The Malta Chamber of Commerce, Enterprise and Industry recently organised a conference on family businesses or business families as part of its activities to commemorate its 170th anniversary.

The aim was to celebrate family businesses and their achievements, as well as examining their future. Malta and Europe have seen family businesses developing from humble to large enterprises. Issues discussed ranged from shareholding to structure to governance to procedure to finance and to succession.

Family businesses in Malta account for 40-50 per cent of jobs in the private sector. Photo: Shutterstock.com

The following statistics are both interesting and significant:

▪ 60 per cent of businesses in the EU are family-owned.

▪ Family businesses in Malta account for 40-50 per cent of jobs in the private sector.

▪ 69.4 per cent of family businesses are first generation.

▪ 49.5 per cent of family-run businesses employ two family members.

▪ 34.5 per cent employ three or four family members.

An estimated 16.9 per cent of family businesses were inherited, while 82.9 per cent of family business members would prefer to pass on the business to the next generation and eight per cent would prefer to sell it to an outsider. The challenges and risks faced in transferring a family business (shareholding) to someone else are taxation and financial problems, while others are family conflict, retirement uncertainty and inheritance.

The last of these facts and statistics provided by the chamber have been addressed by the government, who has provided an incentive for such transfers to be effected inter vivos. 

Primarily, it has to be said that no capital gains tax is payable by those transferring shares (or any immovable property for that matter) donated to one’s direct descendants. Transfer duty or duty on documents, commonly known as stamp duty, is normally payable by any transferee at the rate of two per cent of the value of the subject company’s assets, or five per cent where 75 per cent or more of the value of such assets consist of immovable property.

Malta and Europe have seen family businesses developing from humble to large enterprises

However, to encourage the transfer of family businesses within the family for survival and continuity, the Finance Ministry issued an order exempting the transfer of shares between family members from the payment of stamp duty at the rates of two and five per cent respectively. Instead, a flat rate of 1.5 per cent in all cases is now payable. This exemption has been extended throughout this year and is now valid up to December 31.

Furthermore, it is usual for the person who is transferring to transfer solely the bare ownership of the shares. In that case, stamp duty shall be reduced further on a rising scale depending on the age/life expectancy of the transferee/donor.

There is no succession duty payable on the consolidation of the usufruct and the bare ownership of the shares by the transferee (say, son) on the death of the transferee (say, father).

The enabling law regulating family businesses, their governance and the transfer of the family business from one generation to the next is the Family Business Act enacted in 2017. A company or other business partnership may be registered as a family business in the Register of Family Businesses held by the Regulator of Family Businesses, who is appointed in terms of the Act.

There are certain conditions that have to be fulfilled for a business to constitute a family business and once registration takes place, then the business may enjoy certain benefits, particularly in terms of the Duty on Documents and Transfers Act and the Business Promotion Act.

There is also the Family Business Office within the Ministry of the Economy, Investments and Small Businesses, which assists and advises family businesses with regard to the workings and benefits of the Family Business Act. Since its inception it has helped more than 250 family businesses.

The Office and the Malta Chamber of Commerce, Enterprise and Industry have jointly set up a family business committee. The chamber’s president, Frank  Farrugia, said: “The committee will ensure that the chamber’s dedication towards family businesses continues. It shall serve as an excellent platform for constant communication between family businesses, the area’s main policy maker and other relevant stakeholders.”

A bank finance scheme for family businesses was also launched to help out with debt finances. Examples of what the scheme offers are: a loan guarantee of up to €500,000 per business for the purpose of acquiring the business, together with the provision of bank finance facilities for acquiring and transferring the business; a maximum grant of €12,500 spread over five years for legal, notarial and accountancy services required to assist in the governance, succession or family business transfer; a grant of up to €2,500 for mediation or arbitration services required to establish the fair value of the business; and positive consideration of lease renewal of industrial government leased premises.

Finally, to quote Patek Phillipe on family businesses: “You don’t own it. You’re just watching it, guarding it, to hand it over to the next generation in as good a condition as possible.”

Dr Austin Sammut is a senior consultant with Fenech Farrugia Fiott Legal.