18 May 2005


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Evolution of financial services industry - is it harvest time?

George M. Mangion

The offshore finance industry in Malta started in 1988 when the first authority, MIBA was set up with the help and advice of Chase Bank. At the time, MIBA was our antidote against economic stagnation and was hailed as our best chance in the search for the economic Holy Grail.
The offshore industry picked up in the early nineties based on self promotion by a number of law and accounting firms who quickly geared up to minimise risks associated with provision to non-residents of the nominee services.
Indeed, initially Government and more so the opposition were covertly suspicious of the nascent industry fearing the worst of unbridled risks and incidence of money laundering. However, regulation fervour was heightened and practitioners were obliged to perform strict due diligence work on clients who demanded secrecy about offshore trading transactions and a five per cent tax.
At the same time other offshore centres particularly in the Caribbean but to a lesser extent Cyprus and Isle of Man were sheltering a number of corporate schemes, which were at best doubtful. Regrettably one notes a few offshore centres harbouring a series of international scandals which later were discovered to be associated with fraud and abuse, notably in Russian money. This climate of suspicion led to the OECD issuing black lists of certain offshore centres.
At the time, during the late eighties governments running offshore regimes were milking the cow dry and they thought the finance industry could be abused with impunity. With hindsight they were proved wrong.
With hindsight offshore businesses flourished under the MIBA regime. Notwithstanding the levelling of additional regulatory burdens on practitioners who were licensed to act as nominees, the industry started suffering the brunt of criticism from OECD particularly owing to the offshore flavour of its legislation, which gained it the unsavoury title of a tax haven. The pendulum did swing hard from one extreme to a moderate position when a political decision was taken to apply for EU membership in 1992.
To prepare the country for membership and to align its fiscal laws to EU directives a bold step was taken in 1994 by John Dalli [ex-minister of finance] to abandon the offshore tax haven status and change to a more friendly onshore centre. John Dalli was the politician with a vision to spearhead a big-bang approach and pave the way for the island's major fiscal reform. Dalli was instrumental to pilot 20 new regulatory laws, which rocketed the island into a new world of financial services. It was a baptism of fire for practitioners who went back to their studies to catch up.
Looking back as a result of his reform we now can witness a flourishing industry boasting a class of qualified financial service practitioners who in compliance with the EU directives can navigate the Island into the new and uncharted waters of financial opportunities.
It is no secret that the initial impetus given to creation of this nascent industry by John Dalli is evident by the proliferation of over 80 licensed nominee companies that have mushroomed overnight.
The collective efforts of top lawyers and fiscal advisers have managed to change Malta 's outlook from a purely manufacturing and tourist resort to one which stands tall among the world's leading corporate domiciles through its careful drafting of a unique onshore regime.
The regulator MFSA harkens to maintain a positive and proactive environment. This helps practitioners by presenting a one-stop-shop. It is no wonder that satisfied investors applaud this as an elixir in their quest for seeking an island nurturing financial prosperity.
Another driver of change was the international pressure exerted on us to reform the offshore regime and to abolish the aura of secrecy that enveloped nominee companies registered under the preceding regime called MIBA. The reform of the fiscal structure has resulted in a unique incentive to non-residents who were attracted to make full use of the tax imputation facilities afforded by the local tax legislation when applied to foreign source capital. The primary objective of the 1994 reform was to carry through the revised legislation the many positive attributes of both the ITC and IHC structures for non-resident activities. This regime won the approval of EU and OECD regulators and removed us from the list of tax haven countries.
This year saw another reform of the onshore regime, which includes the gradual elimination of the nominee licensees and its replacement by a vastly improved law of mandate coupled with a revamped trustees licensing regime. A number of measures have been taken to achieve a smooth transition to scale down the existing nominee licensed companies over a two-year period. Much hard work and expensive consultancies have culminated in a comprehensive reform of existing legislation catering for a modern Companies Act, investment and insurance services Acts and the introduction of the Trust and Trustees Act 2004.
Financial commentators notice that a new dawn has peaked on these Islands now brushing shoulders with world-class international tax planning circles.
The timing of the trusts project has been fortuitous. Over the past four years the MFSA has commissioned a number of studies by well renowned law firms and practitioners to conduct a benchmarking exercise against Trusts legislation of a number of onshore and offshore jurisdictions.
The result is the Trust and Trustees Act 2004, which comes into force this year.
A Maltese trust is quite similar to any other Jersey or English law trust. Trusts were first regulated by the promulgation of the Trust Act in 1994.
Over the past decade we have had a slow start to the registering of foreign trusts in Malta.
By and large we have something in the region of 400 registered trusts but these are bound to increase exponentially when the new trusts act is fully marketed by practitioners as it now caters for both domestic and foreign use. We augur that the impetus of the renewed vigour of trustees and financial practitioners will be reaping the harvest of the regulatory reforms in the past decade.
Prime minister Lawrence Gonzi is heading a top-level committee overseeing the industry. He is working hard to establish the Island’s credentials as an ideal location for developing a diversified economy. Naturally this is much helped by the fact that both sides of parliament have reached consensus to support a strong and expanding financial sector.

[email protected]
The writer is a partner with PKFMALTA an audit and
business advisory firm



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