Venture Capital Comparative Guide

1 Legal framework

1.1 Which general legislative provisions have relevance to venture capital investment in your jurisdiction?

The Malta Financial Services Authority (MFSA) is the sole regulator of financial services in Malta, overseeing:

• banking and payment institutions;
• financial institutions;
• investment services companies and collective investment schemes;
• securities markets;
• recognised investment exchanges;
• trust management companies;
• company services providers;
• pension schemes; and
• insurance services companies.

The MFSA's functions include:

• protecting consumers;
• ensuring financial stability;
• supervising financial services; and
• ensuring the integrity of financial markets.

In Malta, the legislative provisions relevant to venture capital include the following:

• Investment Services Act (Cap 370): This act provides the regulatory framework for investment services and collective investment schemes in Malta.
• Venture Capital Fund (Tax Credit) Regulations (SL 123.90): These regulations offer the framework for the allowance of tax credits to venture capital funds investing in Malta-based companies in the seed or early stages.
• European Venture Capital Funds Regulation: This EU regulation facilitates cross-border fundraising by venture capital funds, allowing them to market across EU countries with a ‘passport'. Malta has implemented this regulation to promote investments in innovation businesses.

1.2 What specific factors in your jurisdiction have particular relevance for, or appeal to, venture capital investors?

Malta's appeal to the venture capital market stems from the following factors:

• Strategic location: Situated in the Mediterranean, Malta serves as a bridge between Europe, North Africa and the Middle East, offering access to diverse markets.
• Supportive business environment: The Maltese government has launched initiatives to support startups, including a €10 million venture capital fund aimed at innovative startups. Many public services are available online through the government portal, reducing the need to travel to government offices and waiting times.
• Pro-business climate: Malta has fostered a pro-business climate in which stakeholder accessibility is key. Entities and stakeholders in both the private and public sectors are highly accessible and forthcoming, listening to and supporting businesses to the best of their ability.
• Non-dilutive support measures: These measures, offered by entities such as Malta Enterprise, increase the runway for portfolio companies and reduce the risk for venture capital investors.
• Advantageous legal and taxation system: Malta's corporate tax rate is 35%; however, in the case of companies owned by non-resident shareholders, the effective tax rate on distributable profits is reduced to 5% through the application of the 6/7 refund mechanism. Malta also applies the full imputation system, whereby the law eliminates the risk of double taxation of the same income received by companies and thereafter distributed to shareholders. Therefore, as soon as the corporate tax is applied on the income of the company, no further tax is payable by the shareholders on the dividends received.
• Growing startup ecosystem: Malta has a growing startup scene – particularly in sectors such as fintech, blockchain, i-gaming and medical technology – attracting both local and international investors.
• Open-to-business regulatory approach: This is reflected in the use of regulatory sandboxes for fintech and emerging technology through:
• • the Fintech Regulatory Sandbox issued by the MFSA; and
  • the Technology Assurance Sandbox issued by the Malta Digital Innovation Authority.
• Talent retention: Malta offers preferential personal tax treatment for highly qualified personnel who earn more than €52,000 per year since certain roles are eligible for a flat tax rate of 15%. This incentive:
• • increases such employees' disposable income;
  • reduces cash burn for venture capital-backed companies; and
  • increases the possibility of retaining talent which is crucial to drive innovation.
• Furthermore, poaching of employees is less common than in more established hubs such as Silicon Valley and London. This also helps to contain wage inflation.
• Well connected with the rest of Europe: Over the years, Malta has made significant investments in its digital infrastructure. As a result, the island has reliable and stable communication services, including internet connectivity. Malta is also physically well connected to mainland Europe through air travel. Several airlines offer regular direct flights to major European cities, making travelling for business purposes relatively easy.

2 Parties

2.1 What types of investors typically provide venture capital investment in your jurisdiction?

The local venture capital market started back in the 1990s with the introduction of the then Malta Development Fund, which had around 10 million in Maltese lira available at its disposal for startups. Companies such as Third Eye Ventures and Hambro European Ventures had a local presence in Malta. Moving forward to the present day, the following investors typically provide venture capital investment:

• Malta's small economic market means that networking and reputation are key to business development. Malta's economic players tend to be well interconnected and this plays a key role in the provision of funds to startups. At times, deals may originate from referrals and introductions based on strong reputations, trust and networks. Therefore, friends and family members of startups will typically provide the funds.
• The local government is doing its utmost to ensure that Malta's economic climate is conductive to business development. Government, through the Seed Investment Scheme facilitated by the Malta Investment Management Company Limited, aims to help startups raise the necessary equity finance in the form of tax credits to individual investors who:
• • are resident or operating in Malta; and
  • invest in qualifying Maltese startups or early stage companies.
• Such investors are eligible to receive a maximum of €250,000 tax credit in a typical tax year. Beneficiary companies can raise up to €750,000 in investment through the scheme.
• Under the Startup Finance Scheme, run by Malta Enterprise, small startups that demonstrate a viable and innovative business concept and showcase commitment are eligible to apply for financial support of:
• • up to €500,000 for small startups;
  • up to €750,000 for startups operating in assisted areas (as per the respective guidelines); and
  • up to €1.5 million for highly innovative startups. The support is provided as a repayable grant.
• In March 2024, the Ministry for the Economy, Enterprise and Strategic Projects launched the Malta Venture Capital Office, which is entrusted with managing a €10 million fund by investing equity in startups operating within the digital economy and other innovative economic sectors that will enhance Malta's long-term productivity.
• Other measures and incentives offered through Malta Enterprise include:
• • Business Start;
  • INVEST;
  • EUREKA Instruments (European Partnership on Innovative Small and Medium-Sized Enterprises (SMEs)); and
  • a research and development scheme.
• Local startups may also avail of EU-funded schemes which are administered by Business Enhance through the European Regional Development Fund. These include:
• • Startup Enhance;
  • Digitalise Your Micro Business;
  • Digitalise Your Business;
  • Business Reports for SMEs; and
  • SME Enhance.
• The Malta Council for Science and Technology also promotes research and innovation and aims to support early-stage projects through the national FUSION programme, which provides support for researchers and technologists in order to develop their ideas from concept to commercialisation.
• More recently, the Malta Digital Innovation Authority established DiHubmt, which provides startups and SMEs with office spaces equipped with the latest technologies, including laboratories to test their products prior to market launch. DiHubmt's vision is to create an ecosystem that connects fresh entrepreneurs with established business leaders. Other private office spaces equipped with facilities including meeting rooms are also available on the island.

2.2 What types of companies do venture capital investors typically seek to invest in in your jurisdiction? Is the investment done directly or through foreign holding structures?

The schemes available through the government or EU funds each have their own eligibility criteria, depending on the priority areas which each scheme addresses. In line with Malta's Recovery and Resilience Plan (2021), economic priority areas include:

• promoting energy efficiency, clean energy and the circular economy;
• achieving carbon-neutrality;
• strengthening the health system;
• enhancing the quality of education; and
• strengthening the institutional framework.

Schemes are predominantly designed to address these areas.

Most of the innovative startups in Malta are based in the following sectors:

• gaming;
• fintech;
• life sciences;
• agritech;
• AI; and
• digital technologies.

When it comes to foreign direct investment, most of the companies being established in Malta are subsidiaries. In most cases, the parent company raises the finance and then transfers funds to finance the operations of the Malta activity.

Various Maltese companies also establish a presence in London, Delaware or other international hubs that are synonyms with investors. It is easier for an investor that does multiple annual deals in, for example, London to invest in a London-based company rather than investing directly in the Malta entity. The latter would be a very costly investment, as an investor would need to fully understand Malta's legal framework and this might not be feasible for a one-off deal.

2.3 How are these companies typically structured?

Startups in Malta are typically structured as limited liability companies, in line with the Companies Act (Chapter 386 of the Laws of Malta). A private limited liability company must have:

• at least one shareholder and one director; and
• a minimum share capital of €1,200, 20% of which must be paid in upon incorporation.

This company structure offers shareholders limited liability protection; and shareholders may also opt to benefit from the 6/7 tax refund system applicable upon the distribution of profits by a Maltese-registered company (or a non-resident company operating a branch in Malta).

Often, companies that opt to relocate to, or open a branch in, Malta have a parent company established outside of Malta, of which the Malta-based company is typically a subsidiary.

More recently, the Malta Financial Services Authority (MFSA) launched a framework for collective investment schemes structed as limited partnerships without separate legal personality, known as ‘special limited partnership funds' (SLPFs). This type of structure may be set up through a limited partnership agreement which is registered and authorised by the MFSA. The SLPF does not have separate legal personality from the partners and the general partner:

• is typically responsible for managing the business;
• holds the assets; and
• can contract, sue or be sued in the name of the partnership.

The partners are liable up to the amount of capital contributed to the business, which ultimately is a form of protection for investors. The general partner has unlimited joint and several liability for the debts of the partnership. This structure must be notified and authorised by the regulator.

3 Structuring considerations

3.1 How are venture capital investments typically structured in your jurisdiction (eg, equity, quasi-equity (SAFE/KISS), debt, other), and how does structuring typically differ between seed-stage, early-stage and later-stage investments?

Typically, a startup investment is an equity investment between shareholders, irrespective of the stage of the startup. Often, startups and founders find this type of structure to be more effective than merely borrowing capital.

While the type of investment structure does not vary between investments, the level of investment typically differs depending on the valuation of the startup: the more mature the startup, the higher the valuation and thus the higher the investment. The amount of investment also differs at each startup stage, as the level of product development and market research increases.

3.2 What are the potential advantages and disadvantages of the available investment structures?

Not applicable, as normally an equity investment is preferred irrespective of the stage of the startup.

3.3 What specific issues should be borne in mind in relation to cross-border venture capital investments?

Often, startups are in the early stages of setting up internal processes, governance structures and risk management procedures, as the capital injected is utilised for market research and product development, rather than other matters which are also critically important when operating a solid company. Good governance becomes extra challenging when it comes to cross-border venture capital investments. Moreover, regimes differ from jurisdiction to jurisdictions, and thus the legal obligations for a non-resident shareholder investing in Malta may not be the same as those applicable in other jurisdictions.

3.4 What specific issues should be borne in mind when multiple investors are involved (eg, pooling)?

As for any other business, multiple investors may be involved in a startup, irrespective of its stage of development. Often, the diverse goals and interests of the respective investors may complicate matters. Furthermore, different investors may also have different expectations concerning the expected return on their investment. If the investors have varying shares within the company, this can create an imbalance of power when it comes to strategic decision making and implementation of decisions.

4 Investment process

4.1 How does the investment process typically unfold? What are the key milestones?

For private investors, the key factor during a typical investment is the process that matches the stage of the startup with the preferences of the potential investor. As soon as a potential investor deems that the startup's business model is feasible and will afford an adequate return on investment, the parties will typically move on to agree on:

• the level of investment to be made; and
• the size of the shareholding.

On average, the higher the amount of capital being injected, the greater the due diligence required by the investor, along with a need for a valuation of the company.

Moreover, if the startup obtains funds through government entities, there will be a specific process tailored to each specific scheme. Prior to applying for government-managed or EU schemes, startups should be cognisant of:

• the eligible legal form of the startup for the scheme; and
• the eligible activities included in the respective scheme.

The prospective beneficiary will also be requested to complete an application form, typically within 60 months of the date of registration as a limited liability company with the Malta Business Registry. The company must:

• be established within the European Union; and
• have an operating base in Malta.

Applicants:

• must typically submit a full business plan; and
• will be subject to evaluation against several pre-set criteria, including:
• • financial feasibility;
  • job creation potential;
  • level of innovation;
  • knowledge dependency; and
  • the level of market research already performed, including identification of the potential client base for the product being developed.

It is recommended that an independent review be submitted to enhance the application, particularly for technological products. Prospective companies eligible for funding may also be asked to deliver a presentation to Malta Enterprise.

4.2 What types of due diligence (eg, legal, financial, technical) do venture capital investors typically conduct into prospective portfolio companies? What are key red flags for venture capital investors?

The level of due diligence will depend on the stage at which the investment is being made.

At the proposal and pre-seed/seed stages, no due diligence is typically conducted. However, as the company matures and investors start coming in, the venture capital investors will begin:

• conducting due diligence (technical, financial and anti-money laundering); and
• asking for financial documents and legal contracts.

The intensity of the due diligence increases with the maturity of the company.

All applications for funding by Malta Enterprise are subject to a thorough due diligence exercise.

4.3 What documentation is typically prepared during the investment process and who is responsible for preparing this?

Essential documents include the following:

• Term sheets: Non-binding agreements outlining the investment's key terms.
• Shareholders' agreements: Detail the rights and obligations of shareholders.
• Subscription agreements: Specify the terms under which investors subscribe to shares.
• Due diligence reports: Summarise the findings from the due diligence process.

Typically, legal counsel prepare these documents, with input from financial and technical advisers as necessary.

In the case of a government and/or EU-funded scheme, the startup will be required to sign a grant agreement which includes the terms on which the project has been approved. The startup may also be asked to grant the issuing entity a general hypothec on all current and future assets of the undertaking on a global level.

4.4 Are standard investment documents available for venture capital investments in your jurisdiction? If so, who (eg, industry association, organisation) provides them and how frequently are they used in practice?

Malta has no centralised repository of standard investment documents; however, industry best practices influence the drafting of such documents. Legal advisers often tailor these documents to suit the specific context of each investment.

4.5 What disclosure requirements and restrictions may apply throughout the investment process, for both the venture capital investor and the prospective portfolio company?

During the investment process, both parties must adhere to:

• confidentiality agreements, to ensure that sensitive information is protected; and
• regulatory disclosures, to comply with legal requirements for transparency (eg, anti-money laundering regulations).

In the case of government and/or EU-funded schemes, startups that obtain assistance are normally subject to monitoring terms by the issuing entity. This may take the form of a request for a progress/monitoring report and/or on-site verification.

4.6 What advisers and other stakeholders are involved in the investment process?

Accelerators, finance professionals and lawyers, in the case of private equity. If the government is involved, the process will also involve Malta Enterprise as the main stakeholder and funding entity.

4.7 What is the process and what (corporate) approvals are required for a portfolio company to issue shares or debt instruments to investors in your jurisdiction?

The board of directors issues a resolution authorising the issuance of shares or debt instruments by the company. This resolution should include the terms of the issuance, such as:

• the number of shares;
• their monetary value;
• share rights; and
• other pertinent matters.

If the issuance of shares involves changes to the company's authorised share capital, amendments to the articles of association may need to be effected. Such changes must be registered with the Malta Business Registry.

5 Equity investment terms

5.1 What key investment documents and terms (eg, valuation, share class, governance rights, liability concept, transfer restrictions, exit rights) typically feature in venture capital equity investments in your jurisdiction?

The standard investment document is technically called a ‘simple agreement for future equity' (SAFE). It is a legal agreement between the investor and the startup for future equity and provides the prospective investor with the right to acquire equity in the startup at a later date. This document is typically standard and aims to cover early-stage financing even up to Series A financing. A business accelerator that is situated and operating in Malta can assist in the provision of resources and mentorship in this regard.

5.2 What type of security is typically issued to new investors as part of venture capital equity investments in your jurisdiction and what (economic) preference rights are typically attached to these securities (by operation of law, under constitutional documents and/or contractually)? What rules and requirements apply in this regard?

Often, ordinary shares are issued for venture capital investments; however, sometimes preferences shares are issued. Typically, pre-emptive rights are standard across the industry, although anti-dilution rights are set on a case-by-case basis.

Normally, a board of directors is formed only once the company has reached Series A financing.

5.3 What anti-dilution measures or rights (eg, pre-emptive rights, down-round protection) typically feature in venture capital equity investments in your jurisdiction?

Anti-dilution rights are set on a case-by-case basis in the respective shareholder agreement/rights issue.

5.4 What are the key features of the liability regime (eg, representations and warranties, disclosure concept, liability caps, remedies) that applies to venture capital investments in your jurisdiction?

Typically, Venture Capital investments are governed by general contract law (that is; the Civil Code - Chapter 16 of the Laws of Malta), combined with specific regulations attached to the specific type of investment being made. If the investment is a Professional Investment Fund or Alternative Investment Funds (for example), then the Investment Services Act (Chapter 370 of the Laws of Malta) and the MFSA rules would be applicable, given that these are regulated financial instruments. The liability regime for that specific investment would be included in the contract which is normally drawn up by seasoned corporate lawyers in the field.

5.5 What key transfer rights and restrictions (eg, lock-up period, right of first offer/right of first refusal, drag/tag-along rights, purchase options) typically feature in venture capital investments in your jurisdiction? Are (reverse) vesting/good and bad leaver provisions commonly applied to founders in your jurisdiction? If so, how are these typically structured?

Similarly, in Malta the key transfer rights and restrictions would be enshrined in the investment contractual agreement which may also take the form of a shareholders' agreement (in the case of private equity) and/or the company's memorandum and articles of association, or a share purchase agreement. Lock-up periods are normally subject to negotiation in Malta and a period of 1-3years is normally practiced. Other transfer rights are also commonly included such as the right of first offer, and that clause is most commonly included in the company's articles of association.

5.6 What management incentives (eg, equity, options, phantom shares) typically feature in venture capital investments in your jurisdiction?

The standard is that a venture fund gets a 2% management fee and 20% carry (carried interest). The 2% management fee should cover salaries and the cost of operating the fund; while the 20% should incentivise with the upside of the fund. This is the standard, but it can be increased or decreased depending on the circumstances.

6 Debt investment terms

6.1 What terms typically feature in non-equity venture capital investments in your jurisdiction?

In venture capital, equity is typically preferred over debt financing. The vast majority of startups opt to raise capital by issuing new shares rather than raising debt, as loans involve several terms which are more burdensome for the company.

If the startup is in financial difficulties and has debt to repay, an agreement must be reached with the creditor with a new payment plan; otherwise, the company will be liquidated. From consultations with stakeholders, we understand that debt is not the preferred way of raising capital, due to the associated obligations.

6.2 How are such non-equity investments typically treated in the event of (a) an equity investment, (b) a change of control and/or (c) maturity?

Not applicable, as share capital is typically preferred.

7 Governance and oversight

7.1 What are the typical governance arrangements of venture capital portfolio companies?

The governance structure of a venture capital company is defined by the shareholders' agreement. In the pre-seed and seed stages, the founder is normally in charge of decisions and processes to grow the company further. As the company evolves and reaches Series A funding, it tends to increase its efforts to enhance its governance by putting in place a board of directors and other good governance structures.

In Malta, there are also fund structures which are licensable by the Malta Financial Services Authority (MFSA), such as professional investor funds (PIFs), which are used in non-traditional investments and/or specialised instruments such as special purpose vehicles and derivatives. The minimum investment threshold for PIFs is €100,000, applicable per investor.

7.2 What legal considerations should venture capital investors take into account when putting forward nominees to the board of portfolio companies?

The Companies Act (Chapter 386 of the Laws of Malta) defines a ‘director' as "any person occupying the position of a director of a company by whatever name he may be called carrying out substantially the same functions in relation to the direction of the company as those carried out by a director". The act also sets out the duties and responsibilities of directors, including the following:

• the duty of loyalty to:
• • act in the best interests of the company; and
  • avoid any potential conflict of interests.
• Appointed directors should be cautious not to place themselves in a position where there could be a conflict between their duties towards the company and their own personal interest or that of others. This is particularly critical if the potential nominee is the founder or investor;
• the duty of care, diligence and skill which is exercised by a diligent person who has accumulated the knowledge, skills and experience that would be expected of a person carrying out such a function;
• the duty to promote the company's wellbeing and ensure its appropriate management and administration, in line with the Companies Act. Among other things, this includes:
• • submission of annual returns; and
  • filing of documents such as those relating to:
  • • changes to the company memorandum and articles;
    • removal of directors; and
    • changes to the issued share capital.
• Furthermore, company directors must:
• • ensure that the company keeps a proper record of accounts in order to draw up the financial statements at year end; and
  • issue a directors' report together with their approval and signatures; and
• the duty to act within the scope of their authority as enshrined in the company's memorandum and articles.

When putting forward a nominee for a venture capital company, the investors should be convinced that the candidate:

• understands these duties towards the company; and
• is aware of the applicable anti-money laundering regulations – particularly if the company is operating in a space which is legally considered as a ‘subject person' and would be legally obliged to comply with this regime; and
• is aware of the General Data Protection Regulation/Digital Operation Resilience Act – particularly if the company is operating in a space which is subject to these regimes.

If the startup is operating in a regulated space, the directors must also be cognisant of the MFSA's regulations pertaining to the sector.

Investors must seek legal counsel to ensure compliance with the relevant rules and legal obligations pertaining to the startup's specific setup and circumstances. In line with best practice, it is advisable that board resolutions, agreements and board meeting minutes be properly documented and signed by the board of directors. It is also advisable that investors monitor on an ongoing basis the nominated director's performance, to ensure that they are fulfilling their duties and responsibilities towards the company.

7.3 Can a venture capital investor and/or its nominated directors typically veto significant corporate decisions of a portfolio company? If so, what are the common types of corporate decisions over which a venture capital investor might request veto rights?

Venture capital investors may prefer to have veto rights over significant corporate decisions within their portfolio companies in order to:

• protect their investments; and
• ensure that there is an alignment with their portfolio's strategic objectives.

In Malta, this practice is similar to that in other jurisdictions. Typically, an investor will request veto rights on pertinent matters affecting the company's structure and decision making, such as:

• the raising of new share capital/changes to share rights;
• changes to the memorandum or articles;
• the appointment and removal of directors;
• material financial decisions; and
• changes in business strategy.

7.4 What information and reporting rights do venture capital investors typically enjoy in your jurisdiction (by law and contractually)?

Investors are the primary stakeholders of the venture capital company. As they do not manage the day-to-day operations, they have the right to access information which is imperative for monitoring the company's performance, governance and processes. The directors must thus provide the following documents to the investors/shareholders:

• annual accounts, to enable the investors to review the company's financial performance on an annual basis;
• auditor's report and directors' report, so that the investors can understand the company's financial position and activities;
• the register of members and debentures;
• minutes of meetings; and
• the memorandum and articles of association.

7.5 What other legal tools and strategies are available to venture capital investors or other minority investors to monitor and influence the performance of portfolio companies?

The introduction of an internal audit function can also be instrumental for investors and directors alike to monitor the performance and modus operandi of the company. Internal audits can enhance risk management and operational efficiencies through improved internal controls, which will ultimately provide comfort to the investors about the performance of the company. This is particularly essential if the venture capital company is operating in a regulated space such as fintech or payment services – areas which are subject to a plethora of compliance requirements. Typically, entities that are regulated by the MFSA must introduce an internal audit function to ensure compliance with regulations, sound risk management and effective good governance practices, which ultimately enhances investor and stakeholders' confidence.

8 Exit

8.1 What exit strategies are typically pursued by venture capital investors in your jurisdiction?

A typical exit strategy is for an investor to sell shares to:

• another investor; or
• a large and financially stable company within the market.

A gradual buyout is typically employed, spanning between one and three years, during which the terms of purchase are defined in terms of:

• conditions;
• confidentiality; and
• transfer of intellectual property.

An investor may also opt to sell solely a portion of its shares to gain liquidity, but at the same time maintain a degree of control over the company.

Another potential exit strategy is to convert the company from private to public through the launch of an initial public offering (IPO). An IPO may be beneficial because it:

• offers greater liquidity, increased credibility and visibility; and
• ensures a smooth transition for the current investors.

8.2 What specific legal and regulatory considerations (if any) should be borne in mind when pursuing each of these different strategies in your jurisdiction?

If a venture capital firm opts to exit the company by selling its shares on the public market, regulatory considerations must be factored in. Typically, this process involves:

• approval by the Malta Financial Services Authority of:
• • the company's prospectus and audited accounts for the last three financial years;
  • the same documents for any guarantor of the applicant;
  • signed directors' declarations; and
  • certified copies of the memorandum and articles;
• the appointment of a sponsor in line with the listing rules; and
• the appointment of a board of directors and an audit committee in accordance with a set of pre-defined criteria.

Prior to listing, the company should consult with an appropriate corporate legal team for direction on the preconditions for listing on the Malta Stock Exchange.

9 Tax considerations

9.1 What are the key tax considerations in relation to venture capital equity investment in your jurisdiction?

Corporate taxation: A company that is incorporated in Malta is taxed on its income and chargeable gains at the corporate income tax rate of 35%. Companies which are not incorporated in Malta but whose management and control are exercised in Malta are considered to be resident companies and are also subject to the 35% corporate tax rate. Where companies are neither resident nor incorporated in Malta, they pay tax only on Malta-sourced income and chargeable gains. This is called the ‘participation exemption'.

Depending on the profit's allocation of the company in the respective tax account, the company's shareholders may be able to claim tax refunds. There are three kinds of refund systems:

• the 5/7 refund, available on taxes payable on profits derived from passive income;
• the 2/3 refund, available on tax payable on profits on which double taxation relief has already been claimed; and
• the 6/7 refund, available on those taxes which are allocated to the Malta Taxed Account and the Foreign Income Account. This is the most type of popular refund mechanism and is typically opted for by companies registered in Malta, as it reduces the tax payable by the company on its distributable profits to an effective tax rate of 5%.

When a company which is registered in Malta (whether resident or operating via a branch in Malta) distributes profits, shareholders may be eligible for a partial tax refund. The most common refund is 6/7 of the corporate tax paid, equivalent to 30% of taxable profits. This results in an effective tax rate of 5% on distributed profits, provided that no double taxation relief is claimed. Importantly, Malta's refund system applies to both resident and non-resident shareholders on profits derived from domestic and international activities, except those arising from immovable property situated in Malta.

In this regard, Malta employs the full imputation system, which implies that there is no further tax charged on the dividends earned by shareholders following the payment of corporate taxation by the company. While dividends are subject to income tax upon their respective distribution, the shareholders are eligible for an imputation credit for the tax paid by the company, which effectively nullifies the shareholders' tax liability on the dividends earned. The imputation system applies to dividends which are distributed by Maltese companies to their shareholders – irrespective of whether they are residents or not and whether they are individuals or companies.

The full imputation system is designed to eliminate the economic double taxation of company profits. Under this system, shareholders receiving dividends benefit from a tax credit equivalent to the tax paid on the profits out of which those dividends are distributed. Since Malta's corporate tax rate is 35% – also the highest personal tax rate – shareholders incur no additional tax on dividends. If the shareholder's tax liability on the dividend is lower than 35%, any excess tax credit is refunded, provided that the dividend is declared in its tax return.

The Maltese tax system also allows for a tax exemption on any profits which emanate from the representation or branch of the company outside of Malta, provided that the profits are being charged to tax by the foreign jurisdiction.

In the case of the recently launched special limited partnership funds, income generated from the fund is not taxed at the fund level, but investors are taxed according to the regime applicable in their respective jurisdiction.

Double taxation treaties: Over the years, Maltese governments have signed over 80 double tax treaties with worldwide partners and emerging countries. Such bilateral treaties aim to resolve issues relating to double taxation of passive and active income. Taxpayers will therefore be eligible for a tax credit against the tax attributable in Malta on the foreign tax incurred. The tax credit must not be higher than the tax liability in Malta on foreign sourced income.

Maltese tax law offers three principal methods for relieving double taxation on foreign-source income:

• Treaty relief: A form of tax credit on the amount of foreign tax paid on foreign sourced income originating from a country with which Malta signed a tax treaty as per the commissioner for tax and customs' website.
• Unilateral relief: Available when treaty relief does not apply, operating in a similar manner to treaty relief. Unilateral relief is applicable to a resident taxpayer that pays tax in a country with which Malta does not yet have a double taxation agreement, in order to avoid double taxation
• Flat-rate foreign tax credit: A notional credit of 25% on qualifying income, which is added to the net income received. Taxable income is calculated after deducting attributable expenses from this aggregate. To apply the tax credit, the company must be authorised by its memorandum and articles to allocate income to the foreign income account, along with meeting other applicable conditions.
• Commonwealth relief: Available only when no double taxation agreement exists and contingent on reciprocal relief being granted by the other Commonwealth country, making its application somewhat limited.

Venture Capital Fund (Tax Credit) Regulations: These regulations provide the framework for a number of tax incentives applicable to funds invested in resident companies. A number of schemes are in place which are applicable to startups, such as the Seed Investment Scheme and the INVEST scheme.

The above list of incentives is not comprehensive and an appropriate tax professional should be consulted to ensure that the right incentive is applicable in each specific case.

9.2 What are the key tax considerations in relation to venture capital debt investments in your jurisdiction?

In 2019, Malta introduced the Thin Capitalisation Interest Limitation Rules, which limit the amount of the interest deduction that can be allocated in the tax period under consideration. The rules limit by the higher of either:

• 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA); or
• €3 million.

A higher deduction may be allowable for members of a consolidated group of companies, provided that the taxpayer can demonstrate that its equity to total assets ratio is not more than 2% lower than the equity to total assets ratio of the relevant accounting group.

Therefore, when a company's interest and similar borrowing costs exceed taxable interest revenues and other economically equivalent taxable revenues, the maximum tax deduction allowed for the excess costs in a given tax period is limited to 30% of EBITDA. Any excess borrowing costs may be carried forward indefinitely, while unused interest capacity (including the unabsorbed interest allowance for the current year and any carried-forward interest allowance from previous years) can be carried forward for a maximum period of five years.

To streamline administrative processes, Malta, in accordance with the EU directive, has implemented a safe harbour rule. This rule ensures that net interest will always be deductible if exceeding borrowing costs do not surpass €3 million, even if this results in a deduction that is higher than what would be allowed under the EBITDA-based ratio.

Moreover, no withholding tax is charged on interest paid to non-residents, on the basis that the beneficiary:

• is not owned and/or controlled by, or is not acting on behalf of, persons/companies which are resident and domiciled in Malta; and
• is not effectively connected to a permanent establishment in Malta.

Withholding taxes are also not applicable to interest paid to residents; however, a 10% or 15% tax may apply if the interest income is qualifiable as investment income.

Interest received directly by a non-resident individual, or by a foreign company that is ultimately owned by individuals who are neither resident nor domiciled in Malta, is exempt from income tax, provided that the foreign company does not have a permanent establishment in Malta.

The above list of tax incentives is not comprehensive and an appropriate tax professional should be consulted to ensure that the right incentive is applicable in each specific case.

9.3 What are the key tax considerations in relation to equity-related incentive schemes in the context of venture capital investments in your jurisdiction?

Equity-related incentive schemes, such as stock options or share awards, are utilised to align the interests of employees and shareholders. Tax considerations include the following:

• Tax credits for investors: The Seed Investment Scheme offers qualifying investors a tax credit amounting to 35% of their investment in qualifying companies, up to a maximum of €250,000 per annum. Qualifying investors can receive a tax credit equivalent to 35% of the value of investments made in one or more qualifying companies.
• Malta's participation exemption provides a full exemption (100%) on profits, including dividends and capital gains, derived from a participating holding or its transfer. Recent legislative updates have broadened the scope of this exemption while lowering the thresholds for qualifying holdings.
• No withholding tax is imposed on dividends distributed by Maltese companies (except for distributions of untaxed income to resident persons other than companies), because no additional tax is imposed on distributions other than the tax charged on the company with respect to the distributed profits.
• Companies which have their business activities mainly outside of Malta may be eligible for an exemption of stamp duty on the transfer of marketable securities. However, this applies in cases where more than half of the ordinary shares, voting rights and rights to dividend distributions are held by investors which are not resident locally.

The above list of tax incentives is not comprehensive and an appropriate tax professional should be consulted to ensure that the right incentive is applicable in each specific case.

10 Disputes

10.1 What kinds of disputes typically arise in relation to venture capital investments in your jurisdiction and how are they typically resolved?

Disputes typically arise when the views of the investor and the founder diverge, particularly as the investor will have invested its own money into the venture capital. If the venture capital has several investors and capital in place, it will be difficult to put pressure on the founder. However, if the founder lacks options and needs liquidity, the investor has leverage and can put pressure on the founder.

11 Trends and predictions

11.1 How would you describe the current venture capital landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?

The Maltese venture capital landscape is growing and the current economic climate is conducive to further investment. Malta Enterprise has noted the establishment of a number of startups through its ongoing schemes aimed at providing opportunities to obtain government funding. Such government support programmes are playing a critical role in driving this growth and increasing opportunities locally. Malta has also been establishing itself as a hub for financial services with the support of Finance Malta and other key industry stakeholders, such as:

• Malta Enterprise;
• the Malta Digital Innovation Authority; and
• the Ministry for the Economy, Enterprise and Strategic Projects.

In Malta, there is an ongoing and continuous push towards bringing in new investment with programmes such as:

• the Malta Permanent Residence Programme;
• the Nomad Residence Permit Programme; and
• the Malta Start-up Residence Programme.

In particular, the Malta Start-up Residence Programme grants a three-year residence permit, which may be extended for a further five years, during which beneficiaries may reside in Malta while they are launching their startup. This programme is intended for non-EU nationals and is specifically designed to facilitate the relocation of private individuals when setting up innovative startup companies locally. The Specialist Employee Initiative is also beneficial, ensuring a fast-track visa process for qualified professionals earning at least €25,000.

The Maltese government has adopted an open-for-business approach with policies aimed at:

• embracing the latest industry developments; and
• engaging with the appropriate regulators and authorities, such as the Malta Financial Services Authority and the Malta Competition and Consumer Affairs Authority, to ensure consumer protection and maintain market stability.

Moreover, the recently launched Private Equity and Venture Capital Association (PEVCA) augurs well for venture capital investment in Malta. The PEVCA – a hub which promotes innovation and industry growth – has members including:

• fund managers;
• investors;
• professional services firms; and
• family offices.

The PEVCA can assist foreign investors looking into setting up locally by:

• offering access to local professionals; and
• providing networking and investor-finding opportunities through its regular informative meet-ups.

A guide to Malta can be found through the Start in Malta website at https://startinmalta.com/.

In order to set up locally, one should also consult with an established company service that can assist with:

• establishing a presence in Malta;
• accessing funding and government programmes; and
• connecting with the right stakeholders locally.

Malta's open and diversified economy – which includes various sectors, such as financial services, gaming, construction, maritime, pharmaceuticals, manufacturing and tourism – poses abundant opportunities for prospective investors and startups. According to the latest figures published by Eurostat, Malta's real gross domestic product (GDP) increased by 6% over the previous comparable period; and according to the latest European Commission forecast, the Maltese economy is set to continue expanding with a predicted GDP growth of at least 4.3% each year over 2025 and 2026 in real terms, with investment growth also set to increase further at 4.5% and 3.5% in 2025 and 2026 respectively. This – coupled with a favourable regulatory environment, an attractive tax structure, various government-funded incentive schemes and suitable office space and lab facilities – is conducive to increasing the proportion of venture capital investments in Malta while boosting investor confidence.

The biggest challenge is understanding local and EU regulations, as regulatory compliance – particularly for regulated entities – may be a hurdle. However, founders should rest assured that a variety of service providers and professionals available on the island can help to navigate the complexities of setting up shop in Malta.

11.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?

The Annual Start-up Festival led by Malta Enterprise will take place later in 2025. This is a platform for founders and startups to find both local and international angel investors.

While current funding opportunities are expected to remain, we also expect further government and EU funding support for new startups – particularly in sectors which Malta intends to develop, such as:

• fintech;
• life sciences; and
• AI.

In late 2024, the minister for the economy also announced that in mid-2025, a new law will be introduced to regulate INDIS Malta, a government agency entrusted with managing government-owned industrial parks. This new legislation will prioritise the allocation of industrial sites to more high-value generating enterprises with a view towards attracting further investment in sectors in value-adding sectors such as:

• aviation;
• life sciences; and
• AI.

In 2025, the government is also planning a new incubation centre in the Hal Far industrial area, which will host up to 50 new companies that generate value-added to the economy.

12 Tips and traps

12.1 What are your tips to maximise the opportunities that venture capital presents in your jurisdiction, for both investors and portfolio companies, and what potential issues or limitations would you highlight?

In order for founders and investors to maximise the opportunities which Malta has to offer, we would suggest the following:

• Know your remit – try to understand the applicable regulations and requirements to ensure that your company is compliant.
• Explore funding opportunities offered by the government both for the company and on an individual basis.
• Network – Malta hosts several events throughout the calendar year which are great opportunities to network and matchmake with potential investors and for recruitment purposes, as Malta is particularly invested in human capital
• Consult with the right individuals within the industry to stay ahead of the game.
• Find the right co-working space or tech hub suitable for you, which will provide you with access to the necessary resources for your startup to grow.

PKF Malta Limited would like to acknowledge and thank Finance Malta, the Private Equity and Venture Capital Association, Finco Trust, SuperCharger Ventures and Malta Enterprise for their kind cooperation and contribution in compiling the information contained within this Q&A.

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.