Cryptocurrency Regulation in Malta

Malta, a self-declared blockchain island, is one of the few European Union (EU) jurisdictions to have an explicit regulatory framework for crypto assets and services as several years ago the Maltese government made the decision to formally recognize and regulate cryptocurrency-related businesses for the sake of the development of the innovative technology sector in Malta.

Just like other financial service providers in Malta, cryptocurrency businesses are supervised by the Malta Financial Services Authority (MFSA) who’s responsible for protecting the integrity of the financial services industry and for maintaining stability within the financial sector for the benefit and protection of consumers.

The Malta Digital Innovation Authority Act

The Government of Malta aims to accelerate the development of Malta as a centre of excellence for innovation-related activities by enforcing the Malta Digital Innovation Authority Act (MDIA Act) of 15 July 2018. It refers to the establishment of the Malta Digital Innovation Authority (MDIA), which supports technological innovation in Malta by liaising with relevant national authorities and enforcing the regulations of persons, digitization.

The main objectives and principles of MDIA are:

• Promoting public policies conducive to technological innovation
• Promoting the development and use of innovative technologies
• Protecting Malta’s reputation for innovative technologies
• Harmonization of national regulations with international standards and laws
• Partnering with other regulators on AML/CFT, data protection and fair competition
• Promoting transparency and control in the use of innovative technologies

The Innovative Technology Arrangements and Services Act

By passing the Act on Innovative Technological Mechanisms and Services (ITAS Act) on 1 November 2018, the Government of Malta has increased its focus on standardizing regulation of rapidly evolving new technologies. The ITAS Act is applied by the MDIA.

The ITAS Act contains the following provisions:

• Principles for Registration of Innovative Technology Service Providers
• Guidelines for the conduct of innovative technology service providers (integrity, transparency and knowledge)
• Appointment and functions of Resident Agent in case the applicants are not residents of Malta

The ITAS Law defines innovative technological solutions as software and architecture, which are used in the design and delivery of DLT, which is usually, but not necessarily:

• Use of distributed, decentralized, general and/or replicated ledger
• May be public, private or mixed
• Permitted, not allowed or hybrid
• Provides a high level of protection against retrospective interference, so that the transaction history can not be replaced
• Encrypted
• Is being tested

The ITAS Act defines innovative technological services as follows:

• Review or audit services referred to in this Law, with reference to innovative technological mechanisms provided by system auditors
• Technical administrative services referred to in this Law, with reference to innovative technological mechanisms provided by technical administrators

THE PREVENTION OF MONEY LAUNDERING ACT

The AML/CFT principles are enshrined in the Law on the Prevention of Money Laundering of 23 September 1994 and the Regulations on the Prevention of Money Laundering and the Financing of Terrorism of 1 January 2018 and applied by the Financial Information Analysis Unit (FIU) which functions as a regulator of relevant innovative technological services. In addition, the FIAU has implementation procedures that are also legally binding.

In order to monitor compliance with the relevant AML/CFT legislation, GAFI is authorized to collect, process, analyse and disseminate data submitted by regulated enterprises.

Advantages

THE VIRTUAL FINANCIAL ASSETS ACT

The basis of the Maltese cryptocurrency regulatory framework is the Virtual Financial Assets Act (VFA) on November 1, 2018, which covers the classification of assets distributed Ledger Technology (DLT), virtual financial assets (VFS), and sets the rules for companies, providing DLT products or services, including cryptocurrency licensing.

According to the VFA Act, DLT assets refer to virtual tokens, VF, electronic money, and financial instruments that are inherently dependent on or use the DLT.

VFA is defined as any form of digital record of the environment that is used as a digital medium of the unit of account or storage of value and it is not a virtual token, electronic money or financial instrument.

The regulatory framework of DFA distinguishes three types of permits – registration of WFA agents, registration of documents and statements of WFA service providers.

WFA Agents

When an issuer of VFA intends either to register white paper or to apply for a license of a VFA service provider, it must appoint a VFA agent who will advise the company on its obligations, ensure compliance with all applicable requirements, provided for in the DFA Act and to receive and keep all documentation. The list of registered AFA agents is available in the Financial Services Register of the MFA.

The AFA agent is authorized to carry out professional activities: a) an attorney, accountant or auditor, b) a firm of lawyers, accountants or auditors or corporate service providers; c) a legal organization wholly owned and controlled by persons, referred to in paragraphs (a) or (b), whether in Malta or in another recognized jurisdiction. There may also be any other category of persons with permits, qualifications and/or experience who, in the opinion of the Ministry of Foreign Affairs, are competent to perform the prescribed functions.

White paper

Any person intending to issue DFA to the public in Malta or from Malta is required to prepare a white book that complies with the requirements of the DFA Act and to register it with IFAS. Official white paper is valid for 6 months.

Each White Paper must be written in English, dated, indicate the required information and include a statement from the Administrative Board confirming that the white paper complies with the requirements of the DFA Act.

The designated DFA agent shall complete the registration form and confirm to the Ministry of Foreign Affairs that the white paper complies with the DFA Act, and shall indicate any assumptions he has made and any reservations he may have on any question concerning white paper, for consideration by the Ministry of Foreign Affairs.

The registration form is divided into two stages to be completed by the AFA agent. After the submission of the first phase, the MFA conducts a preliminary review of the submitted documentation. Once the review is completed, the applicant is allowed to proceed to the second stage of the registration process.

The first phase consists of the following parts:

• Agent VFA and applicant data (applicant may still be in the process of formation at the time of submission of the application)
• VFA Details and White Paper Details
• Fees and declaration

The second phase consists of the following parts:

• Organizational structure
• Owners-beneficiaries and qualified station wagon owners
• Internal control
• Functionaries

All parts should be supported by supporting documents. If this is not sufficient, the MFA may decide to request the applicant to provide any additional information and/or documentation through its AFA agent.

VFA Service Providers

The VFA service providers are Maltese-based enterprises providing VFA-related services as defined in the VFA Act. They are bound by the following principles:

• Do business honestly and faithfully
• Communicate with their investors in a fair and undisciplined manner
• To conduct business with due skill, care and diligence
• Be able to identify and manage conflicts of interest that may arise;
• Effective mechanisms in place to protect investor funds
• All its security access systems and protocols are aligned with relevant international standards
• Consider as a voluntary cooperating entity with the Ministry of Foreign Affairs and other relevant bodies

VFA SERVICE PROVIDER LICENCE

Businesses intending to supply VFA services are required to apply for a license through a registered VFA agent by submitting an online VFA service provider application form.

Types of cryptocurrency licences:

• Class 1 (required authorised capital – 50,000 EUR or 25,000 EUR with PII) – financial advisors, entitled to receive and transfer VFA-related orders and offer investment advice
• Class 2 (required authorised capital – 125,000 EUR) – provision of crypto wallets, peer to peer exchange, management of investment portfolios
• Class 3 (required authorised capital – 730,000 EUR) – over-the-counter traders and transactions, market makers, except for VFA exchange
• Class 4 (required authorised capital – 730,000 EUR) – the most extensive license permitting VFA operations related to the control of the customer money as well as cryptocurrency exchange of any type

Registration fees:

• Class 1 – 3,000 EUR
• Class 2 – 5,000 EUR
• Class 3 – 7,000 EUR
• Class 4 – 12,000 EUR

Annual supervision fees:

• Class 1 – from 2,750 EUR
• Class 2 – from 4,500 EUR
• Class 3 – from 6,000 EUR
• Class 4 – from 25,000 EUR

Requirements for the Applicants

First, the applicant must either register the company or be from a recognized jurisdiction and open an office in Malta for the sole purpose of acting as a licensee whose actual activities are compatible with the description of authorized WFA services.

The operational structure of the company should provide internal compliance control procedures (AML/CFT, customer asset protection, cyber security, data protection, etc.).

In order to determine whether the nature of the applicant’s activities falls within the scope of the AFW Act, all applicants must pass a financial instrument test through a selected AFA agent. The test consists of three categories – virtual tokens, financial instruments, and electronic money. If the applicant’s business is not related to any of these three categories, it by default falls into the category of UFA.

Candidates are required to pass an eligibility and eligibility test and meet the criteria of integrity, competence and ability to pay. In addition, these basic requirements must be constantly fulfilled after the opening of the enterprise. The evaluation should be carried out by:

• Person having in the applicant
• Beneficial owner
• Administrative board member
• Senior manager
• MLRO
• Compliance officer
• Risk manager
• Any other person who will manage the applicant’s VFA business

Application process

Enterprises wishing either to register their white paper or to apply as a DFA service provider must apply through a registered DFA agent. The list of registered AFA agents is available in the Financial Services Register of the MFA. Depending on whether IFAD requires additional documentation, the application process may take three to six months.

Steps to be taken before submitting the application form:

• Obtain the address in Malta required to send notices or documents to the applicant in accordance with the law
• Beneficial owners, eligible owners, administrators and senior managers of the applicant must submit a personal questionnaire

The application process consists of three stages:

• Preparatory stage
• The applicant must send written notice to the Ministry of Foreign Affairs through the AFA agent of his intention to apply for the AFA license
• After receiving the notification, the Ministry of Foreign Affairs organizes a preliminary meeting with the applicant, who then has 60 days to submit the application
• Pre-licensing stage
• If the Ministry of Foreign Affairs is satisfied with the information included in the application and the completion of the evaluation of fitness and fitness, it issues a principal permit, which is valid for three months
• The applicant has three months to resolve any issues raised and to meet the preconditions for licensing set out in the approval principle
• After fulfilling all requirements, IFAS issues a license to the AFW service provider
• Post-licence and pre-business phase
• New licensees may be required to meet post-licence requirements before commencing business within 12 months of the date of issuance of the AFW service provider licence

The application shall be accompanied by the following documents:

• Unified structure (information on direct and indirect owners of the association as well as beneficial owners)
• Business plan summary (general business details, justification for applying for a specific DFA licence, and management information)
• Memorandum or Statute and Council Regulation
• Declaration form (relating to a statement of reliability of the information provided and a notice of confidentiality)
• Corporate Shareholder Questionnaire (includes Authorized Person, Regulatory History, Corporate Structure, etc.)
• Eligibility assessment (details of proposed individual, competency issues, potential conflicts of interest)
• Evaluation of outsourcing (details on outsourcing, mechanisms and responsible persons)

Crypto regulation in Malta overview

HOW TO OPEN A CRYPTOCURRENCY COMPANY IN MALTA

One of the most common legal structures of cryptocurrency companies in Malta is a Private Limited Liability Company (Ltd) which can be registered within 9 weeks.

A new company can be registered with the Malta Business Registry (MBR) either by the shareholders or by their authorised representatives such as lawyers or accountants.

Requirements for a Private Limited Liability Company:

• 1-50 shareholders (no local shareholders required)
• Minimum authorised capital applicable to a relevant VFA class must be possed
• A locally registered office address, however an operational office isn’t legally required
• At least one director
• A company secretary who doesn’t have to be a resident in Malta
• A compliance officer, an AML/CFT officer and a risk manager (no nationality requirements)

Required documents:

• A Memorandum and Articles of Association
• Form BO1 containing details about the identification of the company’s beneficial owners
• Proof of locally registered office address
• Evidence of transferred share capital (e.g. a bank deposit slip)
• Notarised photocopies of shareholders’ passports

Key steps of opening a cryptocurrency company in Malta:

• Verifying and reserving a unique company name which must end with an Ltd
• Opening a bank account
• Transferring authorised share capital
• Settling registration fees
• Submitting registration documents with the MBR
• Obtaining a certificate of registration from the MBR which enables the start of the company’s activities
• Applying for a VFA service provider licence
• Registering for taxes with the Commissioner for Revenue (CFR)

REPORTING REQUIREMENTS

All Maltese private limited companies are required to prepare annual audited financial statements, which are also required for the purpose of preparing annual tax returns. The audit is conducted by independent auditors registered with the local Board of Accountants and compliant with the International Auditing Standards (ISAs).

An annual report should be prepared for each anniversary of the company’s registration. The return form must be submitted to the IDB within 42 days of the date of its completion. The refund form must be accompanied by a payment of 100-1400 EUR (depending on the authorised capital).

In addition, a copy of the annual reports as well as a copy of the audit report and the report of the directors should be provided. Annual accounts must be approved within 10 months of the end of the financial year, followed by a grace period of 42 days.

Exemptions from auditing apply to new enterprises that meet the following criteria:

• Maximum annual turnover of the company does not exceed EUR 80,000 or a proportional amount if the relevant accounting period does not exceed 12 months
• All shareholders of a company meet the criteria of qualification of the shareholders; the shareholder is considered to meet the qualification requirements if he/she has completed his/her formation at least 3 ICF or equivalent level, recognized Malta Qualifications Recognition Information Centre, which completed such studies no earlier than 3 years from the date of incorporation of the company

TAXATION FRAMEWORK

Malta has more than 70 international double taxation agreements, making it an attractive jurisdiction. In addition, VFA companies can obtain clarity from crypto-specific tax guidelines issued by the CFR office. They determine the application of income tax, stamp duty and VAT rates to transactions or arrangements related to DLT assets.

The VFA Tax Principles clarify that the processing of VAT, stamp duty and income tax on any DLT-asset will depend on the purpose of use of the asset, not on the category of asset. For example, transactions subject to VAT should be analysed on the basis of the nature of the activity, the status of the parties involved and the specific circumstances of the particular case.

For tax purposes, DLT assets are divided into the following categories:

• Coins – cryptocurrencies, functionally constituting the cryptomized equivalent of fiat money (created for use as a means of payment or exchange, or function as a means of preserving value)
• Financial tokens – equivalent to shares, bonds, units in collective investment schemes or derivatives
• Utilitarian tokens – utility, value or use is limited solely to the acquisition of goods or services either exclusively within the DLT platform on or to which they are issued or within the limited network of DLT platforms

Standard tax rates in Malta:

• Corporate Income Tax – 35%
• Value Added Tax – 18%
• Stamp Duty – 2-5%

Examples of tax benefits:

• According to the VFA Tax Guidelines, funds raised from the issuance of financial tokens at the time of the initial offer are not subject to corporate income tax
• The tax regime for transactions involving coins, such as Bitcoin, is identical to the tax regime of transactions with fiat money, so the profits from isolated transfers of cryptocurrency are not taxed
• VFA service providers in Malta can apply for the Highly Qualified Professionals Policy (HQP), allowing them to take advantage of a flat tax rate of 15% up to a maximum return of EUR 5 million. Any excess of the specified amount is exempt from tax

Our highly experienced and reliable lawyers will be delighted to provide you with tailored support in establishing a cryptocurrency company in Malta and in obtaining a VFA service provider licence. We closely monitor local regulations and are therefore well equipped to guide our clients through every stage of the process.

ESTABLISH A CRYPTO COMPANY IN MALTA

In Malta, cryptocurrency companies operate within a well-designed regulatory framework designed to protect customers, investors, market integrity and the country’s reputation. The requirements for a fully licensed Maltese cryptocurrency company are therefore high. If you are well-prepared to meet them, you will surely unlock the numerous benefits of this crypto-friendly jurisdiction.

Notable advantages of the Maltese business environment:

• Favorable tax system (such tax incentives as low efficient corporate income tax (5-7%), international double taxation agreements and relatively low VAT)
• Malta is an EU member that opens doors to the entire EU market
• A well-educated, innovation-oriented workforce that can boost your business
• English is one of the official languages in Malta, which facilitates incorporation and operation
• Reliable banking system – Malta ranks 17th in the Global Competitiveness Index 2017-2018 for bank reliability

The main legislation governing companies in Malta is the Companies Act 1995, which is largely based on the United Kingdom Companies Act 1985 and is consistent with relevant EU directives. It regulates matters such as incorporation, management and insolvency.

The public register of Maltese companies is maintained by the Malta Business Register (MBR), which is responsible for the registration of companies and business documents, the issuance of certificates, the collection of fees and fines and the publication of notices.

The Malta Financial Administration (MFSA), the supervisor of Maltese cryptographic companies, is another body with which you must be prepared to deal in order to establish a fully licensed cryptographic company in Malta. Its primary responsibility is to ensure compliance with the anti-money-laundering/counter-financing of terrorism provisions.

You do not need to be a citizen of Malta to get equal rights related to the establishment and management of a crypto business in Malta.

Types of Maltese business entities

Limited liability companies – Private Limited Liability Company (Ltd) and Public Limited Liability Company (Plc) – are generally well suited to most cryptography-related business models. These types of enterprises may allow shareholders to profit from the company’s activities without taking personal responsibility for the company’s debts or other liabilities.

General requirements for the name of the company:

• Should not be similar to the name of another company, which would lead to confusion
• Authorities reject any name deemed offensive or undesirable
• The authority will also reject a name that has been reserved for registration of another company not more than three months before the date of the second request

The following documents are required for the establishment of a company in Malta:

• Memorandum of association
• Articles of association
• Certified photocopies of shareholders’ passports
• Form BO1 containing detailed information on the identification of owners-beneficiaries of the company
• Confirmation of local registered office address
• Certificate of transfer of share capital (for example, bank statement)

The memorandum of association of any limited liability company should include:

• Claiming it’s a private company
• Company name
• Names and addresses of each subscriber
• Registered office address in Malta and company e-mail address
• Company facilities
• Size of the authorized share capital with which the company applies for registration
• The number and valuation of shares, as well as the number of shares owned by each subscriber and the amount of money paid for each share (if the share capital is divided into classified shares, the rights associated with each share should be specified)
• Number of directors, names and addresses
• How the company will be represented, including those responsible for representation
• Names and addresses of the first company secretaries
• Where applicable – period during which a company is established

The following documents shall be attached to the Memorandum of Association of a joint-stock company (Plc):

• Total or estimate of all start-up costs to be paid by the company before it is authorized to commence operations, including those related to operations required to obtain authorization
• Description of any benefit given to any person who has participated in the formation of the company or in the transactions necessary to obtain authorization before the company is allowed to start its business

The requirements for the authorized capital depend on the type of crypto-activity planned. Currently, they are divided into the following classes:

• Class 1 (financial consultants who have the right to receive and transfer VFA-related orders and offer investment advice) – 50000 EUR or 25000 EUR with PII
• Class 2 (provision of crypto-wallets, peer-to-peer exchange, management of investment portfolios) – 125,000 EUR
• Class 3 (traders and traders without prescription, market makers, except VFA exchange) – 730000 EUR
• Class 4 (customer money control as well as any type of cryptocurrency exchange) – 730,000 EUR

Private Limited Liability Company (Ltd)

One of the most common legal structures of cryptocurrency companies in Malta is the Private Limited Liability Company (Ltd), which is usually selected to run small and medium-sized businesses.

The main requirements for a private limited liability company (LLC):

• Its name should end with the words Private Limited Company or the word Limited or its acronym Ltd
• 1-50 shareholders (no local shareholders required)
• The minimum authorized capital applicable to the appropriate class of VFA shall be
• Address of local registered office, however, an active office is not legally required
• At least one director
• Secretary of a company that does not have to be resident in Malta
• Compliance Officer, AML/CFT Officer and Risk Management Officer (no nationality requirement)

A private limited liability company (LLC) may be exempted from auditing if it meets the following criteria:

• The maximum annual turnover of the company does not exceed 80,000 EUR or a proportional amount if the reporting period does not exceed 12 months
• All shareholders of a company meet the criteria for shareholder qualification; a shareholder shall be deemed to meet the criteria if he/she has completed his/her formation at least at the IWC level 3 or equivalent, recognized by the Maltese Information Centre for Recognition of Qualifications, not earlier than three years from the date of incorporation of the company

In order to benefit from this exemption, the company must apply to the IDB within six months of the end of the reference period for which the exemption is to apply.

Open Limited Liability Company (PLC)

If you plan to start a cryptographic business on a larger scale, consider incorporating the Public Limited Liability Company (PLC), which can issue shares to raise capital and whose shares can be sold on the stock exchange.

The main requirements for the Public Limited Liability Company (Plc):

• The name should end with the words Public Limited Company or their abbreviation Plc
• At least two shareholders (no limit on the number of shareholders)
• At least two directors, who will form a board of directors responsible for smooth external and internal activities, who must sign a memorandum of association and a charter to express their agreement to serve as directors
• Secretary
• At least 25% of equity must be transferred before registration
• An auditor residing in Malta and registered with the Malta Board of Accountants should be appointed by company directors regardless of the size of the company

A joint-stock company (Plc) is obliged to prepare a balance sheet, profit and loss statement, reports of directors and auditors, which would reflect a clear understanding of the financial position of the company, profits and losses, as well as assets and liabilities. The audited accounts must be submitted to the members of the General Assembly for approval within seven months of the end of the relevant reporting period and submitted to the IDB.

Any legal entity – Private Limited Liability Company (Ltd) and Public Limited Liability Company (Plc) – can be established as either a trading or holding company. While the former is a natural choice for those who plan to buy and sell products or services and bear all the associated risks and liabilities, the latter simply owns assets (i.e. shares and intellectual property) and is selected for such purposes, as the distribution of income among shareholders at an effective tax rate, the division of assets and the minimization of double taxation.

What you need to do

You can register a new company within three months, provided that all necessary documentation is carefully prepared and properly submitted. If you do not want to go to Malta, signing a power of attorney is an effective solution.

To create a cryptocurrency company in Malta, take the following steps:

• Check and reserve a unique company name
• Find office space in Malta (it can also be a virtual office) and get a legal address where the Maltese authorities will deliver notices or documents in accordance with the law
• Open a local bank account
• Transfer of the share capital required for the selected class of cryptographic operations
• Pay company registration fee
• Submit an application for registration of the company together with the necessary documents to the IDB
• Obtain a certificate of registration with the IDB
• Company registration with the Revenue Commissioner (CFR) for tax purposes
• Apply for VFA Provider License

Your company can only start operations in Malta or from Malta if it is fully licensed by MFSA. To initiate the application process, send a written notice of your intentions to MFSA through the selected VFA agent, who will be responsible for the entire application process, including the submission of the online VFA Service Provider application form.

Taxation of crypto companies in Malta

Tax administration is carried out by the CFR, which has issued guidelines for the application of income tax, stamp duty and VAT to asset-related activities based on distributed accounting technology (DLT). The fundamental rule is that VAT, stamp duty and income tax on any DLT asset depend on the purpose for which the asset is being used rather than on the category of asset.

Maltese crypto companies are generally subject to the following taxes:

• Corporate Income Tax (CIT) – 35% (regulated by the Income Tax Management Act)
• Value Added Tax (VAT) – 18% (regulated by the Value Added Tax Act)
• Stamp Duty (SD ) – 2%-5% (regulated by the Duty On Documents And Transfers Act)
• Social Security Contributions (SSC) – rates vary depending on an employee’s age, salary and other conditions (regulated by the Social Security Act)

The tax value of transactions with DLT assets is determined by reference to the market value of DLT assets. Payments made or received in cryptocurrency are treated as payments in any other currency for corporate income tax purposes. To ensure the correct application of corporate income tax, it is necessary to keep proper records of transactions related to DLT assets. Values expressed in cryptocurrency must be converted into accounts in fiat currency, in which the taxpayer submits financial statements.

Many DLT-related activities are exempt from VAT, for example:

• If a crypto-asset serves as a payment instrument accepted by certain operators, it is treated as fiat money, meaning the exchange of cryptocurrencies for other cryptocurrencies or fiat money is exempt from VAT
• Cryptographic mining itself does not fall within the scope of VAT if there is no recipient, but if crypto-mining service providers are paid for such actions as transaction verification, the standard VAT rate applies
• If financial tokens are issued solely for the purpose of raising capital, they are exempt from VAT, as the activity does not consider the provision of products or services

If you are determined to start a successful cryptocurrency business in Malta, our trusted and dynamic team of the Regulated United Europe (RUE) will be happy to support you at every stage. We provide comprehensive legal advice on company creation, crypto-licensing and taxation. In addition, we will be happy to intervene if you need accounting services. Contact our specialized experts today for individual consultation.

We also offer a virtual office service that eliminates the need for expensive office rents, equipment and personnel. This is a profitable solution for a small business that wants to create a professional image, having access to such physical office functions as business address, conference rooms and reception, while reducing costs and preserving the benefits of telecommuting. Learn about our virtual office here.

Also, lawyers from Regulated United Europe provide legal support for crypto projects and help with adaptation to MICA regulations.