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Taxation of Funds
In accordance with the Collective Investment Schemes (CISs) Regulations, a fund is defined as a CIS or in the case of a CIS divided into sub-funds, a sub-fund of that scheme. The term CIS is defined as any scheme or arrangement, which is licensed under the Investment Services Act.
There are two main types of CISs (i) prescribed funds and (ii) non-prescribed funds. A prescribed fund is a fund of a Malta based scheme that has declared that the value of its assets situated in Malta equals at least 85% of the value of its total assets. In essence, a prescribed fund is a fund which invests wholly or mainly in assets situated in Malta. A non-prescribed fund (whether resident or not) is a fund which is a non-prescribed fund.
Taxation of a Prescribed Fund
Whereas most of the income of non-prescribed funds is exempt from tax, most of the income of a prescribed fund is not so exempt. 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.
Investment Income (other than investment income paid by another CIS) received by a prescribed fund is subject to withholding tax under the following rates:
a) When the investment income in question is namely interest payable by a person carrying on the business of banking under the Banking Act, the rate of 15% applies;
b) In every other case, the rate of 10% applies.
In the case whether a prescribed fund, and also a non-prescribed fund, has income from immovable property situated in Malta, such income would be subject to tax at the normal corporate rates of tax.
Taxation of a Non-Prescribed Fund
Non-prescribed funds benefit from a more fiscally advantageous treatment than prescribed funds. A blanket exemption applies on gains or profits accruing to a non-prescribed fund. Given that by definition they are funds which do not hold immovable property situated in Malta and derive Maltese investment income, the income of a non-prescribed fund is, wholly or mainly exempt from tax.
It is important to note that the blanket exemption should not apply to foreign funds which are not licensed in Malta.
Taxation of Capital Gains at the level of the investor
a) Transfers by resident investors of a prescribed fund
No tax is incurred on capital gains realized by resident investors on disposal of units in a prescribed fund, as long as the fund is listed on the Malta Stock Exchange. Such exemption does not apply if the fund is not listed on the Malta Stock Exchange. In order to benefit from such exemption, the units must be held as capital assets, and the transfer must be either a direct transfer or redemption.
b) Transfers by non-resident investors of a prescribed/non-prescribed fund
Non-resident investors are exempt from tax on gains or profits on disposal of units in a prescribed and non-prescribed fund (not through the services of an Authorised Financial Intermediary ‘AFI’). Such exemption applies on the basis that the investor is not resident in Malta for tax purposes and is not owned and controlled by, directly or indirectly, not acts on behalf of an individual who is not resident in Malta.
Such exemption for non-resident investors do not require for the fund to be listed on the Malta Stock exchange. In addition, the disposal can be a redemption but also a straight transfer. The gain or profit may be a capital gain or a trading gain.
c) Transfers by resident/non-resident investors of a non-prescribed fund
Capital gains arising on the disposal of units in a CIS upon the redemption, liquidation or cancellation of units held in a resident/non-resident non-prescribed fund attract a 15% final withholding tax. The disposal made by non-resident investors should be made through the services of an AFI.
CISs which are licensed by another EU state and classified as UCITSs, are not required to be licensed in Malta. Even if UCITSs are not licensed in Malta, resident investors therein are still entitled for the 15% final withholding tax on redemption, liquidation or cancellation of units.
The 15% final withholding tax will not apply if the disposal involves a direct transfer, rather than a redemption, and the gain is a trading gain and not a capital gain.
Taxation of dividends by non-prescribed funds
The normal rules apply to distributions from tax accounts, except that CISs do not allocate profits to the Foreign Income Account. Given that most of the income of non-prescribed funds is exempt from tax, such income is allocated to the untaxed account. Distributions are taxed at the withholding tax rate of 15% only when made to recipients, resident individuals or a non-resident person (including a non-resident company) owned and controlled by, directly or indirectly, or who acts on behalf of, an individual who is ordinarily resident and domiciled in Malta. Other distributions are not taxed.
Profits distributed by a non-resident non-prescribed fund where such dividends are paid through the service of an AFI are taxed at the special rate of 15%.
Taxation of dividends by prescribed funds
The normal rules apply to distributions from tax accounts, except that CISs do not allocate profits to the Foreign Income Account.
Stamp duty considerations
A CIS which holds a license under the Maltese Investment Services Act can benefit from a blanket stamp duty exemption in respect of:
A similar exemption exists in the case of foreign CISs (including UCITSs) which do not hold an Investment Services Act license, as long as the business interests of such CIS are more than 90% situated outside Malta.
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