‘Tax exile’ scheme raises fears of price inflation

The Malta Financial Services Authority (MFSA) and the Inland Revenue Department will be scrutinising every applicant for permanent residence permits, now that former finance minister Tonio Fenech has flagged a lack of deterrents which ensure that foreigners, especially non-EU citizens, who choose Malta as a retirement destination do not abuse of the scheme and public services.

Following last week's launch of the Global Residence Programme (GRP), which will grant foreigners, including non-EU nationals, who purchase property in Malta immediate residence and the same rights enjoyed by Maltese and EU citizens, the Opposition has called for risk mitigation measures.

But the parliamentary secretariat for economic growth claims the GRP was drafted after a review of similar programmes in other countries. "Every individual and every application will be scrutinized, assuring an efficient and transparent process that respects the applicant and safeguards the country's interests," a spokesman told MaltaToday.

The new scheme reduces the thresholds in Malta for foreigners who want to buy property in Malta to benefit from a 15% flat-rate tax on all income remitted to the island. The former scheme - the Permanent Residence Scheme - was suspended by the former administration and replaced by the High Net Worth Individuals (HNWI) Scheme in 2011, raising minimum values of property acquisition from €116,000 to €400,000, and also laying down a €500,000 bond for all applicants.

Under the Global Residence Programme, the value of immovable property was brought down to €275,000 and the €500,000 bond removed, while the minimum value for property is in the south of Malta or in Gozo was reduced to €220,000.

But a spokesperson for Parliamentary Secretary Edward Zammit-Lewis has not denied the risk that such a programme could strengthen the notion abroad of Malta being a tax haven. "The GRP is an attractive programme designed to appeal to persons seriously considering Malta as an investment country. The programme includes procedures that increase efficiency, sending a positive signal to those who want to invest in Malta.

"However, on the other hand we are asserting that the programme is a serious one, abides to the EU framework and gives certainty and reputation to Malta as a place where one can invest."

As a safeguard, the government says that only applicants passing through proper due diligence will be considered. But the PN's spokesperson on economic growth, Kristy Debono claims Malta "might be at risk of attracting residents where tax is their main motive for them relocating to Malta."

She also believes that the lower property thresholds can lead to a bigger burden on the taxpayer, giving GRP applicants the option of being cheaper property "without being balanced off by adequate income brought to Malta by these foreign residents. This might be a case of a lose-lose situation for the Maltese taxpayer."

In short, it might not be the mega-millionaires that come to Malta under the GRP, but those with enough liquidity to buy high-end property and remit their income to the island.

"If a scheme is not regulated in a proper and diligent manner, the risk exposed to money laundering is higher," Debono said. "Hence the need for government to do proper checks and balances when implementing such a scheme is paramount to avoid several risks including money laundering."

Property prices and first-time buyers

Tonio Fenech himself sheds doubts on whether the scheme can boost the economy and foster economic growth. "In recent years, around 3,600 properties were sold to foreigners, however only around 100 persons a year applied for the former permanent residence schemes."

But John Huber, an independent tax auditor who sat on the committee which drew up the GRP, insists that aiming too high as the former administration did with the KNWI scheme "does not work".

"We have worked hard to ensure that the risk of potential abuse is wiped out. Currently, if a non-EU has lived in an EU country for five years, without being absent for more than 10 months, the person can apply for long-term residence. We have already taken measures to safeguard against that through a means test," Huber said.

The University of Malta's Dean of the Faculty of Economics, Management and Accountancy, Prof. Joe Falzon, also says that the programme should go a long way in addressing vacant luxury properties that have been long on the market. "Foreigners with money to spend will be more keen on buying prime, upmarket properties. It will help us to fill up the large amount of empty properties in Malta," he said.

But he did concede that an increase in demand would lead to a rise in property prices, although the volume of vacant properties will at present act as a counter-balance. "Between 1987 and 2007, prices rose organically as a consequence of a rise in demand. However, there is currently a very strong supply, and so inflation is not such a big concern."

Edward Zammit Lewis is quick to dismiss the fears that the scheme would lead to first-time buyers competing with foreigners in an already inflated market. He claims the GRP is not in direct competition with the local market for first-time buyers. "The oversupply of property in Malta ensures prices will not shoot up."

Kristy Debono says however that foreigners will be competing more directly with a wider base of Maltese nationals including first-time buyers. "If the demand for the property within the price range increases, then this will probably lead to an increase in the price of property and thus to the detriment of the Maltese."

Alternattiva Demokratika Secretary-General Ralph Cassar pours cold water over the scheme as another excuse to encourage further development. "We hope it will not be used as an excuse for more development. Depending on the property sector as a means of economic growth will backfire big time. Just look at what happened in Spain and Cyprus.

"Government must be careful that this scheme doesn't end up in spiralling property prices in our village centres, pricing property out of the reach of the normal Maltese wage earner and driving out lower-income residents."

Residency schemes abroad

EU law allows member states to offer permanent residency rights to non-EU nationals, and a number of countries facing economic woes, including Spain, Portugal and Ireland, have introduced alluring schemes aimed principally at the Chinese and Russian markets.

Zammit Lewis in fact confirmed the government will embark on a marketing campaign which will target untapped markets such as South Africa and China.

Last, year, Portugal and Ireland granted residency permits for property buyers who spend over €400,000 and €500,000, respectively. Hungary's threshold is at €250,000 but interest was not high, as in the first three months of the legislation's introduction only three deals were closed. Spain attempted to undercut these offers significantly, promising residency in return for investment in properties with a minimum value of €160,000.

In Cyprus, the purchase of a property with a minimum market value of €300,000 grants investors a permanent residence permit. The Mediterranean island needs to raise €5.8 billion in relief funds to overcome its debt crisis, so under its new immigration laws, non-EU nationals who buy property cannot work or compete with Cypriots for work.

Between August and October 2012 more than 600 properties were sold in Cyprus to Chinese buyers. The opportunity to secure permanent residence in an EU member state is a huge attraction for rich Chinese citizens, because it offers them visa-free travel throughout Europe and the possibility to send their children to European schools and visit them without difficulty. According to the 2012 Hurun report, 85% of China's "$1.4 million millionaires" planned to send their children overseas for their education.