With the shock news of local bank shares shedding €110 million in value, investors are questioning what a safe shelter for their savings is. This year has witnessed investors protesting against the fall of the La Valette Property Fund managed by a Bank of Valletta subsidiary, which lost €50 million in value (amazingly, no generals lost their command). More bad news followed with the fall of the dollar denominated investments and the debt-stricken eurozone countries. They say that gold remains the only safe investment as it looks like the only tried and tested safe haven when uncertainty hits the markets (gold topped the 1800 mark). Locally, we have been accustomed to look on investments in brick and mortar as an equally safe haven. Many bought expensive second homes in premium areas as a hedge against falling currency values.

In fact, this was fuelled by the cash of repatriated millions of foreign undeclared nest eggs, lured by successive government tax amnesties. Lucrative development in property has traditionally been the playground of the landed barons (essentially the politically well-connected business tycoons) in the past decades. Quality real estate in Malta has withstood all turmoil in the recession and, with some minor exceptions, prices remained stable. It is true that estate agents admit suffering a small correction in the aftermath of the Lehman collapse, but really and truly the property bubble supports a pseudo price equilibrium with some banks heavily loaded with advances, having property as the sole collateral.

It is surreal how a standard 3-bedroom apartment (with sea views) in Tigné Point carries a minimum €1 million price tag. Not bad, considering that developers acquired pubic land at a negotiated price with an option to pay the government over 20 years. But then any speculation linked with mega projects is well thought-of by any party in power (and Mepa) as it always generates jobs and is perceived to have a healthy multiplier effect on the economy. The government also makes a profit as it has imposed an ingenious stamp duty on property buyers and levies tax on capital gains at 12 per cent, which is payable on contract by the sellers (a deferred 35 per cent tax is optional when terms and conditions apply). With this background one can understand how a permanent resident scheme (currently suspended) attracted many foreign high net worth individuals to invest in real estate. Before its sudden and unexpected suspension, applicants were paying a nominal flat tax of 15 per cent on remittances. They were expected to either rent or acquire property. It is lamentable that the criteria which established the scheme 25 years ago has not been updated.

Participants were expected to spend more than €23,000 a year, buy a permanent residence of more than €69,000 for an apartment or €116,000 for a house, or rent for €4,000 a year. Up to the time before its suspension, there were 1,042 permanent residents, of whom more than 50 per cent paid less than €4,000 individually and 90 per cent paid less than €10,000. Statistics showed its popularity was waning as only 14 had bought residences last year. Some buyers of real estate achieved permanent residence status and then sub-let to others when they moved on. The government is contesting the effectiveness of the PRS scheme. It discovered that last year applicants came predominantly from BRIC countries such as China, South Africa and Russia, with some buying property in Malta as insurance against having to leave their countries. They had no real intention to reside and spend. But our case is not an exception as such lax practices also occurred in UK.

Britain recently had a number of non-residents who were not taxed on their worldwide income except on a remittance basis. Prior to recent amendments, people with links abroad but living in the UK can declare another country as their real home, or “domicile”, regardless of where they actually reside. As a result they pay no UK tax on their earnings or capital gains outside the UK. In simple terms it means that non-domiciled are people with links abroad who declare another country as their home or “domicile” and as a result pay no UK tax on their earnings or capital gains outside Britain.

This has encouraged many rich foreign businesspeople to live in the UK. The Treasury has said that in 2005 about 115,000 people qualified under the scheme and contribute £4 billion in income tax on the earnings they bring into the UK. The catch is that this is in addition to a massive foreign income generated elsewhere. In fact, they spend a cool £16 billion, which official sources say leaves the Treasury £3 billion in VAT and £300 million in stamp duty.

This ingenious scheme has lured many Greek shipping tycoons, Saudi princes and wealthy American bankers to take advantage of the laws. Paradoxically, the outgoing Labour Chancellor had enacted a budget that aimed to tighten up on taxing non-domiciled persons. The UK government then headed by Gordon Brown forged ahead with plans to levy an annual charge on wealthy foreigners who so far have managed to avoid paying tax in Britain.

After strong opposition, he stopped short from making them (as originally intended)to pay tax on offshore income or capital gains not remitted into the country. Naturally, there has been widespread criticism on such a move, to impose levies on non residents. Many groups had criticised what they branded a levy on wealthy foreigners, saying it could prompt those individuals to move elsewhere and so harm Britain’s reputation as a financial power centre. In a nutshell, the new legislation now taxes non-UK domiciled individuals who had been resident in Britain for more than seven of the past 10 tax years, at a flat annual tax of £30,000 (since amended upwards). To add salt to the wound, there were also plans to tighten up rules on UK residency and to crack down on offshore trusts owned by such people.

Normally immune from capital gains tax, offshore trusts are being inspected to ensure that wealthy individuals do not avoid paying any tax at all. Back in Malta, the Federation of Property and Estate Agents told MaltaToday that they had been privately told by government officials that the residence scheme is being held up by the permanent representative in Brussels Richard Cachia Caruana. MaltaToday was told that Mr Cachia Caruana was under pressure from the EU because it was being alleged that non-European residents who had bought property in Malta had been abusing their Schengen visa. Concurrently, the Chamber of Commerce insists that with the suspension of PRS places, as many as 12,000 direct jobs are at risk (12 per cent of the working population) aside from those at risk due to loss of revenue for the whole economy.

The suspension, now in its ninth month, was badly received by property owners, notaries, contractors and some banks. Indeed, for many years there have been various schemes, with varying degree of success, aimed at attracting people to settle here. Over the years the scheme worked well because, essentially, applicants were retired EU or EEA persons who created no strain on the unemployment list. They were barred from taking employment or engage in business unless authorised by the competent authorities.

The Utopian dream was to try attracting people brimming with overseas expertise and ideas in the tourism, manufacturing and artistic sectors. Perhaps because of thinly veiled political bigotry, we failed in the process to attract experts in various fields to create “think tanks” that could then platonically assist in the creation of wealth. Granted, permanent residents are not allowed to participate in political activities although on a local level they are allowed to participate in local councils. How effective and equitable was the old permanent resident scheme (PRS)? A welcome incentive was that any income taxed in Malta qualifies for double taxation relief under the wide network of 55 double taxation treaties and other forms of double tax relief.

Many UK pensioners who applied for the scheme could effectively declare their pensions and consequently escape UK tax, as they will be taxed in Malta at 15 per cent. In spite of this relatively attractive scheme, particularly following EU accession, the authorities suddenly said the time had come for its suspension and nominated a team of experts to formulate a complete overhaul.

The main bone of contention is the negative advertising by aggressive estate agents who allegedly used it for ulterior motives, branding it as a fast lane to gain EU or Maltese citizenship. Some properties had actually been sold under these false pretences. This gave participants legitimate expectations that the government would not have been able to change without facing expensive lawsuits. PRS empowered a foreign resident equal treatment for employment and conditions of work, grants for education, social assistance and insurance and any other public service, including free health service. To give an example, the government was arguing that if a 50-year-old foreigner came to Malta with wife and two children, normal health care would cost an estimated €100,000 – nowhere near the contribution the country was receiving.

To conclude, with a battered euro area facing so many debt problems and the civil war raging in Libya there is no time to waste. We need to come out with a sensible solution. The proposed new scheme termed Global Mobile Permanent Scheme is rumoured to cater for non-EU citizens for four years and is non-renewable. It would cover foreigners working in North Africa on three-year contracts who would want to bring their families to nearby Malta. It would be cheaper but participants would know they would not get the benefits of EU citizenship, although it should have beneficiary effects on the sale of property. If properly handled, the new PRS opens the floodgates to top investors and business associates to the island. In passing, I recall Prime Minister Gonzi, when addressing the financial services practitioners on the eve of the 2008 election, promised that if re-elected his party would lay more red carpet and cut red tape. There is never a better occasion to put such promises into action. Laying a red carpet for permanent residents will pay rich dividends and help reduce the stock of 70,000 vacant premises in our fair isle.

The writer is a partner at PKF Malta, an audit and business advisory firm