Salient features of the Business Promotion Act

In the first of a two part series, Dr Conrad Portanier provides an insightful look at the Business Promotions Act, designed to boost investment in Malta through a number of specifically designed schemes and incentives. Part two of Dr Portantier’s review will follow next week

By Conrad PortanierPurpose and Scope

The recently enacted Act to amend the Industrial Development Act, Cap. 325 has renamed the ‘Industrial Development Act’ (IDA) as the ‘Business Promotion Act’ (BPA) and has also updated and widened the scope of the provisions of the IDA.

The BPA makes provision for the introduction of new incentives and schemes for the promotion of business in Malta, shifting the focus from "industries" to "businesses". Indeed, the incentives and benefits available under the BPA are now linked to an enterprise, defined as any individual or body of persons who or which carries on or exercises a trade, business, profession or vocation and the definition of "qualifying company" has been amended to read a company which carried on, or intends to carry on in Malta, a trade or business consisting solely of any of the activities referred to in section 3(1)(a) to (k).

Beneficiaries under the BPA

The incentives and benefits available under the BPA shall be due and obtained by any enterprise which carries on or intends to carry on, in Malta, a trade or business which consists solely of:

•the production, manufacture, improvement, assembly, processing, repair, preservation or maintenance of any goods, materials, commodities (including computer software), equipment, plant or machinery; or

•the rendering of services of an industrial nature analogous to the activities referred to in paragraph (a), including the repair, maintenance, commissioning, installation, inspection or testing of plant, machinery or equipment and the recycling or treatment of waste material; or
•fisheries or large scale aquaculture; or

•agriculture, stock farming or large scale horticulture; or

•the rendering of a service by a company to non-resident persons or to a company which satisfies the provisions of s.4(1)(b), whether the service is performed or rendered in Malta or from Malta, provided such service is prescribed by the Minister to be a qualifying export service; or

•the rendering of a qualifying support service as may be prescribed by the Minister; or

•the export of goods or services, produced or provided, as the case may be, by other qualifying companies; or

•research and development programmes; or

•the activities set out in section 11 of the Malta Freeports Act and carried on mainly in a freeport as defined by that Act, by a company licensed under that Act; or

•the operation of catering establishments, guesthouses, hostels, hotels and holiday premises as defined in the Malta Travel and Tourism Services Act, and falling within such categories as may be prescribed; or

•the undertaking of any project beneficial to the tourism industry as may be prescribed; or
•the production of feature films, television films, advertising programmes or commercials and documentaries.

Moreover, where the BPA makes provision for an incentive or benefit to be obtained by a qualifying company, any such incentive or benefit shall only be due to a company which carries on or intends to carry on in Malta such trade or business.

In the case of the activities listed under paragraphs (c) to (k) above, the incentives and benefits shall only be due to a company subject to the approval of the project by the Malta Development Corporation (MDC), and in granting such approval, the MDC may impose such conditions as it may deem fit.

Malta’s International Obligations

Whereas the former incentives under the IDA were linked to exports, the new incentives in terms of the BPA are targeted towards those enterprises which have a high value added or those which have a high employment potential. In a press release by the Minister responsible for Economic Services, Josef Bonnici stated that this change in emphasis was due to Malta’s membership of the World Trade Organisation (WTO). Indeed, Malta has committed itself to the WTO to the effect that as from the year 2002, it shall not give further incentives which are merely linked to the exportation criterion. However, it must be stated that this shift of policy does not impinge on those incentives already in existence. Indeed, those companies enjoying incentives under the current regime will continue to do so (see below).
In the Malta - European Union Position Paper, Chapter 6 (Competition Policy) it is stated that the amended legislation "will be in line with the acquis and incentives linked to exports will no longer be provided. The amended legislation will also be in line with the EU’s horizontal aid guidelines on regional aid, de minimis aid, research and development, environmental protection, SMEs, employment, training and restructuring of firms in difficulty."

It must be stated that in relation to the negotiation process with the European Union, the Maltese government has requested a transitional period for enterprises which are eligible for aid granted by virtue of the Industrial Development Act (and the Malta Freeport Act) to allow these enterprises to continue to benefit from this aid until their stipulated date of expiry, in light of the legitimate expectations created in this respect.

Guarantee of Incentives

The provisions relating to the Guarantee of Incentives (Part IV of the BPA) remain unchanged. The BPA provides that "the guarantees given shall not be nullified by any retrospective action, whether by legislation or otherwise." Moreover, in terms of the BPA there is deemed to have come into existence a contract between the company (or its members or employees) and the Government (or the MDC as the case may be) guaranteeing the grant and enjoyment of the relative incentives or benefit in accordance with the provisions of the BPA. In practice this means that any breach of such a guarantee by the Government or by the MDC would entitle such company to sue the former for contractual damages arising therefrom. This is of course subject to the other provisions of the BPA relating amongst others to the powers of the President of Malta and the MDC’s power to revoke such incentive or benefit.

Amendments to Old Incentives

The BPA, as recently amended, sets forth a number of substantial amendments to the incentives and benefits formerly established under the IDA, including the following:

With effect from 1 November, 2000, the provision relating to the 10-year tax holiday (section 4) of companies which derive from export sales not less than 95% of its total sales revenue, shall only be applicable to qualifying companies which existed on the day immediately preceding that date, or to qualifying companies which had their project approved by the MDC prior to such date.

With effect from 1 November, 2000, the provisions relating to the Export Incentive Scheme (section 5), whereby a qualifying company which increases its export sales over such sales during a base period by the percentages laid down in the IDA, the additional export profits earned by the company in that year from the export sales resulting in such increase shall be exempt from income tax, shall only be applicable to qualifying companies which existed on the day immediately preceding that date and to qualifying companies incorporated in Malta or registered as overseas companies after that date and which would have been entitled to benefit from section 4 but for the provisions relating to the percentage of its total sales revenue.

Such companies shall be so entitled to the incentive up to and including the year of assessment 2021.

With effect from 1 November, 2000, the provisions relating to the Investment Incentive Scheme (section 5A) shall only be applicable to qualifying companies which existed on the day immediately preceding that date, or to qualifying companies which had their project approved by the MDC prior to such date.

Such companies shall be so entitled to the incentive up to and including the year of assessment 2021.

Of interest is a new section on Financial Assistance, which provides that where the Minister, on the recommendation of MDC, is satisfied that a project to be undertaken by an enterprise may make a substantial contribution to the development of the economy as is consistent with the aims and objectives of the Government, the Minister may, after consultation with MDC as may be necessary, approve that a grant be given by MDC to such an enterprise subject to such conditions as MDC or the Minister may impose.