Seed Investment Scheme (Income Tax) Rules, 2016

L.N. 232 of 2016

INCOME TAX ACT

(CAP. 123)

Seed Investment Scheme (Income Tax) Rules, 2016

IN exercise of the powers conferred by articles 14(2)(b) and 96

of the Income Tax Act, the Minister for Finance has made the

following rules:-

(1) The title of these rules is the Seed Investment

Scheme (Income Tax) Rules, 2016.

(2) The purpose of these rules is to grant tax relief to natural

persons resident in or operating in Malta investing in start-up

businesses, as further regulated herein.

(3) These rules shall be deemed to have come into force on the

1st January, 2016 in respect of investments made as from basis year

2016 and thereafter, and shall have effect until the 31st December,

2018 or upon such later date as may be determined by the Minister

responsible for finance by order published in the Gazette

In these rules, unless the context otherwise requires -

"the Act" means the Income Tax Act;

"Commissioner" means the Commissioner for Revenue;

"competent entity" means the Malta Investment Management

Company Limited;

"connected to the qualifying company" means being

(a) the investor’s spouse, descendants and ascendants in

the direct line and their relative spouses, his brothers or sisters,

and their descendants;

(b) a partner in a commercial or civil partnership of the

qualifying investor;

(c)

a shareholder of the qualifying company in which it

invests, including business angels and financial institutions,

irrespective of their ownership;

(d) an investor, or any of the persons mentioned in

paragraph (a), who is an employee of the qualifying company;

(e)

an investor who, prior to the qualifying investment,

already holds shares, whether directly or indirectly, in the

qualifying company;

(f)

an investor who is, upon winding up of the

qualifying company, entitled to any of its assets, where such

right existed in favour of the said investor prior to the company

being granted the status of qualifying company in terms of these

rules;

(g) an investor who has advanced to the qualifying

company, funds by way of loan the terms of which establish the

right of conversion into shares or other similar equity rights in

the qualifying company;

"equity shares" shall have the same meaning assigned to it in the

Act so however that any such shares shall in all cases not be

redeemable;

"excluded activities" means any one of the following activities

(a) dealing in immovable property, shares, securities

and, or other financial instruments;

(b)

dealing in goods other than in the normal course of

business;

(c)

carrying on banking, insurance or any other activity

covered by the Investment Services Act, the Banking Act, and Cap.

370. the Financial Institutions Act;

(d)

providing legal, accounting or other professional

services;

(e)

activities relating to the development of immovable

property;

(f)

receiving royalties or licence fees;

(g) operating or managing hotels, hostels, guest houses

or residential care homes;

(h) carrying on activities in connection with the

generation of electricity and other energy sources;

(i)

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);

"first commercial sale" shall have the same meaning as is

assigned to it in the Regulation, as may be amended from time to

time;

"investment" means the subscription to a fresh issue of fully

paid up, non-redeemable equity shares in a qualifying company by a

qualifying investor and the term "invest" shall be construed

accordingly;

"natural person" means a person other than a legal entity who is

not an undertaking for the purposes of Article 107(1) of the Treaty on

the Functioning of the European Union;

"qualifying activities" shall mean any activity the income

derived from which is chargeable under the provisions of article

4(1)(a) of the Act, other than the carrying out of any one of the

excluded activities;

"qualifying company" shall mean an SME that satisfies the

following cumulative conditions

(a) is incorporated in Malta or controlled and managed

from Malta or has a place of business in Malta;

(b) has been in existence and engaged in carrying out

qualifying activities for a period not exceeding three years

following its first commercial sale;

(c)

is not listed on any recognised stock exchange;

(d)

has a maximum of ten employees;

(e)

has gross assets of not more than two hundred and

fifty thousand euro (€250,000) immediately preceding the issue

of equity shares to the qualifying investor,

and that has been duly issued with the relative compliance certificate

by the competent entity in terms of these rules

Provided that undertakings in difficulty, undertakings

which are subject to an outstanding recovery order, other

undertakings which are expressly excluded from receiving such aid in

terms of the Regulation, as well as undertakings which, directly or

indirectly, hold shares in any company which carries out any

excluded activities, do not fall within the purport of this definition;

"qualifying investor" means any natural person who is resident

in Malta or who falls within the purport of provisos (i) and (ii) to

article 56(1)(c) of the Act to the extent that he bears the full risk in

respect of his investment, and who has been duly issued with the

relative compliance certificate by the competent entity in relation to

an investment in a qualifying company in terms of these rules

Provided that undertakings in difficulty, undertakings

which are subject to an outstanding recovery order as well as other

undertakings expressly excluded from receiving such aid in terms of

the Regulation are excluded from this definition;

"Regulation" means Commission Regulation (EU) No 651/2014

of 17 June 2014 declaring certain categories of aid compatible with

the internal market in application of Articles 107 and 108 of the

Treaty as may be amended from time to time;

"small and, or medium sized enterprise/s" and its abbreviation

"SME" shall have the same meaning as is assigned to it in Annex I of

the Regulation, as may be amended from time to time;

"undertakings in difficulty” shall have the same meaning as is

assigned to it in the Regulation, as may be amended from time to

time.

(1) These rules shall apply to qualifying investors who Application and

subscribe to fully paid up equity shares at par in a qualifying eligibility.

company on their own behalf

Provided that this investment shall leverage other

investment in the qualifying company involving the sharing of risks

and rewards in proportion to the investment.

(2) Any company wishing to obtain the status of a "qualifying

company" shall lodge an application to the competent entity for a

formal determination and for issue of the relative compliance

certificate in terms of these rules, which application shall be made on

such form or in such manner as the competent entity may require and

shall contain the information and documents therein requested

Provided that investments made in a qualifying company

and qualifying in terms of these Rules shall, in aggregate, not exceed

seven hundred and fifty thousand euro (€750,000) per qualifying

company.

(3) Any natural person wishing to obtain the status of a

"qualifying investor" in relation to an investment in a qualifying

company shall lodge an application to the competent entity for a

formal determination and for issue of the relative compliance

certificate in terms of these rules, which application shall be made on

such form or in such manner as the competent entity may require and

shall contain the information and documents therein requested

Provided that in order to qualify as being eligible for

benefits under these rules, and subject to the satisfaction of the

competent entity in this respect, a qualifying investor shall

(a) continue to hold the investment in the qualifying

company for a period of not less than three years subsequent to

the subscription by the qualifying investor to such equity shares;

(b) not be connected to the qualifying company prior to

the subscription to the equity shares.

(4) A qualifying investor shall invest in the qualifying

company within a period of two years from when the qualifying

company is first issued with a compliance certificate for the status of

a ‘qualifying company’ by the competent entity. Any subscription of

shares made in a qualifying company subsequent to this date shall not

entitle the investor for benefits in terms of these rules

Provided that nothing in these rules shall prohibit an

investment in a qualifying company from being made in instalments

over a period of more than one year, as long as the commitment to

invest, subject to the achievement of defined targets or criteria, is

made within the two year period referred to above. In such instance,

the qualifying investor shall avail of the tax benefits under these rules

as the investment, or part thereof, is made.

(1) Any qualifying investor to whom rule 3 applies shall

benefit from a tax credit equivalent to a sum amounting to thirty-five

per cent (35%) of the aggregate value of the investments made by

such investor in one or more qualifying companies, so however that

the total tax credit applicable to any such investor shall not exceed

two hundred and fifty thousand euro (€250,000) per annum. Such tax

credit shall be set off against the tax due by the qualifying investor in

respect of any income or gains brought to charge to tax in the year of

assessment immediately following the basis year during which the

investment is made.

(2) Any part of the tax credit that is not absorbed in the year of

assessment referred to in sub-rule (1) may be carried forward by the

qualifying investor and set off against tax due for any subsequent year

of assessment until it is fully absorbed.

(3) Without prejudice to the provisions of article 48 of the

Income Tax Management Act, any tax credit available in terms of

these Rules shall not give rise to a right for any tax refund.

Any loss incurred in any year of assessment by the Losses.

qualifying investor from the disposal of an investment made by him

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 Act.

(1) Where the investment in a qualifying company is Capital gains.

disposed of 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 such

disposal shall be calculated on the basis of the higher of the market

value of such investment and the consideration received by the

qualifying investor and shall be charged to tax at the applicable rates

as set out in article 56 of the Act. For the avoidance of doubt, the

amount on which tax is chargeable in terms of this sub-rule shall not

be reduced in any manner by the cost of acquisition of the investment,

nor by any deduction or credit whatsoever.

(2) Where 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 Act.

Where the competent entity or the Commissioner is in Claw back of

receipt of information that, had it been available during the tax credit.

application process lodged, would have resulted in the status of a

qualifying company being refused or alternatively in the status of a

qualifying investor being refused, then all amounts invested by

qualifying investors in the said qualifying company or by that

particular qualifying investor, as the case may be, and which would

have benefited from a tax credit as outlined in rule 3 hereof shall be

brought to charge under articles 4 and 5 of the Act, together with

interest at the rate of one per cent for every calendar month of the

amount availed of as a tax credit by the qualifying investor.

If any person obtains benefits under these rules where that Anti-abuse.

person was not so entitled, or so benefits in a manner which the

Commissioner deems to be contrary to the purpose of these rules, the

qualification status granted in terms of these rules may be withdrawn.

Furthermore, the Commissioner may issue an assessment in terms of

article 31 of the Income Tax Management Act in such manner and in Cap. 372.

such amount as may be necessary in the circumstances of the case, to

nullify or modify the benefits claimed by such person and the

consequent advantage obtained thereby.

(1)

Any application for a formal determination, or Applicability.

otherwise for any benefit, in terms of these rules shall be made on

such form and in such manner as the competent entity, after due

consultation with the Commissioner, may require and shall contain

the information and documentation therein requested.

(2) These rules shall cease to apply and have effect upon the

application of these rules to five million euro (€5,000,000) of

investments in qualifying companies, or to such other amount of

investments in qualifying companies as may be established by the

Minister responsible for finance by order published in the Gazette.

(3) These rules shall apply for qualifying investments made

during an initial period of up to two calendar years, so however that

the Minister responsible for finance may extend the application

thereof for such period or periods as he may deem fit by order

published in the Gazette.

Records shall be maintained by the competent entity for a

period of ten (10) years from the date on which the last benefit was

granted in terms of these rules.

€0.63