It is clear that Small and Medium Enterprises (SMEs) are a significant pillar of the Maltese economy. The renewal of the Seed Investment Scheme (Legal Notice 170 of 2019) granting tax relief to individuals investing in SME start-ups is an indication of the continued support to encourage further investment.
For the purpose of qualification for this incentive, an SME must be either incorporated, controlled and managed, or having a place of business in Malta. It must also
- have been in existence and conducting qualifying activities for a period not exceeding three years since the first commercial sale;
- not be listed on any recognised stock exchange;
- have a maximum of ten employees; and
- have gross assets not exceeding €250,000 prior to the investment in question.
A qualifying investor is an individual resident in Malta or a non-resident EU or EEA national whose worldwide income is at least 90% derived from Malta under the relevant income tax provisions to the extent that he/she bears the full risk of the investment. Furthermore, the investment must not exceed €750,000 and be held for a period of not less than three years and the investor must not have been connected to the company, prior to the subscription of equity shares.
On the other hand, for an SME to be considered as a qualifying company it must not undertake the following activities:
- Dealing in immovable property (including development and related activities), shares, securities and, or other financial instruments
- Dealing in goods other than in the ordinary course of business
- Carrying on banking, insurance or any other activity covered by the Investment Services Act, the Banking Act and the Financial Institutions Act
- Legal, accounting or other professional services
- Being in receipt of royalties or license fees
- Operating or managing hotels, hostels, guest houses or residential care homes
- Generation of electricity and other energy resources
- Holding shares (directly or indirectly) in any company carrying out excluded activities
The Tax Benefit
Qualifying investors will benefit from a tax credit of 35% of the aggregate value of their investment in one or more qualifying companies, capped at €250,000 annually. The tax credit may set off the tax due of any taxable income or gains and any excess may be carried forward indefinitely until utilised.
Qualifying investors who dispose of their investment within three years will be charged to tax on the higher of transfer value or market value at their applicable tax rates. Beyond this prescribed time, any capital gains earned by the qualifying investor will be exempt from income tax. Notably, any losses incurred on disposals will not be considered to be allowable losses for tax purposes.
Availability of the Tax Credit
The tax credit shall apply for investments made from basis year 2019 up until 31st December 2021. However, the rules will cease to apply when investment in the qualifying companies reaches €5,000,000 or any other amount that may be established by the Minister of Finance.
How can we Help?
We invite you to reach out to your RSM contacts or one of the contacts hereunder should you wish to discuss the applicability of these regulations or the impact that they could have in the context of your personal income tax computation. We would be pleased to help you identify potential opportunities therefrom.
Karen Spiteri Bailey – Partner
Jana Farrugia – Senior Manager