Last Updated on Monday, 24 June, 2024 at 10:44 pm by Andre Camilleri
Malta is a relatively small market compared to the UK, which may limit the scale of operations and investment opportunities that may migrate from UK. While it made significant strides in improving its regulatory framework, not underestimating its strategic location in the Mediterranean which provides easy access to both European and North African markets.
This can be advantageous for private equity firms looking to invest in these regions. Other jurisdictions, such as Luxembourg, Ireland, and the Netherlands, also offer attractive tax and regulatory environments for private equity firms and may compete with us for attracting business.
In fact, Luxembourg offers an effective corporate tax rate of 24.94% (2023), but various tax incentives and exemptions can reduce this. Ireland, which is also a prime competitor to Malta, offers a low corporate tax rate of 12.5% for trading income, which is highly competitive.
Lastly, we see how the Netherlands offers a standard corporate tax rate of 25.8% (2023), with a lower rate of 19% for income up to €200,000. Malta by comparison, offers a competitive corporate tax regime, including a full imputation system and tax refunds for shareholders, which can effectively reduce the tax burden on profits.
It levies a corporate tax rate of 35%, but effective tax rates can be significantly lowered due to tax refunds for shareholders, often reducing the effective rate to 5-10%. The Malta Financial Services Authority (MFSA) provides a robust regulatory framework for financial services. The domicile has a well-developed financial services sector, including banking, legal, and accounting services, which can support private equity operations.
Now let us see what is new within the proposed British tax legislation by the Labour Party. The UK’s Labour party has vowed to press ahead with plans to impose higher taxes on private equity operators in the run-up to next month’s general election, which Labour is widely-expected to win according to polls. Reclassifying “carried interest” as income and taxing it at higher rates presents several challenges for private equity firms in the UK.
These challenges include increased tax burdens, reduced competitiveness, changes in investment behaviour, higher administrative costs, and potential impacts on fundraising and economic growth.
An extract from the UK Labour manifesto touches private equity and performance-related pay, specifically on “carried interest”, as it reflects a significant policy proposal aimed at addressing perceived tax inequities. Explaining the meaning of “carried interest” for readers, one may say that this is a share of the profits that investment managers (typically in private equity and hedge funds) receive as compensation, provided that the fund achieves a certain level of return. What is so special about it is that it is distinct from the management fees that fund managers earn, which are typically taxed as ordinary income.
The unique tax difference in UK, is that “carried interest” is treated as a capital gain rather than ordinary income. “Carried interest”, often referred to simply as “carry”, is a share of the overall profits of a private equity fund paid out to a fund’s investment managers.
This means that at the moment, it is subject to capital gains tax rather than income tax. The tax charge for higher earners tax charge is 28%, which is lower than the top income tax rate of 45%.
With this scenario, one examines the Labour proposal (once elected) to close what it describes as a loophole, whereby performance-related pay in the form of “carried interest” is taxed as income rather than capital gain. This potentially jacks up tax to 45%.
Private equity firms might consider relocating to jurisdictions with more favourable tax treatments. British private equity firms and managers might change their behaviour in response to higher taxes, such as restructuring compensation packages or relocating operations.
As a general comment, managing risks in private equity investments requires a multifaceted approach that combines thorough due diligence, active management, strategic planning, and the use of various risk mitigation tools.
By employing these strategies, private equity firms can better navigate the complexities and uncertainties associated with their investments, ultimately enhancing the likelihood of achieving their desired returns. Now, Malta may seize the opportunity to catch up and leverage the potential of more Private Equity funds so as to invigorate its economy, this brings together investors, family offices, private equity and venture capital fund managers, advisors, and service providers. It is interesting to note that locally there are over €20 billion in dormant bank deposits by households.
The likelihood of attracting private equity firms from the UK due to higher interest tax rates in the UK depends on several factors. These include our regulatory environment, tax incentives, promotional efforts by FinanceMalta, and its overall attractiveness as a financial hub. While Malta has several attractive features that could draw private equity firms from the UK, the actual shift will depend on a combination of factors, including the relative attractiveness of our tax and regulatory environment, the availability of business infrastructure, and the overall economic and political stability.
Malta continues to enhance its regulatory framework, maintain political and economic stability, and its competitive tax incentives, so it could indeed; become a more attractive destination for private equity firms looking to relocate from the UK.
