDC) which is the Government agency for the promotion of direct investment into Malta, and through this corporation Malta administers the incentives granted by the Act offering very attractive fiscal and financial incentives to qualify companies.

2. QUALIFYING COMPANIES

A "qualifying company" is a company which qualifies for the incentives and benefits under the law, and a company can only qualify for such incentives and benefits if it has its business and trade in Malta limited to one of the following objects:

  • the production, manufacture, improvement, assembly, processing, repair, preservation or maintenance of any goods, materials, commodities (including computer software), equipment, plant or machinery; or
  • the rendering of services of an industrial nature analogous or complimentary to the above activities;
  • large-scale agricultural projects;
  • large-scale horticulture projects;
  • the export of goods or services produced or provided by other qualifying companies;
  • research and development programmes;
  • the carrying out of industrial product design and related services from an establishment in Malta for persons not resident in Malta;
  • the provision of accounting, control and administration services from an office in Malta to companies which are not resident in Malta which belong to the same group of companies as the qualifying company, provided that the said group consists of at least four companies recognized to belong to the same group by the Corporation;
  • the rendering of computer bureau services, including data bank and computer outsourcing services to companies not resident in Malta from an establishment in Malta;
  • the provision of project management, planning and ancillary services in respect of construction work on sites outside Malta from a co-ordinating office in Malta provided that the project under construction is not related to Malta in any manner;
  • the provision of marketing, advertising, purchasing, procurement and related services from an establishment in Malta for persons not resident in Malta.

Except for the first two activities mentioned above, for a Company to qualify for any of the incentives granted by the Act, the proposed project of the Company must be first approved by the MDC. Furthermore Companies conducting research and development programmes only qualify for those incentives and benefits which the minister responsible for industry may prescribe from time to time.

3. THE INCENTIVES

3.1 Introduction

The incentives offered to Companies setting up industries in Malta may be classified into two broad categories:

  • Automatic: where the company's entitlement to the incentive is automatic if the stipulated conditions are met. In this case there are no application formalities or approval procedures.
  • Discretionary: where the grant of the incentive depends on the use of discretionary panels vested in the MDC.

The incentives can apply individually or cumulatively according to the request made by the company and the final approval by MDC.

3.2 The Automatic Incentives include:

3.2.1 Ten Year Tax Holiday

This is available to a qualifying company which derives at least 95% of its revenue from export sales.

The dividends distributed by a qualifying company out of profits exempted from tax under the above incentives shall likewise be exempted from income tax in the hands of the shareholders

3.2.2 Investment Allowances

Where a qualifying Company incurs expenditure in acquiring brand new plant or machinery, or an industrial building or structure (including a warehouse) for the purposes of its trade or business, such company shall be entitled when computing its chargeable income for tax purposes to an investment allowance expressed as a percentage of the cost of the asset as follows:

  • Plant and Machinery 33%
  • Industrial Buildings and structures 16.5%

The incentives granted for a consecutive period of twenty five years from the first year of assessment of the company.

This allowance is in lieu of the investment allowance due to the company under the Income Tax Act.

3.2.3 Accelerated Allowance

A qualifying company is also entitled to a deduction in respect of wear and tear on brand new assets. This deduction is also granted on industrial buildings and structures from the government.

The accelerated allowance rates are:

  • Plant and machinery 33.33% p.a.
  • Industrial buildings and structures 5% p.a.

This allowance is in lieu of the capital allowance due to a company under the Income Tax Act.

3.2.4. Export Promotion Allowance

Qualifying companies may, for tax purposes, deduct 120% of the expense incurred in the promotion of exports from Malta and this notwithstanding that no increase sales have resulted from the expense incurred.

However, the total deductions allowed in any one year, is limited to twenty-four thousand Maltese Lira (Lm24,000) or to 5% of the Company's export sales, whichever is the higher.

3.3 The Discretionary Incentives Include.

3.3.1 Subsidized Factories.

Ready built factories are leased for 16 year periods. The subsidized rent for the first 3 years is US$ 0.52 per square foot per annum rising to US$ 0.80 for the remaining 13 years of the lease. Thereafter, the rent is re-negotiable.

  • All ready built factories are constructed to a high standard and include office space and staff facilities. All normal municipal facilities are provided.
  • Development and land is available at a nominal ground rent of US$ 0.60 per sq. ft. per annum, on 25 year renewable leases. No transfer duties payable.
  • Custom built factories can also be provided at negotiable subsidized rates.

3.3.2 Relief from Custom Duty

Plant, machinery and other equipment as well as materials, components and accessories required for the production of goods intended for export, shall be exempted from Custom Duty.

3.3.3 Training Incentives

  • Grants are available for approved training programmes offered to new employees for up to 50% of the minimum wage for a maximum of 48 weeks over 1 year period.
  • A tax deduction of 120% of costs incurred in organizing an MDC approved training programme (increased to 150% in some of the training of handicapped persons). The total deduction may not exceed 5% of the Company's payroll for that year.

3.3.4 Tax Incentives for Re-Financing

A flat rate of 15% tax (instead of the normal 35%) is charged on the company profits set aside for the purpose of financing any MDC approved project.

3.3.5 Soft Loans

Soft Loans at 4% below maximum prevailing bank lending rates may be granted to finance a proportion of the capital investment in new plant, machinery and other fixed assets excluding land and buildings. This loan is granted subject to the MDC' s approval of the company projected investment programme for 3 years and provided that not less than 95% of the company's revenue is export oriented.

The minimum capital investment shall be of Lm 100,000 and the MDC may finance up to 33% of the projected investment subject to a limit of Lm 500,000.

Repayment terms are negotiable on a two year moratorium period and repayment between 6 to 10 years.

Loans and other credit facilities can be obtained from local banks at current lending rates (presently 8.0% / 8.5%).

3.4 Expatriate Employees

The employment of expatriate workers is possible if their employment is considered to contribute to the industrial development of Malta and understudy arrangements are set up.

If an expatriate controls 40% of a project, he is always entitled to obtain a work permit for at least one other expatriate to be employed by the company.

An expatriate employee's personal tax is charged on the graduated income tax scale limited to the maximum rate of 30%, but subject to a minimum annual liability of Lm 1,000 or to a proportionate amount where the period of employment is of less than one year. In cases where under the normal provisions the tax liability would have been less than that applicable above, the lesser amount would apply.

3.5 Research and Development

Local companies undertaking approved Research and Development schemes may increase these costs by an additional 20% for tax purposes. The maximum allowance is not higher than 15% of the company's turnover.

3.6 Incentives for Gozo Based companies

In order to attract more industries to Gozo, the MDC offers the following additional incentives to companies setting up in Gozo namely:

  • Grants to cover the costs of transport of raw material and equipment between Malta and Gozo;
  • Grants equivalent to one half of the minimum wage for a period of three years for approved training programmes involving the instruction of new employees.

3.7 Expenditure On Feasibility Studies

Costs incurred in the preparation of feasibility studies shall be deemed to have been incurred by the company on the first day on which it carried on its trade or business and as being deductible expenses for tax purposes.

3.8 Double Tax Treaties

In those cases, where in terms of an existing treaty, dividends payable to the shareholders are chargeable to tax at a reduced rate, the company's profits are taxed at this reduced rate instead of the normal procedure were company profits are taxed at the high rate and the shareholder is later reimbursed the additional tax on the distribution of the dividends.

3.9 Preferential Trade Agreements

Malta has negotiated preferential trade agreements with many world markets in particular:

(a) The Malta/EU agreement of 1970 enables all industrial products manufactured in Malta to be exempt from customs duty or quota restrictions; and,
(b) Malta is favoured with special access to such markets as the USA, Canada, Australia and Japan through the General System of preferences; and,
(c) Malta has a number of trade agreements with various individual countries ensuring preferential treatments of its products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.