The Family Business Act

Helping Family Businesses Survive and Strive

Historically family businesses have been the drive and backbone behind any country’s financial system and have proven to be some of the most robust dynamic sectors of the economy. They are the backbone to the economy generating millions of turnover and their existence provides stability to the economy in a way that no other enterprise can. Unfortunately at the same time they are exposed to their vulnerabilities and it has been these same vulnerabilities that have served as the common factor into the decline or death of family businesses. One of the key factors is that after years in operation and practise, when it comes to facilitating the transfer, many businesses were faced with either a legislative vacuum or else legislation that would render it not feasible to continue with the transfer. The scope of this legislation is to tackle these difficulties and find sound, practical and responsible ways in paving a way ahead.

Family businesses are of various sizes, which expose them to different difficulties and problems. While most family businesses are SMEs, family businesses can be small, medium-sized or large, listed or unlisted. Family businesses have been widely equated to SMEs, neglecting the fact that there are also very large multinational corporations in certain member states that are also family businesses. In some EU Member States a few family businesses account for a large share of the total turnover of all businesses and thus make a significant contribution to job retention, including in times of crisis, to creation and growth and to the economic success of the country concerned.

Direct taxation and succession law are Member State competences, and some Member States have adopted limited measures to support family businesses and address their concerns owing to the fact that family businesses are perceived as exhibiting high integrity and values that guide their business operations, and henceforth introduce high standards of corporate social responsibility towards their employees and the environment, which also creates a favourable environment for work-life balance.

Crucially to date there was no legally binding, concrete, simple and harmonised European-wide definition of family businesses and equally a lack of policy decision-making which means that the needs of family businesses are not being met adequately by any Member State. Additionally the imbalance of roles in family businesses is an Achilles heel to their sustainability. In the EU women earn, on average, 16% less per hour than men and there is a dearth of women in high-level and leadership positions. The labour practices and wage systems applied to men are not the same as those applied to women, making it more difficult for the latter to be financially independent, participate fully in the job market and achieve a work-life balance. In family businesses women often play an invisible role, or act as figureheads, and do not have their job or salary status appropriately recognised, which has serious repercussions in terms of social security contributions, pensions and welfare entitlements and also in terms of recognition of their skills.

Maltese Family Businesses

In Malta, family businesses have been the economic pillar and backbone of our society and have withstood economic downturns robustly. Addressing their needs was primarily the foundation for such policy initiatives and the scope of establishing legislation to give due form to this sector. At present, many family businesses in Malta do not succeed to transfer their family business beyond their second generation and this is for the most part due to liquidity difficulties and lack of developed governance during the lifetime of the family business. A lack of succession planning, clear demarcation of roles and competencies and financial planning all add to the limited ability for these family businesses to successfully transfer to the next generation.

Primary research conducted through a nationwide statistical survey commissioned specifically for the purposes of this proposals shows that nearly half (49.5%) of family run businesses employed two family members; another 34.5% employed three or four family members while the remaining 16.0% employed more than five. In addition, 41.9% of such enterprises had at least one family member who helped out seasonally or periodically.

The majority (69.4%) of family run businesses started to operate by the current family members, while another 16.9% were inherited. A further 7.3% bought the business from other family members.

From a total of 1,557 enterprises who participated in the nationwide survey, in the absence of a formal definition, 769 family run businesses were identified. Once a formal definition is now established it is estimated that around 4,000 are identifiable. From this category 287 enterprises or 37.3% had a future plan to continue the business. Of these, 82.9% would opt to pass it on to the next generation while 8.0% would choose to sell it to other persons (non-family members). These enterprises indicated that taxation issues and financial problems were the major challenges and risks to transfer the business to someone else followed by challenges regarding family conflict, retirement uncertainty and inheritance.

The vast majority (97.5%) of family run businesses indicated that family members took major decisions within the company, with the highest percentage being recorded for enterprises employing 50 persons or more. Just over 35% of family run businesses had a future plan from the current family members involved for the continuity of the company. For family run businesses employing 50 persons or more, this percentage was equal to 45.2%.

The Family Business Act

The back drop against which this legislation was developed is with the knowledge that in Malta, around 98% of all businesses are micro, small and medium sized enterprises with the vast majority of them being family run businesses. More significantly 95% of these SMES are classified as micro enterprises having less than 10 employees. These SMEs provide about 80% of all jobs in the business economy and create 71% of the overall value added: for both variables, this is about 14 percentage points more than the EU average.

To date there was no legislation on a European or International level that specifically seek to assist and encourage the regulation of family businesses, their governance and the transfer of the family business from one generation to the next. Henceforth the scope of the legislation is to encourage and assist family businesses to enhance their internal organisation and structure with the aim of effectively operating the business and working towards an effective succession of the family business.

Main Provisions of the Family Business Act

This legislation is intended to provide a legal as well as an administrative environment conducive to the development of this sector. It seeks to do this by establishing the parameters which would entitle a business to be considered as a family business, by proposing the establishment of a regulatory framework including the role of a regulator whose function would include ensuring the continued development of the sector by nurturing, encouraging and assisting family businesses. The intention of the legislation is to encourage family members within the same family to transfer their family business during the life time of the family members (inter vivos) as opposed to waiting for a family member, and most often and crucially – the founder, to pass away and affect a transfer causa mortis. In transferring a family business inter vivos the benefits and likely success of the continuity of the family business far outweigh a transfer causa mortis especially as most transfers’ causa mortis arise as a result of an unexpected and unforeseen passing away of a family member. A transfer inter vivos will not only be more transparent, smooth and successful, but the same family business will maintain the confidence of its employees, business partners, investors, customers, shareholders and all financial and credit relationships related to the family business. Furthermore the legislation crucially identifies benefits and assistance which the family businesses require to facilitate a successful transfer.

Fiscal Incentives

  1. For the exclusive period of April 2017 – April 2018, parents transferring their family business to their children during this one year period will benefit from a reduced stamp duty of 5% to 1.5%.
  2. Duty on immoveable property shall be chargeable on the first €500,000 of the value of the property transferred at the advantageous rate of three euro and fifty cents per one hundred euro or part thereof;
  3. Duty on shares, interests in a partnership, trust or foundation; no account shall be taken of the first €150,000 or such other greater amount as may be prescribed of the value of the shares, or interests in a partnership, trust or foundation transferred, in assessing the duty chargeable.

Governance Incentives

  1. Loan guarantees of up to €500,000 per business for the purpose of acquiring the business or parts thereof;
  2. Micro Investment of a maximum tax credit of €50,000 over a three year period;
  3. Legal, notarial and accountancy advisory services up to €2,500 over a five year period for the purposes of assistance in the succession or business transfer of a family business;
  4. Education and training for owners and their employees of up to €1,000 annually per family business;
  5. Arbitration of up to five sittings with a value of €2,500 with the objective to establish the fair value of the business;
  6. Lease renewal – The positive consideration of lease renewals occupying government premises; When a registered family business is occupying industrial government premises or land on lease or emphyteusis respectively as prescribed under Chapter 325 the Business Promotion Act and subject to the business satisfying all the conditions of the tenancy agreement, the Regulator shall recommend to the Malta Enterprise Corporation and, or Malta Industrial Parks to renew the tenancy, which renewal shall not be unreasonably withheld when the objectives of the renewal are to ensure the continuity of the family business between family members.
  7. Investment Aid – The Incentive Guidelines for Investment Aid 2014 – 2020 launched by Malta Enterprise in 2014 specify that in the case of acquisition of the assets of an establishment only the costs of buying the assets from third parties unrelated to the buyer shall be taken into consideration. The transaction shall take place under market conditions. If aid has already been granted for the acquisition of assets prior to their purchase, the costs of those assets shall be deducted from the eligible costs related to the acquisition of an establishment. The Incentive Guidelines shall allow that where a member of the family of the original owner, or an employee, takes over an enterprise, the condition that the assets be bought from third parties unrelated to the buyer shall be waived. The acquisition of shares does not constitute initial investment. Following the launch of the Family Business Act, the eligibility for the latter provision will be linked to actual registration of the family business under the Act.

Conclusion

With this innovative legislation and new support system being established by the Family Business Office we hope and intend to bring recognition and support to this vital economic sector. Furthermore the Family Business Office will serve as a support to family businesses in the regulation of their business, their governance and enhancement of their internal organisation and structure with the aim of helping them to effectively operate their business and work towards a successful succession of the family business.

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