The new administration has hit the road running to catch up with time lost during the over stretched electoral campaign and is ready to put into action various schemes and financial incentives which were contemplated in the budget. To start last month saw a bevy of incentive-based legal notices aimed to kick start the economy and encourage more start-ups. This is very commendable if it works on the ground, however, as always one needs to take in the whole picture which includes certain niceties that are relevant to the overall feasibility and utility of the aforementioned. For a start let us visit Legal Notice 101 of 2013, ushering a revamped Micro-Loan Guarantees regulations aimed to target enterprises facing difficulties in obtaining a conventional bank loan. Typically, this would catch within its grasp those start-up enterprises that would be facing such a financing difficulty owing to them translating into high-risk in loan terms. The incentive offered here is in the form of a guarantee and not the provision of credit per se, as Malta Enterprise takes upon itself to act as a (partial) guarantor in view of those enterprises carrying out a “qualifying activity” as defined in the rules.

At the offset this clarifies the point that this incentive is not meant to act as the Hercules to those damsel-in-distress enterprises encountering financial distress but rather as a support system to allow new ventures to breathe a breath of fresh air into the market. As always applicants need to be proactive and choose the right scheme which best suits his/her business model otherwise there will be time wasted in bureaucratic shuffles which in the end may frustrate the scope of such assistance. An upside of this incentive is that it applies equally to incorporated entities and to self-employed individuals, provided the latter employ not more than 20 persons and provided the latter have an annual turnover which does not exceed €4m.

As can be expected there is an anti-abuse provision, which states that linked enterprises do not qualify as eligible enterprises, thus forestalling the likelihood of the overall same persons receiving multiple doses of the same assisted loan guarantee benefit. Such a provision is common to many of our laws, which seek to prevent the fabrication of circumstances, which have the aim of avoiding the spirit of the law.

Thus, just as within taxation an enterprise cannot divide a project into multiple short contracts given to related companies in order to avoid qualifying as a permanent establishment whose income would be taxable, similarly, an enterprise here cannot artificially segregate ties with related companies to create an artificial entitlement to a benefit and thus submit multiple claims. Applicants are to be aware about the capping of €100,000 which the loan cannot exceed. In response to this, if upon consideration Malta Enterprise deems it fit to act as guarantor, Malta Enterprise can employ its exposure capped to a maximum of 80%, that is €80,000 which can be a real benefit to start-ups.

Yet not everything is rosy and one often encounters another criticism to this incentive that has been the “price-tag” on such partial loan guarantee, which comprises a 2% interest payable by way of premium. This would effectively raise total interest payable to around 9% (where a risky loan is assumed to trigger an interest rate of around 7%), thus rendering somewhat questionable the “affordability” of the incentive in practical terms. While in isolation the 2% interest “fee” has been deemed a just consideration, it becomes food for thought in the context of the foregoing.

Moving on to another scheme one reads about the Assistance to Small and Medium Sized Undertakings Regulations, LN 102 of 2013 that annotates “the economic development of Malta” in view of which it incentivises the obtaining of ISO certification in various forms by granting an extra deduction of 150% of eligible expenditure where a qualifying activity is sufficiently proven to exist. The intention behind these regulations has been suggested to be driven by Malta’s still young development in the certification field, the betterment of which would undoubtedly place the country in a more advantageous place on the map where such certifications are the order of the day overseas.

Moving on and one never fails to consider how the spirit of the law is stretched a little for the better good of the Maltese economy under the Merger and Divisions regulations in LN 104 of 2013. In something of a contradiction here, given that the rules warn away the avoidance of liability or duty to tax, while exempting the accepted applications of the anti-avoidance provision in the law, which disregards artificial or fictitious schemes as normally assessable. Basically the exemption here envisages a company in a negative financial climate, which is for instance occasioned by genuine internal strife and where the expense of duty on documents has genuinely barred a division occurring prior. The exemption hinges however on the important criteria of “bona fide commercial reasons” which need be satisfied at the Commissioner’s discretion which is absolute. This incentive bears a €1,000 application (a pseudo tax) fee which is non-refundable and does not in any way reflect on the chances of an application being successful. Additionally, admission being at the absolute discretion of the Commissioner of Inland Revenue makes anticipation of success or otherwise nearly impossible since identical circumstances in various cases do not imply identical treatment. Still it is a step in the right direction if one contemplates other linked incentives such as the new Capital Gains rules in Legal Notice 105 of 2013 which has been deemed overall beneficial to the tax-payer. First off these rules widen the ambit of what constitutes “controlling interest” through the introduction of a new ground: where a shareholder is entitled to 25% or more of rights to profits. Secondly, these rules rectify by elimination the taxation of the “phantom gain” which had been taxable for the last two decades. This is achieved through the introduction of a new formula, which ensures that the total amount taxable never exceeds 100%. It is expected that when in full operation it will remove an anomaly, which hinders progress in the past. Talking of the past let us see what the budget measures have in store for the future. Here one welcomes the promulgation of LN 111 of 2013 entitled the Repatriation of Persons established in the field of Excellence and equally exiting the heralding of LN 106 of 2013 entitled Qualifying Employment in Innovation and Creativity, which clearly both bear intrinsic similarities that transcend their common effective date of 1 January 2013. Both sets of regulations target persons not domiciled in Malta and in both cases where an eligible person or office is respectively identified and the latter so elects, a flat rate of 15% is applied to the first part of such person’s income. While in relation to LN 106 the minimum income is €45,000 and needs to relate to the development of innovative and creative digital products, in LN 111 the minimum income is €75,000 and needs to relate to an ex-Maltese domiciled individual whose expertise lies in the sectors of manufacturing, research and development. While in practice ordinary residence emerges to subsist after a person has resided in Malta for around three years, the latter regulations extendedly prescribe the concerned person to have not been ordinarily resident in Malta for a period of ten consecutive years preceding date of return. LN 111 applies to persons who were initially ordinarily resident in Malta for 20 years, thereby indicating its application to Maltese expats who were born and formally educated in Malta.

To conclude from an author’s perspective it is easy to comment upon the legislator’s work where it always follows that “there is nothing to it when you don’t have to do it”, however the job of the legislator is a daunting one indeed that needs to move with the times and for once help create a practical stimulus to improve the chances of a faster rate of economic growth which optimistically is planned to reach 1.7% of GDP this year. Thus, as the new regulations unravel into practice and together with the benefits perhaps further lacunae or impracticalities are identified, then perhaps it would be optimal to adopt the view that where the law was well-intended we either win or learn, but we never lose.