Malta at the Forefront of Family Business Legislation in the EU

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The Maltese Economy’s backbone is supported by small and micro enterprises. The majority of private business enterprises in Malta are micro-enterprises, many of which are considered to be family owned businesses. Such businesses can be found in multiple industries, including: Agriculture, Automotive, Construction and Engineering, Financial Services, Food Processing, Hospitality and Leisure, Manufacturing, Technology, and Transport and Distribution. Despite the support given to small businesses by the Small Businesses Act, a law that deals with the struggles faced by family businesses is still lacking.

On March 23rd 2015, Dr. Chris Cardona, the Minister for Economy Investment and Small Businesses, announced that the proposed draft Family Business Act (‘The Act’) would be presented to Cabinet. Subsequently, a White Paper is to be issued later this year for public consultation. This is highly innovative as Malta will be the first EU Member State to enact such a law.

The first struggle faced by family businesses is that of survival. As stated by the Minister, only 30% of family businesses are passed on from one generation to the next. Furthermore, less than 10% make it to the third generation. Family-owned businesses are faced with high tax costs and cash flow difficulties linked to their transfers.

Malta’s Income Tax Act exempts capital gains on transfers of immovable property, shares, businesses, goodwill and intellectual property, only in the case of a donation between family members. The transferee is faced with a 5% stamp duty with no exemption. Said stamp duty is a disincentive to family members, as it is only reduced to 2% in case of transfers of marketable securities.

The Act will differ from other acts as it is meant to be an enabling act and not a regulatory one. The objective of the Act is to motivate family businesses to apply and be registered as family businesses, and to help them develop better governance structures for the family and for the business. Family Businesses are encouraged to start planning for the continuity of the business from an early stage.

The first initiative by the Act is to define a “family member” for the purpose of applicability under the new law. This is being defined as the business owner’s spouse, his descendants in the direct line and their spouses, and the brothers and/or sisters and their descendants. The criteria will allow for flexibility but seeks to reduce the possibility of abuse. Likewise, the Act will lay down a definition for what constitutes a family business in terms of the law. This will determine which businesses are eligible for the benefits afforded by the Act. The draft act defines family businesses as those owned by at least two members of the same family, although a small minority stake by non-family members will be allowed.

The second proposal intends to strengthen the relationship between family businesses and Maltese taxation. Proposals for this stage of the Act, include a call for the reduction or deferral of family business taxes, as well as the establishment of an educational body responsible for counseling family businesses on Malta’s tax legislation.

Thirdly, the Act seeks to ensure the continuity of family businesses throughout successive generations. This is achievable through the development of clear family governance structures and family protocols to facilitate the way a family business is organized. The Act also aims to provide publicly funded training and consultancy in family and business governance, and succession planning for family businesses, their family members and employees, provided they qualify as a family business under the proposed Act.

Malta has established itself as being family-friendly for businesses, not just at a national level but also internationally. The Family Business Act will compliment existing laws on tax and trusts, which allow for the running of family businesses on an international scale.