REITS in the context of trusts and Green Bonds - both carry a number of fiscal advantages

Three years ago, in support of Malta’s and the European Union’s commitments to the promotion of sustainable finance and investments, the Malta Stock Exchange announced that the Malta Financial Services Authority had approved the bye-laws for the establishment of a Green Market. 

It was a milestone development for the listing of Green Bonds on the local capital markets. Issuers seeking to raise finance for green projects must meet the Green List criteria so that issuers meeting these requirements will qualify for discounted listing fees. 

Let us see how we have reacted to Green Bond issuance. Malta is increasingly positioning itself to attract more green bond issues. The Malta Stock Exchange introduced the MSE Green Market specifically to facilitate the listing of green bonds, providing a platform for issuers to raise finance for green projects. 

This initiative aligns with the International Capital Markets Association’s Green Bond Principles, ensuring that investments contribute to environmental objectives such as climate change mitigation and sustainable water use. This could make us an attractive location for issuing and investing in green bonds as the market continues to evolve globally and within Europe.  

What are Green bonds? These are a type of fixed-income instrument specifically earmarked to raise money for climate and environmental projects. The proceeds of these bonds are typically dedicated to projects that have direct environmental benefits, such as renewable energy projects, pollution prevention, sustainable water management, and other initiatives that address specific environmental concerns. The key characteristic of green bonds is that their use of proceeds is strictly limited to environmentally friendly projects, and issuers often report on the impact of these projects to maintain transparency.  

Close to this are Sustainable Finance Instruments. This is a broader category that includes any financial instrument which supports sustainable development and has positive social and/or environmental outcomes. Sustainable finance instruments encompass green bonds but also include other products like sustainability bonds, social bonds, and loans that are linked to achieving broader ESG (environmental, social, and governance) criteria. 

Unlike green bonds, which are exclusively environmental, sustainable finance instruments can also fund projects that have social benefits, such as improving education, healthcare, or social housing. Sustainability-linked bonds, for example, are differentiated by their performance against predetermined sustainability outcomes, affecting their financial characteristics (e.g. interest rates may vary based on the issuer's achievement of set sustainability targets).  

In essence, while green bonds have a narrow focus on environmental projects, sustainable finance instruments cover a wider range of objectives including social and governance aspects, offering more flexibility in their use for achieving comprehensive sustainability goals. In Malta, these are crucial tools in the transition towards a sustainable economy, but they serve slightly different purposes within that broader objective.  

Green bonds and sustainable finance instruments are both designed to funnel capital towards environmentally and socially beneficial projects, but they have some distinctions in their focus and use. Observers note a slow uptake of green bonds in Malta. This can be attributed to several factors. There's a general lack of awareness and understanding among potential issuers and investors about green bonds and their benefits. This includes knowledge about the financial and environmental advantages of issuing green bonds and how they can be utilized to fund sustainable projects.  

Moving on to discuss the introduction of REITS, one notes that other countries have tasted their success as trusts. Starting with United States: REITs must distribute at least 90% of their taxable income to shareholders, who then pay income tax on these dividends.  However, the REIT itself is not taxed at the corporate level on income that it distributes, avoiding double taxation.  

In the UK, REITs are exempt from corporation tax on profits and gains from their qualifying property rental business, provided they meet certain conditions, including distributing at least 90% of their property income to shareholders. By comparison, REITs in Singapore are subject to tax exemption on specified income (including foreign-sourced income) that is distributed to unit holders if certain conditions are met. This is part of the international government's efforts to promote the growth of the REIT sector. 

Australian REITs pass through their income to investors without paying corporate tax, provided they distribute 100% of their taxable income to their shareholders annually.  Each domicile has its specific regulatory framework guiding these tax treatments to ensure compliance and sustainability of the tax advantages. 

REITs in Malta, although a relatively new introduction to the legislative framework, have a promising outlook due to Malta's competitive and attractive tax environment. The Maltese tax system offers several advantages that would be beneficial for the operation of REITs. These include a full imputation system. 

This system prevents the double taxation of corporate profits by allowing shareholders to receive a tax credit for the tax paid by the corporation on the profits out of which dividends are paid.  Shareholders may claim a refund of a portion of the tax paid by the company, typically 6/7ths of the tax paid. This effectively reduces the tax on distributed profits, enhancing the attractiveness for investors. Profits derived from a participating holding or from the disposal of such holdings are exempt from tax, which can include dividends or capital gains from foreign subsidiaries. NID - this allows companies to achieve a more balanced treatment between equity and debt, by providing a deduction for notional interest on equity, which can significantly reduce taxable profits.  

All this is backed by a formidable array of double taxation treaties and an EU -compliant framework make Malta an attractive domicile for REITs, potentially enhancing returns for investors through efficient tax structuring. Currently, REITs are required to distribute a high percentage of their profits as dividends to benefit from tax exemptions. Reducing the required distribution percentage could allow REITs more flexibility to reinvest profits into property development and maintenance, which could lead to higher long-term value for shareholder.  

While Malta’s tax system is already investor-friendly, providing additional tax incentives such as reduced dividend withholding tax rates for foreign investors or exemptions from capital gains tax on the sale of REIT shares, more needs to be done to attract international investors. This could include streamlined reporting requirements and reduced bureaucratic hurdles.  

In conclusion, Malta could potentially increase the competitiveness of its REITs in the European market, drawing more investment into the real estate sector and supporting the country’s economic growth.