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Seed Investment Tax Credit

Josef Mercieca , Tax Partner |

29 July 2019

Legal notice 170 has repealed the previous seed investment tax credit rules and introduced a more beneficial tax credit system applicable for seed investments.

The legal notice grants a 35% tax credit, capped at €250,000 per annum to qualifying investors (natural persons tax resident in Malta) on upon an investment by subscribing  to  fully  paid  up  equity  shares  at  par  in a qualifying company. The tax credit can be carried forward indefinitely but cannot give rise to a tax refund. In order to in a position to apply be a qualifying company, the company must meet all the following conditions:

  1. It is an SME that is incorporated in Malta or controlled and managed from Malta or has a place of business in Malta;
  2. has been in existence and engaged in carrying out qualifying activities for a period not exceeding three years following its first commercial sale;
  3. is not listed on any recognised stock exchange;
  4. has a maximum of ten employees; and
  5. has gross assets of not more than €250,000 immediately preceding the issue of equity shares to the qualifying investor.

 

The following are the excluded  activities:

  1. dealing  in  immovable  property,  shares, securities and, or other financial instruments;
  2. dealing  in  goods  other  than  in  the  normal course of business;
  3. carrying  on  banking,  insurance  or  any  other activity  covered  by  the  Investment  Services  Act,  the Banking Act, and the Financial Institutions Act;
  4. providing   legal,   accounting   or   other professional services;
  5. activities  relating  to  the  development  of immovable property;
  6. receiving royalties or licence fees;
  7. operating  or  managing  hotels,  hostels,  guesthouses or residential care homes;
  8. carrying  on  activities  in  connection  with  the generation of electricity and other energy sources;
  9. the  holding  of  shares,  whether  directly  or indirectly, in any  company  which carries  out  any  of  the activities listed in any one or more of paragraphs (a) to (h).

 

The programme is capped at a maximum of €750,000 per qualifying company and €5 million in total.

In order to qualify as being eligible for benefits under these rules, the qualifying investor must continue to hold the investment in the qualifying company for a period of not less than three years subsequent to the subscription and not be connected to the qualifying company (as defined) prior to the subscription to the equity shares. The qualifying investor must effect the investment within two years (but can be made in instalments) from when the qualifying company is first issued with a compliance certificate for the status of a ‘qualifying  company’ by  the  competent entity. 

Any loss incurred from the disposal of an investment in a qualifying company or from the liquidation of such qualifying company shall not be allowed as a deduction in respect of income or gains chargeable under articles 4 and, or 5 of the ITA.

Where  the  investment  in  a  qualifying  company  is sold within three years from the date of subscription to the equity  shares  by  the  qualifying  investor,  and  where  the  qualifying investor qualified for benefits in terms of these rules relative to such investment, the tax due in respect of the income derived from the disposal is calculated on the basis of the higher of the market value  of  such  investment  and  the  consideration  received  by  the qualifying investor and taxed at the applicable progressive tax rates without any deduction whatsoever. However, if the investment in a qualifying company is disposed of after the lapse of three years from the date of subscription to the equity shares by the qualifying investor, any gains or profits derived from such disposal shall be exempt from any tax otherwise due in terms of the ITA.

Contact BDO today to learn more.