According to the IRS QI List, recently published, there are 17 Qualified Intermediaries (QIs) in Malta, mainly comprising of the larger, well known financial institutions such as Bank of Valletta, MeDirect and APS. The rest of the financial institutions in Malta will be non-qualified intermediaries or NQIs by default, or one of a small number of sponsored entities. The question is, how many NQIs are there, and does this pose a problem as far as Maltese investors are concerned?

To estimate the total number of Maltese financial institutions that are potentially exposed to the US securities market, we can use the Global Intermediary Identification Number or “GIIN” as a rough guide. GIINs are issued to financial institutions by the IRS because it’s worried about American citizens hiding their financial assets outside the US (including Malta) to evade US taxes. Malta is just one of the places this can happen. So the IRS requires financial institutions with GIINs to report US account holders each year. The GIIN is important here because over the years, the US has forced all financial institutions in Malta to get a GIIN, which makes it a useful guide to how many financial institutions there are in any jurisdiction that provide custody or depository services to clients.

Just to clarify, custody means holding stocks and shares in safekeeping on behalf of investors. A depository institution just manages cash deposits. It’s these financial institutions, and the custodial institutions in particular, that have an exposure to the US securities markets by allowing their clients to hold and trade US equities, bonds and other financial instruments such as ETFs (Exchange Traded Funds) and CFDs (Contract for Difference).

The IRS has to date issued 470,543 GIINs – of which 140 are in Malta. From that we can make a couple of reasonable assumptions. First, that most of these GIINs are registered to smaller firms certifying that they are reporting model 1 IGA FFIs. This means they operate financial accounts for clients, and they are certifying that they perform annual due diligence on all account holders to determine the FATCA or US Internal Revenue Code Chapter 4 status of all their accounts in order to report those held by American citizens. An IGA is simply the agreement between Malta and the US, signed on June 30^th, 2014, which led to Malta to enacting domestic law to force Maltese financial institutions to comply with FATCA.

Now, a financial institution in Malta will wear two hats to the IRS, depending on their status. They’ll wear a Chapter 4 (or FATCA) hat and a Chapter 3 (QI or NQI) hat. The Chapter 4 is an anti-tax evasion system, and the Chapter 3 regulates the taxation of US investment income when it’s paid to Maltese residents. The only two options in Chapter 3 for a Maltese financial institution are QI or NQI. Now, since we know there are only 17 QIs in Malta and we know there are 140 GIINs issued to Maltese financial institutions, many, but not all of which will have been issued to trusts. There must therefore, by definition, be a significant number, up to 123 NQIs in Malta. Those NQIs, and more particularly, their clients, have two big problems – over-taxation and data privacy.

Over Taxation

Malta has a double tax treaty with the United States, under which dividend income from US corporations is taxable at 15% instead of 30%, and portfolio interest (interest from US corporate or government bonds) is taxed at 0% instead of 30%. But the kicker is, ONLY a qualified intermediary can grant those tax treaty benefits. So if you’re a Maltese resident and you invest in US securities, unless your accounts are with one of the 17 QIs, any US dividends will be taxed at 30% and any interest on US bonds is likely to be taxed at 30%. So unless your accounts are with one of the 17 QIs, you lose – big time.

Data Privacy

The second issue for these NQIs is data privacy. All financial institutions in Malta must report any US income that they receive on behalf of Maltese clients to the IRS. But the way it’s done is different between QIs and NQIs. A QI gets to pool their clients so that no individual client (whether that’s a Maltese individual or a Maltese corporation) is being disclosed to the IRS. So if your account is with one of the 17 QIs in Malta, then your information is kept secret – even the IRS doesn’t get to know who you are.

That’s not the case if you are a client of one of those 123 Maltese NQIs. The US considers NQIs to be facilitators of tax evasion so they require reporting at recipient level. In other words, if you are a client of an NQI in Malta, you will be reported on a form 1042-S to the IRS each year. That form submitted electronically to the IRS will disclose your full name, address, Maltese Tax ID Number together with the total of each type of US income you received from US sources and any tax that was withheld. And that happens every year.

So, if you’re currently a client of an NQI in Malta, there should be some serious alarm bells ringing at the moment. If you are an NQI reading this, you’re at a competitive disadvantage to your QI rivals and you may get data privacy questions from your clients that force you to reveal the extent to which you are sharing their financially sensitive data with the US government.

If it all seems confusing, talk to us today.