The Malta Chamber of Commerce, Enterprise and Industry recently organized a conference on family businesses or business families, as part of its activities to commemorate the Chamber’s 170th anniversary. The aim was to celebrate family businesses and their achievements, as well as examining their future. Malta and Europe in general have seen family businesses developing from humble to large enterprises. Issues discussed ranged from shareholding to structure to governance to procedure to finance and to succession.
The following statistics are both interesting and significant:
- 60% of businesses in the EU are family-owned.
- Family businesses in Malta account for 40-50% of jobs in the private sector
- 4% of family businesses are first generation
- 5% of family-run businesses employ two family members
- 5% employ three or four family members
- 9% of family businesses were inherited
- 9% of family business members would prefer to pass on the business to the next generation
- 8% would prefer to sell it to an outsider
- The challenges and risks faced in transferring a family business (shareholding) to someone else are taxation and financial problems, while others are family conflict, retirement uncertainty and inheritance.
The last of these facts and statistics provided by the Chamber, that is the challenges and risks faced in transferring a family business, have been addressed by the Government, which has provided an incentive for such transfers to be effected inter vivos.
Primarily, it has to be said that no capital gains tax is payable by the transferor on shares (or any immovable property for that matter) donated to one’s direct descendants. Transfer duty or duty on documents, commonly known as stamp duty, is normally payable by any transferee at the rate of 2% of the value of the subject company’s assets, or 5% where 75% or more of the value of such assets consist of immovable property.
However, the Minister for Finance, in order to encourage the transfer of family businesses within the family, such as to ensure their survival and continuity, has issued an Order exempting the transfer of shares between family members from the payment of stamp duty at the rates of 2% and 5% respectively. Instead, a flat rate of 1.5% in all cases is now payable. This exemption has been extended throughout 2018 and is now valid up to 31st December of this year.
To take an example, this effectively means that the overall tax payable on a transfer of shares by donation between an existing shareholder (say, father) and a direct descendant (say, son) of shares worth euro 5m will amount to euro 75,000, rather than euro 100,000, or euro 75,000 rather than euro 250,000 in the case of a property company; a savings of euro 25,000 and euro 175,000 respectively.
Furthermore, it is usual for the transferor to transfer solely the bare ownership of the shares (i.e. retaining the right to receive dividends – thus safeguarding his income for life). In that case, then stamp duty shall be reduced further on a rising scale depending on the age/ life expectancy of the transferee/donor. This would mean that, with regards to the above example, say the transferee is 65 years old, the duty payable will be euro 60,000 and euro 140,000 respectively. There is no succession duty payable on the consolidation of the usufruct and the bare ownership of the shares by the transferee (say, son) on the death of the transferee (say, father)
The enabling law regulating family businesses, their governance and the transfer of the family business from one generation to the next is the Family Business Act enacted in 2017. A company or other business partnership may be registered as a family business in the Register of Family Businesses held by the Regulator of Family Businesses, who is appointed in terms of the Act. There are certain conditions that have to be fulfilled for a business to constitute a family business and once registration takes place then the business may enjoy certain benefits, particularly in terms of the Duty on Documents and Transfers Act ( rates of stamp duty payable)and the Business Promotion Act (lease of Government property).
There is also the Family Business Office within the Ministry of the Economy, Investments and Small Businesses, which assists and advises family businesses with regard to the workings and benefits of the Family Business Act. Since its inception it has helped more than 250 family businesses. The Office and the Malta Chamber of Commerce, Enterprise and Industry have jointly set up a Family Business Committee. The President of the Chamber, Mr. Frank V. Farrugia, has stated: “The Committee will ensure that the Chamber’s dedication towards family businesses continues……………..It shall serve as an excellent platform for constant communication between family businesses, the area’s main policy maker and other relevant stakeholders.”
A bank finance scheme for family businesses was also launched to assist them with debt finances. The Minister for the Economy, Investments and Small Businesses, Dr. Chris Cardona, noted that “while family businesses wished to transfer, they had a problem with access to finance. This will be the first time that a local bank, BOV [Bank of Valletta], is offering a specialized scheme specifically for family businesses. The Malta Development Bank is the third party to the agreement [together with the Family Business Office] and will act as a guarantor.” Examples of what the scheme offers are:
- a loan guarantee of up to euro 500,000 per business for the purpose of acquiring the business, together with the provision of bank finance facilities for acquiring and transferring the business.
- A maximum grant of euro 12,500 spread over five years for legal, notarial and accountancy services required to assist in the governance, succession or family business transfer.
- A grant of up to the value of euro 2500 for mediation or arbitration services required to establish the fair value of the business.
- Positive consideration of lease renewal of industrial government leased premises.
Finally, to quote Patek Phillipe with regard to family businesses:
“You don’t own it. You’re just watching it, guarding it, to hand it over to the next generation in as good a condition as possible.”
To find out more, please contact Dr. Austin Sammut
References: Family Business Office; Ministry for the Economy, Investment and Small Businesses; Chamber of Commerce, Enterprise and Industry.