Ownership is the backbone of any family business. While leadership succession often takes centre stage, the way shares are transferred to family members, employees, or external buyers can ultimately determine whether a business remains stable or falls into conflict. In Malta, succession planning is not only a question of strategy but also one of legal certainty and tax efficiency.
Below we explore the main types of agreements used to transfer ownership, their role in succession planning, and the Maltese legal and tax considerations that accompany them.
1. Shareholders’ Agreements
A shareholders’ agreement is one of the most widely used tools in succession planning. It regulates how shares can be transferred and what happens in the event of death, retirement, or exit. Common provisions include:
Pre-emption rights: requiring shares to be offered first to existing shareholders before being sold externally.
Tag-along and drag-along rights: balancing the rights of minority and majority shareholders in a sale.
Succession clauses: providing automatic buy-out rights or transfer mechanisms when a shareholder dies or retires.
Valuation mechanisms: setting clear formulas for determining the fair value of shares.
Maltese Legal and Tax Perspective
Legal Requirements:
The Companies Act requires that all share transfers be documented with an instrument of transfer and registered with the company
The memorandum and articles of association must be reviewed to ensure compatibility with the proposed transfer restrictions
Stamp Duty:
Share transfers are subject to stamp duty under the Duty on Documents and Transfers Act
Donations of shares to family members may qualify for a reduced duty rate, subject to conditions such as holding periods
Capital Gains Tax:
Capital gains arising from the transfer of shares are generally taxable on the difference between consideration and cost
Where the participation exemption conditions are satisfied, capital gains derived from the disposal of a qualifying participation are exempt from capital gains tax, provided the relevant criteria are met
2. Buy-Sell Agreements
A buy-sell agreement ensures that when certain events occur — such as death, disability, or voluntary exit — there is a clear, binding mechanism to transfer shares. Key features are:
Triggering events: defining when a buy-out is required.
Valuation method: agreed upfront to avoid disputes.
Funding mechanism: often supported by life insurance or sinking funds.
Maltese Considerations
Legal and Procedural:
Transactions must comply with Companies Act formalities and solvency rules, especially if a company is buying back its own shares
The company must have distributable reserves to fund a share buyback
Directors must make a solvency declaration when redeeming shares
Stamp Duty:
The share transfer triggers stamp duty, unless exemptions apply
Reduced rates may be available for family transfers if conditions are met
Reliefs may be forfeited if holding period requirements are not satisfied
Capital Gains Tax:
Where the transfer qualifies for the participation exemption, gains are exempt
Otherwise, gains are taxable
The valuation method in the agreement directly impacts the taxable gain calculation
For share redemptions, the company may need to consider the tax treatment from both the shareholder's and the company's perspective
Insurance proceeds used to fund buyouts are generally not subject to income tax in the hands of the beneficiary company
3. Employee Share Participation Agreements
For businesses seeking to reward or retain key employees, share participation schemes can play an important role in succession. These may take the form of:
Option agreements: granting employees the right to purchase shares at a future date.
Direct transfers: transferring or issuing shares, often with vesting conditions.
Phantom share schemes providing cash-settled benefits tied to share value without actual share ownership (less commonly used in Malta but available as an alternative)
Maltese Considerations
Employment Tax:
Under the Fringe Benefit Rules, exercised share options are taxed on the difference between the market value and the price paid for those shares by the employee
The benefit is treated as employment income and taxed accordingly
Timing of the taxable event depends on whether the options are transferable and subject to restrictions
Stamp Duty:
Share transfers also trigger stamp duty unless exempt
New share issues to employees attract duty based on the consideration paid
Capital Gains Tax:
When employees subsequently sell their shares, capital gains tax applies on any profit
The participation exemption is unlikely to apply to employee shareholders unless they hold qualifying stakes
Employees are typically taxed at individual rates on gains from shares that do not qualify for exemption
Proper documentation of the acquisition cost (including any amount already taxed as employment income) is essential to calculate the gain correctly
Structural Considerations:
Terms must align with the company's memorandum and articles of association
Restrictions on transfer must be clearly documented
4. Management Buyouts (MBOs)
When the next generation is unwilling or unable to continue, a management buy-out offers continuity by transferring ownership to senior managers. These agreements typically cover:
The sale of family shares to management
Financing arrangements (bank loans, vendor financing, private equity)
Transitional roles for outgoing family members
Earnout provisions and deferred consideration
Maltese Considerations
Legal Framework:
Employment protections may apply under the Transfer of Business Regulations if the transfer involves a change in employer, though not in simple share sales
Financial assistance rules under the Companies Act must be observed if the target company is involved in financing the acquisition of its own shares
Stamp Duty:
Share transfers are subject to stamp duty
The rate depends on whether the transfer qualifies for any exemptions or reduced rates
Capital Gains Tax:
Selling shareholders are subject to capital gains tax on the gain, unless the participation exemption applies
For family businesses, careful planning can structure the transaction to maximise available exemptions
Vendor financing arrangements should consider the tax treatment of interest payments and capital repayments
The acquiring management team must consider the tax implications of their funding structure, particularly if using personal funds versus corporate vehicles
Rollover relief may be available in specific circumstances where the disposal proceeds are reinvested
5. Family Settlement Agreements
In families with multiple heirs, settlement agreements help avoid disputes by balancing business ownership with alternative assets or compensation. These agreements can also establish:
Governance rules for family shareholders
Dispute-resolution mechanisms
Voting arrangements and board representation
Distribution policies for dividends
Maltese Considerations
Succession Law:
All share transfers must respect the reserved portion rules of succession law, ensuring heirs receive their statutory share
Children and spouses retain statutory entitlements that cannot be overridden by a will or shareholders’ agreements
Proper planning during the testator's lifetime can help manage these constraints
Stamp Duty:
Stamp duty applies to share transfers unless reduced rates apply
Property transfers within such settlements generally attract duty, unless specific exemptions are available
Donations made in contemplation of succession may qualify for preferential rates if properly structured
Capital Gains Tax:
Transfers between family members are not automatically exempt from capital gains tax
Each transfer is assessed on its own merits
Where shares qualify as a participating holding, the exemption can provide significant tax efficiency
Transfers by way of gift or for below market value may trigger market value substitution rules
Equalisation payments to non-business heirs are generally not deductible for tax purposes
6. Testamentary Dispositions and Wills
Wills remain a vital part of business succession. They allow testators to allocate shares strategically, often in combination with trusts or buy-sell agreements to ensure business continuity.
Maltese Considerations
Legal Framework:
Wills cannot override the reserved portion: children and spouses retain statutory entitlements under Maltese succession law
The available portion allows testators some flexibility in directing business shares to suitable successors
Wills should be coordinated with shareholders' agreements and the articles of association of the company to avoid conflicts
Stamp Duty:
Transfers by inheritance (causa mortis) remain subject to stamp duty
Rates may differ from inter vivos transfers
Proper estate planning can help manage the overall duty burden
Capital Gains Tax:
Transfers on death do not trigger capital gains tax in the hands of the deceased
However, the inheriting beneficiaries acquire the shares at market value on the date of death for future capital gains tax purposes
This "step-up" in base cost can be advantageous for subsequent transfers
Estate planning should consider the long-term tax implications for beneficiaries who may wish to sell their inherited shares
The Value of Forward Planning
The Maltese legislature has progressively introduced measures that acknowledge the importance of family businesses to the economy, including the Family Business Act and related incentives. Nonetheless, the interplay of civil, succession, and tax law remains intricate.
The earlier families seek advice and establish structures, be it through matrimonial agreements, wills, trusts, or group reorganisations, the more likely they are to achieve both fairness and business continuity.
Given these complexities, families are encouraged to formalise their tax approach in a family charter or similar governance document. Such frameworks help align the family’s vision with fiscal realities, reducing conflict and ensuring compliance with current legislation.
Summary
Succession planning, therefore, cannot be divorced from its legal, tax, and financial context. By taking advantage of the available frameworks, Maltese family businesses can protect their legacy, reduce conflict, and ensure that the business not only survives but thrives across generations.Professional advice from legal, tax, and financial advisers is essential to navigate this complex landscape and implement structures that serve both the family's and the business's long-term interests.
At AIMS International Malta, we work closely with families to assess leadership readiness, address relational conflicts, and bring in the right combination of experts, including legal advisors, financial consultants, and coaches, depending on the situation. Many of our advisors are experienced business owners themselves and understand both the practical and emotional pressures involved. This ensures the process is fair, structured, and aligned with long-term strategic goals.
"You can have the most talented heirs and the clearest vision but ignoring legal or tax rules is like building a house on sand. Solid planning today keeps your family business standing tomorrow." — Louise Vella, Managing Partner @ AIMS International Malta
This article is part of a six-part series on Succession Planning, created to help family businesses plan confidently for leadership transitions. Look out for the next piece in the series.
Sources and Further Reading
Companies Act (Chapter 386 of the Laws of Malta)
Income Tax Act (Chapter 123 of the Laws of Malta)
Duty on Documents and Transfers Act (Chapter 364 of the Laws of Malta)
Income Tax Management Act (Chapter 372 of the Laws of Malta)
Family Business Act (Act XX of 2015)
Transfer of Business (Protection of Employment) Regulations (Subsidiary Legislation 452.85)
Civil Code (Chapter 16 of the Laws of Malta) - Book Second on Succession
Income Tax (Fringe Benefits) Rules (Subsidiary Legislation 123.170)
Participation Exemption provisions under Article 12 of the Income Tax Act
Capital Gains Tax provisions under Article 5(1) and Part VII of the Income Tax Act
Commissioner for Revenue Practice Notes and Guidelines
Malta Enterprise - Family Business Support Schemes
About the Author
Louise is a seasoned professional with over 25 years of experience in the Corporate Services Provider (CSP) industry. She has supported a wide spectrum of clients—including those from the corporate, private, and public sectors, as well as entrepreneurs—across various aspects of company secretarial work, corporate governance, trustee, directorship services and risk management.
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Disclaimer: This article provides general information on succession planning in Malta and should not be construed as legal, tax, or financial advice. Given the complexity of Maltese civil, company, and tax law, families and business owners should seek professional advice tailored to their specific circumstances before implementing any succession arrangements.