The Renewal of the Seed Investment Scheme – The Government’s pursuit to encourage the setting up of small and medium-sized enterprises (SMEs) in Malta

Kristine Attard and John Caruana  -  1/August/2019

What is the purpose behind this Scheme?

SMEs form the backbone of the Maltese economy and the Maltese Government regularly demonstrates its determination to continue mobilising private investment to finance and support start-ups. The latest legal measure, being taken just last Friday, is the revival of the Seed Investment Scheme through Legal Notice 170 of 2019, which shall remain effective until the 31st December 2021. The chief objective of this scheme is to grant tax relief in the form of tax credits to natural persons resident in or operating in Malta investing in start-up businesses.  

What are the eligibility criteria for an SME to qualify for such Scheme?

The SME must satisfy the following cumulative conditions:

  • It must be incorporated in Malta or controlled and managed from Malta or has a place of business in Malta;
    • It must have been in existence and engaged in carrying out qualifying activities for a period not exceeding 3 years following its first commercial sale;
    • It is not listed on any stock exchanges;
    • It does not have more than 10 employees;
    • It has gross assets of not more than €250,000 (immediately preceding the issue of equity shares to the qualifying investor).

What types of activities is an SME allowed to carry out in order for it to apply for such Scheme?

An SME shall be allowed to carry out any type of activity except for activities which involve:

a)    dealing in immovable property, shares, securities and, or other financial instruments;

b)    dealing in goods other than in the normal course of business;

c)     carrying on banking, insurance or any other activity covered by the Investment Services Act, the Banking Act, and the Financial Institutions Act;

d)    providing legal, accounting or other professional services;

e)    activities relating to the development of immovable property;

f)     receiving royalties or licence fees;

g)    operating or managing hotels, hostels, guest houses or residential care homes;

h)     carrying on activities in connection with the generation of electricity and other energy sources;

i)      the holding of shares, whether directly or indirectly, in any company which carries out any of the activities listed in any one or more of paragraphs (a) to (h);

What are the eligibility criteria for an investor to apply for such Scheme?

In order for a person to be eligible to qualify as an investor in terms of this Scheme, such person must be:

  • a natural person; and must be EITHER
  • a resident in Malta; OR
  • a non-resident individual who is a national of an EU or EEA Member State whose worldwide income, at an individual level or coupled with that of his spouse, is at least 90% derived from Malta under the relevant provisions of the Income Tax Act, to the extent that he or she bears the full risk of his or her investment.

The investor must also continue to hold the investment in an SME (which qualifies for such Scheme in terms of the above) for a period of not less than 3 years and he must not be connected to the said SME prior to the subscription to the equity shares in the SME.

Who can be deemed to be connected to the SME (which qualifies for such Scheme) and thus would not be able to benefit from this scheme?

The Legal Notice indicates a number of instances where an individual can be deemed to be connected to the SME. These include cases where the individual is:

  • the investor’s spouse, descendants and ascendants in the direct line and their relative spouses, his brothers or sisters, and their descendants;
  • a shareholder of the qualifying SME in which it invests, including business angels and financial institutions, irrespective of their ownership;
  • an investor who, prior to the qualifying investment, already holds shares, whether directly or indirectly, in the qualifying SME;
  • an investor who is, upon winding up of the qualifying company, entitled to any of its assets, where such right existed in favour of the said investor prior to the company being granted the status of qualifying SME in terms of these rules;

What is the Tax Credit Benefit offered to an investor under such scheme?

  • A qualifying investor shall benefit from a tax credit equivalent to a sum amounting to 35% of the aggregate value of the investments made by the said qualifying investor in a qualifying SME/s, provided that the total tax credit applicable to any such investor shall not exceed €250,000 per annum.
  • The applicable tax credit shall be set off against the tax due by the relative qualifying investor in respect of any income or gains brought to charge to tax in the year of assessment immediately following the basis year during which the relevant investment/s is/are made.
  • Should any part of the applicable tax credit not be absorbed in that year of assessment, the qualifying investor may carry forward the remaining part of the tax credit and set it off against any tax due for any subsequent year of assessment, until it is fully absorbed

How can KSi Malta be of assistance?

At KSi Malta, our legal and tax team can help you determine whether this Scheme is applicable for your company (SME) or for you, as an investor. We can also offer all assistance which is required in the application process. 

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