Incentives for the Manufacturing and Services Industries

Revision No. 4  -   Last Updated : 09-10-2002

 

 

The Business Promotion Act (BPA) - Act IV of 2001 – has amended and substituted the Industrial Development Act (IDA) which had been with us since 1988 and which had, all told, served well the functions for which it had been enacted.  Regulations have been issued under the BPA by LN135 of 2001.

Malta Development Corporation (MDC)

The MDC, founded in 1967 by Act of Parliament, is the exclusive Government agency entrusted with promoting and supporting a quality business environment in Malta for both foreign and local enterprises in the manufacturing and services sectors. 

Besides being responsible for 10 Industrial Estates around Malta and Gozo and a Technopark for high technology industries, the MDC is responsible for implementing the Government’s industrial policy thereby enabling the growth of some 200 foreign and 300 Maltese enterprises.

The Incentive Package: Types of Companies

For an exhaustive list of Companies that qualify to benefit from the incentives under the BPA please refer to Appendix 1.

Incentives: General

Please refer to Appendix 2 for a detailed list of the incentives provided for under the BPA and the types of companies qualifying for such incentives.

Application procedure and powers of the MDC

Interested parties are to apply to the MDC on the appropriate form.  A declaration signed by all the directors or, alternatively, by the company secretary stating that throughout the relevant accounting period the company is eligible to qualify for the incentives shall, in all cases, be attached to the application.  Applicant’s auditor is also to confirm that to the best of his knowledge and belief the director/company secretary’s declaration is correct.  If an application is successful, the MDC will issue a certificate confirming the eligibility of applicant and setting out the conditions to be satisfied by the enterprise within 60 days from receipt of all requested information.  The certificate shall be deemed to constitute a contract between applicant and the MDC/Government of Malta. 

The MDC reserves the right to request any additional information necessary in the circumstances and may also visit the premises.  The MDC may also, in particular:

·       examine the books, documents, premises and all other things and matters of applicant as may be necessary to ensure that the assistance is being applied for the purpose for which it has been given; and

·       request that financial statements be submitted to it on a quarterly basis or at such shorter intervals as the MDC may determine.

The MDC may revoke the incentives granted to an enterprise if such enterprise fails to comply with any of the conditions attached to the grant of any incentive.  An appeal from any such decision lies by the aggrieved party to an independent and impartial Appeals Board constituted under the BPA.  An appeal from a decision of the Appeals Board may be made to the Court of Appeal on a point of Law.

An enterprise shall only be entitled to benefit from the incentives listed in the BPA if, with the submission of its income tax return for every year of assessment in respect of which it claims a benefit, it submits:

·       a declaration signed by all the directors confirming that throughout the relevant accounting period the enterprise’s trade or business consisted solely of permissible activities and that it is not disqualified from benefiting from such incentives*; and

·       a declaration signed by the enterprise’s auditor stating that to the best of his knowledge and belief, the directors’ declaration is correct.

 

Fiscal incentives explained

(i) Reduced Rates of Income Tax

‘Target Sector Companies’ may benefit from the following highly favourable rates of tax:

 

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These reduced rates of income tax are applicable until year of assessment 2021 or such earlier date as the Minister responsible for industry may determine.

The MDC shall confirm in writing to each qualifying enterprise the minimum number of years (which cannot exceed 10 years) of assessment for which the reduced rates of tax apply.  The MDC may not earlier than 12 months prior to the expiry of such minimum period renew such confirmation for a period not exceeding 5 years.

Profits which are taxed at reduced rates are not subject to further taxes upon a distribution of such profits to the shareholders.

Enterprises carrying out waste treatment or biotechnology should have their project approved by the MDC prior to qualifying for this incentive.

Undertakings which are not eligible to benefit from this incentive are those whose activities consist of:

1.     retail sales.  For this purpose, an enterprise shall be deemed not to sell by retail if its sales of goods or services are made to:

·       a person who carries on a trade and who either resells such goods or services or else who makes use for the purpose of his trade of such goods or services; or

·       a person, other than an individual, who uses those goods or services for the purpose of an undertaking carried on by such person.

2.     dividing, sorting, packaging, mixing without changing the character of the goods, drying, labelling or such other similar process or any combination of such processes to goods which are acquired in bulk merely to prepare such goods for sale or distribution;

3.     spurious assembly[1];

4.     the installation, commissioning or assembly of goods on site where the said goods have not been manufactured by the enterprise which is installing, commissioning or assembling such goods on site;

5.      the repair, maintenance, preservation, improvement, reconditioning, refurbishing or restoration of any goods or any combination of such activities where such activities do not impose on such goods a change in their character;

6.     companies which do not revoke their right to benefit from IDA-export based incentives; and

7.     the mere expansion, duplication or replacement of a trade or business formerly carried on by any related company in Malta.

(ii) Investment Tax Credits

Tax payable can be reduced substantially (or, indeed, eliminated altogether) by Investment Tax Credits calculated as the higher of:

·       50% (or up to 65% in the case of SMEs) of the company’s investment on qualifying expenditure (being tangible fixed assets and technology or know-how as defined in the BPA); or

·       50% (or up to 65% in the case of SMEs) of the first 2 year wage cost of new jobs created in Malta as a result of an investment project.

Unutilised investment tax credits may be carried forward and increased by 7% or such other rate as the Minister may prescribe.  In addition, an enterprise entitled to claim such benefit may, at its option, defer the claiming of such benefit, or part thereof, in any one year of assessment to one or more subsequent years of assessment but, in that case, no increase shall operate.

For an enterprise to be eligible for Investment Tax Credits based on job creation:

·       an individual must have been employed during the ‘employment qualifying period’[2]; and

·       employment must not be in replacement of another employee; and

·       employment must not be terminated before the lapse of 5 years.

Part-time jobs are to be converted into the equivalent of full-time jobs.

Undertakings wishing to claim an Investment Tax Credit based on job creation must attach the following to the application to be submitted to the MDC:

1.     details of the investment project and of the individuals employed for MDC’s approval;

2.     for each year comprised in the ‘employment qualifying period‘ the company has to submit further details consisting of:

·       further amounts invested;

·       termination of employees;

·       new employees (new jobs created);

·       new employees (replacing existing ones); and

·       wage cost on which tax credit is to be claimed.

Chargeable income relieved from tax is once more to be allocated to the Maltese Taxed Account which means that distribution of profits are also exempt in the hands of the shareholders.

Where a company is charged to tax at different rates, the investment tax credit shall first be deemed to have relieved that part of the income which has been taxed at the lowest rate.

Worked example:

an enterprise (not being an SME) having a qualifying expenditure of Lm400,000, wage costs amounting to Lm200,000 and benefiting from Reduced Rates of Income Tax of 10%.

 

(iii) Reduced Rates of Tax on Re-invested Profits

Tax on profits and gains which are set aside and re-invested in projects approved by the MDC is reduced to 19.25%.  Naturally, the MDC will ascertain that funds set aside are, indeed, used for the said purpose.

(iv) Investment Allowances

Tax deductions applicable to enterprises that incur expenditure in acquiring plant and machinery and industrial buildings or structures in addition to normal tax depreciation are provided as follows:

1.     plant and machinery -- 50% of the investment; and

2.     industrial buildings or structures -- 20% of the investment.

These tax deductions operate provided that:

·       the asset is first used in Malta#;

·       the allowance is claimed in the year the asset is first used by the company in its trade or business;

·       the asset is owned by the company; and

·       no allowance has been claimed by any person in respect of the same asset by a related company.

 

 

(v) Value Added Incentive Scheme

Undertakings may benefit from reduced rates of tax on a portion of their profits to be calculated according to a formula laid down in the BPA according to the increase in value added of their activities.  The reduced rates of tax are as follows:

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This scheme is applicable until year of assessment 2021 or such earlier date as the Minister responsible for industry may otherwise determine.

The MDC shall confirm in writing to each qualifying company the minimum number of years (which cannot exceed 10 years) of assessment for which the scheme applies.  The MDC may not earlier than 12 months prior to the expiry of such minimum period renew such confirmation for a period not exceeding 5 years.

A company shall only qualify for the Value Added Incentive Scheme if:

·       the amount of value added resulting from the company’s audited financial statements for the relevant accounting period exceeds the average amount of value added as shown in that company’s financial statements covering the base period;

·       it was entitled to benefit from this incentive throughout the base period and the relevant accounting period;

·       it does not sell by retail and is not simply involved in a spurious assembly or in a process without changing the character of the goods;

·       its trade or business does not include the preparation and production of ‘food in the course of catering’ as defined in the BPA; and

·       its trade or business does not involve the mere expansion, duplication or replacement of a trade or business formerly carried on by any related company in Malta.

(vi) Tax Treaties

Malta’s vast network of double taxation treaties (DTTs) [Kindly view our fact sheet entitled ‘RELIEF FROM DOUBLE TAXATION’ for more information on Malta’s tax treaties] ensure that profits generated in Malta are either exempt from tax in the country of residence of the investor or that such a jurisdiction will provide a tax credit for the Malta tax spared as a consequence of the incentives Maltese legislation offers.

The benefits provided for under the BPA are exempt from income tax.  Profits exempted from income tax are also exempt from such tax in the hands of the shareholders.

Moreover, where any benefit under the BPA is granted to a partnership in terms of the Companies Act, 1995, and, accordingly, the partners and not the partnership itself are taxable on any income of such partnership, any such benefit shall also be due to the partners personally.

 

Non-Fiscal incentives explained

(i) Incentives for job creation

An enterprise may benefit from a tax deduction based on full-time job creation when:

1.     it employs a ‘qualifying individual’ for a period of, at least, 3 years; and

2.     it proves to the satisfaction of the MDC that such employment is not in replacement of another employee whose employment was terminated by the enterprise.

A ‘qualifying individual‘ is an individual who either:

(1)   has been registered as unemployed for at least 2 years; or

(2)  has been registered as unemployed for at least 1 year and is over 40 years of age; or

(3)  has been registered as unemployed for 1 year and is registered as disabled with the Employment Training Corporation (ETC); or

(4)  has been made redundant as a consequence of a restructuring programme undertaken by an enterprise with which he was employed#; or

(5)  is employed with a public sector related entity#.

The tax deduction is equivalent to a percentage of the wage cost according to the table below:

 

It should be noted that:

·       wage cost includes gross emoluments and the employer’s share of social security contributions;

·       wage costs cannot exceed 125% of the individual’s main employment in the previous 12 months or 24 months, as the case may be, prior to his employment with the enterprise in question or, alternatively, an amount to be established by the ETC in the case of (1) and (2) above; and

·       an enterprise may opt to be given a cash grant if the employee was previously employed in the public sector.

(ii) Research and development expenditure

A qualifying company is entitled to deduct an amount equivalent to 120% of the expenditure incurred but the total deduction is limited to 5% of the turnover of the company for any year of assessment.  Carry forward is allowed.

(iii) Accelerated depreciation

A deduction in respect of wear and tear on assets is available.  These are as follows:

1.     plant and machinery -- 33.33%

2.     industrial buildings and structure -- 5%

(iv) Export Incentive Scheme

Additional profits related to increases in export sales derived by a qualifying company over sales of a base period are exempt from tax.

(v) Investment Incentive Scheme

Increased export sales proportionately attributable to a qualifying percentage (of expenditure on qualifying assets to total sales) is subject to reduced rates of tax.  Applicant must, together with the appropriate application, submit supporting documentation consisting of inter alia copies of statements, business plans and financial projections to the MDC.

(vi) Soft loans

Enterprises investing money on:

1.     tangible fixed assets (e.g. land, buildings, plant & machinery); or

2.     the acquisition or development of technology or know-how,

may benefit from loans of up to 75% of the expenditure incurred if the MDC is satisfied that such investment may contribute to the development of Malta’s economy.

The interest rate to be charged by the MDC shall be 2.5% less than the minimum discount rate established by the Central Bank of Malta (CBM) subject to a minimum of 2.5% per annum.  Repayment of both the principal and interest shall be secured by a general hypothec over the enterprise’s property present and future in addition to any other security which the MDC may require.  The MDC may accept a prime bank guarantee in lieu of or in addition to such general hypothec.

Unless otherwise agreed, a 2-year moratorium on capital repayments shall apply (i.e. for the first 2 years of the duration of the loan the enterprise shall only be required to pay interest on the loan).  The loan, however, has to be settled in full within 10 years from the date on which the first loan amount was received.

If a loan has been granted by the MDC by instalments, the MDC may, at its absolute discretion and without prejudice and in addition to any other right laid down in the BPA, withhold any portion of the loan still outstanding in case of any breach by the enterprise of the conditions attached to the loan or of the BPA.

The benefits derived by the enterprise are exempt from income tax.  In this case, the benefit is the difference between the interest rate charged by the MDC and that normally charged by a bank as determined by the MDC.

(vii) Loan interest rate subsidies

Where the MDC is satisfied that the activities of an enterprise may contribute to the development of Malta’s economy, the MDC may agree to subsidise the rate of interest payable on a loan issued by a bank or other licensed financial institution obtained in order to acquire additional assets (being qualifying expenditure as defined in the BPA) for which a soft loan has not been granted.  The interest subsidy cannot be applied to interest incurred on soft loans.  The subsidy shall be such as to ensure that the rate of interest effectively borne by the enterprise is not less than 2.5% less than the minimum discount rate established by the CBM subject to a minimum of 2.5%.

(viii) Loan guarantees

The MDC may, if it is satisfied that the activities of an enterprise may contribute to the development of Malta’s economy, guarantee loans taken by enterprises from banks and other licensed financial institutions to finance the acquisition of such additional assets (being qualifying expenditure) to be employed in the enterprise’s trade or business.  The guarantee cannot exceed 75% of the expenditure incurred.  The MDC will only accept to give guarantees to banks and other licensed financial institutions.

(ix) Exemption from import duties

Plant, machinery and equipment as well as materials, accessories and components to be used for processing may be imported duty free.

(x) Training assistance

A training grant may be given if a full-time employee engaged for an indefinite period undergoes a training programme approved by the MDC.  Depending upon whether an enterprise is classified as a ‘large’ or a ‘small and medium’ enterprise, such assistance may vary from 35% to 80% of the eligible costs involved according to the table below:

 

 

General Training means training involving tuition which is not applicable only or principally to the employee’s present or future position in the enterprise but provides qualifications and skills that are largely transferable to other enterprises or fields of work thereby improving the employee’s employability.  Eligible costs are trainer’s fees/costs, trainers’ and employer’s travel expenses, materials and supplies, depreciation of tools and equipment to the extent that they are used for the training project and personnel costs relating to the employee.

(xi) Work permits

Indefinite work permits are granted to shareholders holding more than 40% of the equity.  Work permits are also granted to specialists for definite periods according to company requirements.

(xii) Provision of immovable property

Industrial buildings available in areas of 250 sq. m. to 3,000 sq. m. and undeveloped land may be leased out by the MDC to prospective entrepreneurs at subsidised rates.  The usual rates for the first years is 1.75 Malta liri (approximately US$4.50) per square metre for buildings and 23 cents (approximately US$0.75) per square metre for undeveloped land.

All industrial estates are fully serviced with asphalt roads, water, electricity, telephone and fax connections.  Each factory has an adjoining administration block with adequate office space and staff facilities.  Minor modifications and additions to the standard factory may be carried out by Government employees, the cost of which is passed on to the tenant by way of additional rent.  Factories are also provided with adjoining areas for future expansion.

 

SMEs and Micro-enterprises

Over and above the incentives which are available to qualifying companies (including SMEs) SMEs, in particular, qualify for additional incentives.  Accordingly, SMEs that require the assistance of experts in a particular field may apply to the MDC for a grant which cannot exceed 50% of the costs incurred.  Grants shall not be given in respect of expert services which are of a continuous nature or are provided periodically and relate to the enterprise’s usual operating expenditure such as routine consultancy services or advice.

Likewise, where the MDC is satisfied that an SME may benefit from participation in fairs and exhibitions, it may give such an enterprise a grant not exceeding 50% of the costs of renting, setting up and running the stand.  Such a grant may only be provided in respect of the first participation of an SME in a particular fair or exhibition.

Late payments due to micro-enterprises by SMEs, large companies and/or any public authority shall carry with it a penalty, i.e. additional interest due from the day the debt falls due until such day as the debt is settled at the rate of 6 percentage points above the minimum discount rate.

New obligations

The MDC is entrusted with inter alia the following duties:

confirming the granting of certain incentives which under the IDA were of an automatic nature;

determing the number of years for which certain incentives are granted;

determining the eligibility or otherwise of companies for the incentives granted under the BPA;

verifying whether the provisions of the BPA have been complied with;

ascertaining that a beneficiary has not carried out any disqualifying activities;

providing the State Aid Monitoring Board with any information as may be required; and

informing the Department of Inland Revenue whether the benefits claimed have been properly calculated.

Enterprises claiming benefits under the BPA should forward a copy of their income tax return to the MDC within three (3) months from having filed such return with the Department of Inland Revenue.

One should note that all MDC staff are bound by oath of secrecy.

Malta: an ideal investment location

Building on the experience acquired through the implementation of the IDA, the BPA introduces greater scope and flexibility to the incentives available for the promotion of business and covers a much more extensive range of qualifying sectors and activities than before.

Indeed, the driving force behind the BPA is to allow Malta to remain a competitive investment location whilst, at the same time, reflecting Malta’s international commitments to bodies like the WTO, OECD and the EU.

 

Downloads:

·                  This Document in PDF Format.

·                  Appendix 1      : Qualifying Companies

·                  Appendix 2      : Categories of Incentives