The Industrial Development Act, 1988, provides for a number of substantial incentives, tax and non-tax incentives, which may be availed of by "qualifying" companies engaged in "qualifying" activities.
A. 'QUALIFYING' COMPANY
A 'qualifying' company must satisfy the following conditions:
1. It must be a company constituted in accordance with Maltese company law;
2. It must carry on, or intend to carry on, actually and physically in Malta, a trade or business which consists solely of one of the following activities:
(i) Production, manufacture, improvement, assembly, processing, repair, preservation, maintenance, of goods, materials, equipment, etc.;
(ii) Related industrial services;
(iii) Large-scale aquaculture or horticulture;
(iv) Prescribed qualifying export or support services to non-residents (e.g. industrial product design, computer bureau services, project management and ancillary services, marketing, quality control and ancillary services, service base for petro-chemical industries, telecommunication services);
(v) Export of goods/services produced/provided by other qualifying companies;
(vi) Research and development programmes.
B. INCENTIVES
"Qualifying" companies are given the option to choose those incentives best suited to them, possibly even refraining from availing themselves of a particular incentive. Cumulative benefits may be obtained.
One should note that these incentives are guaranteed against claw-back, whether by legislation or otherwise.
The incentives available under the IDA include:
TAX:
1. TAX HOLIDAY
A 10-year tax holiday to companies which export in excess of 95% of total sales revenue. The definition of 'export sales' has been widened to include indirect exports, namely those cases where a qualifying company, Co.A, sells to another qualifying company, Co. B, which then directly exports the said goods or services, whether as subjected to further processing or incorporation in other goods or services, itself. Accordingly, Co. A may now avail itself of this export-related incentive.
Such profits are tax free also in the hands of the shareholders.
This incentive is not however available to those companies which export goods/services produced/provided by other qualifying companies.
2. EXPORT INCENTIVE SCHEME
Companies which do not meet the 95% test may benefit from a tax exemption on additional export profits.
Such profits are tax free also in the hands of the shareholders.
This incentive is also not available to companies exporting goods/services produced/provided by other qualifying companies.
3. REDUCED TAX RATES
Profits used to finance specific MDC-approved projects will be charged to tax at a reduced rate of 17.5%. Maltese companies (namely companies owned by Maltese citizens) get slightly better terms.
4. INVESTMENT ALLOWANCE
A tax free allowance of 30% of the actual costs of plant and machinery, and of 15% on industrial buildings and structures - available for a consecutive period of 25 years. Maltese companies are given higher allowances.
Such allowance is tax free also in the hands of the shareholders.
5. ACCELERATED DEPRECIATION
Enables plant and machinery to be written off over 4 years and industrial buildings and structures over 25 years. Maltese companies are given more advantageous terms.
6. TRAINING COSTS ALLOWANCE
Deductible at 120% of actual expenditure incurred.
7. EXPORT PROMOTION ALLOWANCE
Deductible at 140% of actual expenditure incurred.
8. RESEARCH AND DEVELOPMENT ALLOWANCE
Deductible at 120% of actual expenditure incurred, provided the said research and development is substantially carried on in Malta.
This incentive is not available to companies undertaking research and development programmes as their trade or business.
9. EXPATRIATE EMPLOYEES
Maximum individual tax rate is reduced from 35% to 30%, with a minimum annual tax liability of Lm 1,000.
10. FEASIBILITY STUDIES
Costs are tax deductible.
11. DIVIDENDS AND TAX TREATIES
Where in virtue of a tax treaty profits are taxable at a lower rate on distribution by way of dividends, corporate profits are taxed at that lower rate without the need to wait for distribution to take place.
NON TAX:
12. SOFT LOANS
Available for the acquisition of plant, machinery and other fixed assets (excluding land and buildings). A maximum amount of Lm500,000 is given to export-oriented industries, interest payable thereon being reduced by four percentage points from that otherwise payable, and a maximum amount of Lm200,000 is given to other industries, interest payable thereon being reduced by two percentage points.
The maximum amount thus available is limited, in all cases, to 33% of MDC-approved projected capital investment. Assets acquired must be new and unused, although a loan may also be granted for the acquisition of used assets, subject to special conditions.
13. RELIEF FROM CUSTOMS DUTY
Reduced rates or total exemption as regards materials, components or accessories, equipment, etc. Since 1995, customs duty has largely been replaced by VAT (no relief from VAT is available although the payment of VAT is deferred in certain cases).
14. FACTORIES AND LAND
Factories (may also be custom built) and land (all transfers of land being exempt from transfer duty) are made available at highly subsidised rates.
15. TRAINING GRANTS
Various tax-free cash grants, computed on the basis of wages paid or tuition fees charged.
16. MANAGEMENT SERVICES GRANTS
A tax-free cash grant of an annual maximum amount of Lm 5,000 - available to small Maltese companies who require qualified administrative, technical, marketing and financial personnel, in accordance with an MDC-approved 3-year plan.
17. INDUSTRY IN GOZO
Companies carrying out part of or all their activities in Gozo (one of the islands forming part of the Maltese archipelago) are given additional tax-free grants to help neutralise the extra costs incurred by way of transportation costs, training and other expenses.
18. SMALL BUSINESSES
MDC may, at its discretion, grant relief from customs duty and industrial buildings grants to small businesses (as defined).
C. BUSINESS WITH - OFFSHORE COMPANIES / INTERNATIONAL TRADING COMPANIES
Reference is made to the various prohibitions imposed upon offshore companies and ITCs addressed in previous articles, namely the article "Malta - An International Financial Services Centre, The 1994 Legislative Package" (s.9 and 11) and the article "Offshore Companies".
In this regard, it may be interesting to note that:
1. An offshore non-trading company may hold shares / debentures in a non-resident owned Maltese subsidiary company involved in the manufacture or processing of goods, cultivation of agricultural or horticultural products, or fish farming.
2. Offshore trading companies may purchase for export, goods manufactured, assembled or processed in Malta, agricultural and horticultural products and fish produced or bred locally.
3. An ITC may purchase for export goods manufactured, assembled or processed in Malta, provided the seller thereof does not hold more than 15% of the ordinary shares in the ITC.
THE CONTENTS OF THIS ARTICLE ARE INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.
