The government is planning to announce fiscal incentives in the coming Budget to cover the Prospects product launched earlier this year by the Malta Stock Exchange.

Prospects was launched last February to offer a cost-effective alternative source of financing to SMEs that need between €1 million and €5 million. The MSE is the regulator and the admission process has a lighter regulatory structure than the main market. Furthermore, the cost to come to market should be very affordable, with the Exchange keeping its own fees between €5,000 and €15,000. The product is based on the concept of a corporate adviser who would bring the SME to the listing. Besides helping the SME to come to market and attain the standards required, the adviser also ensures continued adherence to the rules and transparency.

“Progress has been made. We were held back by State aid issues but an acceptable solution has been found by the Stock Exchange and its advisers,” Finance Minister Edward Scicluna told The Business Observer.

The news was welcomed by the Malta Stock Exchange. Simon Zammit, CEO designate, said that following the Prospects launch, the MSE continued to listen to stakeholders and suggestions on how to continue improving the product.

“The fiscal position in respect of equity admitted on Prospects was one area of concern and the MSE worked closely with the finance ministry, the Inland Revenue Department and Mimcol in order to come up with, through our advisers, an incentive package that will make Prospects an attractive market to both SMEs and their investors.

“We welcome the minister’s announcement that these incentives will be announced in this year’s Budget. This is very good news and will surely accelerate the already substantial interest that has been shown for admission to Prospects by the many family-run SMEs in Malta.”

We were held back by State aid issues but an acceptable solution has been found

However, the news was not as good for shareholders hoping to see an end to anomalies in the tax refund on dividends, with the minister saying that a solution may be proposed in this year’s or next year’s Budget, but a final decision has not yet been taken.

“We have to see whether spending the money on this issue is a priority for this year,” Prof. Scicluna said.

Shareholders receive dividends from companies net of tax, as the 35 per cent corporate tax is deducted at source. In their tax return, people then declare their gross dividends along with any other income and, depending on the tax band into which they fall, get a rebate for the difference between the 35 per cent tax deducted from the dividends and their tax band.

The problem arose when the income tax 35 per cent rate dropped to 32 per cent in 2013, 29 per cent in 2014 and 25 per cent in 2015. Shareholders who fall into the new 25 per cent bracket are still being taxed at a rate of 35 per cent on their dividends – while those who were originally in the 25 per cent tax bracket were getting a 10 per cent rebate.

Sources had explained over two years ago that the problem was that there are currently hundreds of millions of euro in company reserves built up over decades, on which tax has been paid provisionally at the rate of 35 per cent.

This means the government would have to give a refund to any shareholders receiving dividends paid from those reserves who fall into a tax bracket of less than 35 per cent.

The government has been planning to remove this unfair anomaly since the tax rate started to fall but the minister said he was not prepared to go ahead until he had a proper estimate of how much the government would have to refund – and watertight legislation.

“We knew that the reduction in tax bands would reduce our revenue by €45 million – but this did not include this dividend issue.

“Successive governments for years have been collecting the 35 per cent on the reserves – imagine having to refund the difference! It is dynamite. There is no way we can afford to pay out all those refunds if all these undistributed profits were released as dividends.

“The problem is that no one could give me an estimate on what it would cost us, which is very disappointing. Our system, no matter how many improvements we make, is not up to my standard. We need better data for planning purposes.

“Now I have an estimate but I am not going to divulge it for now as the range is too wide. We then considered starting with those companies listed on the Stock Exchange but the issue of State aid had to be considered.

“Now I have been assured that there is a way to solve this. This is important as there is a strong bias in favour of bank deposits and against investment in risk-based equities,” he concluded.