Tax exile rules flounder with just eight applications

Onerous thresholds for non-domiciliary tax scheme dent island’s competitive edge over Mediterranean economies.

Finance Minister Tonio Fenech launching the new rules in September 2011: John Huber (right) had predicted the onerous thresholds would affect the scheme.
Finance Minister Tonio Fenech launching the new rules in September 2011: John Huber (right) had predicted the onerous thresholds would affect the scheme.

Malta has lost the momentum it had achieved under its permanent residence scheme for tax exiles, under the onerous rules of the new High Net Worth Individuals scheme that has only attracted eight applicants since September 2011.

The information was revealed in a parliamentary question by Labour MP Leo Brincat.

Since the revamp of the suspended tax scheme, ostensibly due to the potential claims on national health services by non-EU nationals who had permanent residency, just two applicants under the onerous high net worth scheme have been granted residency. Another six are under review.

Taxation expert John Huber, the president of the Malta Business Bureau, was not surprised at the news, having predicted back in September that the "bold move" was trying to target people with greater financial resources.

"The figures reflect the onerous requirements of this new scheme, considering what is being offered in other countries," Huber said of destinations like Spain, France, Cyprus and Portugal, the latter allowing exiles to receive pension income with zero tax deducted.

"Due to the length of suspension last year, Malta lost its momentum especially in Scandinavian countries. I believe the permanent residency scheme was one of the factors that kept the country going, thanks to the spillover from persons who buy high-end property," Huber said.

Labour MP Leo Brincat told MaltaToday the figures spoke for themselves. "Despite the expectations raised by the government throughout its lengthy suspension, the scheme has proven to be almost a total failure. The government has an obligaton to make a serious comparitive study with other jurisdictions to strengthen the country's competitive edge without opening a window for abuse."

Under the new rules, applicants must purchase a property of over €400,000, or rent at €20,000 per annum, a substantial bounce up from the former thresholds of €69,000 for property purchased, or €4,150 for property rented under the permanent residency schemes.

Applicants will also go through a 'fit and proper test' by a foreign investigation company, to keep out "undesirable individuals".

Successful applicants benefit from a 15% tax that allows the possibility to claim double tax relief, with a minimum tax cap of €20,000. The scheme will also apply an additional minimum tax of €2,500 per dependent of the applicant.

Non-EU nationals must however enter into a qualifying contract with government with a financial deposit of €500,000, in addition to €150,000 per dependent.

The Chamber of Commerce's real estate section had warned back in September that the long overdue tax incentives for high-earning foreigners had qualifying thresholds that were too high and may impinge on the attractiveness of Malta's offering. "The thresholds can have negative repercussions on the property market in general, with a ripple effect on all other service providers, not only to the property industry but also local business in general... the new cost of joining the Scheme is somewhat exorbitant."

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The main problem of the EU Residents sceme is that the minimum income requirement is unrealistic ally too high. The scheme will be used in conjunction with the Double Tax Treaty and requires a taxable income of over €130,000. This is quite unrealistic and it is not surprising that people no longer find it attractive. There are other jurisdictions which are now far more attractive and Malta is no longer competitive. The minimum property requirements are not such a problem, it is the minimum tax which is wholly unrealistic. A foreigner can now do better elsewhere.
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It was a big blow your own government inflicted on Maltese economy and above all, because was a decision taken over night, the trust in Maltese government has diminished tremendously. It is hard to believe that this new scheme pass and was nobody able to stop it. As a foreign real estate investor, from the other side of Atlantic, probably will take years before I will consider Malta as investment, again.
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A classic example of the Maltese irrational behaviour of ruining a scheme because of some specific unwanted circumstance or an ad hominem argument. We all remember the saga of mabel strickland wanting to adopt a nephew. In this case it was because some residents unfortunately found that they needed to use our free medical services for expensive treatment. If you accept somebody you have to accept them with all the good and the bad which may ensue. At best a qualifying period of say ten years before becoming eligible for free treatment would have been enough. We have to realise that in the same way many resident maltese in the UK, Canada or Australia get the same health treatment like locals if they are accepted as immigrants. A big raspberry to the persons who devised this new scheme and denied the country of a potential regular source of revenue in various sectors of the economy.