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Malta Tax

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Malta Tax Advantages

Having amended its tax legislation in anticipation to EU Accession, Malta has enhanced its tax system that is ideally suited both to inbound and outbound EU investors. Notable amendments were the introduction of a Participating Holding and a Participating Exemption regime.

The credit imputation system was retained, however, the statutory impediment placed on International Trading Companies from trading domestically, thereby artificially segregating the EU common market, was removed. The new tax climate offers to the investors:

  • Low taxation;
  • Onshore, EU– status;
  • Possibilities for tax planning in order to lower taxes even further (in some cases to 0%);
  • Extensive double tax treaty network;
  • Exemption from tax on dividends received;
  • Exemption from tax of profit generated from transactions in securities;
  • Exemption from withholding tax on the repatriation of income either of dividends, interest and royalties;
  • Access to EU directives

Malta Tax Incentives

In preparation for Malta’s accession to EU Membership in 1 May 2004, a series of legislative measures were enacted to the main provisions regulating income tax in Malta mainly to the Income Tax Act and to the Income Tax Management Act.

The end result is a simplified, effective and transparent tax system in place that is fully EU, OECD and FATF compliant, blending the benefits of an onshore, fully-regulated jurisdiction with investor-friendly incentives.

All companies resident in Malta are subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system, wherein tax paid by a company in Malta is, on the distribution of a final dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company.

The full imputation tax credit thereby renders Maltese companies highly efficient tax vehicles, with a number of applicable refunds to shareholders possible: (6/7ths refund, 5/7ths refund and 2/3rds refund). Effective Tax leakage in Malta on Net Trading Income can be of only 5% or less, in some case 0%. Contact us to help you setup in the most beneficial way according to your needs.

View Malta Full Imputation Tax System for a more detailed illustration.

The income of a Maltese company is divided into five (5) different tax accounts – as follows:

(i) Final Taxed Account

The Final Tax Account includes distributable profits that have suffered tax, including the following:

  • Profits after tax resulting from income which has been charged to tax under the investment income provisions;
  • Profits that are exempt under Maltese law and where the distribution of such profits by the company to the shareholders is exempt from tax;
  • The amount of chargeable income, the tax chargeable of which has been relieved from payment by any tax credits where the distribution of such profits is exempt from tax in the hands of the shareholders;
  • Dividends paid out of profits allocated to the final tax account of another company;
  • The profits after tax derived from the transfer of immovable property;
  • Any profits after tax which under the provisions of Maltese Law are not subject to tax when such profits are distributed by a company to any person and where upon such a distribution no person is entitled to claim any tax credit in respect of any tax paid on such profits;
  • Profits resulting from income or gains in respect of which the Participation Exemption may and has been applied;
  • Profits resulting from any grant or subsidy where the distribution of such profits is exempt from tax in the hands of the shareholders;and
  • Profits after tax derived from rental income received by the Housing Authority

(ii) Immovable Property Account

The Immovable Property Account includes distributable profits that have suffered tax, including tax derived (directly or indirectly) from immovable property situated in Malta and include:

  • Profits or gains from the transfer of immovable property;
  • Net profits or gains deemed to have been derived from immovable property;
  • Gross amounts which are deemed to have been derived from immovable property;
  • Annual Market Rent

(iii) Foreign Income Account

The Foreign Income Account includes distributable profits that have suffered tax, including profits resulting from royalties and similar income arising outside Malta and includes:

  • Profits resulting from royalties and similar income arising outside Malta and from dividends, capital gains, interest, rents, income or gains derived from a Participating Holding or from the disposal of such holding, and any other income derived from investments situated outside Malta, which are liable to tax in Malta and are receivable by a company registered in Malta;
  • Profits resulting from investments, assets or liabilities situated outside Malta, and licensed as a bank in Malta or in possession of a licence granted under the provisions of the Financial Institutions Act;
  • All profits or gains of a company registered in Malta, which are liable to tax in Malta and attributable to a Permanent Establishment (including a branch) situated outside Malta, and for these purposes “profits or gains” shall be calculated as if the Permanent Establishment is an independent enterprise opertaing in similar conditions and at arm’s length;
  • Profits resulting fom dividends and paid out of the foreign income account of another company registered in Malta;
  • Profits or gains resulting from a company registered in Malta under the Insurance Business Act

(iv) Maltese Taxed Account

The Malta Tax Account includes distributable profits that have suffered tax and have not been allocated to the foreign income account, which have suffered tax or which have been exempt from tax and where the distribution of such profits by the company is also exempt from tax in the hands of the shareholders.

(v) Untaxed Account

Any profits which represent the total distributable profits or the total accumulated losses, deducting therefrom the total sum of the accounts allocated to other taxed accounts.

In summary, Malta is a fully-regulated, onshore Jurisdiction blending the EU acquis communitaire in a flexible, robust and sophisticated legislation, and retaining the following benefits:-

  • Friendly and investor-friendly Tax Authorities, always keen at helping foreign investors;
  • Possibility to obtain Advance Tax Rulings – binding on the Commissioner of Inland Revenue for two years from date of issue, or from change in law. Renewable for further periods of five years;
  • Tax only payable at the earlier of 18 months after year-end, or when a dividend is paid;
  • Tax losses may be carried forward indefinitely;
  • Full imputation tax system allows foreign tax paid to be taken into account for purposes of refund calculation, subject to the maximum refund not exceeding Malta Tax paid. Effectively, it is possible to envisage situations of 0% Maltese tax being suffered by the Maltese company;
  • No capital gains or income tax on the liquidation of participations or the liquidation of the Malta Holding Company itself.
  • No net worth taxes (as mentioned before no capital gains taxes) during the life of the Malta Holding Company;
  • Attractive Permanent Establishment (PE) rules and generous PE provisions available in the DTT Network;
  • No exchange controls;
  • Stamp duty exemptions for non-resident-owned companies in most cases;
  • No thin capitalisation, anti-CFC and similar rules;
  • Flexible transfer pricing considerations;
  • Invoices from offshore companies are acceptable in Malta Companies’ books and payments to offshore companies bear no withholding tax (tax planning point);
  • No specific substance requirements;
  • There is added commercial value and monetary benefits due to the ability to register for EU VAT in Malta;
  • No obligation for the Holding Company (or right) for VAT registration & compliance.
  • Trading in securities in Maltese companies by non-resident shareholders is tax exempt, provided the Maltese Company owns no immovable property in Malta;
  • The foreign beneficial owners of Malta Companies, Branches and Partnerships are not liable to additional tax on dividends or profits over and above the amount paid or payable by the respective legal entities;
  • Low personal tax rates that reach a maximum of 35% for income of person ordinary resident, 15% for returning migrants and individuals qualifying under the Permanent Residence Scheme;
  • No capital gains tax or net worth taxes except with respect to Real Estate situated in Malta;
  • Beneficial use of EU Directives that have been transposed into the Malta Tax Legislation;
  • Wide and exceptionally beneficial Double Tax Treaty Network;
  • Mergers, Takeovers and other Re-Organizations can take place within groups without tax consequence;
  • Unilateral tax relief is granted to all Malta Companies for foreign tax suffered irrespective of the absence of a double tax treaty;
  • Tax losses are carried forward indefinitely and can also be surrendered as group relief;
  • Interest deduction for borrowing costs provided;
  • Low registration fees on the establishment of companies;
  • Very low expense level (fees) for financial and professional service provision compared to other EU Jurisdictions. The difference is more evident in the case of professional service and/or recurring costs (administration, accounting & tax compliance) are estimated to be at 35- 40% of Western European rates. Note: One could very easily be misled by the low quoted start up costs for major European Jurisdictions as to the final total costs which can be considerable if one calculates recurring costs.
EU Directives, Malta’s Double Tax Treaty Network

Beneficial use of EU Directives enacted into Malta Law (effectively “copied” – transposed into Malta Law and their benefits extended to residents of Third Countries):

  1. Parent / Subsidiary Directive (no withholding tax on payment of dividends, no transitional period [immediate effect], no minimum participation [shareholding limits], no minimum holding period, dividend exempt subject to conditions, tax credit for tax withheld abroad);
  2. Interest / Royalties Directive (no withholding tax on interest paid to non-residents, no transitional period [immediate effect];
  3. Merger Directive (involves resident and Non-Resident Companies, leads to elimination of the tax consequence of any reorganisation, merger, division, transfer of assets, and exchange of shares).

Malta has a wide and beneficial Double-Tax Treaty (DTT) Network. There are currently 50 DTTs in force and several others being negotiated. The existence of these treaties, combined with the low overall tax paid by Malta Companies, offer significant possibilities for international tax planning through the island.

A significant number of double tax treaties concluded by Malta, lowers or eliminates foreign withholding taxes on dividends, interest and royalties or capital gains paid out from or arising in the contracting states, some also include particularly beneficial tax sparing credit provisions for dividends, interest and royalties.

In conclusion, the Malta Tax System Enables:

  • The extraction of foreign sourced dividends, at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable);
  • The distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions).
  • Allows for the realisation of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains”, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.
Malta (Group) Finance & Royalty Companies

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Malta (Group) Finance & Royalty Companies are the following:

Important Features of Malta (Group) Finance Companies:

  • Absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest withholding tax;
  • Low overall tax burden;
  • Possibility of deducting interest expenses from taxable income;
  • Absence of thin capitalisation rules or their inapplicability in the case of “back to back” financing;
  • Absence of interest withholding tax in connection with interest paid on loan financing irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions);
  • Reasonable level of “margin” required by tax authorities;
  • Low expense level for professional / financial fees.

Important Features of Malta Royalty Companies:

  • Absence or reduction (under a Double Tax Treaty or the Interest and Royalty Directive) of withholding tax on royalties paid to the Malta Company;
  • Low overall tax burden;
  • Tax deduction of royalty payments;
  • Effective tax depreciation of investments in intellectual property;
  • Absence of withholding tax on royalty payments irrespective of jurisdiction or the absence of a DTT (including to offshore companies) for rights used outside Malta – the usual case;
  • Neutral VAT treatment;
  • Reasonable level of “margin” required by tax authorities;
  • Effective protection of intellectual property rights by Legislation and the participation of Malta in international agreements;
  • Low expense level for professional / financial fees.

Malta Tax Structures

This section is an indicative, but not exhaustive list and summary description of specific tax structures that are presently used extensively by international clients due to the Malta’s exciting tax planning potential and in particular its tax, commercial and legal system.

These structures can legally mitigate one’s tax liabilities. More information can be provided on request (contact us). However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors.

Corporate Taxation

All companies resident in Malta are subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system, wherein tax paid by a company in Malta is, on the distribution of a final dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company. In most cases, the ultimate tax leakage can be as low as 5% or less.

The full imputation tax credit thereby renders Maltese companies highly efficient tax vehicles, with a number of possible applicable refunds to shareholders:

Applicability

Following reforms to Malta’s tax system, which became effective as from 1st January, 2007, the refundable tax credit system has been extended to:

  • dividend payments made by all Maltese companies out of all sources of income (with the exception of profits derived from Maltese immovable property) and to all shareholders irrespective of their tax residence;
  • companies carrying out activites in Malta;
  • Malta tax paid on profits attributable to a Malta branch (click here for more detailed information regarding the setting up of branches as overseas companies):
General Rules Relating to Tax Refunds

Provided the shareholders are registered with the Maltese Commissioner of Inland Revenue, the tax refund is:

  • not itself taxable;
  • paid directly by the Maltese Commissioner of Inland Revenue on production of appropriate support documentation (e.g. dividend warrant);
  • paid regularly and swiftly: not later than fourteen (14) days after the end of the month in which it becomes due in the same currency in which the relevant profits were charged to tax (which is also the share capital and accounting reporting currency).
Refunds

The applicable refunds available on the distribution of dividends to shareholders are as follows-

6/7 Refund

The 6/7 refund is the default refund applicable to companies in respect to active trading income, and is the refund which would typically be applicable with respect to Affiliated Insurance Companies (“Captives”), Remote Gaming Companies and International Trading Companies.

A novel, but greatly important feature is that foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid. Effectively, it is possible to envisage situations where no Maltese tax leakage would be suffered by the Maltese Company, in the manner set forth below:

Maltese Company No Foreign Tax With Foreign Tax
Net Foreign Income 2000 2000
Grossing up with Foreign Tax 0 105
Chargeable Income 2000 2105
Tax at 35% 700 737
Credit- Double Tax Relief 0 105
Malta Tax Payable
(tax at 35% less tax credit)
700 632
Shareholder of Maltese Company
Refund on distribution
(6/7 of Malta Tax Payable)
600 632*
Effective Tax Paid in Malta 100 0
Effective Tax leakage in Malta on Net Income 5% 0%

* 632 (6/7ths of 737)

5/7 Refund

This refund applies to passive interest or royalties that are not derived, directly or indirectly from a trade or business and where any foreign tax suffered thereon is less than 5%.

The refund also applies where Maltese Companies own a Participation Holding in a company but do not qualify for the participating exemption in view of non-satisfaction of anti-abuse requirements.

The Maltese tax leakage suffered by the Maltese Company receiving passive interest or royalties can be illustrated as follows:

Maltese Company No Foreign Tax With Foreign tax
Net Foreign Income 2000 2000
Grossing up with Foreign Tax 0 75*
Chargeable Income 2000 2075
Tax at 35% 700 726
Credit-Double Tax Relief 0 75
Malta Tax Payable
(tax at 35% less tax credit)
700 651
Shareholder of Maltese Company
Refund on distribution
(5/7 of Malta Tax Payable)
500 519**
Effective Tax Paid in Malta 200 132
Effective Tax leakage in Malta on Net Income 10% 6.6%

*Less than 5%
**519 (5/7ths of 726)

2/3 Refund

This refund applies on most foreign passive income on which Malta Double Tax Relief is claimed. Maltese income tax rules do no allow claiming 6/7 or 5/7 refunds on most foreign income (mostly passive) on which double taxation is claimed- in such situations the 2/3 refund applies.

This form of refund would typically be availed of by credit institutions and/or financial institutions carrying on business outside of Malta or by most foreign passive institutions on which double taxation relief is claimed.

As with the 6/7ths refund, foreign tax paid can be taken into account for purposes of the 2/3rds refund, subject to maximum refund not exceeding Malta tax paid. Effectively, it is possible to envisage situations where no Maltese tax leakage would be suffered by the Maltese Company, in the manner set forth below:

Maltese Company With Foreign Tax With Foreign Tax
Net Foreign Income 2000 2000
Grossing up with Foreign Tax 150 265
Chargeable Income 2150 2265
Tax at 35% 753 793
Credit- Double Tax Relief 150 265
Malta Tax Payable
(tax at 35% less tax credit)
603 528
Shareholder of Maltese Company
Refund on distribution
(2/3 of Malta Tax Payable)
502 528*
Effective Tax Paid in Malta 101 0
Effective Tax leakage in Malta on Net Income 5.05% 0%

*528 (2/3rds of 793)

100% Refund/ Participation Exemption

This refund or participation exemption is applicable when the profits out of which the relevant dividend is distributed are derived (dividends and/or capital gains) by the Maltese company from a participating holding.

Participating Holdings

Shares held by a Maltese company in another company (Maltese or Foreign) may qualify for a full tax refund, insofar as the Maltese company holds a “participating holding”. Effectively, this means that:

  • The shareholders of the Maltese company would be able to claim a full refund on any tax paid upon any income or gains derived by the Maltese company from a participating holding or from the disposal of such holding and distributed to such shareholders.
  • Alternatively, a Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever on any income or gains derived by it from the paticipating holding or from the disposal of such holding. Although, the tax refund is processed very swiftly and efficiently (paid not later than fourteen days after the end of the month in which it becomes due), a Company claiming a participation exemption at its level on the particular dividends/ capital gains, shall avoid the need to pay any tax at corporate level, thereby retaining a significant cashflow advantage over the full refund mechanism available to shareholders.

The definition of participating holding as included under Art.2 of the Income Tax Act provides six (6) alternative criteria in which a holding would be treated as a Participating Holding. These conditions are non-cumulative, and the satisfaction of just one criterion shall be enough for the Maltese Company to qualify for a Participation Holding. Kindly note that the criteria are identical for both a Participation Exemption and a Participation Holding. Namely, these require that a company:

(a) holds directly at least ten percent (10%) of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least ten percent (10%) of any two (2) of the following:

(i) right to vote;

(ii) profits available for distribution; and

(iii) assests available for distribution on a winding up.

(b) is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or

(c) is an equity shareholder in a company and the equity shareholder is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company, or

(d) is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or

(e) is an equity shareholder which holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of (€ 1,164,000) (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days; or

(f) is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade:

Likewise, a holding of a company in a body of persons constituted, incorporated or registered outside Malta, which is not resident in Malta, and is of a nature similar to a partnershp en commandite the capital of which is not divided into shares constitued under the Companies Act, shall be deemed to constitute a participating holding if it satisfies the provisions of any of paragraphs (a) to (f) above.

Apart from satisfying the conditions of the Participating Holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions:

I. it is resident or incorporated in the EU; or

II. it is subject to foreign tax of a minimum of fifteen (15) percent; or

III. it does not derive more than fifty (50) percent of its income from passive interest and royalties.

Alternatively, if none of the abovementioned three (3) conditions are satisfied, the satisfaction of both two (2) ancillary conditions would need to be satisfied. These two additional criteria are that-

I. the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment. In this respect, a ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investment and is done with no intention of influencing the management of the underlying company; and

II. the non-resident company or its passive interest of royalties have been subject to tax at a rate which is not less than 5%

Malta company: Management and Control

A Company which is registered in Malta shall be deemed to be tax resident in Malta from the date of its incorporation. However, in terms of Article 2 of the Maltese Income Tax Act ‘”resident in Malta” …when applied to a body of persons, means any body of persons the control and management of whose business are exercised in Malta….’

The wording of the aforesaid Article 2, right implies that a company established abroad shall become a resident of Malta if it is managed and controlled in Malta, and shall therefore be deemed to be tax resident in Malta.

Factors Which Determine Central Management and Control

As a general rule, the most manifest indication of where central management and control of the company is exercised, is the seat where the board of directors meets and resolves business. However, substance prevails over form and other factors should be assessed, for the location for the central management and control to be inferred.

Management and control is not established on the basis of clauses contained in the company’s Articles of Association but on the basis of the actual running of the company. If the central management and control of the company rests with an entity other than the board of directors (e.g. shadow directors) or the shareholders, the company would be managed and controlled in the country of residence of the aforesaid shadow directors / shareholders, irrespective of the clauses in the company’s Articles of Association.

It is possible for a body corporate to change its residence from one jurisdiction to another, insofar that the transition in management and control is done in good faith and can be clearly evidenced. Factors, which would typically indicate that the choice of residence where the company is effectively managed and controlled, is Malta, would be:

  • Copies of Board minutes attesting that board meetings were held in Malta;
  • Evidence that the company possesses an office in Malta;
  • Evidence that the company’s accounts are audited in Malta;
  • Evidence that the Company operates a Maltese Bank account (through bank statements etc.)

No factor is decisive on its own, and a thorough assessment of all criteria, cumulatively, should be entertained.

Malta Tax Rules

Malta asserts its right to tax on the basis of source jurisdiction and residence jurisdiction. All income that is deemed to arise in Malta, shall be taxable in Malta, irrespective of whether such income arising in Malta is remitted to Malta or not. With regard to foreign source income, the taxation of such income, is subject to socio-economic considerations (notably residence and domicile rules).

The basic rules relating to jurisdiction to tax derive from Article 4 of the Maltese Income Tax Act:

  • Foreign source income derived by persons who are both ordinarily resident and domiciled in Malta is taxable in Malta, irrespective of whether such foreign source income is remitted to Malta (worldwide basis of taxation);
  • Foreign source income derived by persons who are either not ordinarily resident but domiciled in Malta or domiciled in Malta but not ordinarily resident in Malta is taxable if received in Malta (remittance basis of taxation);
  • Foreign capital gains derived by persons who are either (i) not ordinarily resident but domiciled in Malta or (ii) domiciled in Malta but not ordinarily resident in Malta, are not taxed in Malta even if remitted to Malta.
Tax Issues

Having set the benchmarks, there are fiscal advantages to be reaped if the effective place of management and control of companies is satisfied. A company registered abroad that shifts its management and control seat to Malta is deemed to be resident in Malta and would be able to apply the tax credit imputation mechanism, taking full advantage of refunds which would be applicable to the shareholders of the company, on a final distribution of dividends.

Click here for more details on the credit imputation mechanism and the applicable tax refunds of a Malta Company.

Furthermore, a company registered abroad which is effectively managed and controlled in Malta, would only suffer tax in Malta on a remittance basis. Moreover, such company may ‘break off’ previous residence, if there are for instance, adverse Controlled Foreign Company (CFC) rules in its country of registration, that would not apply if the company were resident in Malta.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors. For bespoke tax advice, please click here to contact our tax advisors or send us an email on enquiries@fbsmalta.com or by calling at +356 2338 1500

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