Registration of a Family Business

Family businesses in Malta are considered to be the beating heart of the Maltese economy since approximately the 70% of the Maltese businesses are run by families. However a family business encounters a lot of problems along the way and the most significant one is that regarding succession. In fact, only 30% of these businesses are transferred from one generation to the next. As a result there was the need to have a legislation that in some way or another could regulate and also help out in the governance of these family businesses.

As already stated, one of the aims of the legislation would be that to encourage the regulation of the family businesses. Any type of family business can qualify for registration under the Act, whether it is set up in the form of a public limited liability company, a private limited liability company, a registered partnership, a trust or any other registered form of a family business. However, there are some conditions that one needs to abide with when it comes to the registration of a family business.

If the business is set up in the form of a public limited liability company, the majority of the shares have to be owned by at least two owners who have to be family members within the same family in order to have such company registered as a family business.

On the contrary, in the case of a private limited liability company, all the shares of the company have to be held by at least two owners who also have to be family members within the same family and at least one family member has to be formally involved in the general governance, in the proper administration and in the management of the company in order to register such business under the Family Business Act.  Moreover when the shares are held by non-family members including employees who have been in continuous full time employment with the family business for over 3 years, the business shall not be qualified to be registered under the Act if the aggregate value of the shares does not exceed 10% of the issued share capital of the company in the case of employees and 5% in the case of other non-family members. Furthermore, the Act states that when the owner happens to be also a family member, he or she cannot own more than 80% of the issued share capital of the company in order for such company to be registered as a family business. The 80% shall be calculated once the 5% and the 10% owned by non-family members and by employees have been deducted. For a business to be registered as a family business in terms of the Act it must be established in Malta which means that the head office, agency or branch is situated in Malta or part of a business is carried out in Malta.

Following the registration, a family business would be eligible for benefits which are provided under the Family Business Act. The objective behind the granting of benefits is the facilitation for the transfer of the registered family business from the owners who would be family members to other family members within the same family. Only transfers made to descendants qualify for the said benefits as transfers made to ascendants are not eligible. The said benefits also include any relief granted in terms of the Duty on Documents Transfers Act. A reduction in the stamp duty would take place on the transfer of a family business. However the said benefits would only be granted if the family business has all fiscal returns and contributions duly submitted up to the date of the transfer and the taxes due in terms of the said Act have been paid in full before the transfer took place. As a consequence a new Article, 41C was introduced in the Duty on Documents and Transfers Act. When a family business is transferred by an individual to other family members and where such transfer includes a commercial tenement that has been used in the business for a period of at least 3 years preceding the transfer, the rate of stamp duty would be that of 3.5% on the first €500,000 instead of 5%. Also, registered businesses shall be able to brand themselves as official family businesses.

The Family Business Act came into force only a few months ago and it is already considered as a pioneering law as it established a legal framework within which the family businesses can work, it assisted the family businesses to operate in an efficient way and it granted incentives in case the family businesses are transferred successfully from one generation to the other. With regards to the succession process, Dr. Nadine Sant, the Legal Advisor for Ministry for the Economy, Investment and small Business who sat as Chairperson for the Family Business Act committee while commenting on family businesses said that “It is not their success but their succession that is their Achilles’ heels.”

Read more: registering a company in Malta. For more information get in touch with our team of experts by filling the quick contact form here.