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Special report: Malta – Fund-loving Europhiles
9 June 2014 | By Jonathan Ames
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A responsive stance to EU legislation has led to a thriving Maltese funds market. Is it enough to make rumours of a global firm’s move there come true?
Voters in Europe’s big beast countries may have sent a strongly sceptical message to their leaders in the union-wide parliamentary elections last month, and given the keepers of the Euroflame a bloody nose, but those in the EU’s smallest state could not be more enthusiastic.
Nearly 75 per cent of eligible voters in Malta went to the polls. And in a further sign that neither apathy nor antagonism towards the ‘European project’ has seeped into that Mediterranean island, they overwhelmingly returned Europhile MEPs. Five from the pro-integration Socialist and centre-right European People’s parties will pack their bags for Brussels, along with one independent.
The Maltese have good reason to parade the windy streets of Valletta sporting ‘I love EU’ badges. Ever since accession a decade ago the tiny country of well fewer than half a million souls has witnessed a booming financial services and funds market. That, in turn, has created a corporate law sector which, while bijou in size, is thriving.
Indeed, so potentially lucrative a legal market is Malta that rumours waft around Valletta that at least one global law firm is weighing up the possibility of planting a flag on the island.
Success is not linked exclusively to the funds market, say lawyers. Malta has a long maritime history and aviation is the inheritor of that tradition, with the registration of air operator certificates and private jet registration particularly lucrative.
Nonetheless, the funds market is key to the island’s success and its love affair with the EU. Finance Malta – the public body launched seven years ago to promote the financial services sector – cites EU accession as triggering a rush of funds to the island. Before May 2004 it was home to only four hedge funds; now there are 620 collective investment schemes domiciled in Malta.
Key to that growth was the positioning of Malta on equal terms with other EU jurisdictions, meaning, according to Finance Malta, that investment services and schemes under Europe’s Undertakings in Collective Investment in Transferable Securities (Ucits) directive can be registered in Malta and moved to any EU country.
A personal income tax regime for non-domiciled employees has helped to attract ex-patriot experts to the funds sector. Tax is capped at 15 per cent for those not habitually resident on the island, but there is no time limit on the stay of nationals from other EU states. There is also no tax on personal income exceeding €5m (£4m) annually, and the Maltese authorities will not tax revenue generated from work conducted outside the island, provided the cash is not brought to the jurisdiction.
Another help has been the Malta Financial Services Authority’s membership of the European Commission’s 13-year-old Committee of Securities Regulation, which creates a regulatory and legislative framework to foster investor confidence.
Rounding out the package that has lured funds to the jurisdiction is the government’s adoption of the euro at the beginning of 2008, which removed currency exchange burdens allowing, according to Finance Malta, “businesses and individuals to consummate previously unprofitable trades”.
Political support for Malta’s growing position as a domicile of choice for funds has survived despite a dramatic change of government a year ago. The Nationalist Party of former prime minister Lawrence Gonzi had been in power for 15 years before tripping up in December 2012 over the issue of whether the national bus service should be outsourced to Germans.
The Maltese are even keener on domestic elections, with more than 90 per cent turning out to boost the Labour Party’s young leader Joseph Muscat to a runaway victory. Labour took nearly 55 per cent of the vote, comprehensively overturning the one-seat majority the Nationalists had enjoyed since 2008.
The 39-year-old Muscat – a former print and broadcast journalist – wooed the electorate with promises to slash the island’s electricity prices, which are among the most expensive in the world. Labour aims to cut fees by a quarter, triggering fears in the island’s business and legal sectors that the party’s socialist history and inclinations might have a negative impact on the growing funds and financial services market.
A year on from the election fireworks, nerves have calmed. Relative certainty around Malta’s funds-friendly tax structure remains.
“Knowing the tax position is not going to change tomorrow and there is a level of government commitment has encouraged corporate structures as well as individuals to move here,” explains Romana Piscopo, a partner at Zurich-based cross-border tax planning niche law firm Pisco Partners, which has an outpost in Malta. “You know what to expect in Malta. It is not wishy-washy. There are no great upheavals, especially in the field of financial services. EU membership put Malta on the map – and it’s made the biggest impact from the point of view of the professions.”
For the three or four domestic law firms catering to the funds market, getting to grips with the EU’s alternative investment fund managers directive (AIFMD) sits atop the in-tray. The legislation came into force less than a year ago, with the Malta government rushing to the head of the queue for implementation into domestic law. It was the first EU member state to do so, despite concerns, not least from UK asset managers, that the directive over-regulates the sector.
Indeed, Malta’s Investment Services Act technically hit the country’s statute books about a month before the directive officially came into force in Brussels. The legislation’s genesis is rooted in the global financial crisis, with eurocrats and parliamentarians taking the view that a lack of regulatory consistency for hedge and private equity fund managers relative to mutual and pension funds was a factor in the 2007/08 crash.
As the Malta Financial Services Authority published the domestic legislation, one of the island’s biggest law firms, Ganado Advocates proudly blared that “Malta is open for AIFMD business”. The funds community is now gearing up for the latest Ucits directive, Ucits V.
The amendments are likely to come into force next spring and Louis de Gabriele, the partner heading the corporate and finance group at Camilleri Preziosi, says “it is important for Malta to be one of the first jurisdictions to get that right because our market is still heavily reliant on funds and investment services”.
De Gabriele is also a big proponent of Malta’s burgeoning aviation sector, which he predicts will expand considerably in the next six to 12 months.
“We’ve already managed to bring several aircraft charterers to Malta,” he says, “and that has a multiplying effect in the financing area. It also creates spin-offs by boosting M&A work around the aircraft industry.”
Another important practice area for business lawyers is reinsurance special purpose vehicles, in which Malta was a first-mover.
Global firms ponder moving in
So is all this top-end work eventually going to attract a heavyweight global firm? One Maltese lawyer says a well-placed partner at an international firm maintains that its partnership committee has had internal discussions in the past few weeks about the possibility of nosing into the market with an office opening.
“No global law firm is going to open an office in Malta without having done its homework to ensure it will profit from being in there, and that could ultimately be good for the market,” muses the lawyer.
But others see the prospect as fanciful at best.
“I’d be surprised if a global firm was looking to open in Malta,” says de Gabriele. “The global firms all have relationships with local firms and are well-served by them. Not only that but the fee structures of the global firms would make it difficult for them to have a viable proposition here. While global firms may be referring some work to local Maltese law firms, no individual firm has sufficient work in the jurisdiction to sustain a full-time presence on the ground.”
It seems likely that in a global legal practice world of tightening budgets, opening an office in sunny Valletta will be an expansionist move too far for the law firm generals in London and New York.
Before 2004 Malta hosted four hedge funds; now there are 620
Standard time to register a fund: six to eight weeks
Average cost of setting up a fund: €25,000
Annual administration servicing fees: €15,000 to €17,000 for a standard fund with around 50 positions and monthly valuations
Normal audit fee: €7,000
Source: Finance Malta
Key figures: Malta
Life expectancy at birth: 81
Source: World Bank, National Statistics Office