This publication recently interviewed a senior legal advisor working with the Maltese government on a signature piece of legislation that it says will give it an edge in the constant competition between wealth management jurisdictions.

In the competitive world of international financial centres, one that has seen its profile rise significantly in recent years has been Malta. (To see a previous feature profile of the jurisdiction, see here.) The island, once a former UK colony and now an independent republic and member of the European Union, has been developing a number of legal structures to put it firmly on the wealth management map. One of the most recent innovations is the proposed Family Business Act, which is, its framers say, designed to encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next.

Your correspondent recently travelled to Malta and spoke to Dr Nadine Sant, an advocate in Malta and barrister at law in England & Wales, and legal advisor at the Ministry for the Economy, Investment and Small Business in Malta. Her experience includes a spell as a diplomat in the Ministry of Foreign Affairs in Malta and she has, after a period working in the UK, worked at the attorney general’s office. Dr Sant is also a visiting lecturer and examiner at the University of Malta in the Faculty of Law and the Faculty of Economics, Management and Accountancy.

What is the Family Business Act? What are its key features?
The Family Business Act is a standalone legislation created to assist family businesses to achieve continuity between generations, provide legal form and clarity to the sector, provide a legal and administrative framework against which family businesses can finally have a method to guide and facilitate their transition to ensure growth and continuity.

Some of its keys features include a formal definition of what constitutes a family business, who should be considered a family membership, how is governance regulated, how can foreign owned family businesses avail themselves of the Act, and incentives and schemes created to assist family businesses and their members when transferring the business and its wealth to the next generation.

Why was the legislation sought?
The Family Business Act is the first known act of parliament created specifically to encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. The Act seeks to encourage and assist family businesses to enhance their internal organisation and structure with the aim of effectively operating the business and working towards a successful succession of the family business.

What sort of calls had there been from local/international clients about the need for such an act ahead of it being put through parliament?
Internationally we have seen lobby groups and family businesses coming together to create associations and lobby groups to encourage governments and policymakers to address the Achilles heel that family businesses face when transferring their wealth and business to the next generation.

Undoubtedly the biggest call has been from the European Commission, which firmly believes that family businesses have a key role to play in Europe’s economic recovery and future sustainability. The European Commission has been a recurrent voice in asking its member states to enact legislation, which was most recently repeated in its report of 30 June 2015 on family businesses, reiterating its request to member states to provide tangible support for the continuity, succession transfer and good governance of family businesses.

What stage is this legislation at?
The law as this stage is in the form of a proposed bill. The bill will be soon published as a white paper on the 21 October for public consultation. Following the publication consultation and its review the final bill will be presented to parliament so that it may be enacted as an act of parliament in the coming year.

What would you say are its principal benefits and attractions?

There are considerable benefits and attractions which are best explained within the white paper document.  First and foremost family businesses will for the first time be given an identity and platform. Having an identity through a definition will allow family business to develop further on the sector, lobby and grow to achieve its aim.  

Furthermore the legislation is intended to act as a complement to present legal and financial structures to local and foreign family business considering making Malta their jurisdiction of choice. The legislation intends to assist family business to acquire key governance structures to sustain their continuity and introduce policy and fiscal decisions to assist the same family business when carrying out their transfers.  

Are there any misconceptions about this act that you have heard of and would like to correct?

I don’t believe there are any misconceptions that deviate from the intention of the legislation. However, I believe that it is vital that the legislation is interpreted to first and foremost be a legal tool to aid family business in their governance structures. No assistance, financial or fiscal relief will serve its purpose if at the core of matters the same family businesses still suffer from lack of sound governance, succession planning and family structures.  

What sort of evidence are you seeing of the Act being a success? Are there any facts/figures you can point to?

There has been tremendous interest not only by the local community but by the European Commission, which is encouraging member states to introduce legislation targeting family business transfers as well as interest by the international community. Acquiring and interpreting statistics has been and still presents itself as one of the major challenges in the absence of a definition of what constitutes a family business. In the process of developing the Maltese Family Business Act, a nationwide statistical survey was commissioned within the Maltese business register of the National Statistics Office which established that the vast majority (97.5 per cent) of the major decisions within family-run businesses were taken by family members yet just over 35.0 per cent of family-run businesses had a future plan within the pool of current family members involved for the continuity of the company.  

Moreover, circa 83 per cent would opt to pass it on to the next generation, which further strengthens the need to introduce regulatory policy to assist family businesses.

How does the Act fit with other key aspects of the Malta tax/regulatory structure, such as its well known imputed dividends system for example?
Malta has for a significant period of time established itself as a competitive jurisdiction in the financial sector. This owes itself to a number of factors: no inheritance tax; low income tax; foreign businesses having the potential to acquire up to 6/7th tax rebate; over 67 double tax treaties, in order to avoid the double taxation of income and provide low withholding taxes on dividends, incomes and royalties for the companies where the foreign investors don’t have a residency in Malta, but their business is located here and is producing profits; cheaper and more efficient than any other EU jurisdiction; OECD and Commission approved; onshore jurisdiction; attractive citizenship by investment and residency schemes; EU and Commonwealth member; member of the eurozone and Schengen Agreement area; civil law jurisdiction with a flexible and regulatory framework in line with EU directives and regulations; Euro-Med-North African relations; pro-business government and political stability; multilingual country; excellent climate and tourist destination – over 300 days of guaranteed sunshine.

The Family Business Act is intended to be a complement to these present structures, many of which are in fact family businesses. The legislation is intended to be another positive consideration for businesses to consider Malta as their primary financial jurisdiction of choice. This legislation will be a first for Europe and therefore family businesses will for the first time have a jurisdiction that has developed legislation intended to address the needs of family business in their transfer process from one generation to the next.

More broadly, what would you say is the main trend in Malta in terms of how it is developing as a wealth management sector? Is it becoming more or less diverse, are there issues around getting enough talent locally/externally, etc?
Developments in recent years in Malta and the introduction of the Family Business Act have certainly placed Malta at the front line for consideration as a jurisdiction of choice. The Act addresses wealth management by encouraging family businesses to establish sound governance structures, responsible family planning and address succession.  

Since Malta’s accession to the EU in 2004, Malta has emerged as an attractive jurisdiction for the establishment of international corporate holding structures, to be used in multinational groups, owner-managed companies as well as the holding of assets for high net worth individuals. Worthy of note is the fact that in the last decade Maltese legislature has been very active in the area of fiduciary obligations, specifically those resulting from the creation of trusts and foundations.

I would say that the greatest development and the diversity of the wealth management sector has been down to the fact that Malta is [an] EU and eurozone location; provides multi-disciplined advisors able to adapt to the changing needs of HNW individuals; it has a sound and sophisticated banking system, fast-track authorisation for Professional Investor Funds (PIFs), flexible investment structures (SICAVs, trusts, partnerships, etc), and a reputable stock exchange; it is one of the only civil law jurisdictions to have successfully developed a trust concept by integrating it with Roman law sources, recognition of foreign trusts, offering the set-up of both trusts and foundations and a stable macroeconomic environment.

In terms of talent the Maltese have a very high regard for education and some 60 per cent of students remain in education up to tertiary level. Furthermore, English is the principle language of education and business in Malta with many Maltese fluent in Italian. Collectively these encourage the same Maltese not only to expand their talent and education abroad but furthermore serves as an attractive feature for foreign students to develop their studies in Malta and eventually integrate into the local employment market.

What is the largest challenge in wealth management that Malta faces? (Regulation, technology, available skills, etc)
Challenges are many times opportunities for development and excellence. Today, jurisdictions are certainly more competitive than ever due to the mobility of businesses moving to friendly jurisdictions catering for all their needs. Malta is increasingly viewed as an alternative [centre] to Luxembourg and Ireland especially in the field of insurance, funds and investments services. I believe that the challenge ahead is not in acquiring the skills, diversity or infrastructure but in keeping up the momentum and continuing to offer excellence as a competing jurisdiction. The proposed Family Business Act will certainly serve its role in this respect as it will put Malta a leader in the family business sector.

Can you talk about any other changes coming through?
At present there are a number of key developments in Malta taking place that range across various areas. To touch on a very few we have seen the development of the maritime hub and the surge in the aviation sector. We have this year significantly expanded in the medical sector with the contractual conclusion with the prestigious Queen Mary University of London, which will be establishing the Bart’s London Medical & Dentistry School in Gozo and opening its doors in September 2016. Equally the medical sector will see a boost in medical tourism through the further development of the Gozo General Hospital and the regeneration of St Luke’s Hospital, which will be reconverted. Furthermore education is becoming more diverse with the intended introduction of the American University in Malta.

Malta will be in the news a lot soon - the Commonwealth gathering in the autumn, etc - how do you think the country now ranks in the international pecking order of financial centres?
The World Economic Forum's 2014-2015 Competitive Index ranks Malta 47th overall out of 144 countries, 36th for business sophistication and rates its banking system as the 13th soundest in the world.

Malta's growing reputation for stability and security was enhanced during the global financial crisis when Malta experienced a shallow recession compared to its European neighbours. International ratings helped too. Fitch's affirmation in late 2010 of Malta's country ceiling as an AAA is a solid enough rating for the euro area.

More praise came from the Global Financial Services Index published by the City of London in 2008. It ranked Malta in fourth place as the centre most likely to increase in importance in the next few years. The island's banking system, as one sector example, has earned international praise for its robustness and resilience through the financial crisis.

In fact, the Competitiveness Index 2010-2011 ranked Malta at number 10 for the soundness of its banks and number 11 for financial market development out of 139 countries by the World Economic Forum. In just 15 years the island's banking sector has grown from four retail banks serving the local market into an industry sector with 24 foreign or privately owned credit institutions and 15 financial institutions, and over 200 international banks and financial institutions registering their intention to provide services in or out of Malta.

All of this, coupled with the present government's vision to ascertain Malta's position as a European centre for excellence in financial services and international business by 2015, provides an optimum operating environment for business, ensuring the island's placement on the radar of the international finance industry.

Moreover, Malta's financial centre currently enjoys greater credibility when compared to the past because of various factors. The island's financial stability has exhibited a very good resilience in the latest financial crisis. In fact, in a report published by the IMF, it was stated that although vulnerabilities have increased, Malta's financial sector has so far withstood the global financial turmoil relatively well. The conservative policies which Maltese financial institutions have introduced in the running of their business, with regards to structured financial products, lending policies and borrowing in a traditional retail funding model, have in fact safeguarded Malta's financial stability from systemic events, adversely encountered in other economies.

Malta´s SME sector is one of the very few in the EU which has expanded throughout the crisis. Last year, it was estimated to have expanded by 5.7 per cent in value added and by 4 per cent in employment terms. Between 2008 and 2014, the number of persons employed by SMEs rose by 14 per cent or by 13,000 in absolute terms. While the expansion spanned most sectors, it was particularly strong in tourism and IT-related services. For the near future, the expansion is set to continue. The number of persons employed is predicted to rise by almost 5,000 or 6 per cent in 2014-2016. SME value-added is set to grow by 13 per cent. These alone are an indicator of the robustness of the internal financial structure that offers support to this sector.  

I believe these statistics are the benchmark against which Malta can be ranked in the international pecking order of financial centres.