Do present conditions allow family businesses to have their full economic impact? Do governments lend business families the support they require to fulfill their role as job creators and innovators? For many countries around the world the answer to these questions is disappointingly in the negative. In spite of this apparent short-coming, there are notable exceptions such as the island nation of Malta. The Mediterranean country is a true forerunner for petitioning its authorities for the family business cause and has utilised a private sector initiative to move forward with establishing the Family Business Act. The legislative maneuver, which encompasses a set of laws that will support the continuity of family businesses, is set for parliamentary vote later this year.
Mario Duca and Dr. Jean-Philippe Chetcuti are the masterminds behind the Family Business Act and joined forces with other family business leaders a few years ago over their passion for family– owned firms. Together they founded the Malta Association for Family Enterprises (MAFE). By combining Chetcuti’s professional background in tax law and Duca’s consulting and educational expertise for multigenerational family businesses with family business owners across Malta, the two men were well armed to advance their cause as witnessed by the progress of their landmark act. In the following article, Duca and Chetcuti describe the reasons why family business lobbying is important, what exactly it will bring to Malta, and why simple tax optimisation is not enough to ensure the continuity of family businesses across generations to come.
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The failures of simple tax optimisation
55% of Malta’s registered businesses are family-owned. It is estimated that of the nation’s $8 billion GDP, family businesses contribute €4-5 billion. These enterprises also employ roughly 40% of the Maltese work force, a figure, which is estimated to continue growing.
Malta’s exposure to the 2008 financial crisis is believed to have been caused by multinational corporations and not family businesses. If it had not been for the foresight of these business families that conduct their affairs with financial prudence and a long-term vision, the crisis would have hit the economy much harder. This type of backing, which family firms have provided for Malta has catalyzed the degree of fervor many are throwing behind the effort calling for governmental support.
Malta has always been an ideal destination for offshore investment due to the many tax advantages the country provides. However, family businesses encounter significant tax disadvantages when they undergo transitioning from one generation to the next. Although Malta does not enforce inheritance tax, it does apply stamp duty on the transfer of assets, which is a great challenge and sometimes forces family businesses to forfeit assets. These practices make little sense economically, as the losses incurred by losing family businesses unable to cope with lost capital, far outweigh any short-term gains from transfer taxes.
Appealing for more sound provisions from the Maltese government is not solely based on tax relief but also includes requests for better tax guidance. Malta joining the European Union in 2004 greatly enhanced its international credibility and thus attracted global family businesses that have since chosen to set up their family trusts and holding companies in the country. The flock of business has garnered a new order of competitiveness as investors are also offered the option to gain citizenship through investment. With the increase in activity, family businesses need not only sufficient tax optimisation advice but also education in how to approach the structuring of a family’s wealth that is both holistic and sustainable. A combination of family governance, succession planning, and tax advice has to be achieved as a result of cooperation between the private sector and the government.
A petition’s driving force
80-90% of family businesses in Malta aspire to retain family ownership, according to a 2010 survey. 85% of survey respondents stated however, that succession planning was not yet in place. Unsurprisingly, 75% of Maltese family businesses fail to transition successfully from the founding generation to those following. The survey’s findings clarify why a great number of family businesses have signaled the need for a family business– facing initiative to take action.
MAFE was founded with the primary focus to advance the family business cause politically. However, the Family Business Act is not being proposed to offer family businesses solely free support. It is instead being lobbied to help them understand that they must adhere to certain good practice standards in terms of governance and the creation of family charter or constitution. Support will be lent only to those families that have indicated their commitment to these standards and taken steps to implement a family constitution.
The Family Business Act
MAFE was founded in 2011 with its express aim to council family businesses, offering this strong contingent of the Maltese economy a voice on both interests domestic and international. The Association’s efforts have reached its defining cause in the form of the Family Business Act project, soon expected to culminate in a bill designed to address three major family business concerns.
The first segment for the proposed legislation is constructed to address the definition of the family business model for the purpose of determining eligibility to benefits under the proposed FBA. What exactly is a family business as determined by law? The definition stage of the Family Business Act should foremost answer this question, yet also create a framework for formulating official statistical analysis related to family businesses. This section of the Act will create fluidity for defining which businesses are family-owned in the eyes of the Maltese government and thus eligible for the provisions to come.
The second proposal of the Family Business Act will serve to strengthen family businesses’ tenuous relationship with Maltese taxation. The levying of stamp duty and /or other transfer taxes at times of death and share transferal have led to the shattering of important family businesses in Malta both due to their size and lack of preparation. MAFE’s proposal for the taxation phase of the Family Business Act calls for the reduction or deferral of family business taxes whilst also organise an educational body responsible for counseling family businesses on how to best finesse the Maltese tax code.
The Family Business Act’s third, and final, segment is aimed at bolstering Malta’s family business community with publicly funded options for training and consultancy related to family business governance. Family entities represent a substantial portion of the country’s GDP and the Act will work towards guiding both family businesses and Malta’s long-term viability. Succession planning will stand at the forefront of this third segment.
With MAFE’s leadership, the Family Business Act will tackle a range of Maltese family business deficiencies. By officially identifying what makes a family business and subsequently restructuring their taxation and succession planning, the Act will paint a brighter, more lucrative future for Malta as a whole.
The future of the Family Business Act
If the Family Business Act is passed through parliament, it will not only support family businesses in achieving continuity but also create awareness in the community of the importance of family businesses. It will help to protect the wealth of generations to come and allow them to create the economic impact they were destined for.
The white paper for the Family Business Act is expected to be published during the second part of this year. Presumably through MAFE’s petitioning, politicians will recognise the Act’s importance and vote in its favour. As a considerable number of family businesses in Malta are foreign, the Act will continue to represent an incentive for international family business investors to bring their companies to the country.
Business families have to play their part too. They must exert their energies on staying together to further family ownership by educating their next generations in the proper methods for good leadership and wealth management. MAFE will continue to provide support to families who want to continue across generations. It is only through the holistic approach of legal frameworks, tax optimisation and education however, that family businesses have a chance of affecting the economic impact they were designed for.
Tharawat Magazine, Issue 22, 2014