FAMILY BUSINESS ACT
To encourage the regulation of family businesses, their governance and
the transfer of the family business from one generation to the next; to
encourage and assist family businesses to enhance their internal
organisation and structure with the aim of effectively operating the
business and working towards a successful succession of the family
business; and for other matters consequential or ancillary thereto.
1st January, 2017
ACT XLVIII of 2016.
The Family Business Act is intended to introduce very specific provisions catering for the sensitivities and vulnerabilities of these kind of businesses which show a marked trend of unwinding by the third generation in the family.
The law attempt to address issue of governance and transfers within the family so as to ensure these businesses continue to survive given how important they are for the local economy. The law proposes to cater for a series of incentives of a finance and fiscal nature but also go into some detail on ensuring education and advisory support as well as dispute resolution mechanisms to support transfers of interests in these kind of structures.
The Family Business Act is an exciting piece of legislation, being the first of its kind.
Through this legislation the government aims to address a problem which many family businesses face since only thirty per cent of such businesses complete a successful transition from the first to the second generation, while less than ten per cent of such businesses make it to the generation after that.
This new Act will be creating a legal framework; members of family businesses can receive legal guidance and assistance to plan adequately and affect a successful transfer of their business when the time comes.
Of great interest is the fact that it will be possible for family businesses based even outside Malta to register under the Act which means that they will qualify for the incentives as well. This has the potential of making Malta a very attractive jurisdiction for the restructuring of Family Businesses wherever the operations may be taking place. Interestingly this legislation is not limited to limited liability structures but encompasses unincorporated firms, holding structures like trusts and foundations and informal partnerships often found in families. Maltese law caters for the domiciliation of legal organisations and this may be a very useful tool for relocating foreign family companies to Malta to enjoy the benefits emerging from this law.
THE FAMILY BUSINESS ACT
The back drop against which this legislation was developed is with the knowledge that in Malta, around 98% of all business are micro, small and medium sized enterprise with the vast majority of them being family run businesses. More significantly 95% of these SMES are classified as micro enterprises having less than 10 employees. These SMEs provide about 80% of all jobs in the business economy and create 71% of the overall value added: for both variables, this is about 14 percentage points more than the EU average.
To date there was no legislation on a European or International level that specifically seek to assist and encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. Henceforth the scope of the legislation is to encourage and assist family businesses to enhance their internal organisation and structure with the aim of effectively operating the business and working towards an effective succession of the family business.
This law is being developed in line with the European Commission recommendations to create a transfer-friendly regulation framework:
- Creation of a transfer-friendly regulation framework: To help the transfer of businesses means having the right regulatory framework. The European Commission dealt with this area in its recommendation on the transfer of small and medium-sized enterprises. It invited the Member States to improve their legal and fiscal environment for business transfers. Some progress has already been made in implementing the recommendation, but there is still work to be done.
and the Governments pledge to introduce the Family Business Act which will offer benefits to registered family businesses seeking to transfer their business and ensure next generation continuity.
- Se jiġi indirizzat l-Att tan-Negozju tal-Familja. Il-liġi se tagħti definizzjoni ċara ta’ x’inhu negozju tal-familja u min huma l-membri tal-familja u se tinċentiva t-trasferiment tan-negozju bejn membri tal-istess familja. Kull negozju tal-familja rreġistrat taħt dan il-Att se jkun eliġibbli sabiex japplika għal numru ta' benefiċċji.
FAMILY BUSINESS STATISTICS FOR MALTA
The Ministry for the Economy, Investment and Small Business and the National Statistics Office under the Ministry for Finance in 2016 were the beneficiaries of a grant awarded under the COSME programme. COSME is an EU 2014-2020 programme running for the Competitiveness of Enterprises and Small and Medium-sized Enterprises. It supports SMEs in better access to finance; access to markets; supporting entrepreneurs; and more favourable conditions for business creation and growth.
The grant was awarded for the implementation of a Project Proposal, entitled “Identifying and Establishing Core Variables and Statistics to Support the First Legislation on Family Business in Malta”, submitted by both beneficiaries under the call “Statistics for Family Businesses”. The application was very favourably evaluated achieving a final acceptance result of 97% on 100% as to its suitability to be awarded the funding. The main objective of the project was to collate statistics onfamily businesses of the legal definition of family business as set out in the Family Business Act which is a first for Malta and also within the European Union. This data will aid the legislator, policy maker, key stakeholders and family businesses to garner credible, real, comparable and systematic information and indicators of the family businesses in the Maltese economy. On the basis of this data, it will further offer usable and practical information for decision making in the development of, and assistance to, this key economic sector.
MAIN PROVISIONS OF THE FAMILY BUSINESS ACT
This legislation is intended to provide a legal as well as an administrative environment conducive to the development of this sector. It seeks to do this by establishing the parameters which would entitle a business to be considered as a Family Business, by proposing the establishment of a regulatory framework including the role of a regulator whose function would include ensuring the continued development of the sector by nurturing, encouraging and assisting family businesses. The intention of the legislation is to encourage family members within the same family to transfer their family business during the life time of the family members (inter vivos) as opposed to waiting for a family member, and most often and crucially – the founder, to pass away and affect a transfer causa mortis. In transferring a family business inter vivos the benefits and likely success of the continuity of the family business far outweigh a transfer causa mortis especially as most transfers’ causa mortis arise as a result of an unexpected and unforeseen passing away of a family member. A transfer inter vivos will not only be more transparent, smooth and successful, but the same family business will maintain the confidence of its employees, business partners, investors, customers, shareholders and all financial and credit relationships related to the family business. Furthermore the legislation crucially identifies benefits and assistance which the family businesses require to facilitate a successful transfer.
The main provisions of the Act are the following:
- The establishment of a legal form for a Family Business. The term family business is defined and identifies the business models by which family businesses trade and operate. Whilst the Act is developed keeping in mind the scenario in the Maltese economy it allows for foreign family business to benefit from the legislation through establishing a part or all of their family business in Malta. As Malta is the first jurisdiction legislating specifically for family business, this Act spearheads Malta’s status as a core financial centre for European Union, international and commonwealth businesses and acts as a further compliment to foreign direct investment.
- Family businesses vary from ‘normal’ businesses since they are motivated by the unity and continuity of the family ties. In this respect it was vital to clearly identify what family members will be recognised within a family business for the purposes of registering as a family business as well as to provide adequate safeguards to their employment.
The definition of family member is intended to identify those relatives in accordance to Maltese Law who are considered within the parameters of the Act. It takes into account the current indications of family members already established through existing legislation such as the Income Tax Act, Chapter 123 of the Laws of Malta, the development and emergence of fresh legislation regulating partners and spouses as well as the intentions of the legislation which is to encourage succession down to the next generations.
- The definition of family business throughout article 3 of the legislation identifies direct ownership of those family businesses that are 1) listed or trading on a multilateral trading facility, 2) limited liability companies, 3) registered partnerships, 4) businesses set up as a trust, 5) unregistered partnerships, and 6) those that the Minister may prescribe. Indirect ownership is identified as those family businesses set up as 1) holding companies, 2) those held in a trust or 3) a private foundation;
An owner is identified as being mean the ultimate beneficial, physical individual who, directly or indirectly, has a shareholding or other interest in the family business. A family business, to be understood as a family business, must be made of up two owners who are family members within the same family unit. The definition takes into account the requirements not only of ownership held by family members but the importance of their involvement in the governance and decision making rights of the family business.
The legislation aims towards the consolidation of ownership as opposed to its fragmentation. Keeping this in mind, the legislation takes into consideration that successful family businesses are not necessarily entirely 100% family owned and that furthermore part of its continuity and success depends on allowing participation and ownership by non family members. In this respect, the legislation provides that where forms of ownership are held directly or indirectly by individuals who are not family members or by employees they shall be disregarded if their aggregate issued value does not exceed five per cent or ten percent respectively of the said ownership as prescribed in the provisos of articles 3(2), (3), (4), (5) and (7) of the legislation.
The legislation furthermore takes into account that business assets may be held on lease and not through ownership and for these purposes and to provide for this state of fact, the legislation provides that where any business assets are held on lease, the family members shall be the majority of the lessees in the lease agreement. In this way, the net encompassing family businesses is further extended and takes into account the real scenario for those family businesses lease their premises.
- The success of family businesses highly depends on family members being fully and properly integrated in the ownership and governance of the family business. Therefore achieving a balance is fundamental to ensuring continuity and success. For these purposes the success of a family business requires not only the presence but the involvement of the same family members operating it and who will eventually inherit it. The legislation seeks to achieve this balance by establishing the parameters for the duration of the family business both in registering as a family business and maintaining the label, the level of direct and indirect ownership as well as the quality of ownership, management and decision making rights.
- Governance, structured management and good administration are the Achilles heels of family business owing to the fact that family businesses invest much of their personal qualities in growing and establishing the business. In failing to plan, a business plans to fail. The legislation tackles this aspect by requiring family businesses to clearly determine the role of family members within the family business not only from an ownership perspective but also through decision making rights and formal involvement in the management of the business;
- To further assure the continuity and transfer of the family businesses benefits have been developed to complete the scope of the legislation and assist family businesses. Access to benefits is on the precondition that family business are fiscally sound thus further strengthening their internal governance and also allowing the State to collect its fiscal dues and increase revenue and transparency in the operations of these family businesses.
- A Regulator of Family Business is established with a complimentary function of being a leader and representative of the sector, as well as to administer a Register of Family Business to collate those businesses that have been allocated the Family Business label after meeting the established requisites. The Regulator’s function goes further than that of a ‘licensor’ by striving to create a community bringing together family businesses and professionals to work together and develop opportunities to continually assist family businesses in their transfers and succession.
- The Act contains other provisions establishing parameters for acceptance as Family Businesses as well as to guide the functioning of these businesses so as ensure transparency in their operations, fiscal accountability and to enhance the survival of the sector.
- Finally the Act includes enabling provisions to allow the Minister to further legislate on a number of aspects including the further development of benefits.
THE INITIAL INCENTIVES
- Benefits are twofold: governance and fiscal.
- The initial governance benefits which are supported through Malta Enterprise will range as follows subject to Malta Enterprise’s terms and conditions:
1) Micro Investment of a maximum tax credit of €50,000 over a three year period;
2) Legal and Accountancy advisory services up to €2,500 over a five year period;
3) Arbitration of up to five sittings;
4) Education and training for owners and their employees of up to €1,000 annually per family business;
5) The positive consideration of lease renewals occupying government premises;
6) Loan guarantees of up to €500,000 per business for the purpose of acquiring the business or parts thereof; and
7) When a registered family business is occupying industrial government premises or land on lease or emphyteusis respectively as prescribed under Chapter 325 the Business Promotion Act and subject to the business satisfying all the conditions of the tenancy agreement, the Regulator shall recommend to the Malta Enterprise Corporation and, or Malta Industrial Parks to renew the tenancy, which renewal shall not be unreasonably withheld when the objectives of the renewal are to ensure the continuity of the family business between family members.
- The fiscal incentives are integrated in Chapter 364 the Duty on Documents Transfers Act. The intention for their introduction is to allow for a more effective and smoother transfer or retention of the family business within the family. This should work simultaneously with encouraging financial and fiscal good governance. The fiscal incentives will afford varying fiscal rates to those family businesses transferring to other family members. In essence duty on immoveable property shall be chargeable on the first five hundred thousand euro (€500,000) of the value of the property transferred at the advantageous rate of three euro and fifty cents per one hundred euro or part thereof and with respect to duty on shares, interests in a partnership, trust or foundation no account shall be taken of the first one hundred and fifty thousand euro (€150,000) or such other greater amount as may be prescribed of the value of the shares, or interests in a partnership, trust or foundation transferred in assessing the duty chargeable.
These incentives should be considered as the foundations to commence the operation of the legislation. They are not intended to be exhaustive and final but will serve as the platform for family businesses to immediately benefit upon introduction of the legislation. The Regulator will monitor their success or otherwise and propose and work towards developing further benefits for family businesses in the widest context possible.
It is intended and shall be comprised to form part of the role of the Regulator to continuously update, develop and introduce further governance and fiscal incentives. Furthermore, it is intended that other incentives through other third party stakeholders should be developed and integrated within the operational aspect of the legislation.
For the year of 2017 there shall be an initial one time boost for family businesses. Those family businesses who transfer their business to their children will benefit from a reduction of tax being from 5% reduced to 1.5%.
For further information, one can touch base with the family business unit within the MEIB.
Regulator: Dr. Nadine Lia