Passport to Europe

Transparency, sustainability and credibility have become top priorities for investors over the past year or so as plans are re-evaluated in response to the changing global economic environment. As a result, many financial services providers – particularly those in the investment funds business – are looking beyond the jurisdictions they have traditionally relied upon. A growing number are showing an interest in Malta.

Between January and November of last year, five hedge funds relocated to Malta from the Cayman Islands, significant given that the country saw no redomiciles in 2008 and 2009. A further 94 hedge funds set up new structures in Malta last year under the professional investor fund (PIF) format, following 102 registrations in 2009 and 111 in 2008. There are now around 400 investment funds – including PIFs – based in the country and nearly 50 licensed fund managers.

“Although Malta is a relatively new domicile compared with the established EU jurisdictions, the sustained rate of growth of the funds industry over the past five years, the increased presence of asset management companies, as well as the presence of a comprehensive regulatory framework augurs well for continued growth of the industry,” said Kenneth Farrugia, chairman of FinanceMalta, a non-profit public-private initiative that promotes the country as an international financial center.

 

While financial service providers’ desire to relocate within the EU – for a combination of regulatory and reputational reasons – is certainly a factor in Malta’s success, it is not the only one. The country also offers strong regulation, fiscal efficiency, comparatively low operating costs and high quality information technology and human resources. The appeal is therefore broad. Fund managers are joined by insurers and investors interested in trusts, foundations and highly flexible Malta limited liability company structure; and their clients and capital are not just from Europe.

Malta, like several other jurisdictions in the region, has sought to build financial ties with China. Last year the country signed agreements on collaboration and information exchange with China’s banking and securities regulators, respectively. The latter pact is intended to establish a system under which Chinese funds could be domiciled in Malta and invest in global equities while Maltese funds gain access to Chinese capital markets. 

Investment opportunities in financial services are one of a number of areas of focus for a Malta business delegation that will visit China in June.

Forging new partnerships is high on the country’s agenda as it strives to reach its goal of doubling the financial services contribution to GDP by 2015. The sector currently accounts for 12% of the economy and some 8,900 jobs. Financial services activity was growing in excess of 30% a year up to 2008 and still managed to expand by 22% in 2009, when most financial centers experienced a drop in business activity due to the global economic downturn.

Malta may not yet have the scale of Ireland or Luxembourg – two other “onshore” financial centers expected to benefit from the shift taking place in the industry – but this is a symptom of its youth. The country only began to implement much of its international financial legislation 17 years ago. It joined the EU in 2004 and formally adopted the euro in 2008.

Nevertheless, its fundamentals appear strong. Malta’s banking system was identified as the 10th-soundest in the world in the World Economic Forum’s Competitiveness Index 2010-2011. It was also 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.

If there is something currently lacking, it is the presence of a critical mass of heavyweight financial institutions, particularly international banks that can operate as custodians for funds. Given Malta’s growing industry clout and the tendency of these institutions to follow investor demand, officials expect the gap to be filled. Indeed, Deutsche Bank recently received a license to provide custody services in Malta and negotiations are underway with other global custodians.

HSBC already has a footprint in the country, having entered the market through the purchase of Mid Med Bank in 1999. HSBC has said that Malta lies at the heart of its European growth strategy, stressing the geographical advantages offered by the nation. While access to the EU is certainly part of this, Malta can equally serve as a platform for accessing markets further afield. From its location in the southern Mediterranean, HSBC Malta enjoys close relations with its sister entities in the Middle East and Africa.

 

It is hoped that Malta’s strategic location will draw in a wider array of financial services specialists. Coupled to this are clear fiscal benefits. Corporate profits are taxed at 35%, but shareholders can claim much of this back on distribution of dividends. Personal income tax rates can also reach 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.

In addition to tax savings, firms that set up in Malta can enjoy operating costs – office space, utilities and salaries – that are 30-40% lower than most EU nations.

These advantages would be useless without local staff either to help develop innovative financial structures or provide the ancillary support services required by the financial sector. Malta has gone to great lengths – and is unique within Europe in this respect – to ensure that no company lacks qualified applicants.

“The highly skilled workforce is driven by the presence of an educational system where university and vocational degree programs are not only free of charge, but the government pays a stipend to students seeking to pursue tertiary education,” said FinanceMalta’s Farrugia.