Malta offers a winning combination to international businesses looking for an onshore establishment within the European Union that also offers advantages of a low tax jurisdiction. Moreover, Malta structures are also very tax-efficient for holding assets outside of Malta.
While the general rate for corporate taxation in Malta for Malta registered companies is 35%, numerous tax advantages offered by Maltese tax legislation reduce this tax rate in certain circumstances. As such, foreign shareholders of a Malta company may attain an effective tax of 5% on profits on trading activities, and 0% in many cases of holding assets, in particular outside of Malta.
A shareholder of a Malta registered company is entitled to claim certain tax refunds. Such refunds may be claimed when dividends are distributed out of profits arising from income (except in certain instances, such as income from immovable property situated in Malta). Tax refunds are not subject to further tax (except in the hands of persons who are resident and domiciled in Malta). Moreover, under the Maltese imputation system, the domestic dividends carry a full imputation credit and are therefore, treated as fully taxed when distributed to the shareholder.
One form of the above-mentioned refund is so-called 6/7 tax refund, which is available as long as the income in question is not qualified as passive interest or royalties and the company does not seek double taxation relief on foreign-sourced income.
A Non-Resident shareholder in Malta , who receives a dividend from a Malta-Resident Holding Co, which had received dividend from a Malta-Resident Trading Co, would be entitled to a refund of 6/7 of the tax suffered by the trading company on its profits.
One should note that it is the direct shareholders wishing to obtain the tax refund that must register with the Malta tax department and claim the refund. Accordingly, it may be beneficial for the non-resident shareholder to have an intermediary holding company for this purpose. Such intermediary holding company could be a Malta resident holding company, but one can opt also for a non-resident company
Another form of the tax refund is a so called 5/7 tax refund, which is available in respect of tax on profits arising out of passive interest or royalties where the company does not seek double taxation relief on foreign-sourced income. In this scenario, through the full imputation system and the 5/7 tax refund, a shareholder would be subject to an effective tax rate of 10%.
It is important to note that the Malta resident holding company may qualify in many cases to be a totally transparent structure for tax purposes.
As for holding assets outside of Malta, on satisfaction of certain conditions, shareholders may be able to obtain the full exemption from tax in Malta which exempts from tax completely any dividends received from a holding overseas which is deemed to be a ‘participating holding’. A participation held by a Maltese company would constitute a ‘participating holding’ if at least one of the following conditions is fulfilled:
(a) The Maltese company owns 10% of the equity shares in the non-resident company
(b) The investment in the non-resident company amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days
(c) The Maltese company has the option to acquire the remaining balance of the equity shares in the non-resident company
(d) The Maltese company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in the non-resident company
(e) The Maltese company is entitled to sit on the Board of the non-resident company
(f) The holding of shares in the non-resident company is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes
Alternatively, shareholders of a Malta-registered holding company may opt for the full tax refund on distribution of dividends where the said company derives income from ‘participating holdings’ overseas, resulting in no tax being effectively paid in Malta.
Where the participation exemption relief as described above is not possible, a flat-rate foreign tax credit may be allowed. For this to be applied, the income should be received by a Malta company; provided that the company is specifically empowered to receive income from overseas and in respect of which documentary evidence is available which indicates that such income has been received from overseas. In such cases, a Flat-Rate Foreign Tax Credit (FRFTC) is available. A company claiming FRFTC may claim a tax credit of 25% assumed to have been levied outside of Malta irrespective of whether such foreign tax has actually been levied. FRFTC is calculated on the net income received from abroad before any allowable deductions. Accordingly, the income plus the FRFTC credit are subject to tax at 35%. The shareholder would be then entitled to a 2/3 refund of tax paid by the company.
Malta currently has close to 50 double taxation relief treaties in force, most of which are based on the OECD Model Convention. In most of its double tax treaties, Malta has agreed to relieve double taxation using the tax credit method.
As was shown above, there are various methods of obtaining very competitive effective tax rates for Malta-registered companies, both for trading activities, as well as for assets holding and exploitation, both tangible and intangible. This coupled with the fact that Malta is a full Member State of the European Union, has an extensive network of double taxation treaties, and also provides incentives for a variety of industries (such as software development, call centres, amongst others) which makes Malta a very attractive base for multinational operations.
First Published in:
WCR(World Commerce Review) Vol. 4 Issue 1 March 2010