A Collective Investment Scheme (CIS) under Maltese law as is likewise the case under many foreign laws, generally comprises a vehicle that affords potential investors the opportunity to entrust their funds to a vehicle which would perform activities of a collective investment nature. As previously discussed in the introduction, the advantages pertinent to investing in a CIS involve risk spreading and the prospect of partaking in investment opportunities that would otherwise have not been accessible to a sole investor. By and large a CIS established under Maltese law would be set up as a separate legal entity in its own right, endowed with the possibility of operating locally within the remit of the Investment Services Act (“ISA”). A CIS may be set up in an array of legal forms. Broadly categorized a CIS may be set up as a corporate fund, such as a SICAV, or as unincorporated fund which by way of example would include a Mutual fund.
For Malta tax purposes a CIS refers to any scheme or arrangement which is licensed under the Investment Services Act. The definition of a CIS also includes undertakings for collective investment in transferable securities (UCITS). A number of rules in the Malta tax legislation provide for a special tax regime pertaining to CISs which afford significant tax mitigation opportunities.
By and large CISs are set up as companies and should at least from a theoretical standpoint constitute fiscally opaque entities. Consequently, CISs should be held tantamount to treaty subjects within the purport of general principles of international tax law.
Income of a CIS, with the exception of that income which arises from immovable property situated in Malta and specific investment, shall be exempt from tax.
The tax regime pertinent to CISs is based on the categorization of funds into prescribed and non-prescribed funds. In the scenario that a CIS is made out of several sub-funds, the abovementioned distinction in fund classification ought to apply to each sub-fund within the CIS.
A prescribed fund comprises a fund of a scheme based in Malta that has made an express declaration to the Director General Inland Revenue that the value of its assets held in Malta, as at a particular date represent at least 85% of the fund’s total assets value. All other remaining funds constitute non-prescribed funds.
Non-prescribed funds rope in all funds held in a scheme based overseas and funds of a Malta based scheme that do not meet the necessary requirements to constitute prescribed funds
Income which accrues to a prescribed fund, which falls within the remit of those categories of specific investment income fall outside the scope of the tax exemption enshrined in Malta tax legislation and is consequently subject to tax at source. The rate of withholding tax is reliant upon the prescribed fund’s type of income earned. A payer is obliged to withhold tax at the rate of 15% with regard to local bank interest and 10% in the event of any other form of investment income. Such withholding taxes ought to be withheld when payment of investment income is made to a CIS. With regard to income derived from immovable property situated in Malta, the fund is subject to the normal corporate rate of tax. However, any other form of income or gain not constituting investment income and received by a CIS does not give rise to any Maltese tax implications.
While a greater part of the income accruing to non-prescribed funds is tax exempt, the income pertinent to a prescribed fund does not enjoy such a privileged status. Prescribed funds established in corporate form are taxable at the standard rate of 35%. Nonetheless, other tax rates may be applicable depending on the type of income arising at fund level.
Non-prescribed funds benefit from a tax exemption on income and gains received including investment income. An exception to such an exemption exists with regard to income derived from immovable property situated in Malta.
Reclassification of a Fund
Reclassification may give rise to tax implications when an eventual disposal of fund units takes place. A disposal is deemed to occur on the date of the reclassification. This is crucial for the calculation of the capital gain or loss on the transfer of the units held in the reclassified fund. The disposal value comprises the last quoted price prior to the reclassification date of the fund. Tax on any capital gain will only fall due upon disposal of the units. Units which are disposed of in a fund, reclassified from a prescribed to a non-prescribed fund, are for tax purposes treated as units in a non-prescribed fund for the entire holding period. This holds, irrespective of the fact that part or all gains may have arisen during that period when the fund fell to be classified as a prescribed fund. Consequently tax is due on any gains, accruing during the entire period. Relief is not afforded for those new gains which accrued during the period when the fund was held to constitute a prescribed fund. Furthermore, the fund is obliged to notify the payers of investment income, upon reclassification in order to establishing whether tax ought to be deducted from the investment income payable to the fund or otherwise.