By means of Legal Notice 170 of 2019, the Government of Malta has published new seed investment scheme (income tax) rules. The purpose of these rules is to grant tax relief to natural persons investing in start-ups.
The rules shall apply to qualifying investors who subscribe to fully paid up equity shares at par in a qualifying company on their own behalf. Qualifying investors must be natural persons who are resident of Malta and they must bear the full risk in respect of their investment. The investment made in a qualifying company shall in aggregate not exceed Eur750,000 per qualifying company. For the investment to benefit from these rules, the qualifying investor shall continue to hold the investment in the qualifying company for a period of not less than three years. Furthermore the qualifying investor shall not be connected to the qualifying company prior to the subscription of the equity shares.
A qualifying company means an SME that satisfies all the following conditions a) incorporated in Malta or controlled and managed from Malta or has a place of business in Malta (b) has been in existence and engaged in carrying out qualifying activities for a period not exceeding 3 years (c) is not listed on a recognised stock exchange (d) has a maximum of 10 employees (e) has gross assets of not more than Eur250,000.
Both qualifying investor and qualifying company must lodge an application to the Malta Investment Management Company Limited (MIMC) to obtain the status of a ‘qualifying investor’ and ‘qualifying company’ respectively. MIMC shall issue the relative compliance certificate in terms of these rules. The qualifying investor must invest in the qualifying company within a period of 2 years from when the qualifying company is first issued with the said compliance certificate.
A qualifying company will not be granted such status if it carries out certain excluded activities which include amongst others (a) dealing in immovable property (or other activities related thereto), shares and financial instruments, (b) services regulated by the Investment Services Act, the Banking Act and the Financial Institutions Act, (c) legal, accounting and other professional services (d) operating or managing hotels, guest houses or residential care homes (e) generation of electricity and other energy sources (f) the holding of shares, whether directly or indirectly in a company which carries out excluded activities.
Qualifying investors will be able to benefit from a tax credit of 35% of the aggregate value of their investment in one or more qualifying companies, with a capping of Eur250,000 p.a. The tax credit will be set off against the tax due by them. If not fully absorbed, such tax credits may be carried forward until fully absorbed, without giving right to a tax refund. Qualifying investors who dispose of their investment within three years, will be charged to tax on the transfer value at the applicable tax rates. No deductions are allowed including the cost of acquisition and the transfer value is considered to be the higher of the market value of the qualifying company and the consideration received by the transferor. If the shares are disposed of after three years, any capital gains derived by the qualifying investor will be exempt from income tax. Capital losses incurred on disposals will not be considered to be allowable capital losses and therefore cannot be set off against any other capital losses.
The rules are deemed to have come into force on the 1st January 2019 in respect of investments made as from basis year 2019 and shall have effect until the 31st day of December 2021. The rules will case to apply when the investment in qualifying companies reach an established threshold of Eur5,000,000.