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EU Commission Reviews Malta's Financial Stability
Taxand Malta investigates the report's findings on corporation tax and its impact on foreign investment from multinationals.
Past current account deficits have been comfortably financed by FDI inflows, mainly thanks to an expanding banking sector. Malta has historically been an attractive destination for foreign investment, despite the small size of its domestic market. FDI inflows have averaged around 10% of GDP since the beginning of the decade and in a recent survey the majority of respondents indicated that Malta's attractiveness as a destination for foreign investment is related to its stable social climate and corporate taxation regime.
However, even though registered in Malta, internationally-oriented banks hardly do any business in the jurisdiction. While this does limit the potential risk to domestic financial stability that they carry, the existing tax regime sets a lower tax rate for institutions that obtain a very small share of their profits from business with residents, which provides a further disincentive for these large international banks to increase their exposure to the domestic economy.
The debt ratio of non-financial corporations (NFC) increased substantially until 2009 on the back of increased borrowing. As a result of improving financing conditions, facilitated by EU and euro-area entry, and partly also thanks to a bias against equity in corporate taxation, the non-consolidated debt of non-financial corporations grew substantially. Malta has the largest gap between the effective marginal tax rates on debt- and equity-financed new corporate investment among the 27 Member States.
Discover more: Access the EU Commission's in-depth review of Malta
Given the small size in nominal terms, public and private debt issuances do not attract significant interest from foreign investors, leaving the burden of funding the government almost entirely on Maltese corporates. This may crowd out private investment and consumption in case of insufficient liquidity in the financial system. Therefore, ensuring that public and prviate debt is put on a downward path and addressing the challenges to the long-term sustainability of public finances would be beneficial for domestic stability.