A secret shared

Of the nine countries that joined the EU as it expanded westward in 2004, Malta was the smallest. The island nation in the Mediterranean remains – by population, geography and GDP – the junior member of the euro zone, having formally adopted the currency in 2008.
 
But compared to its fellow EU initiates, Malta is a robust, well-managed and reasonably wealthy economy. Its introduction to the euro zone capped a decade of reforms that saw its financial sector undergo rapid development and internationalization. Through a combination of strong regulation, tax efficiency, low operating costs, and investment in information technology and human resources, Malta has emerged as a useful platform for investments into and out of the EU.
 
"It always used to be said that Malta was Europe’s best-kept secret, but we are now seeing rapidly increasing levels of interest," said Kenneth Farrugia, chairman of Finance Malta, a  non-profit public-private initiative that promotes the country as an international financial center.
 
The parties taking notice include China. Earlier this year, the Malta Financial Services Authority (MFSA) signed two memorandums of understanding (MOU) with China’s banking and securities regulators, respectively. The agreements could be viewed both as testament to the European nation’s past and as a nod to its future.
 
Robust regulation
 
Malta has created a strong regulatory environment: It was among the first countries included in the Organization for Economic Cooperation and Development’s "white list" of jurisdictions that are being constructive on tax transparency issues, and it has built up a network of 55 operational double taxation treaties. The provisions in the MOU for information exchange and regulatory collaboration are a reflection of this progress.
 
As for the future, the agreement on securities regulation is intended to create a mechanism for private investment in both directions. Chinese groups participating in the Qualified Domestic Institutional Investor (QDII) program would be able to access investment funds domiciled in Malta, thereby gaining exposure to global equities markets. Similarly, Malta-based funds could purchase Chinese-listed securities under the Qualified Foreign Institutional Investor (QFII) scheme.
 
Malta is not the only European financial center seeking to build ties with China, but there is no denying that the island nation has emerged as a credible challenger to Switzerland or Luxembourg in recent years.
 
Around 25% of the 400 investment funds currently domiciled in Malta were set up in 2009, taking total assets under management to US$9 billion at the beginning of 2010. This is in part a response to the OECD’s drive for tax transparency: Investors want a degree of regulatory flexibility wrapped in cast-iron legal and political respectability. Malta is increasingly seen to fit the bill.
 
Much the same applies to the full range of financial services products available in Malta.
 
Insurers – interested in both captive and reinsurance – are flocking to the country, with the number of protected cell companies rising from 22 in 2007 to more than 45 today. The limited liability company, which can be used for all kinds of corporate functions, is also becoming more popular, as are trust and foundation structures, both of which have undergone significant reform in recent years as part of efforts to boost private wealth management services.
 
"I have received a number of enquiries which focus on Malta as a jurisdiction that is better recognized as being more compliant to the international expectations and standards," said Malcolm Becker, CEO, Bentley?Trust (Malta). "Malta has a good infrastructure of practitioners to handle investments and it is often seen as a very acceptable base for EU investments."
 
Financial services now account for 12% of Malta’s GDP and the government wants this share to double by 2015. The sector was posting annual growth rates of 30%-plus to 2008 and still managed to expand by over 20% in 2009 despite the shadow of the global economic downturn. It’s worth noting that Malta’s banks are well-capitalized, liquid and carry substantial retail deposits, and this helped them emerge from the financial crisis relatively unscathed. The banking system – worth US$57 billion as of December 2009 – was identified as the 11th-soundest in the world in the World Economic Forum’s Competitiveness Index 2009-2010.
 
High quality human resources – the financial services sector is responsible for 6,700 jobs, or around 4% of the country’s workforce – are inevitably a key ingredient to Malta’s success. The "hardware" has received just as much attention as the "software," with considerable investment going into telecommunications and information technology.
 
Beyond that, there are compelling fiscal reasons for doing business in Malta. The country offers all the advantages of EU membership, but at two-thirds of the cost of most of its regional neighbors, taking into account salaries, office space, services and utilities. On the tax front, corporate profits are subject to an income tax rate of 35%, but shareholders can claim some if not all of this back on distribution of dividends. Personal income tax can also be as much as 35%, although high-net-worth individuals who move their tax residency status to Malta can qualify for a flat rate of 15% on any income remitted into the country.
 
Major players
 
This increasingly sophisticated environment has inevitably drawn in leading companies, from financial services specialists to the financial units of Fortune 100 firms. HSBC is a notable presence; it bought local operator Mid Med Bank in 1999 and now controls 80% of Malta’s banking market alongside Bank of Valetta.    
 
"Malta today is at the core of the HSBC Group’s European strategy for growth," said Monika Dick of HSBC Malta. "As the country is a member of the EU, a number of financial institutions domiciled in Malta benefit from having access to a market of 27 countries through EU-passporting arrangements."
 
At the same time, Malta can act as a staging post for business beyond EU borders. Dick noted that the bank has forged close ties with HSBC Group entities in the Middle East and Africa, leveraging Malta’s strategic location in the southern Mediterranean.
 
The future of financial services in Malta – from a Chinese perspective, at least – may lie as much in these emerging markets as in the established powers of Europe.