Malta financial services legislation, provides for the establishment of retirement funds which may be used as pension pooling vehicles established for the principal purpose of investing contributions of occupational retirement schemes and/or overseas retirement schemes/plans. A retirement fund can be set up as an investment company with fixed or variable share capital. A retirement fund can be established as a multi-class company with various sub-funds or pools of assets. This means that a retirement fund may be constituted of several asset classes or pools of assets to match the varying objectives of different occupational retirement schemes pooling their assets in the retirement fund.
A Malta retirement fund must:
- take the form of an investment company with a fixed or variable capital;
- have a minimum of three directors who must satisfy prescribed independence criteria. The retirement fund may have corporate directors and a corporate secretary serving on its board of directors. However in such case, the company concerned must be involved in financial services related activities and an individual within the company must be identified as the person responsible for the functions of director or secretary, as the case may be;
- appoint a retirement fund administrator and an auditor.
A retirement fund must invest contributions received from occupational retirement schemes and/or overseas retirement schemes/plans, and all returns on such contributions in instruments and other assets, with the aim of maximising the return on such contributions.
A retirement fund is expected to invest all money and other assets received in accordance with the applicable investment policy of the occupational retirement scheme and/or overseas retirement scheme/plan and in accordance with the retirement fund’s memorandum of association and the fund particulars. In this regard, saving any agreement to the contrary with the MFSA, the retirement fund must also follow the general investment restrictions according to the pertinent directives. These directives specify the manner of diversification of investments effected by the retirement fund, without limiting investment in any particular asset category. These investment restrictions are similar to those applicable to occupational retirement schemes.
A retirement fund must appoint a retirement fund administrator to carry out its day-to-day operation and administration. A retirement fund administrator is required to operate in Malta and its head office must be established either in Malta or in a country which, in the opinion of the MFSA, is subject to an adequate level of regulatory supervision.
A Malta retirement scheme may become a Qualifying Recognised Overseas Pension Scheme (QROPS) upon recognition by the UK HM Revenue and Customs (HMRC). A QROPS is a pension scheme which is established and regulated outside the UK but which is recognised in the UK for tax purposes. Due to an efficient regulator and attractive tax benefits, Malta has proven itself an attractive jurisdiction to set up such schemes.
A QROPS is an overseas pension scheme into which UK private pension rights can be transferred. UK non-residents, or those planning to become non-resident in the next 12 months, can apply to transfer their pension scheme into a QROPS. Applicants must be aged between 18 and 70. The scheme has to meet certain criteria set out by HMRC and act as if it were a UK scheme for QROPS members who have been resident in the UK at any time in the previous five tax years. A QROPS transfer is not subject to taxation unless it exceeds lifetime allowances. Consequently, a QROPS provides investment flexibility and with proper planning, tax benefits and tax planning opportunities to individuals who have an accumulated pension in a UK recognised scheme.
The majority of QROPS are set up under a trust deed with independent trustees being responsible for the implementation of the said deed and rules, with the member/s being the beneficiary/ies. Alternatively, a QROPS can be set up via a contract. Any scheme requires a ‘scheme document’. This is the written instrument evidencing the registered scheme and establishing the manner in which the scheme should be run, and typically it is such document which takes the form of a contractual agreement or a trust deed.
Tax treatment of Retirement Benefits arising from Retirement Funds or Schemes
The following tax treatment applies to any benefit derived from a retirement fund or scheme that is licensed under the provisions of the Special Funds (Regulation) Act, applying from the 1 January 2012 onwards.
Taxation of the Retirement Fund or Scheme
The income of any retirement fund or retirement scheme that is licensed, registered or otherwise authorised under the Special Funds (Regulation) Act or any Act replacing the said Act is exempt from income tax provided that this income is not derived from immovable property situated in Malta.
Taxation of Benefits derived from a Retirement Fund or Scheme
Given that under the provisions of the Special Funds (Regulation) Act, the principal purpose of any such funds or schemes is to provide retirement benefits, these retirement benefits are to be characterised as a pension. Any capital sum received by way of commutation of a pension remains exempt.
These benefits are considered to be arising in Malta and taxable accordingly. In determining the tax treatment of such benefits, due consideration needs to be given to any relevant provisions found in any applicable double tax treaty.
Registration of Beneficiaries
Pursuant to the above, beneficiaries receiving retirement benefits considered to be a pension arising in Malta are required to register for Maltese income tax purposes and to submit an annual tax return These returns will also need to include details of any tax withheld at source on the distribution or, if distributed free of withholding tax due to the provisions of a double tax treaty, then details of the treaty benefits being claimed would need to be provided, together with evidence of the tax residence of the recipient.
Such evidence should ideally be in the form of a tax residence certificate issued by the tax authority of the jurisdiction in which the beneficiary is resident. Where procuring such a certificate is not possible, the evidence may take the form of a declaration by the beneficiary to the trustee supported by relevant documentation (such as utility bills excluding mobile telephones).
WDM International offers its extensive experience in this area with the full support of its Malta and cross border tax practices.