Investment Services & Funds
The financial services sector is considered to be one of the main pillars of the Maltese economy and is also its fastest growing sector. This even more so after EU membership.
Malta has established itself as a reputable financial services jurisdiction which adopts a serious approach to regulation with embedded flexibility. Furthermore, Malta's very favourable tax regime and effective double taxation relief mechanisms together with the single passport regime, ensure an extremely attractive environment for financial services operators to carry out business.
Investment services are regulated by the Investment Services Act, 1994 ('the Act'). The Act defines an 'investment service' as 'any service falling within the First Schedule to the Act when provided in relation to an instrument'.
The Provision of an Investment Service in or from Malta is a Licensable Activity
The Act's First Schedule lists the following services: reception and transmission of orders in relation to one or more instruments; execution of orders on behalf of other persons; dealing on own account; management of investments; trustee, custodian or nominee services; investment advice; underwriting of instruments and, or placing of instruments on a firm commitment basis; placing of instruments without a firm commitment basis, operation of a multilateral trading facility and the reception, transmission, and submission of a bid relating to emission allowances.
The term 'instrument' is defined in very general terms in the Act, with many types of investments being provided for, including shares, bonds, units in a collective investment scheme, futures and other derivative contracts, and foreign exchange contracts entered into for investment purposes.
Fund administration is no longer a licensable activity, with firms providing this service now being required to apply to the Malta Financial Services Authority for recognition in terms of the Act. It is also pertinent to point out that companies providing back office services in the financial services sector must seek the approval of the said Authority, prior to commencing operations.
There are also a number of exemptions from the requirement of having an investment services licence, which apply in particular circumstances.
In assessing a licence application, the Malta Financial Services Authority must be satisfied that the applicant is 'fit and proper' and willing and capable to act in accordance with the law and any Standard Licence Conditions attached to the licence issued. The 'fit and proper' test is a fundamental regulatory concept which requires potential and existing licensees and their qualifying shareholders and senior staff to demonstrate competence, integrity and solvency in all their dealings. These requirements apply both at the licensing stage and on an on-going basis thereafter.
Malta offers a very favourable tax regime to the shareholders of investment services operators. Moreover, advance revenue rulings may be obtained as to the tax treatment of transactions involving financial instruments and international business. Further information may be obtained from the fact sheet entitled 'Malta Companies and Taxation'.
European Passport Regime
In terms of the European Passport Rights for Investment Firms Regulations, 2004 investment firms may take advantage of the single passport regime and upon the fulfilment of the prescribed formalities, passport into Malta or out of Malta from/to an EU or EEA state through the establishment of a branch or by providing services on a cross border basis.
The Investment Services Act, 1994 ('the Act'), establishes the regulatory framework for collective investment schemes.
The Act provides the necessary infrastructure for the setting up of collective investment schemes as corporate structures, unit trusts or through contractual arrangements. Both open-ended and close ended investment fund structures are provided for.
In addition, investment funds may be set up as either public or private funds. It is also possible for investment funds to obtain a primary or secondary listing on a regulated market.
A collective investment scheme organised under the laws of Malta or operating in or from Malta requires a licence under the Act. There is however a number of exemptions from the need of a collective investment scheme licence, which are applicable in particular circumstances.
The applicant for a collective investment scheme licence must be 'fit and proper'. Thus, potential and existing licensees and their qualifying shareholders and senior staff must demonstrate competence, integrity and solvency in all their dealings. These requirements apply both at the licensing stage and on an on-going basis thereafter.
The fiscal treatment of a fund depends on certain of its characteristics. There are a number of fiscal incentives applicable to funds and their investors. Advance revenue rulings may be obtained as to the tax treatment of transactions involving financial instruments and international business.
Professional Investor Funds
A Professional Investor Fund (PIF) is a type of collective investment scheme promoted to particular investors. A PIF is usually set up as an open or closed ended investment company (SICAV or INVCO), a limited partnership or unit trust.
A PIF set up under Maltese law would require a collective investment scheme licence under the Investment Services Act, 1994. On the other hand, a PIF established outside Malta would only require a license for the purpose of obtaining a listing on a regulated market in Malta or if it undertakes any licensable activity, such as managing itself in or from Malta.
PIFs are subject to tailored licence conditions. The applicant, its senior staff and its service providers (if any) and the latter's senior staff must be 'fit and proper' and must thus demonstrate solvency, competency and integrity in all their dealings both at licensing stage and on an on-going basis thereafter.
The PIF regime consists of three categories, namely Qualifying Investor Funds, Experienced Investor Funds and Extraordinary Investor Funds.
PIFs Promoted to Qualifying Investors
In order to be 'Qualifying', an investor must certify that he/she/it meets one or more of the following criteria: a body corporate which has net assets in excess of EUR 750,000 or which is part of a group which has net assets in excess of EUR 750,000; an unincorporated body of persons or association which has net assets in excess of EUR 750,000; a trust where the net value of the trust's assets is in excess of EUR 750,000; an individual, or in the case of a body corporate, the majority of its board of directors or in the case of a partnership its General Partner, who has reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile or of property of the same kind as the property, or a substantial part of the property, to which the PIF in question relates; an individual whose net worth or joint net worth with that person's spouse, exceeds EUR 750,000; a senior employee or director of service providers to the PIF; relations or close friends of the promoters limited to a total of 10 persons per PIF; entities with (or which form part of a group with) EUR 3.75 million or more under discretionary management, investing on their own account; or the investor qualifies as a PIF promoted to Qualifying or Extraordinary investors.
The minimum initial investment in the case of a PIF promoted to Qualifying Investors is EUR 75,000 or equivalent in another currency, but additional investments may be of any size. This minimum initial investment threshold applies to each single Qualifying Investor.
Before a PIF may accept any investment, the PIF must obtain a completed 'Qualifying Investor Declaration Form' in which the investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it is a 'Qualifying Investor'.
Any amount expressed in EUR should be interpreted to mean the equivalent expressed in other convertible currencies.
PIFs promoted to Qualifying Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document.
PIFs Promoted to Extraordinary Investors
An 'Extraordinary Investor' is required to meet one or more of the following criteria: a body corporate which has net assets in excess of EUR 7.5 million or which is part of a group which has net assets in excess of EUR 7.5 million; an unincorporated body of persons or association which has net assets in excess of EUR 7.5 million; a trust where the net value of the trust's assets is in excess of EUR 7.5 million; an individual whose net worth or joint net worth with that person's spouse, exceeds EUR 7.5 million; a senior employee or director of service providers to the PIF; the investor qualifies as a PIF promoted to Extraordinary Investors; or an entity (body corporate or partnership) wholly owned by persons or entities satisfying any of the criteria listed above and which is used as an investment vehicle by such persons or entities.
The minimum initial investment in the case of a PIF promoted to Extraordinary Investors is EUR 750,000 or equivalent in another currency, but additional investments may be of any size. This minimum initial investment threshold applies to each single Extraordinary Investor.
Prior to accepting any investment, the PIF should be in receipt of a completed 'Extraordinary Investor Declaration Form' in which the investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it is an Extraordinary Investor.
Unless they invest in immovable property, PIFs promoted to Extraordinary Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document/Marketing Document.
PIFs Promoted to Experienced Investors
Experienced investors are persons having the expertise, experience and knowledge to be in a position to make their own investment decisions and understand the risks involved.
An experienced investor is a person: having relevant work experience by having worked in the financial sector for at least one year in a professional position or having been active in this type of investment; or having reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile, or property of the same kind as the property, or a substantial part of the property, to which the PIF in question relates; or who has carried out investment transactions in significant size at a certain frequency.
The minimum initial investment threshold for experienced investors is EUR 10,000 or the equivalent in another foreign currency. This minimum initial investment threshold applies to each single experienced investor.
Before an Experienced Investor Fund may accept any investment, it should obtain a completed 'Experienced Investor Declaration Form' in which the investor confirms that he/she/it satisfies the definition of an 'experienced investor' and indicates the basis of such confirmation and that he/she/it has read and understood the mandatory risk warnings.
PIFs promoted to Experienced Investors are not subject to any investment restrictions. Whilst borrowing on a temporary basis for liquidity purposes is permitted and not restricted, borrowing for investment purposes or leverage via the use of derivatives is restricted to 100% of NAV.
A PIF may appoint any service provider as it may deem necessary, although PIFs promoted to experienced investors must appoint a custodian. The service providers of a PIF may include, amongst others, a manager, administrator, investment advisor and/or a custodian/prime broker. The service providers appointed by a PIF need to be licensed or approved by the Malta Financial Services Authority, if they are operating in or from Malta. Any service provider located outside Malta and which provides services to PIFs in Malta must likewise be approved by the said Authority. Service providers should be established and regulated in a Recognised Jurisdiction with very minor exceptions.
It is not necessary for the manager, administrator, custodian or any other appointed service provider to be based in Malta. However, where the service providers are all based outside Malta and no local resident director has been appointed, a judicial representative needs to be appointed.
A PIF targeting experienced or qualifying investors must draw up an Offering document which is a document intended to provide sufficient information to enable potential investors to take an informed investment decision. The Offering document should as a minimum include the information required in this regard by the Investment Services Rules for Professional Investor Funds.
A PIF targeting extraordinary investors may either draw up an Offering Document or a Marketing Document, which in each case should include the minimum information prescribed in the Investment Services Rules for Professional Investor Funds.
Should all relevant documentation (including the application form) have been properly completed and attached, the Malta Financial Services Authority will respond to the application within seven working days. This only applies where the PIF appoints a third party manager and where any service providers to the PIF are based and regulated in a Recognised Jurisdiction.
Listing on a Regulated Market
A PIF (provided that it is not a private company) that has been granted or has applied for a Collective Investment Scheme licence may apply to a regulated market for a listing.
Particular Types of PIFs
PIFs which invest predominantly in real estate are subject to tailor-made policies.
Furthermore, under the Maltese regulatory regime, hedge funds may be set up as PIFs. Such funds are becoming increasingly popular and we would be pleased to provide further information upon request. PIFs are not able to passport under the new Alternative Investment Fund Managers Directive (AIFMD) unless such PIF opts to qualify as an Alternative Investment Fund (AIF).
Alternative Investment Funds
The recent transposition of the AIFMD through amendments to the Investment Services Act and the Investment Services Rules as well as the introduction of subsidiary legislation, created a framework for the management and marketing of non-UCITS funds. The scope of the AIFMD is broad and covers the management, administration and marketing of AIFs. Its focus is on regulating the AIFM rather than the AIF. The extensive requirements with which AIFMs must comply are designed to ensure that these managers can manage AIFs on a cross-border basis and the AIFs that they manage can be sold on a cross-border basis. It mainly covers authorisation, operating conditions and transparency obligations of AIFMs and for the marketing of AIFs to professional investors throughout the EU. AIFs are collective investment undertakings which raise capital from a number of investors with a view to investing it in accordance with a defined investment strategy and do not require authorisation under the UCITS regime. These type of funds include hedge funds, private equity funds, real estate funds and venture capital funds amongst others.
The AIFMD framework provides for a lighter or de minimis regime for small AIFMs. De minimis AIFMs are managers which, whether directly or indirectly, manage portfolios of AIFs whose assets under management collectively do not exceed the following amounts:
- 1) '100 million or
- 2) '500 million for AIFMs managing only unleveraged AIFs with no redemption rights exercisable within 5 years from the date of initial investment in each AIF.
A de minimis AIFM is not able to use the EU passporting rights deriving from the AIFMD regime. However, any AIFM whose assets under management fall below the above thresholds may choose to opt in to the AIFMD framework. This would render it subject to all of the obligations applicable to full-scope AIFMs but would also enable it to make use of the EU passporting rights deriving from the AIFMD.