Malta and its tax system

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Malta lies at the heart of the Mediterranean, a few hours’ flight from most European cities and from North Africa. The advantage of living in Malta is that you can work and enjoy life to the full at the same time.

Malta has been a member of the European Union since May 2004, is politically stable and is strongly oriented towards the outside world. Malta is a signatory to many important international agreements, mainly in the economic and financial domains, but also with regard to maritime, transport and cultural matters.

Malta has proved to be an attractive tax and cost-efficient Eurozone jurisdiction for financial services, trading and holding activities. The Maltese economy is a very open one in which foreign direct investment in many of its sectors is vital to its continued growth. The overriding climate is one of encouraging and assisting inward investment particularly in key and targeted sectors such as financial services and related industries. It has a strong, yet flexible single regulatory body in the Malta Financial Services Authority (MFSA). The MFSA is responsible for all licensed financial services activity on the Islands. The MFSA is structured in line with world best practice. Malta is a leading force in the development of regulatory policy and is fully involved with OECD, the EU and the Commonwealth in policy development.

Malta has one of the lowest OECD compliant tax rates within the EU area.  Investors can set up tax efficient structures in Malta and benefit from the interaction of the full imputation system of company taxation (whereby dividends carry a tax credit equivalent to the tax paid on the profits out of which the dividends are paid), the general tax refund system which was also approved by the European Commission in late 2006, and of its extensive double taxation treaty network, including all EU Member states.

Repatriation of profits is tax free as Malta does not charge any withholding taxes on payment of dividends to non-residents.  In addition, interest and royalties paid to non-residents are also free of tax, increasing the potential for efficient tax planning.

The absence of transfer-pricing rules, thin capitalisation regulations, CFC regulations or annual wealth taxes is an added bonus to investors.

Other tax related benefits in setting up a company in Malta include:

  • Dividends received from a participating holding are exempt from tax in Malta so long as certain conditions are satisfied.  Proper structuring enables compliance with the said conditions in the vast majority of scenarios
  • Gains on the sale of a participating holding are exempt from tax in Malta
  • Where the holding of shares in a foreign company does not qualify as a participating holding, tax on dividends and gains is reduced with the application of double taxation relief, namely treaty relief, unilateral relief and flat rate foreign tax credit
  • Non-residents are not taxed on gains realised on the sale of securities in Maltese companies, provided that they are not held in a company whose assets consist principally of immovable property situated in Malta.
  • So-called “non-dom” companies benefit from the taxation of foreign income solely to the extent it is remitted to Malta.  Foreign gains are not taxed in Malta
  • Companies may be continued or re-domiciled to Malta and from Malta; no exit taxes are chargeable
  • Malta has a wide treaty network with over 60 countries

 

Malta tax facts

Maltese law contains international tax measures which make Malta a very competitive, cost and tax efficient basis for setting up structures to carry out international trading, investment and holding activities. Besides being the only EU member state with a full tax imputation system, Malta’s tax laws allow shareholders of a Maltese company to claim certain tax credits and refunds of all or part of the tax paid by the company on its profits which reduce the overall tax burden to between 0% and 10%. Economic double taxation is relieved through the full imputation system. Malta also applies the participation exemption in respect of dividend income or capital gains received from a qualifying subsidiary and any overseas tax suffered by a Malta company would generally be eligible for relief against the Malta tax liability arising on the corresponding source of income. Through the application of this refund mechanism, the combined overall effective tax rate in Malta is reduced.

 

Tax refund provisions

The corporate income tax rate in Malta is a flat 35%.  However, upon the distribution of dividends, the shareholder may claim a refund of six-sevenths (6/7) of the tax credit if the dividend is distributed from active trading income and five-sevenths (5/7) when it is distributed out of passive interest and royalties.

Alternatively one may claim flat rate foreign tax relief whereby the effect is that the initial rate of tax is reduced from 35% to 18.75%.  A tax refund may also be claimed but this will amount to 2/3rd of the Malta tax credit.

We generally set up a two-tier structure in Malta, a holding company and a subsidiary.  The subsidiary may carry out both trading activities and investment activities.

Consider a structure where EU Co holds the shares in Malta Co.  Assuming Malta Co’s trading profits amount to 100, tax payable in Malta is 35.  Malta Co distributes all post tax profits and EU Co claims a tax refund of 30.  Such a structure will not work since even though the dividend may not be taxed in the hands of EU Co as a result of the participation exemption provisions, the tax refund received by EU Co will be taxed as other income in such foreign EU jurisdiction.  The tax refund is not a dividend.

For this reason a double tier structure is used in Malta which could reduce effective corporate tax to 5%.

 malta-its-tax

Dividends

By having a double tier structure in Malta, the tax refund received by Malta Hold is converted into a dividend when it is distributed to EU Co.

In a number of structures that we have in Malta, profits are “parked” in Malta Hold.  The funds are loaned back to Malta Co free of interest (no transfer pricing rules) for further investment.

The above structure can also be used for captive insurance operations set up in Malta.

 

Double Taxation Relief

Apart from relief in terms of a double taxation treaty (click here for a list of double taxation treaties) Maltese tax legislation contains domestic rules aimed at ensuring that income originating from overseas is not subject to double taxation even if there is no double taxation agreement in existence. Relief is provided on a unilateral basis (Unilateral Relief), through a Flat Rate Foreign Tax Credit (FRFTC), underlying relief and Commonwealth Relief.

Unilateral Relief is available where treaty is not available. With regard to investments held by Maltese companies in foreign companies, the relief also extends to underlying taxes suffered abroad, that is, the taxes suffered by the foreign company on the profits distributed to the Maltese company.

The FRFTC may be claimed instead of treaty relief and the unilateral relief. The FRFTC assumes a deemed foreign tax of 25% of the income received in Malta, regardless of the amount of tax actually paid abroad and this may be claimed even where no tax abroad has actually been suffered. The 25% deemed foreign tax is allowed as a credit against the Malta tax due on the gross income after allowing for any deductible expenses. The combination of the FRFTC and tax refunds available to shareholders (see above) may produce very interesting tax-efficient results.


Participating holdings

A holding of shares in non-Maltese entities (companies and partnerships en commandite the capital of which is divided into shares) qualifies as a participating holding when any of the following conditions is satisfied:

  1. a company holds directly at least ten per cent of the equity shares of a company not resident in Malta whose capital is wholly or partly divided into shares, provided that where the shares held confer different percentages of entitlement with respect to votes, to profits available for distribution and to assets available for distribution on a winding up, the lowest percentage figure shall be deemed to be the percentage of equity shares held; or
  2. a company is an equity shareholder in a company not resident in Malta 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
  3. a company is an equity shareholder in a company not resident in Malta and the equity shareholder company 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
  4. a company is an equity shareholder in a company not resident in Malta 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
  5. a company is an equity shareholder which invests a minimum sum of one million, one hundred and sixty-four thousand Euro (1,164,000) (or the equivalent sum in a foreign currency) in a company not resident in Malta and that investment in the company not resident in Malta is held for an uninterrupted period of not less than 183 days; or
  6. a company is an equity shareholder in a company not resident in Malta 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.

Investments by Maltese companies in the capital of partnerships en commandite the capital of which is not divided into shares qualifies as a participating holding so long as any one the conditions set out above is satisfied.

 

Participation exemption

The participation exemption rules provide for the following exemptions:

Gains on the sale of a participating holding – gains are always exempt from tax in Malta wherever the foreign entity is situated.  Most of the Malta double taxation treaties provide that gains realised by a Malta company on the sale of shares in foreign companies, provided that the assets of the foreign companies do not consist mainly of immovable property situated in that other contracting state, are taxable solely in Malta.  With the provisions of the participation exemption, the gain is not subject to tax.  The gain may then be distributed by the Maltese company to a non-resident without the imposition of withholding taxes.

Dividends received from a participating holding – dividends received by a Malta company from a participating holding are exempt from tax when:

  • The foreign company or partnership (hereinafter referred to as “entity”) is situated in another EU member State; or
  • The income of the foreign entity does not consist of more than 50% of passive interest and royalties; or
  • The profits of the foreign entity are taxed at the rate of at least 15%; or
  • The holding is not a portfolio investment and the income and interest and royalties received by the foreign entity is subject to foreign tax of at least 5%.

Note – a foreign company carrying on treasury functions or IP licensing for the group may be deemed not to be one which is in receipt solely of passive interest or royalties.  A ruling may be obtained that the company is actively trading and therefore the participation exemption may still apply.

Practical application

Malta may be used to repatriate profits from low tax jurisdictions into the EU.  Equally, in the absence of withholding taxes on dividends, interest and royalty payments, profits may be transferred out of Malta to low tax jurisdictions.

Holdings not qualifying as participating holding

If the holding of shares does not qualify as a participating holding, then the gains and dividends are taxed in Malta at the rate of 35%.  However, upon the distribution of these profits and gains to the shareholders, the latter may claim a tax refund of the tax paid by the company on the profits so distributed.  The tax refund can amount up to six-sevenths (6/7) of the tax credit.

Alternatively one may claim flat rate foreign tax relief whereby the effect is that the initial rate of tax is reduced from 35% to 18.75%.  A tax refund may also be claimed but this will amount to 2/3rd of the Malta tax credit.

 

Non-dom companies

Companies incorporated and managed and controlled in Malta are in terms of our tax legislation both domiciled and resident in Malta.  They are taxed on their world-wide income and capital gains, subject to certain exemptions.  In addition when such companies have foreign branches, branch profits are subject to Malta tax with relief for foreign taxes.

Foreign companies (companies incorporated outside Malta) are generally taxable in the jurisdiction in which they have been incorporated.  However, their tax residence may be moved to Malta by transferring the effective management and control of their business to Malta.  In such cases, though the companies become resident in Malta for tax purposes, they are still foreign companies and in accordance with the provisions of our tax legislation, they are not domiciled in Malta.

The following tax principles apply to companies resident but not domiciled in Malta:

  1. Income and gains arising in Malta are taxed in full in Malta (tax refund provisions also apply when profits are distributed by way of dividend);
  2. Income arising outside Malta is taxed in Malta but only to the extent that such income is remitted to Malta;
  3. Gains arising outside Malta are not taxed in Malta even if such gains are remitted to Malta.