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17.4.2012

Malta Taxation of Collective Investment Funds

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Summary

The Malta tax treatment on income of hedge funds hinges on the differentiation made between 'Prescribed' and 'Non-Prescribed' funds. A Prescribed fund is subject to tax in Malta on its profits, a Non-prescribed fund is not.

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Taxation of Collective Investment Funds

The Malta tax treatment of the income of investment funds hinges on the differentiation made by Maltese law between ‘Prescribed’ and ‘Non-Prescribed’ funds.  In this paper the term ‘Funds’ refers to entities  or arrangements  which have been established to perform the function of a ‘Collective Investment Schemes’ (hereafter referred to as ‘CISs’). 

Default CIF Taxation

By way of summary, a ‘Malta Fund’  which is ‘Prescribed’ (defined hereunder) is subject to tax in Malta on its profits.  On the other hand, a Malta fund which is ‘Non-Prescribed’  (referred to hereafter as ‘non-prescribed funds’ ) is not subject to tax its profits.  However, non-prescribed funds are subject to tax on gains they have made from immovable property/real estate situated in Malta. 

Prescribed v. non-Prescribed funds

A ‘Prescribed Fund’ is considered to have been established under a Malta based scheme,  and:-

1. holds at least 85% of the value of its total declared assets in Malta;  and

2. 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. 

Taxation of Investment Income of Prescribed Funds

The tax rate at which a prescribed fund which is a company is taxable is, by default, at the rate of 35%.  However other rates of tax apply depending on the fund’s income streams.

4.1. Withholding tax rates

Moreover, tax should be withheld on Investment Income  to which a CIS is entitled by the ‘Payor’ of the income.  A payor should withhold as tax 15% on investment income which classifies as ‘Bank Interest Income’.   Otherwise a withholding tax of 10% applies to every other form of investment income.   Income which is derived from other CISs, whether prescribed or non-prescribed, or received by a non-prescribed fund is not considered to be investment income.   

To an extent the smooth operation of the system relies on a fund notifying all parties from whom investment income is due of their status.   In this regard a CIS should do so in terms of Maltese law. 

4.2. Income of prescribed funds not charged to tax 

1. Investment Income which is derived from a source not linked to Malta;  

2. Investment Income received from other CISs; 

3. Capital gains derived from the disposal of securities or units in a prescribed fund or a non-prescribed (foreign) fund (and not paid through the services of an AFI ) are not subject to tax; 

Tax Treatment of Non-Prescribed Funds

The income which is derived by a non-prescribed fund is exempt from Malta tax.   This general rule is without prejudice to income derived from immovable property situated in Malta which is subject to tax at 35%.

 

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