Malta Pension Funds Background
Malta has established itself as a strong financial services centre, and has now sought to further increase this market with the establishment of new retirement schemes and funds. Malta has been recognised as a Qualifying Recognised Overseas Pension Schemes (“QROPS”) jurisdiction by Her Majesty’s Revenue and Customs (“HMRC”) in the U.K. Effectively, HMRC shall consider applications from retirement schemes based in Malta for registration as QROPS.
The Special Funds (Regulation) Act 2002 (“SFA”) makes provision for the establishment and operation of Pillar II retirement schemes (both occupational and person) as well as for the registration and supervision of the related service providers of a retirement scheme or fund, mainly the administrator, the asset manager and the custodian. The regulator of retirement schemes or funds is the Malta Financial Services Authority (“MFSA”).
In addition to the SFA, the EC Institutions for Occupational Retirement Provision Directive (“IORP Directive”) which has been fully transposed in Malta, establishing a European framework for the operation and supervision of institutions for occupational retirement provisions (“IORPs”) and applies to all IORPs whether they operate cross-border retirement schemes or not.
The Retirement Scheme
The SFA defines a ‘scheme’ as an arrangement which is registered under the SFA whereby payments are made to the beneficiaries for the principal purpose of providing retirement benefits.
A scheme which has any of the following characteristics, shall be deemed to be outside the scope of the SFA:
- Unless application is made to the MFSA, any arrangement for the payment of retirement benefits which has less than five (5) beneficiaries;
- Any arrangement whereby the retirement benefits start before the beneficiary attains the age of fifty (50) or after the age of seventy (70), with the exception of any benefit due by reason of permanent invalidity or death of the beneficiary and any cash payment to the beneficiary without the need of his consent if the beneficiary is no longer employed by the contributor;
- Unless, application is made to the MFSA, The payment of proceeds from the surrender or maturity of a long term contract of insurance effected by an insurance company;
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 takes the form of a contractual agreement or a trust deed established under Maltese Law.
The Retirement Fund
The retirement fund is set up as an investment company with fixed (INVCO) or variable share capital (SICAV) incorporated under the Companies Act, 1995, used as a pension pooling vehicle, for the principal purpose of holding and investing the contributions made to one or more retirement schemes or to one or more overseas retirement plans.
The Related Parties of a Retirement Scheme/Fund
Retirement Scheme/Fund Administrator
Every retirement scheme or fund must have a retirement scheme or fund administrator to carry on the duties assigned to it under the SFA.
The retirement scheme/fund administrator must be a company operating in Malta, which either has its head office in Malta, or if its head office is outside Malta, is established in a jurisdiction with an adequate level of regulatory supervision.
Only registered asset manager or a retirement scheme administrator that are duly authorised to provide investment management services may manage investments of a retirement fund or scheme.
The asset manager must be a company operating in Malta, licensed under the Investment Services Act, or in the case of a retirement scheme asset manager, a company authorised to carry on long-term business under the Insurance Business Act, 1998.
The asset manager may also be a company operating outside Malta, provided it is established in a country where an adequate level of supervision exists. Where such company is established in another Member State and is duly authorised to carry out portfolio investment management, it shall be exempt from the registration requirement.
Retirement Fund Custodian
No person, other than the retirement fund administrator, may provide custody services to a retirement fund, unless such person is registered by the MFSA to act as a Retirement Fund Custodian.
The Retirement Fund/Scheme’s Service Providers in Malta
All retirement scheme/fund administrators, asset managers and fund custodians set up as companies resident in Malta are subject to income tax on company profits at a rate of thirty-five percent (35%).
However, subject to Malta’s full imputation tax system, upon a distribution of dividends, shareholders are entitled to a tax credit of 6/7ths of the thirty-five percent (35%) corporate tax rate, which is the refund applicable to companies in respect of trading income, thereby reducing the effective tax burden on distributed profits to just five percent (5%). Furthermore, foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid. This, in effect, means that there may be situations where there will be no Maltese tax leakage.
View Tax Treatment of the Malta Company for a more comprehensive view of the tax credit applicable to trading income.
The Registration of a Retirement Scheme/Fund and Related Parties
Retirement schemes/funds and the related parties mentioned above require to be registered with the MFSA, a process which normally takes 8-12 weeks, and typically involves the following registration process.
- Preparatory Phase – Following a preliminary meeting of the representatives of the retirement scheme/fund with the MFSA, applicants shall be asked to submit a draft application together with any supporting documents. The draft applications are reviewed and vetted by the MFSA, with particular scrutiny being made on the nature and structure of the retirement scheme/fund;
- Pre-Registration Phase – The MFSA will subsequently issue an ‘in principle’ approval for the registration of the retirement scheme/fund and any related parties. The applicant must finalise any outstanding matters, such as the incorporation and capitalisation of any corporate entities, submission of signed copies of the application forms and supporting documents in their final format;
- Post-Registration Phase – The MFSA may impose a number of post-registration matters prior to the formal commencement of the business.
Scheme administrators, fund administrators and retirement fund custodians who are already licensed by the MFSA are subject to an abridged application process and registration will typically occur well before the routine 8-12 weeks.
The Investments of the Retirement Scheme/Fund
The scheme may opt to invest in one or more retirement funds, as well as invest directly on the market in shares, bonds, collective investment schemes and other instruments. In all cases, the scheme’s assets shall be invested according to the ‘prudent man principle’ and the best interest of beneficiaries shall rank paramount.
The retirement scheme administrator must ensure that:
- The assets are invested in order to ensure the security, quality and liquidity and profitability of the portfolio as a whole;
- The majority of the assets are invested in regulated markets;
- The proper diversification of assets and investments;
- The assets are invested in derivative instruments only insofar as they contribute to the reduction of investment risks or facilitate efficient portfolio management;
- The scheme may temporarily borrow money solely for liquidity purposes, as long as the borrowings do not exceed 10 % of the value of the scheme and save for the acquisition of debt securities, the scheme cannot grant loans or act as a guarantor on behalf of a third party;
- The scheme may acquire the units of retirement funds or other collective investment schemes and, unless otherwise provided, not more than 5 % of the scheme’s assets may be invested in contributor-related investments.
The Investments of the Retirement Fund
Similarly the MFSA shall require a retirement fund to comply with the following restrictions:
- The retirement fund shall be mainly invested in regulated markets;
- The retirement fund shall be properly diversified;
- The retirement fund may, subject to certain conditions, invest in the units of collective investment schemes;
- The retirement fund may employ techniques and instruments relating to transferable securities for the purposes of efficient portfolio management, and to provide protection against exchange rate and other risks in the context of the management of its assets and reserves;
- The retirement fund may invest in derivatives only in so far as these are used a means of reducing risk or facilitating efficient portfolio management;
- The retirement fund may borrow as long as the borrowing does not exceed ten percent (10%) of the value of the fund and only insofar that such borrowing is temporary and for liquidity purposes;
- The retirement fund shall not invest in a feeder collective investment scheme, nor in another retirement fund;
General Funding Requirements
A retirement scheme administrator shall ensure that the scheme establishes at all times an adequate amount of reserves to reflect its financial commitments.
Occupational retirement schemes shall maintain minimum ‘technical funding requirement’ calculated by a sufficiently prudent actuarial valuation and shall be composed of assets that, had the scheme wound up on the valuation date, the assets would have provided for:
- Benefits in course of payment;
- Benefits which consist of additional benefits secured under the retirement scheme on behalf of the beneficiary by way of additional voluntary contributions or a transfer of rights from another scheme;
- Benefits with at least uniform attribution payable in respect of a service completed up to the valuation date;
- The estimated expenses of administering the winding up of the scheme.
If the value of a scheme assets in a purely local scheme falls below the minimum technical funding requirement, the retirement scheme administrator must take action so that the employer (and where appropriate any other contributor) sets up a recovery plan to replenish the required amount. The required increase must take place within 10 years (or average working lifetime of any individual contributors if less) from the date of the actuarial valuation or before the date when the scheme is wound up, whichever is earlier. Cross-border schemes however, must be fully funded at all times.
The inverse situation, overfunding may occur. In this case, the retirement scheme administrator shall keep such excess in the scheme and the reduction of such assets may be provided by a reduction or suspension of the contributions.
Cross-border Occupational Retirement Schemes
The IORP Directive provides for the operation of cross-border occupational retirement schemes, thereby allowing multinational firms the opportunity to operate a single retirement scheme for all its employees throughout the European Union.
A Maltese IORP may accept sponsorship in terms of the IORP Directive from sponsoring undertakings situated in another Member State or EEA state, provided that prior authorisation be obtained from the home Member State. A sponsoring undertaking, however, is not subject to prior authorisation.
Before the Maltese IORP may start to operate the occupational retirement scheme for a sponsoring undertaking in another Member State, the MFSA must communicate to the Maltese IORP the information received from the host member state authority about the requirements to be satisfied by the Maltese IORP. The Maltese IORP must be informed on and satisfy:
- The requirements of social and labour law of the host Member State
- Strict diversification rules, which rules are:
- the IORP shall not invest more than thirty percent (30%) of its assets in shares or debt securities not admitted to trading on a regulated market OR the institution shall at least invest seventy percent (70%) of these assets in shares or debt securities which are admitted to trading on a regulated market;
- the IORP shall invest not more than five percent (5%) of the assets in instruments issued by the same undertaking and no more than ten percent (10%) of them in instruments issued by undertakings belonging to the same group.
- the IORP shall not invest more than thirty percent (30%) of these assets in assets denominated in currencies other than those in which the reserves are expressed.
However, these rules should only be applied to the part of the assets of the IORP that correspond to the activities carried out in the host Member State. Furthermore, host competent authority may only apply these rules if the same or stricter rules also apply to all IORPs located in the host Member State.
- In respect of the corresponding employees entitled to retirement benefits, the Maltese IORP sponsored by a sponsoring undertaking located within another Member State, shall satisfy the information requirements imposed by the host Member State on IORPs located within its territory.
Likewise, it is possible to have a sponsoring undertaking located in Malta which may sponsor a European IORP. The above procedure which applies to a Maltese IORP receiving contributions from sponsoring undertakings in other Member States, shall apply in this case.
The Overseas Retirement Plans
An overseas retirement plan is a scheme set up under the laws of a country outside Malta, which governs the rights and responsibilities of the parties, and under which payments to the beneficiaries are made for the principal purpose of providing retirement benefits.
The overseas retirement plan does not require registration under the SFA, but it may either decide to establish a retirement fund registered under the SFA or invest its contributions in an existing retirement fund registered under the SFA. However, it is not permissibile for an overseas retirement plan to be promoted or made available to Maltese residents.
Tax Treatment of Retirement Funds and Schemes in Malta
The income, which includes capital gains, of any retirement fund/scheme licensed, registered or otherwise authorised under SFA, other than income from immovable property situated in Malta, is exempt from Maltese income tax.
Income at the Level of the Non-Resident Beneficiary of the Retirement Scheme
Lump sum payments (a maximum of 25 % to 30 % is allowed to be withdrawn by the beneficiary upon retirement) are exempt from Maltese income tax which provides an exemption in relation to ‘any capital sum received by way of commutation of pension, retiring or death gratuity or received as consolidated compensation for death or injuries’.
Benefits in the form of an annuity or another form of retirement income are taxable if paid from a local source i.e. the income arises in Malta. These benefits are aggregated with other income and the resulting chargeable income is taxed at the normal progressive rates (applicable to non-residents) with the highest rate being thirty-five percent (35%). Yet, this is subject to double tax relief, afforded by Malta’s extensive tax treaty networks, with over 50 treaties currently in force, several of which set out the general principle that pensions and other similar remuneration paid to a resident of a contracting state in consideration of past employment shall be taxable only in that state i.e. in the state of residence of the recipient.
For a full list, view the Double Tax Agreements
Contact one of our officers to initiate the licensing process for a Maltese Pension Fund. Simply fill in the contact box below or contact us by email on email@example.com or by calling at +356 2338 1500