SEED INVESTMENT SCHEME (INCOME TAX) RULES *

SUBSIDIARY LEGISLATION 123.208

SEED INVESTMENT SCHEME (INCOME TAX)

RULES *

1st January, 2022

LEGAL NOTICE 356 of 2022.

(1)

The title of these rules is the Seed Investment

Scheme (Income Tax) Rules.

(2)

The scope 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, 2022 in respect of investments made as from basis

year 2022 and thereafter, and shall have effect until the 31st

December, 2023 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

"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

*These Regulations have been repealed by Legal Notice 45 of 2024.

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 as assigned

to it in the Act sohowever 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 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 amended and 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" means 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" means 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 (3) years following its first commercial

sale;

(c)

is not listed on any recognised stock

exchange;

(d)

has a maximum of ten (10) 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 scope of this definition;

"qualifying investor" means any natural person who is

resident in Malta or who falls within the scope of s u b -

p a r a g r a p h s (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 amended and 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 amended and 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 amended

and as may be amended from time to time.

(1)

These rules shall apply to qualifying investors

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

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 submit 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 (3)

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 (2) 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 ( 1 ) year, as long as the commitment

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

is made within the two (2) 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

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 disposed of within three ( 3 ) 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 (3) 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

receipt of information that, had it been available during the

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 ( 1 % ) for every calendar month

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

(1)

If any person obtains benefits under these rules

where that 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.

(2)

The Commissioner may issue an assessment in terms of

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

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

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 (2) 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.