Setting up a blockchain technology company

Setting up a blockchain technology company

Malta occupies the largest share of cryptocurrency trading volume in the world. Photo: Shutterstock

Malta occupies the largest share of cryptocurrency trading volume in the world. Photo: Shutterstock

Being the first to enact a framework to regulate blockchain, publish various consultation papers and introduce numerous block­chain initiatives, Malta, the Blockchain Island, is making big steps forward in the realm of blockchain and Distributed Ledger Technologies (DLTs).

As upheld in Chetcuti Cauchi Advocates’ report entitled ‘Blockchain, Crypto and ICOs – A Legal Review of Leading Jurisdictions’, Malta’s comprehensive approach has attracted various investors to its shores. It is, therefore, no surprise that Malta occupies the largest share of cryptocurrency trading volume in the world. In light of this, it is useful to understand why and how to set up a blockchain technology company in Malta.

Efficient corporate tax:  Apart from being able to incorporate a company in Malta in less than 48 hours, efficient tax treatments are a notable advantage of Malta-based companies. Although Malta’s corporate tax rate stands at 35 per cent, a tax refund system returns a part of the tax paid back to shareholders upon dividend distribution. The refund could range from 100 per cent, 5/7ths, 2/3rds, or 6/7ths, mitigating the corporate tax charge considerably.

Tax incentives for Highly Quali­fied Persons: After becoming a member of the European Union, Malta underwent substantial development and growth in the financial, gaming, and aviation services industries which created the need for more highly qualified workers in these fields. With this in mind, the Malta Highly Qualified Persons Rules came into being. Persons holding a particular office in Malta are, therefore, able to bene­fit from the Malta Highly Qualified Persons Rules, offering a tax rate of 15 per cent on their employment income generated in Malta.

Therefore, if a blockchain technology company is set up in Malta, both the shareholders and people holding a particular office will benefit from this tax treatment.

The Malta Innovative Techno­logy Arrangements and Services (ITAS) Act: All blockchain technology companies must comply with the ITAS Act and any supplementary rules. The First Schedule of the Act provides which digital structures constitute an innovative technology arrangement (ITA) as follows:

Software and architecture that is used in designing and delivering DLTs, which ordinarily uses a distributed, decentralised, shared and/or replicated ledger, may be public or private (or a hybrid of the two), is permissioned or permissionless (or a hybrid of the two), is immutable, is protected with cryptography, and is auditable;

Smart contracts and related applications, including decentralised autonomous organisations (and other similar arrangements);

Any other innovative technology arrangement designated by the minister, on the recommendation of the Malta Digital Innovation Authority (MDIA).

These structures may be the subject of an application to the authority for certification, which may be obtained once the ITA has satisfied the general and specific requirements of the ITAS Act. This will be valid for three years.

What are the requirements for the certification of an ITA?

The requirements to be met are adherence to the principles of legality, integrity and transparency, as well as the following specific requirements:

• The ITA, administrator of the ITA, and in the case of a legal organisation, shareholders who hold more than 25 per cent of the shares, must be fit and proper;

• The ITA software must be reviewed by an independent and registered system auditor;

• The ITA’s characteristics must adhere to reasonable standards and comply with the ITAS Act and any subsequent rules which may be issued;

• The MDIA has discretion to require a high-level review/audit on the characteristics of the ITA, particularly in complex cases;

• A registered technical administrator must be in office at all times;

• Apart from the requirements of the ITAS Act and future rules, other mandatory safeguards must be implemented with respect to AML/CFT, consumer rights and other mandatory laws;

• Important user information must be stated in English and must be accessible and in an intelligible format;

The English language prevails over the underlying code of the ITA.

Recognition of Innovative Technology Service Providers (ITSPs): The ITAS Act provides the requirements for the Recognition of Innovative Technology Service Providers (ITSPs):

• An ITSP may be an individual or a legal organisation;

• An ITSP has fiduciary duties with regard to information submitted by customers and is bound by professional secrecy;

• The ITSP must be fit and proper. In the case of a legal organisation, shareholders holding 25 per cent of voting shares, and any administrator must be fit and proper;

• The ITSP must have qualifications and/or experience in the particular class applied for;

• The ITSP must have sufficient technical resources/third party support;

• The name of ITSPs under the category it determines.

The role of Systems Auditor: The Systems Auditor is independent from all persons owning, administering, operating, or otherwise involved in the innovative techno­logy arrangement, confirms that the ITA meets reasonable standards, reviews the software comprising the ITA, and gives assurance in the case of any alterations in the software. The term of registration of the Systems Auditor is two years.

Is physical presence required? Should it be the case that there is no person involved in the administration of the holder who is resident in Malta, a local resident agent must be appointed. This means that, provided that a local resident agent is duly appointed, the holder is not legally required to be physically present in Malta.

Steve Muscat Azzopardi is a senior manager in the Corporate and Fintech Practice Groups at Chetcuti Cauchi Advocates.

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