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Explaining the benefits of the Family Business Act

The Family Business Act, which entered into force on January 1, 2017, is the first known Act of Parliament created specifically to encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. Photo: Shutterstock

The Family Business Act, which entered into force on January 1, 2017, is the first known Act of Parliament created specifically to encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. Photo: Shutterstock

The Malta Law Academy, in collaboration with the Chamber of Advocates, has invited Nadine Lia, legal adviser to the Ministry for the Economy, Investment and Small Business, to address an afternoon seminar on the Family Business Act on Wednesday. Dr Lia explains how Malta will be proposing a policy paper to the EU’s Competitiveness Council on the way forward for the family business sector, especially when it comes to business transfers.

What is the Family Business Act?

The Family Business Act is an enabling legislation created to assist family businesses to achieve continuity between generations, provide legal form and clarity to the sector, provide a legal and administrative framework against which family businesses can finally have a method to guide and facilitate their transition to ensure growth and continuity.

Some of its keys features include a formal definition of what constitutes a family business, who should be considered a family member, how its governance is regulated, how foreign-owned family businesses can avail themselves of the Act, and incentives and schemes created to assist fami­ly businesses and their members when transferring and running the business and its wealth to the next generation.

Why was the legislation sought?

The Family Business Act is the first known Act of Parliament crea­ted specifically to encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. The Act seeks to encourage and assist fami­ly businesses to enhance their internal organisation and structure with the aim of effectively operating the business and working towards a successful succession of the family business.

What sort of calls had there been from local and international stakeholders about the need for such assistance for family businesses?

Nadine Lia. Photo: Matthew MirabelliNadine Lia. Photo: Matthew Mirabelli

Internationally we have seen lobby groups and family businesses coming together to create associations and lobby groups to encourage governments and policy­makers to address the Achilles heel that family businesses face when transferring their wealth and business to the next generation. Undoubtedly the biggest call has been from the European Commission, which firmly believes that family businesses have a key role to play in Europe’s economic recovery and future sustainability.

The European Commission has been a recurrent voice in asking its Member States to enact legislation, which was most recently repeated in its report of June 30, 2015, on family businesses, reiterating its request to Member States to provide tangible support for the continuity, succession transfer and good governance of family businesses.

As part of our EU presidency we recently held a high-level confe­rence with the participation of Elżbieta Bieńkowska, European Commissioner for the Internal Market and Services, and over 300 registered participants, specifically about the subject of business transfers, family businesses and successions. We received a lot of collaboration and feedback, and we will now be proposing a comprehensive policy paper in the EU’s Competitiveness Council as to the best way forward for the family businesses sector and business transfers.

What are the fiscal and governance incentives of the Family Business Act?

There are considerable benefits and attractions for registered fami­ly businesses of a governance and fiscal nature. First and foremost, family businesses are for the first time given an identity and platform. Having an identity through a definition will allow family business to develop further in the sector, lobby and grow to achieve its aim. Furthermore the legislation is intended to act as a complement to present legal and financial structures to local and foreign family business considering making Malta their jurisdiction of choice.

The key fiscal incentives are reduced stamp duty on the value of the immoveable property – the first €500,000 will be charged at the reduced rate of 3.5 per cent, and exemptions of stamp duty on a capped value of shares – the first €150,000 will not be taken into account.

The European Commission has been a recurrent voice in asking its Member States to enact legislation on family businesses

The key governance incentives are 1) Loan guarantee – Enhanced capping of up to €500,000 on maxi­mum guarantee; 2) Micro invest – Enhanced tax credit of up to €50,000; 3) Positive consideration of lease renewal of industrial government leased  premises; 4) Educational and training – funds of €1,000 annually for family business owners and their employees; 5) Advisory – Funding of up €2,500 for legal, accountancy advice; 6) Mediation through arbitration – Funding of five sittings up to a value of €1,000 for the establishment of the fair value of the family business; 7) Investment aid 2014-2020 – Waivering of the condition that assets are to be bought by unrelated third parties – now applicable to family businesses, allowing them greater access to investment aid.

What sort of evidence are you seeing of the Act being a success? Are there any statistics you can point to?

There has been tremendous interest not only from the local community but also from the European Commission, which is encou­ra­ging Member States to introduce legislation targeting family business transfers as well as interest by the international community. Acquiring and interpreting statistics has been and still presents itself as one of the major challenges in the absence of a definition of what constitutes a family business.

In the process of developing the Maltese Family Business Act, a nationwide statistical survey was commissioned within the Maltese business register of the NSO which established that the vast majority (97.5 per cent) of the major decisions within family-run businesses were taken by family members. Yet just over 35 per cent of family-run businesses had a future plan within the pool of current family members involved for the continuity of the company.

Moreover, circa 83 per cent would opt to pass it on to the next generation, which further strengthens the need to introduce regulatory policy to assist family businesses.

How does the Act fit with other key aspects of the Malta tax/regulatory structure, such as its well-known imputed dividends system, for example?

Malta has for a significant period of time established itself as a competitive jurisdiction in the financial sector. A number of factors contribute to this: Malta has no inheritance tax;  low income tax;  foreign businesses have the potential to acquire up to 6/7th tax rebate; over 67 double tax treaties; cheaper and more efficient than any other EU jurisdiction; OECD and Commission approved; onshore jurisdiction; attractive citizenship by investment and residency schemes; EU and Commonwealth membership; membership of the eurozone and Schengen Agreement; civil law jurisdiction with a flexible and regulatory framework in line with EU directives and regulations; Euro-Med-North Afri­can relations; pro-business government and political stability; multilingual country; excellent climate and tourist destination – over 300 days of guaranteed sunshine.

The Family Business Act is intended to be a complement to present structures, many of which are, in fact, family businesses. The legislation is intended to be another positive consideration for businesses to consider Malta as their primary financial jurisdiction of choice.

This legislation will be a first for Europe, and therefore family businesses will for the first time have a jurisdiction that has developed legis­lation intended to address their needs in the transfer process from one generation to the next.

What would you say is the main trend in Malta in terms of how it is developing as a wealth management sector? Is it becoming more or less diverse, are there issues around getting enough talent locally/externally?

Developments in recent years in Malta and the introduction of the Family Business Act have certainly placed Malta at the front line for consideration as a jurisdiction of choice. The Act addresses wealth management by encouraging family businesses to establish sound governance structures, responsible family planning and address succession.

Since Malta’s accession to the EU in 2004, Malta has emerged as an attractive jurisdiction for the establishment of international corporate holding structures, to be used in multinational groups, owner-managed companies, as well as the holding of assets for high-net-worth individuals. Worthy of note is the fact that in the last decade the Maltese legislature has been very active in the area of fiduciary obligations, specifically those resulting from the creation of trusts and foundations.

I would say that the greatest deve­lopment and the diversity of the wealth management sector has been down to the fact that Malta is an EU and eurozone location; it provides multidisciplined advisors able to adapt to the changing needs of high-net-worth individuals; it has a sound and sophisticated banking system; fast-track authorisation for Professional Investor Funds (PIFs); flexible investment structures (SICAVs, trusts, partnerships); and a repu­table stock exchange.

It is also one of the only civil law jurisdictions to have successfully developed a trust concept by integrating it with Roman law sources, recognition of foreign trusts, offering the set-up of both trusts and foundations and a stable macroeconomic environment.

In terms of talent, the Maltese have a very high regard for education, and some 60 per cent of students remain in education up to tertiary level. Furthermore, English is the principal language of education and business in Malta, and many Maltese are also fluent in Italian.

Collectively these encourage the Maltese not only to expand their talent and education abroad but furthermore serves as an attractive feature for foreign students to develop their studies in Malta and eventually integrate into the local employment market.

For those wishing to register their business as a family business what procedure do they have to follow?

The process is very simple and straightforward. We will initially review whether the family business is eligible to register. If it is eligible we invite them to apply, following which they will be given a certificate. This certificate will then allow them to immediately make use of the fiscal and governance incentives available. If they are not eligible we will also make suggestions as to how they can become eligible.

Further information can be found via the website www.econo­my.gov.mt or by meeting us at our office in Mimcol, based in Tigné Point, Sliema.

The lecture on the Family Business Act will start at 1pm. It is being organised  at the Law Courts by the Malta Law Academy in collaboration with the Chamber of Advocates inside the Chamber of Advocates. Registrations are open against a fee of €10. To register call on 2124 8601, 7724 8601 or e-mail events@avukati.org.

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