Collective investment vehicles, better known as funds, are broadly used in domestic and international tax planning. Within the EU they are subject to freedoms offered by the Single Market (namely, Freedom of Establishment and Free Movement of Capital) and regulated by secondary legislation. This publication presents short description of usage of Malta funds in the light of tax law amendments regarding funds which will be welcomed in Poland as of 1st January 2014.
Overview of Taxation of Polish Funds
Under provisions of Polish Corporate Income Tax Act, funds established under domestic law are exempt from income tax. Moreover, the exemption may apply to investment vehicles established in other EU Member State if several conditions are met. Among others, the investment vehicle should be subject to tax in the state where it has its registered seat, have a depositary who holds its assets and should be managed by qualified persons, recognized and qualified under the law of the state where these persons have their registered seat. Broadly speaking, Polish investment funds are not allowed to be partners in partnerships but may invest in securities.
The advantage of investing in securities was used in connection with Polish partnership en commandite limited by shares (spółka komandytowo-akcyjna). This tax transparent partnership has capital and issues bonds to bondholders which fall under the scope of securities. On the other hand, tax transparency shifted tax liability from the level of the partnership to the level of a bondholder, which in case of an investment fund was tax exempt.
Unfortunately, as of 1st January 2014 this structure may not apply anymore. As a result of proposed amendments, partnership en commandite limited by shares will not be a tax transparent entity and be subject to tax under rules similar to private limited companies (so taxable on the level of the company, regardless taxation on the level of shareholders). This change will remove tax benefits of structures which use domestic funds.
Malta Funds
Malta offers a variety of vehicles that can be used to cater for a wide range of investment strategies and investor types. The majority of funds are typically structured as SICAVs, investment companies with variable share capital, but a Malta fund can also be structured as an INVCO (an investment company with fixed share capital), a unit trust, a contractual arrangement or a partnership. These legal structures serve as vehicles for an array of fund types.
Potential investors may choose from UCITS, retail non-UCITS, Alternative Investment Funds (AIFs) and Investor Funds (PIFs). UCITS funds are investment funds established in accordance with the UCITS (Undertakings for Collective Investment in Transferable Securities) Directive. UCITS schemes invest in transferable securities such as shares in companies and bonds. A UCITS set up as a company and managed by a third party manager requires a minimum capital of €1,250. In the case of a self-managed scheme, the initial paid up share capital should not be less than €300,000. The units of a Maltese UCITS scheme licensed in Malta could be freely marketed across the EU, provided that the necessary notification procedures are adhered to.
A Maltese non-UCITS scheme is a collective investment scheme which does not comply with the UCITS Directive but which could still raise capital from retail investors. Maltese non-UCITS can be either open-ended or closed-ended and must appoint a Maltese custodian and at least one Maltese director.
Following the recent transposition of the Alternative Investment Fund Managers Directive (AIFMD), it is possible to set up Alternative Investment Funds (AIFs) in Malta in accordance with the AIFMD. The major benefit of fully complying with the AIFMD is that it is possible for AIFs to attain passporting rights to be marketed across the EU. Passporting in the case of an EU AIF established in Malta depends on the location of the Alternative Investment Fund Manager (AIFM) and the target market. An EU AIFM managing a Maltese AIF marketed in the EU may attain passporting rights to manage the AIF in any Member State, either directly or through the establishment of a branch. On the other hand, passporting rights do not apply in the case of an EU AIFM managing a Maltese AIF which is marketed in a third country.
At last but not at least, a PIF is an alternative investment fund which complies with the Investment Services Rules for Professional Investor Funds issued by the Malta Financial Services Authority (MFSA). A PIF does not target the general public but is intended for particular categories of high net worth investors who meet certain minimum investment requirements.
It is worth mentioning that regulatory costs in Malta are considerably cheap when compared to other jurisdictions, and Maltese PIFs may benefit from the advantageous fiscal framework in force and the double tax treaties which Malta has concluded with over sixty countries. There are three categories of PIFs depending on the type of target investors, that is, whether experienced investors, qualifying investors or extraordinary investors.
Taxation of a Malta Fund
To grasp the main features of a Malta fund taxation one should distinguish between prescribed and non-prescribed funds. In general, a prescribed fund is considered to have been established under a Malta based scheme, and holds at least 85% of the value of its total declared assets in Malta and is subsequently classified as a prescribed fund by the Commissioner for Revenue by a notice in writing. A Malta fund which does not satisfy one or more of the above 2 characteristics, or a fund which is established outside Malta is classified considered to be a non-prescribed fund.
Prescribed funds are subject to tax on any bank interest (15% final withholding tax), interest, discounts or premiums earned on Maltese government stocks or bonds (10%) and income from immovable property situated in Malta is subject to Maltese property tax at the rate of 35%. All other income is exempt from tax and therefore dividends received from other investment vehicles or from Maltese companies are not subject to any further tax. Moreover, neither income from foreign sources, nor capital gains derived from the disposal of securities or units in other schemes are subject to tax.
Non-resident investors of prescribed funds enjoy their income and capital gains being exempt from tax in Malta.
Non-prescribed funds enjoy full exemption from Maltese tax on its income (including that arising from local investments, and capital gains). Moreover, dividends received from Maltese and foreign companies are not subject to further tax at the fund level. However, it must be noted that income from immovable property situated in Malta remains subject to the local tax regime (with 35% tax rate).
Non-resident investors in prescribed funds are not subject to tax income or capital gains, whether any dividend was distributed is reinvested or otherwise.
Funds set up as companies are subject to general tax rules applicable to companies; among others, governing taxation of dividends and imputation system.
