The island present itself as welcoming to foreign firms but emphatically rejects the tag of "offshore". And while some international financial jurisdictions make a virtue out of specialising in a single sector, such as insurance, Malta takes a very different approach by encouraging a broad range of businesses.

While some international financial jurisdictions make a virtue out of specialising in a single sector, such as insurance, the small Mediterranean island of Malta takes a very different approach by encouraging a broad range of businesses. Given the recent financial crisis, such diversity is very sensible.

And the proof that this approach is working is demonstrated, for example, by a report from the World Economic Forum, renowned for its annual gathering of policymakers and businesses in the Swiss town of Davos. The WEF has ranked Malta in fourth place as the jurisdiction most likely to become more important in the next few years. Considering it is up against the likes of Singapore in such a race, that is an impressive result.

As is often the case with small nations, Malta, a country with few natural resources, has learned to live on its wits. Despite a entrepreneurial, risk-taking ethic that can exist in such small nations, none of Malta's banks got into serious financial trouble in the credit crunch, for example. (That is not to say that there were never any anxious moments). Malta likes to present itself as being thoroughly welcoming to service sector firms, including wealth management.

The wealth management sector has been gaining momentum. For example, Mediterranean Bank, a private bank based in the capital, Valletta, was bought by London-based private equity house AnaCap last summer and has expanded rapidly since then. [To view the WealthBriefing interview with the bank’s CEO, click here]. The country is now home to around 24 banks, hundreds of hedge funds, as well as accountants, insurers and funds. Names include HSBC Bank Malta – Private Clients; Apex Fund Services; Baker Tilly Sant; Sparkasse; BDO; Butterfield Trust (Malta) Ltd; Claris Trustees and Fiduciaries, Volksbank Malta and Ernst & Young. And that is just a fraction of the total.

Meanwhile, Deutsche Bank has been reportedly looking to increase its presence in Malta. Other institutions familiar to wealth managers are represented on the island, such as STEP (the Society of Trust and Estate Practitioners).

Malta is now a member of the European Union, having joined in 2004, a fact of great importance for how the island now sees itself in the global financial system. EU membership means that Malta now emphatically rejects any suggestion that it is an offshore financial jurisdiction and soft touch for people seeking to stash away illicit funds. This issue still has the capacity to raise temperatures. Last September, Maltese finance minister Tonio Fenech dismissed a German press report that the island was being used as a tax haven by major German corporations like Lufthansa and BASF. But such denials, however, do not mean Malta is not trying to attract footloose money: foreigners can nevertheless acquire certain tax advantages by doing business in the country.

This offshore issue brings up the financial diversity approach, as Maltese policymakers are aware, for example, of what can happen if a country is heavily reliant on just one type of business. In Bermuda, for example, the UK dependency which has been renowned as a base for reinsurers has experienced some outflows. The jurisdiction has been hit by fears that a proposed US crackdown on alleged tax havens could make it a less friendly place. (Bermuda has a zero capital gains tax rate). In January, insurer XL Capital, which is headquartered in Bermuda, started to switch its corporate status to Europe. Other firms which have moved or looking to quit Bermuda are Willis Group, Foster Wheeler, Tyco and Warner Chilcott.

In the light of such cases, then, Malta does not intend to be at risk of becoming overly reliant on any sector.

Talk to the regulator

This diversity theme was driven home when WealthBriefing spoke to Professor JV Bannister, chairman and president of the Malta Financial Services Authority, during a visit by this publication to the island.

“What Malta has to do is to stay ahead of the game. This financial centre has to be well diversified,” he said.

Professor Bannister speaks as a man with long experience. He has been at the MFSA since the mid-1990s – apart from a break in 1997 and 1998. During his tenure he has witnessed the impact of growing financial globalisation, the dotcom boom, the subsequent bust and the more recent maelstroms of the credit crunch.

Reflecting on Malta’s EU membership, he said that Malta had already gone a long way to develop its regulatory and financial infrastructure before it joined the bloc, which had put it in good shape to deal with the inevitable pressures of keeping up to speed with developments.

“The [regulatory regime in Malta] started to be developed along European lines in 1994. When we were being assessed [for EU membership], there was in fact very little us to do. It was every easy for us to put everything into place,” he said.

However, Professor Bannister and his colleagues are not complacent; they know that the EU, with its regular output of new regulatory proposals – a process bound to accelerate in the aftermath of the credit crunch – poses all financial centres a constant challenge.

Impact of the credit crisis?

Professor Bannister says Malta, like everywhere else, has felt the impact of the dramatic events in banking, credit markets and property over the past two years, but talks, without any hint of hubris, of the fact that not one single Maltese bank has been put in serious trouble. Malta has not, by any means, escaped the global turmoil, however. Last year, its gross domestic product is estimated to have contracted by 2.2 per cent, according to Eurostat, the EU data agency. But there have been no major banking strains.

“Malta has weathered the storm extremely well…we have had no problems with financial institutions. Banks tend to be conservative anyway – they do not borrow to lend,” he said.

Taxes

In any discussion of a financial centre, tax, of course, has to be considered, particularly at a time when taxes are being cited as reasons for an exodus of financial talent from places such as the UK.

Malta is not a low-tax destination on a par with say, Hong Kong or Dubai. Income tax, for example, is charged at progressive rates up to 35 per cent – a rate that nevertheless compares favourably with the UK’s planned new top rate of 50 per cent on the highest earners, for instance. The country also operates an imputation system for dividends, which means that tax that is paid by a firm is imputed as a credit against the tax due by the shareholders when a dividend is paid out. Companies are taxed at a flat rate of 35 per cent, but the imputation system can significantly mitigate the impact of the tax on shareholders. The amount of the tax refund is set at 6/7ths of the advanced corporation tax paid by the company.

The country has signed a host of double-tax agreements and tax information sharing agreements with other nations. Among other features of note, is the fact that a person is considered to be ordinarily resident in Malta if he or she is physically present in Malta for 183 days, not necessarily consecutively. An individual who is resident and domiciled in Malta is typically taxed on a worldwide basis. There is also no inheritance tax in Malta, although tax planners must be careful, since transmission of property and shares is subject to tax under what is called Duty on Documents and Transfers. Duty is due at the rate of 5 per cent on bricks and mortar assets and 2 per cent with shares.

Redomiciliary

Malta also tries to encourage firms to register in the island through a number of other means. For example, it has been a trailblazer, Professor Bannister says, in having re-domiciliary legislation so that firms can move from one jurisdiction to another and yet maintain the same legal personality. (Luxembourg and Ireland have since taken the same path). The country also intends to avoid what Professor Bannister called regulatory “gold-plating” – a term applying to countries which sometimes add new layers to EU directives. The fund registration regime is relatively light-touch: a fund that does no business in Malta and which is not domiciled in Malta can list in the island without the need for a licence. (However, funds that are domiciled and do business in the island will need a licence if they wish to get a listing in Malta).

Although not strictly related to wealth management, Malta does, as a result of its long maritime history, have a significant insurance sector, connected to shipping as well as other industries; it is also a centre for a number of gaming companies (there are a number of casinos in the island).

Geography also plays a part in helping drive the island’s financial centre: it is just one hour in front of London, and is close to Italy – a country which exerts a strong cultural influence – and also has links to north Africa, with countries such as Libya (that link has proven easier to manage now that the country has re-established diplomatic relations with the West).

Malta is, therefore, putting its faith in diversity when it comes to financial services. Other international financial centres may carry a higher profile and attract more headlines, but this small island with its remarkable history pays a lot of study for any wealth manager.