Although Malta was a latecomer to the European hedge funds industry, the country has made significant progress over the last few years attracting service providers, management companies and start-ups.

The Malta Financial Services Authority (MFSA), set up in July 2002, is the single regulator for financial services responsible for all the supervisory functions previously carried out by the Central Bank of Malta, the Malta Stock Exchange and the Malta Financial Services Centre. The MFSA also manages the registry of companies and has taken over responsibility as the listing authority.

Malta has a strong yet flexible single regulatory body in the Malta Financial Services Authority (MFSA). The MFSA is responsible for all licensed financial services activity. It is known for its flexible approach particularly to hedge fund formations but is also considered one of the tougher jurisdictions in terms of applying European Union rules and its won-funds legislation.

Despite Malta’s small size the MFSA is considered a force in the development of regulatory policy, playing a role in the Organisation for Economic Co-operation and Development (OECD) and within the European Union particularly as an active member of the Committee of Securities Regulation (CESR) which evolves into the new European Securities and Markets Authority (ESMA) in January 2011.

As a developed financial centre, Malta offers a range of financial services. Financial intermediation and related sectors currently account for 12% of gross domestic product (GDP). The government intends to double this figure by 2020.

Malta’s reputation as a hedge fund domicile was established with the island’s accession to the European Union in May 2004. Back then, only four hedge funds were domiciled in Malta. Currently, over 400 investment services licenses have been issued.

EU membership has positioned Malta on a level playing field with other member states. Membership means the jurisdiction can offer passporting rights so that investment services and Ucits schemes may be registered in Malta and then offered to any EU country.

Malta allows domestic, EU-domiciled and other-domiciled single-strategy hedge funds and fund of hedge funds. A minimum investment of $20,000 in the case of an experienced investor fund, $100,000 in the case of a qualifying investor fund or $1 million in the case of an extraordinary investor fund is required to set up a fund in Malta. The custodian/prime broker, administrator, manager and advisor appointed by the fund must be located in an established, regulated and recognised jurisdiction but does not have to be in Malta.

Acceptable jurisdictions include EU or EEA (European Economic Area) member states and some third countries. Hedge funds may not be marketed to retail investors in Malta, although Malta’s entry into the EU means Ucits funds (that may have certain hedge fund-like characteristics) are eligible for a passport enabling them to be marketed in Malta.

The Maltese Investment Services Act (ISA) provides a comprehensive regulatory regime for investment services and collective investment schemes (CIS). These include private investment funds (PIFs). The ISA provides for two types of licences: an investment services licence and a CIS licence.

A CIS may be set up as a Sicav (investment company with variable share capital); an investment company with fixed share capital (such as a closed-ended fund); a mutual fund; an investment partnership or a unit trust.

Hedge funds are typically established as PIFs. It is also possible for a fund established overseas to transfer its domicile to Malta and apply to be registered as a PIF (redomiciled). PIFs may be marketed to corporates and trusts as well as three types of individual investor: qualifying, experienced and extraordinary.

There are various criteria to be met to be classified as a qualifying investor. The main criteria are that the investor must have more than $1m of net assets and that the minimum initial investment is at least $100,000 (or equivalent in another convertible currency).

Experienced investors are defined as persons having the expertise, experience and knowledge in the acquisition/disposal of funds of a similar risk profile to which the proposed PIF relates. The minimum investment threshold is $20,000 (or equivalent in another convertible currency).

Various criteria need to be met to be classified as an extraordinary investor. The main criteria are that the investor must have more than $10m of net assets and that the minimum initial investment is at least $1 million (or equivalent in another currency). There are no restrictions on the investment powers of a PIF.

There is a restriction on the extent of leverage through the use of derivatives or borrowing in the case of PIFs marketed to experienced investors. In order for hedge funds to be marketed in Malta, they must first be approved by the MFSA.

The MFSA has committed to process applications for the authorisation of PIFs within seven working days, provided all relevant documentation has been submitted and all functionaries are based and regulated in a recognised country (EU or EEA members and some other specified countries). If filing of all the required documents with the MFSA is complete, approval usually follows within seven working days in the case of an experienced and qualifying investor fund and three working days in the case of an extraordinary investor fund.

Maltese-licensed single and fund of hedge funds typically have over 15% of their investments overseas. Such funds are not taxed in Malta on income or capital gains. Separate rules apply for funds with at least 85% of their investments in Malta.

Fund managers managing non-resident funds and/or local funds are subject to tax at the normal corporate rate of 35%. Effective tax leakage on distributions to non-resident shareholders could be minimal due to the local imputation system. This would result in a refund of most of the tax paid on distributed profits.