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The Mediterranean Mighty: A Regional Hub for Global Money

The Mediterranean Mighty: A Regional Hub for Global Money

Situated at a strategic intersection between Europe and Africa with a combined size of 316 square kilometers for its main three isles and a population of 413,775 (2011), the tiny island Republic of Malta glistens amidst the waves and tides of the Mediterranean sea.

Relatively unknown to most Chinese, Malta has the very best endowment of the quintessential nature, tamed, tranquil, picturesque; a fabulous historical heritage; and a sophisticated modern financial services industry that the nation can boast of. Out of its active labor force of 350,168 (as at 4th quarter 2010), 5,731 persons (as at 4th quarter 2010) were employed by the financial services industry with an average gross annual salary standing at €46,810 (as of 2010).

After a British colonial rule of 160 years before its independence in 1964, English institutions, culture and language had ingrained in Malta. English, a joint official language with Maltese, is universally spoken and written as well as being the language of education and business. Furthermore, many Maltese are also fluent in Italian, German and French. The Maltese have a very high regard for education and some 60 percent of the local students enter into education at the tertiary level. Therefore one of the nation’s big advantages is the availability of high-caliber, multilingual workers in most essential sectors of its economy. Enjoying an excellent reputation worldwide and attracting international students from afar, the University of Malta is one of the oldest universities in the English-speaking world.

Malta is an independent multiparty parliamentary democracy headed by a parliament-elected President. The head of government is the Prime Minister leading an elected government for five-year terms. Malta is a member of the European Union, the Council of Europe, the United Nations and the British Commonwealth. The Maltese Government has a tradition of encouraging foreign investors to establish operations in Malta and has always adopted policies in favor of an open, free-market economy and direct investment. As a matter of fact, Malta is one of the EU's most open economies with a trading tradition reliant on import and export.

Malta has extensive flight connections with the rest of the world. The national carrier Air Malta operates routes to a number of European and North African destinations, with regular flights. There are also a large number of international airlines flying to and from Malta.

On 1 May 2004 the Central Bank of Malta joined the European System of Central Banks and on 1 January 2008 it adopted the Euro, the European single currency, as the nation’s statutory medium of exchange. This move further facilitated the integration of the Maltese economy with its northern neighbours’. A universal EU-wide currency is much more stable than its previous individual currency backed by a tiny island economy amid speculative volatility. The Central Bank of Malta participates in the preparation and decision-making process of the European Central Bank’s monetary policy.

Like other well-known jurisdictions, Malta has a tax-efficient environment. Businesses set up in Malta reap the benefit from a full imputation system and double taxation treaties with over 40 countries. Malta’s participation exemption regime provides for a 100% relief of dividend and capital gains, provided certain conditions apply. A key advantage of Malta’s tax regime is the full imputation system through which, upon distribution of dividends, tax paid by companies in Malta qualifies for a credit against shareholders’ tax liability generally equal to 6/7ths of the tax paid, as well as the elimination of the economic double taxation of company profits. This tax treatment is also available to branches of foreign companies registered in Malta for tax purposes. 

Financial services activities in Malta are supervised by a single regulator, the Malta Financial Services Authority (MFSA), an institution very similar to the UK Financial Services Authority, which was disjoined from the Bank of England to be placed into stewardship of the financial services industry. The MFSA regulates and supervises credit and financial institutions, investment, trust and insurance business and also houses the country's Companies’ Registry. The MFSA issues guidance notes, monitors local and international developments, works with relevant parties on legislative matters, and plays a major role in training. I t has signed a number of bilateral Memoranda of Understanding (MOU) with international regulators of financial services and is also a signatory to specialized multilateral MOUs through organizations such as the International Organization of Securities Commissions and the Committee of European Securities Regulators. The MFSA inked MOUs with China Banking Regulatory Commission and China Securities Regulatory Commission respectively on 2 February and 26 January 2010.

Despite its comparatively low exposure in the international arena, Malta is a highly developed financial centre. Financial services, financial intermediation and related sectors currently account for 13 per cent of its GPD, a figure expected to double in the next decade. It offers excellent possibilities for low-cost financing of investment transact ions and international activities. All domestic and foreign transactions are handled efficiently and reliably by Maltese and foreign banks with state of the art technology.

Banking for Malta’s Future

Malta’s international banking centre has been gaining considerable momentum in establishing itself as a finance hub in the Mediterranean region. Over the past decade or so, the sector has transformed itself from one having four retail banks serving the local population to a reputable international banking centre currently hosting 22 locally licensed banks.

The spread of foreign-owned banks includes subsidiaries whose parental organizations are headquartered in Australia, Austria, Bahrain, Belgium, Germany, Greece, Portugal, Turkey, and the UK. Other banks have major shareholding interests emanating from Cyprus, Finland, Italy, Kuwait, Saudi Arabia and Switzerland, and a branch of a Netherlands-licensed bank also operates in Malta under the European Passport Rights for Credit Institutions Regulations.

This influx, which includes several leading banking groups, has added dynamism to Malta’s thriving financial services industry, and the expectation is that many other banking institutions will follow its lead.

Scope of Activities

As growth continues, so does the range of products and services being offered in and from Malta. These include retail banking, private banking, trust business, investment banking, trade finance, treasury operations and syndicated loans. 

Malta joined the European Union in May 2004, and successfully adopted the euro in January 2008. This inspires confidence, and also allows operators easy access to the European markets. At the same time, the island’s strategic location in the center of the Mediterranean makes it a convenient gateway to North African markets, and an ideal base for financial institutions wishing to tap into the ever-increasing wealth being generated in the region.

A Robust Regulatory and Legislative Framework

The MFSA is the country’s single regulator for all banking, investment and insurance businesses. It maintains an aptly high regulatory standard in compliance with the EU legislations and the principle of best practice, whilst in the meantime allowing for the resilience necessary in a modern and dynamic banking environment, without imposing undue bureaucratic burdens on operators.

Closely supervised by the MFSA, Maltese banks remain well capitalized, and have high liquidity ratios , reasonable risk exposure, as well as sound, well diversified portfolios. Their funding is sourced mainly from customer deposits, and their prudent business model has enabled them to emerge largely unscathed from the turmoil of the 2008 global financial crisis, as evidenced by the World Economic Forum’s October 2008 report on global competitiveness, which ranked Malta amongst the top ten countries insofar as soundness of the banking system is concerned about.

An Advantageous Business Domicile

The island has a good source of well educated laborforce and a legion of qualified professionals in law, accounting, taxation, I.T. and other disciplines required by the financial services industry. The workforce possesses good language skills – English is an official language – and a positive work ethic prevails.

Costs are also measurably lower than in other European financial hubs, with salaries averaging one third to one-half of the EU level. Other operating costs are likewise competitive, and excellent office space and housing are available at reasonable rents.

The Maltese fiscal regime has also been one of the main drivers in creating an attractive investment environment. Companies are taxed at a flat rate of 35%, but the Maltese tax regime includes not only treaty relief but also unilateral relief and the flat rate foreign tax credit, which assumes a deemed foreign tax of 25% of the income received in Malta, irrespective of any tax paid abroad. Thus income arising from overseas is not subject to double taxation, even if there is no double taxation agreement in existence.

Another key advantage is the full imputation system that applies to the taxation of dividends. This entitles shareholders to a tax refund of 6/7ths of the tax paid by the distributing company out of profits derived from income arising from outside Malta. The refund is reduced to 2/3rds where the distributing company claims double taxation relief.

Malta’s tax system has been deemed by the European Commission to be compliant with EU non - discrimination principles, and with proper planning and structuring, investors can achieve considerable fiscal efficiency using Malta as a base.

Continued Growth

The Maltese financial services sector is today fast becoming a cornerstone of the economy, broadly accounting for around 13% of the GDP. The sector has been experiencing tremendous growth, and government’s vision is to increase the industry’s contribution to 25% of GDP by 2015. Banking has a central role to play in this ambitious development, and in projecting the island’s well-earned reputation as an international finance centre of excellence. 

Fund Management

Malta has developed a sound reputation as a fund domicile, and with a healthy fund management and fund administration sector. Joining the EU in 2004 sparked it all off, and adopting the euro in January 2008 helped further by removing foreign exchange costs for firms dealing with other euro zone members.

Accession to the EU brought the stamp of approval to Malta’s financial regulatory regime, and under the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) legislation, Malta can market appropriately licensed funds throughout the EU.

The statistics tell the story. There were 401 funds or collective investment schemes (CISs) registered in Malta, whose size is akin to that of Baoshan, an outskirt district of Shanghai, at the end of September 2009, amongst which 288 were hedge funds or professional investor funds (PIFs). The 328 locally based CISs had a net asset value of €6.5 billion at the end of September 2009, according to the MFSA. This was a major advance on the situation in 2006, when there were 145 funds with a net asset value of €4.8 billion; and in 2004 their value was only €1 billion.

In January 2010 the MFSA signed a MOU with China Securities Regulatory Commission to “protect and promote the development of the securities markets by providing a framework for co-operation, increased mutual understanding and the exchange of information.” The MOU puts Malta’s funds industry on the same footing as the major fund domiciles in the rest of the world, particularly in the EU, and will facilitate business for financial institutions between Malta and the world’s fastest-growing, second-largest economy. A similar agreement with the China Banking Regulatory Commission was penned in the ensuing month. Chinese ‘qualified domestic institutional investors’ (outward fund managers) are now able to invest on behalf of Chinese investors into Malta-domiciled investment funds, both PIFs and UCITS funds, thereby opening up the sector to one of the world’s largest pools of capital. The arrangement also makes it possible for Maltese fund managers to reciprocally invest in China under certain conditions.

Fund Managers

Running Malta ’s funds are 8 1 licensed fund managers and 13 fund administrators. Apex Fund Services (Malta), a local fund administrator which is part of this network, has its headquarters in Bermuda and around a dozen offices in other parts of the world. John Bohan, one of Apex’s owners, who is based in Ireland, says that the “surge in demand for regulated products and UCITS funds, coupled with the requirement for a robust banking environment, make Malta a perfect choice as a funds domicile.” He says local laws make it easy to redomicile funds to Malta from other approved jurisdictions, and the growth in the country’s funds industry has created many opportunities for banks and others to get involved in fund management and administration. Bank of Valletta Group (BoV), which owns one of the island’s two main banks, has both a fund management arm, Valletta Fund Management (VFM), and a fund administration subsidiary, Valletta Fund Services (VFS). Both performed well last year under difficult circumstances. “VFM’s funds under management have grown to record levels, albeit with a substantial proportion being represented by the La Vallette Malta Money Fund on which minimal margins are earned,” said BoV group chairman Roderick Chalmers in the company’s latest annual report. “VFS’s portfolio of international business has shown encouraging growth, justifying the separate focus that was the rationale behind the establishment of this new and dedicated business entity, which is playing an important role in Malta’s development as an international financial services centre.”

An Industry Voice

Charles Azzopardi, vice-chairman of the Malta Funds Industry Association (MFIA) and managing director of HSBC Securities Services (Malta), a fund administrator, says the industry is now in its 17th year. “It began just after the necessary legislation, the Investment Services Act, was passed in 1994, after which the two major banks, Mid- Med Bank (now HSBC Bank Malta) and Bank of Valletta set up their respective fund management companies i n 1995/96,” says Mr Azzopardi. “These companies issued funds for the local marketplace, consisting purely of traditional funds and directed towards the retail investor. By December 2003, there were 46 retail funds, with a net asset value of €830 million, and a couple of professional investor funds of minimal values. Joining the EU in May 2004 gave Malta the international dimension it needed.” Mr. Azzopardi says the EU membership enhanced the island’s reputation for financial services, allowed its already sound regulations to be harmonized to EU standards, “inspiring more confidence,” and put Malta on an even keel with other EU jurisdictions because UCITS funds could then be registered in Malta and sold in other EU countries. “Joining the euro zone in 2008 galvanized our position,” he adds.

A Channel of Communication

The MFIA represents fund managers, fund administrators and financial intermediaries selling investment funds. It was set up in 2003 by HSBC Global Asset Management and Valletta Fund Management, and it now has 16 members. “The objective of the MFIA is primarily to act as a channel of communication and to make representations to the Maltese government on matters including legislation and regulation, as well as to the MFSA on regulation that affects the business or professional interest of our members,” says Mr. Azzopardi. “The MFIA also provides education and training for its members, promotes the development of the fund and investment management business in Malta, provides a professional forum for members and acts as its pre-eminent voice. “Despite the global financial crisis and turmoil in 2008, Malta has weathered the storm quite well, as we saw fund promoters continuing to view Malta as an alternative and flourishing jurisdiction to domicile their funds, especially in the alternative investment funds space.”

In value terms, the dramatic climb in assets was only arrested in the final quarter of 2008, with a sudden decline in the value of PIFs. This trend stabilized, however, last year and there is a lot of business in the pipeline that augurs well for this year. “I expect that as the island increases its reach we will also see more fund managers coming here,” says Mr. Azzopardi. “The financial market turbulence is a negative, but it can also be considered a positive for us as fund managers look to move their funds to a more stable and recognized jurisdiction, and Malta can be that place.”

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