Myths and misconceptions for Maltese investors - 2

In the first part of this article (published on January 8) I took a general view of the implications of the European Savings Directive and its impact on financial planning. In this second part I am focusing on more specific issues relating to...

Capital gains on bond portfolios

A good part of Maltese investors hold bond portfolios where the risk exposure varies from a conservative A-rated to an emerging market, high-risk exposure. The tax implications on the income generated are the same.

Over the past months we have also come across cases where it was argued that one will not have his bond portfolio managed by a local intermediary so as to bypass any capital gains tax that may become due locally. This is only a myth.

Consultation with a respectable tax consultant would highlight the fact that Article 5 (1) of the Income Tax Act categorically excludes from tax any capital gains realised on the transfer of such instruments as preference shares and bonds, both of which have a fixed rate of return.

Direct equity investments

The views put forward so far have concentrated mainly on fixed income securities. This is in line with and in the true spirit of the ESD itself. However, some investors also have part of their portfolios invested in equities aimed at achieving an acceptable level of capital growth.

Here one must stress that gains on the transfer of foreign securities are subject to capital gains tax irrespective of the portfolio being managed locally or overseas. The potential returns on local securities is often overlooked.

I empathise with those who argue that the local stock exchange is still in its infancy and that trading volumes, restricted liquidity and market imperfections may be an issue. Having said that, no investor should overlook the fact that equities listed on the Malta Stock Exchange are exempt from any capital gains tax. Combined with an annual growth rate of 63%, this makes local listed equities a very attractive and tax efficient investment indeed.

Collective schemes

Are your collective schemes managed by an Authorised Financial Intermediary (AFI)?

A good number of Maltese investors also hold investments in collective investment schemes that are non-prescribed2 funds of a non-resident collective investment scheme. It is common knowledge that substantial amounts are invested in the UK as Unit Trusts, Investment Trusts or OEICs.3

What most investors who hold such investments do not know is that gains on the transfer of such funds is taxable at the person's marginal rate of tax. If, however, the transfer is made through the services of a local authorised financial intermediary, the gains on the transfer are taxable at 15%. Should these funds be duly licensed as UCITS4, the income paid through AFIs can also be taxed at 15%!

Final note

The AFI is not bound to verify that funds have been registered under the IRS or regularised in past income tax declarations. Investors who are eventually found (by the tax authorities) that they are not entitled to such benefits face severe penalties. By virtue of amendments to the Income Tax Act published in the Government Gazette of February 7, 2003, such investors are also divested from the protection afforded to them by the Professional Secrecy Act and similar legislation ensuring customer confidentiality.

There may also be the misconception that assets held under nominee, in the name of an intermediary licensed in Malta, are fully protected from the provision highlighted above. Regrettably one has to note that this is another myth that finds no reinforcement within the current financial services legislation.

It is hoped that this contribution raises your awareness of key issues that you may be neglecting in the management of your investments. As has been seen, there is more to investments than the simple rate of return.

(Concluded)

The purpose of these articles is to provide information on tax issues with particular emphasis on the European Savings Directive and is not intended to provide financial or tax advice. It is therefore recommended that investors contact their investment and tax advisers for a comprehensive overview of their particular investment and tax situation.

Simon Azzopardi is head of Wealth Management at Bank of Valletta plc, which is licensed by the MFSA to conduct investment services business.

References

1. Based on the MSE Index on December 27, 2004, and December 27, 2005.

2. A fund which has at least 15% of its total assets outside Malta as opposed to a prescribed fund which has at least 85% of its assets invested in Malta.

3. Open-ended investment companies.

4. Undertaking for Collective Investment in Transferable Securities under EU regulations.