Thousands of liri moving out of Malta

by David Kelleher

Thousands of liri have moved out of Malta following the decision taken to impose a 15 per cent withholding tax on interest from Collective Investment Schemes, banking sources have told The Malta Business Weekly.
The sources said that the rate of deposits in local banks is not increasing at the same rate as money moving out of Malta, giving rise to fears that local investors are uncertain about their local investments.
The sudden increase in money leaving the country resulted after Finance Minister John Dalli announced in his budget speech that as from next year all Collective Investment Schemes would have to pay 15 per cent withholding tax on interest from underlying investments. While this move was understood to have been taken to remove an anomaly created in 1994, Mr Dalli’s mentioning of gains in his speech created even more uncertainty among investors who feared that any capital gains would also be taxed.
Despite a clarification that capital gains would not be taxed, investors believed that the government was introducing a new capital gains tax. Although this was not the case, investors apparently did not want to take any risks and preferred to transfer their investment out of the country.
Yesterday afternoon the Finance Ministry once again issued a statement to clarify the situation.
Banking sources confirmed to The Malta Business Weekly that a number of major investors had transferred considerable amounts of money as Minister Dalli’s statement had created uncertainty in the marketplace.
“In 1994, the government introduced financial legislation and one of the benefits introduced was the exemption from 15 per cent withholding tax on interest in collective investment schemes. At the same time, those investing directly in government bonds were taxed 15 per cent on interest,” the sources said.
Thus those who had direct bonds would have been better off investing in collective schemes. This had created an “unfair advantage” for those investing in CIS and the Finance Ministry’s move was aimed at creating a level playing field.
“The uncertainty was created when Mr Dalli mentioned gains in his budget speech. Although he was quick to rectify his statement after meeting with stockbrokers and the banks, the damage had already been done,” the sources said.
Financial analysts told The Malta Business Weekly that “for most people tax efficiency was the most important factor. As they are no lon-
ger attractive, people are moving their money
elsewhere”.
“It would have been a good idea for the government to reduce the tax on interest to say five per cent. Thus the investor would still stand to benefit. A better option would have been to adopt the Luxembourg system, whereby a small charge would be levied on the whole fund rather than taxing the income. It would have brought in the same amount of money but caused little harm to the investor,” one financial analyst said.
Last week, Valletta Fund Management issued a statement saying that investors in collective investment schemes listed on the Malta Stock Exchange are still exempt from any capital gains tax.

VFM general manager Charles Borg said: “During the past weeks we have done our utmost to clarify any misunderstandings in respect of this issue. In fact, following a meeting with representatives of the Ministry of Finance we are in a position to confirm that investors in collective investment schemes will still be exempt from capital gains tax on redemption of their share in collective investment schemes.”
Some have also said that the new regulation has created another anomaly. While the government can easily collect dues on local funds, the question that arises is how it will collect the 15 per cent withholding tax on foreign funds.
Contacted yesterday, John Dalli said the tax will be collected from their agents here in Malta and that there are methods how this can be done.
“I am having final discussions with the practitioners on how the 15 per cent withholding tax will be collected. A legal notice to this effect will be published in January,” Mr Dalli said.