Legislating a Malta Family Business Act
Family businesses make up the fabric of the Maltese and European economies. The survival and successful transmission of mature family business across generations are as critical to the economy as the encouragement of innovation, creativity and entrepreneurship, and should be supported accordingly by Government. This was the message underlying the opening speach by MAFE president and co-founder Mario Duca during a seminar and workshop organised by the Malta Association of a Family Enterprises in partnership with Bank of Valletta.
The seminar, entitled "The Family Business Act" was attended by members of MAFE, including members of the most prominent business families in Malta. The workshops invited delegates to discuss MAFE's proposals for a world-first Family Business Act, first proposed to Government in 2011 and now finding fruition in Government's consultation process in preparation for the draft bill. The Hon. Chris Cardona, the Minister for the Economy, Investment and Small Business, addressed the audience of top executives from Malta’s leading family firms and emphasised Government's commitment to enacting the Malta Family Business Act in recognition and support of Malta's business sector, dominated by as much as 80% by family businesses. Minister Cardona outlined the time frames of the consultation process through which Government had received an encouraging feedback from the various stakeholders, which it is now reviewing, as part of the legislative initiative that commenced earlier this year.
Dr Jean-Philippe Chetcuti, managing partner of Chetcuti Cauchi and founder and legal advisor to MAFE outlined the legal and fiscal recommendations made to Government on behalf of MAFE. The definition of a "family business" and the introduction of a framework for gathering statistical data would be critical to the consideration of more advanced legislative interventions in the coming years in the family business sector. Moreover, upon defining "family business". It would also be useful for the Family Business Act to specify the criteria for a family business to qualify as an "eligible" family business, with the aim of ensuring that only family businesses that are worthy of receiving the legal and fiscal accommodations to support their proper governance and inter-generational transmission benefit from such incentives.
Challenges for Maltese family businesses
Maltese family business face many challenges including issues relating to governance, which hamper the professional management of the business; high tax costs and cash flow problems associated with their transfers; and sometimes they can be crippled by the magnitude and suddenness of their transmission from one generation to another. The Maltese Income Tax Act exempts capital gains on transfers of immovable property, shares, businesses, goodwill and intellectual property only in the case of a donation between family members, as defined therein. The transferee is liable to stamp duty and is afforded no exemption. At 5 per cent, stamp duty acts as a major disincentive to family members as this is only reduced to 2 per cent for transfers of marketable securities.
MAFE
Against this backdrop, the Malta Association of Family Enterprises was set up in 2011 to serve the educational and training needs of family businesses in Malta. MAFE also acts as a voice for the family business sector and works with stakeholders at a national and international level. MAFE’s efforts have found support with both government and opposition and have culminated in a governmental pledge to legislate a Family Business Act by early 2014.
Family Business Act
MAFE has suggested the Family Business Act introduce provisions which seek to overcome the three main challenges that family businesses currently face. The first initiative looks to introduce a much awaited definition of ‘family business’ and to provide a framework for gathering and analysing data of relevance to the sector. This will serve as a basis for better understanding family businesses and will help to determine eligibility for special benefits bestowed on family business by the Act.
The second proposal seeks to introduce a fiscal framework for the reduction or deferral of taxes applicable at the transfer of shares inter vivos or causa mortis between generations of business families, or the extension of exemptions already applicable for transfers in the case of non-resident shareholders.
The third proposal seeks to provide public co-funding of training and consultancy in family and business governance and succession planning for qualifying family businesses, family members and employees.
The eligibility rules proposed by MAFE are intended to limit the benefits contemplated above to ‘eligible family businesses’, that is, family businesses that have taken reasonable identifiable steps in the direction of proper governance and succession planning as encouraged by the FBA.
About the author:
Dr Jean-Philippe Chetcuti is tax partner at Chetcuti Cauchi and a founder-secretary of MAFE.
