Family Business Act White Paper Presented in ParliamentBy Admin Admin With With 0 Comments
In his address, the Minister for the Economy, Investment and Small Business, Hon. Christian Cardona (the “Minister”), recognized the importance of family businesses in the Maltese and European economy. As pointed out by the Minister family businesses generate economic growth and employment and provide lasting stability, however, at the same time, such businesses face distinct challenges that legislators and policy makers need to address. One of the most difficult challenges for such businesses is succession. If not properly undertaken, the process of succession could be the cause of the failure of family businesses. The Minister stated that financial issues and lack of proper governance structures are the main reasons why family businesses fail this succession process. It is for this reason that the European Commission has long been calling upon Member States to address this legislative and functional void by policy makers.
In light of all this, the Family Business Act White Paper was presented in Parliament with the scope of providing background information on the family business sector, as well as highlighting family businesses’ needs to ensure their growth and continuity. One of the main recommendations of the proposed legislation is to allow businesses to structure, register themselves and acquire the status of a family business. This will give them the opportunity to benefit from such structure and identity.
The proposed legislation is based on the knowledge that 98% of all businesses in Malta are micro, small, or medium sized enterprises (“SMEs”). The majority of these businesses are family-run. These SMEs provide around 80% of all jobs in the business economy. Currently, legislation that specifically assists and encourages the regulation and governance of family businesses as well as their transfer from one generation to the next, is inexistent both on a European and International level. Thus, it is the scope of this legislation to encourage and assist family businesses to enhance their internal organization and structure which will allow them to effectively operate the business and work towards an effective succession.
One of the intentions of the new legislation is to encourage family members to transfer their family business to other members of the family during their lifetime for an inter vivos transfer, as opposed to waiting and having the business transferred causa mortis. This will create more benefits and increase the likelihood of success.
With so many different definitions of what constitutes a family business, the new legislation sets out to establish a legal form for it and have it clearly defined. Malta will be the first jurisdiction legislating specifically for family businesses. This bill strengthens Malta’s status as a core financial centre for the EU, International, and Commonwealth businesses. The legislation will clearly identify which family members will be covered by the act in order to safeguard their employment. Article 3 of the proposed legislation defines “family business” and identifies direct ownership of those family businesses that are 1) listed or trading on a multilateral trading facility, 2) limited liability companies, 3) registered partnerships, 4) businesses set up as a trust, 5) unregistered partnerships, and 6) those that the Minister may prescribe. Indirect ownership is defined as those family businesses set up as 1) holding companies, 2) those held in a trust, or 3) a private foundation. An owner is the ultimate beneficial, physical individual who, directly or indirectly, has a shareholding or other interest in the family business. For a family business to be understood as such, it must be made up of at least two owners who are family members within the same family unit. The legislation takes into account that the success of a family business sometimes depends on allowing non-family members to participate in ownership. The law will also provide for those family businesses that lease their assets rather than own them. In this case, such businesses will also be caught by the definition of “family businesses” if the majority of the lessees are family members within the same family unit.
The legislation requires family businesses to not only determine the role of family members within the business from an ownership perspective, but also through decision-making rights and formal involvement in the management of the business. The legislation will also establish a Regulator for Family Businesses. While being a leader and a representative for the sector, the regulator will also administer the Register of Family Businesses and will collate those businesses that have been allocated the family business status after meeting the necessary requirements. While being a licensor, the Regulator will also work on building a community for family businesses in order for them to work together and develop more opportunities for the sector.
The benefits provided by the new legislation are twofold: governance, and fiscal.
The Governance Benefits include the following:
- Micro investment of a maximum tax credit of €50,000 over a three year period.
- Legal and Accountancy advisory services up to €2,500 over a five year period.
- Arbitration of up to five sittings.
- Education and training for owners and their employees of up to €1,000 annually per family business.
- The positive consideration of lease renewals occupying government premises.
- Loan guarantees of up to €500,000 per business for the purpose of acquiring the business of parts thereof.
- Subject to the business satisfying all the conditions of the tenancy agreement, when a family business is occupying industrial government premises or land on lease or emphyteusis, the Regulator will recommend to the Malta Enterprise and/or Malta Industrial Parks to renew the tenancy.
The fiscal incentives will be integrated into the Duty on Documents and Transfers Act with the intention of providing for a smoother and more effective transfer or retention of the family business within the family.
The duty on immovable property will be chargeable at the rate of 3.5% on the first €500,000 of the value of the property being transferred. With regards to duty on shares, interests in a partnership, trust or foundation, in assessing the duty chargeable, no account will be taken of the first €150,000, or such other greater amount as may be prescribed.
Support of this legislation shows the Government’s commitment towards family businesses. The Government will facilitate family businesses’ transition from generation to generation, thus contributing towards their continuity and success which in turn leads to a stronger economy. The Minister is inviting all interested parties to put forward their reactions, ideas, suggestions and comments on the proposal of this legislation.
The public consultation will end on November 22nd, 2015.
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