Collective Investment Schemes

Revision No.  88  -   Last Updated : 09-10-2002

 

The setting up of Collective Investment Schemes (CISs) is regulated by the Investment Services Act, 1994, (ISA) which is modelled, to a large extent, on the EU Investment Directive of 1993.  The Regulatory Authority under the ISA is the Malta Financial Services Centre (MFSC).

What is a CIS?

A CIS is a scheme established for the purpose of collecting and pooling funds from the general public and, subsequently, investing these funds in assets in accordance with certain investment objectives published in a Prospectus.

The value of the units/shares held by the public in a CIS reflects the value per unit/share of the underlying assets of a CIS – in the case of a CIS which is ‘open-ended’, its size expands and contracts as investors buy and sell units in it, while a ‘close-ended’ CIS has a fixed share capital.

Types of CISs

CISs may take various forms including:

·         unit trusts under the Trusts Act, 1988;

·         investment partnerships (very similar to the ‘limited partnership’ vehicle adopted in several foreign jurisdictions);

·         mutual funds (the ‘fond commun de placement’);

·         open-ended investment companies that are set up in the form of a variable share capital company or SICAV under the terms of the Companies Act, 1995; or

·         close-ended investment companies (or INVCO) also set up under the terms of the Companies Act, 1995. 

However, by far, the most common and popular vehicle for CISs is the SICAV.

License requirement

A CIS operating in or from Malta or which is organised under the Laws of Malta and which has any of the following characteristics will require a license:

·         it operates according to the principle of risk spreading; or

·         the contribution of the participants and the profits or income out of which payments are to be made to them are pooled; or

·         at the request of the holders, units are or are to be re-purchased or redeemed out of the assets of the CIS, continuously or in blocks at short intervals; or

·         units are, or have been, or will be issued continuously or in blocks at short intervals.

A Maltese CIS carrying on any activities from abroad must have a valid CIS license.

Exemption from requirement of a license

The following CISs are exempted from the requirement of obtaining a license:

·         a scheme involving participants each of which carries on a business other than that which constitutes an investment service and enters into the arrangement for commercial purposes related to that business;

·         a scheme which operates according to the principle of risk spreading or in respect of which the contributions of the participants and the profits or income out of which payments are to be made to them are pooled but only if the general purpose of the scheme is commercial and not for investment purposes;

·         a CIS which the MFSC is satisfied is essentially private in nature and purpose; and

·         a scheme approved by the MFSC and operated by a company for its own employees, former employees and their dependants, or for employees, former employees and/or their dependants of companies in the same group, in instruments issued by a company/companies within that group.

License conditions

Apart from the Standard License Conditions contained in the Investment Services Guidelines which are tailored to meet each type of CIS, particular conditions may apply to licenses granted to specialised funds.

Appendix I lists a number of investment and borrowing restrictions contained in the Guidelines.

For further information please refer to our fact sheet entitled ‘Guide to the provision of Investment Services in or from Malta’

Application

The MFSC uses a standard application form.  Initially, unsigned draft copies of the application may be submitted to the MFSC as the basis for discussions between applicants and the MFSC regarding the license conditions and the requirements for obtaining a license.

For a detailed list of documentation that must be submitted to the MFSC in order to apply for a CIS license please view Appendix II

In general, once an application (properly completed) is submitted to the MFSC in final form with all supporting documentation attached, a CIS license would normally be approved within 6 to 8 weeks.

Fee structure

General requirements

The Fund Manager of a CIS and the Custodian must be independent of each other and act independently and solely in the interests of the investors.  Any replacement of the Fund Manager or Custodian must be approved by the MFSC.

Where the scheme assumes a corporate form, the directors must be approved by the MFSC.  Similarly, the directors of the Fund Manager must also be approved.

MFSC approval is required for amendments to the principal documents submitted with an application for a CIS license.

Tax treatment of CISs

Licensed CISs may choose between 2 alternative fiscal regimes, namely:

1.         They may choose to be exempt from income tax and tax on capital gains in Malta but, in that case, they cannot avail themselves of Malta’s vast network of Double Taxation Treaties.  This structure is ideal for CISs that intend investing in various Maltese securities which can, therefore, invest in a tax-free environment; or

2.         CISs set up as SICAVs (but not as unit trusts or partnerships), may elect to be liable to income tax at the favourable rate of 25% (as opposed to the standard corporate tax rate of 35%) and benefit from Malta’s Double Taxation Treaties.  These CISs would likewise be exempt from capital gains tax which means that profits from the disposal of any investments, assets or liabilities would remain exempt in the hands of the CIS.  For obvious reasons, this fiscal regime is more suitable for CISs that intend investing internationally. 

It should be pointed out that non-resident shareholders (i.e. investors) in a SICAV are entitled to a two-thirds (2/3) refund of the Malta tax paid by the SICAV upon receipt of a dividend paid out of the foreign source profits of the SICAV.  The refund may even be of 100% in the case of a ‘qualifying participation’.

A mathematical example will illustrate the tax effectiveness of CISs better.  In the following example it is being presumed that the CIS has elected to be liable to tax at 25% and that it is eligible for the Flat-Rate Foreign Tax Credit (FRFTC): 

CIS’s point of view       US$

Net foreign income received in Malta                                       100

Add FRFTC @ 25%                                                                       125

Malta CIS tax @ 25%                                                                     31

Less FRFTC                                                                                   25

Distributable profits to non-resident shareholder                           94

 

Non-Resident Investor’s point of view     US$

Distributable dividend to non-resident                                           94

2/3rds refund of Malta tax (i.e. 2/3rds of 6)                                    4

Dividend received by non-resident shareholder                              98

Total tax suffered in Malta                                                             2

Although the above calculation presumes that the FRFTC credit would apply, this is not necessarily so.  In fact, which of the various types of relief is available depends on the location of the source country and the evidence provided to the Maltese Revenue Authorities.

The 85% limitation of the FRFTC applies also to CISs.

[Please view our ‘ RELIEF FROM DOUBLE TAXATION’ fact sheet for further information on the FRFTC and the other forms of double taxation relief available].

Dividends paid by a CIS to a Maltese resident out of profits allocated to either the Foreign Income Account or the Untaxed Account are subject to a final withholding tax of 15% on the net amount of the dividend.

A capital gain made by a non-resident upon the disposal of his shares in a CIS is not liable to tax.

A capital gain made by both a non-resident and a Maltese resident upon the disposal of shares in a CIS quoted on the Malta Stock Exchange are also exempt from tax.

In addition, the following attractive features should also be highlighted:

·         no stamp duty is payable on share issues or transfers;

·         no tax on the Net Asset Value of a CIS; and

·         no withholding tax on dividends paid to non-residents.

Listing on the Malta Stock Exchange

Both Malta-based and overseas-based CISs may be listed on the Malta Stock Exchange (MSE).  They must have a minimum of 3 directors who cannot be corporate.

A CIS which is not listed on a stock exchange abroad may apply to the MSE for a Primary Listing.  If a CIS is already listed elsewhere, it may, instead, apply for a Secondary Listing on the MSE.  For detailed listing requirements kindly view our fact sheet entitled ‘LISTING COLLECTIVE INVESTMENT SCHEMES ON THE MALTA STOCK EXCHANGE’.

The advantages of seeking such a listing on the MSE include:

·         the international profile of a CIS is enhanced;

·         the capital gains tax exemption on the disposal or transfer of a holding in the CIS would also apply to Maltese residents; and

·         since some institutional investors may only invest in CISs which are listed, a listing necessarily increases the marketability of a CIS.

Fund managers

Every licensed CIS must employ the services of an external Fund Manager, unless, in certain circumstances and with the approval of the MFSC, it is constituted as a company with its own management and, therefore, specifically exempted from this requirement.

The Fund Manager must, generally, be set up under the Laws of Malta as an investment services company having an established place of business in Malta and sufficient financial resources to conduct its business and meet its liabilities.

A Fund Manager must be licensed under the ISA enabling it to provide management, administration, safekeeping or investment advice to a CIS. 

For further information on how to obtain an investment services license kindly refer to our fact sheet entitled GUIDE TO THE PROVISION OF INVESTMENT SERVICES IN OR FROM MALTA‘

However, the MFSC has the authority, in appropriate circumstances, to exempt an overseas Fund Manager of sufficient standing and repute from certain of the formalities associated with the licensing.  The extent of exemption will mainly depend upon the level of regulation that is exercised in the primary jurisdiction.

An investment services company set up in Malta may also provide the above services to a CIS resident elsewhere.

Taxation of Fund Managers and Expatriates involved in fund management

Please refer to our fact sheet entitled ‘GUIDE TO THE PROVISION OF INVESTMENT SERVICES IN OR FROM MALTA’.

Custodian

A CIS must also engage the services of an external Custodian which, generally speaking, must have an established place of business in Malta.  Alternative custodianship arrangements may be approved by the MFSC where these provide adequate protection for investors and the scheme’s assets.

The following entities are eligible to act as Custodian:

·         any bank licensed under the Banking Act of Malta that meets certain minimum Financial Resources Requirements; or

·         any other institution approved by the MFSC.

Both HSBC Bank plc and Bank of Valletta plc are licensed custodians for CISs.

Reports

A CIS is required to submit monthly returns and semi-annual and annual audited reports to the MFSC.  The annual report must include a report by the Custodian which must state, inter alia, whether in its opinion, the CIS has been managed:

·         in accordance with the limitations on investment and borrowing powers imposed by the constitutional documents and the MFSC; and

·         otherwise, in accordance with the provisions of the constitutional documents and license conditions.

Local agents appointed by CISs based overseas are required to submit an annual report confirming adherence by the CIS to its license conditions.

Prospectus

A CIS is required to provide a Prospectus to its investors free of charge.

MFSC approval is required before publication of the Prospectus and before any amendments may be made to it.

A Prospectus must contain sufficient information for investors to make an informed decision about the proposed investment and, accordingly, must, inter alia, contain a description of the CIS’s investment objectives and criteria along with sufficient disclosure to inform investors of the risks associated with their proposed investment.

Malta – non-tax advantages

A critical factor in the setting up of offshore funds is the choice of domicile with particular attention being paid to the tax position of the fund and that of the investors in the fund.  Indeed, in addition to the attractive and flexible tax regime, Malta is an inviting location for cross-border funds, inter alia, on account of:

·         its geographical position;

·         the existence of a skilled professional labour force at a competitive operating cost;

·         the fact that Malta is an established financial services center of world repute;

·         an existing financial infrastructure and related services industry; and

·         a developed Double Taxation Treaty network.

‘UCITS’ Funds

It is possible to create funds in Malta that comply in all material aspects with the EU directive on Undertakings for Collective Investment in Transferable Securities (‘UCITS’).  Indeed, the standard conditions that apply to public funds are drawn up to reflect many of the UCITS requirements.  However, such funds will not technically be UCITS funds for purposes of EU legislation. 

Can non-Maltese CISs be sold in Malta?

This is possible.  However, a foreign CIS being marketed in Malta must appoint a Maltese investment services license holder as its authorised agent to deal with investors’ queries and to provide a local point of reference.  All advertisements and other promotional activities must be approved by MFSC.

Downloads:

·        This Document in PDF Format.

·        Appendix 1 : Restrictions on investments and borrowing

·        Appendix 2 : Documents to accompany license application

Further Reading

·        Guide to the provision of investment services in or from Malta

·        Listing collective investment schemes on the Malta Stock Exchange

·        Relief from Double Taxation