IN160 - Malta Tax Planning Opportunities

Malta’s full imputation system of taxation, generous unilateral relief and tax refunds, have made Malta a leading European financial centre. Benefits include:

• A low Malta tax burden for overseas shareholders. The effective rate of Malta tax for overseas shareholders is: zero percent on participating holding income, five percent on trading income and ten percent on passive interest and royalties.
  
  
• Malta has an extensive network of Double Tax Treaties as detailed in the attached appendix.
  
  
• No withholding tax on dividends.
  
  
• Access to European Conventions, including the Parent/Subsidiary Directive, the Mergers and Acquisitions Directive and the Interest and Royalties Directive.
  
  
• Advance tax rulings can be obtained.

Examples of how Malta companies can be used in international tax planning are detailed below.

1. Use of a Malta Company as an International Holding Company



Dividends and capital gains derived from a participating holding in a non resident company are exempt from income tax.

To qualify as a participating holding the Malta company must satisfy one of the following conditions:

• the Malta holding company must hold 10% or more of the equity shares of an overseas company, whose capital is wholly or partly divided into shares, or
  
  
• the value of the equity shareholding exceeds Malta Lire 500,000 (€ 1.2 million approx) and the investment is held for at least 183 days, or
  
  
• the Malta holding company is entitled to be represented on the Board of the overseas company in which it has an equity shareholding, or
  
  
• the equity shares are held in the overseas company for the furtherance of the business of the Malta company and the holding is not held as trading stock for the purpose of a trade. An advance ruling can be obtained from the Inland Revenue to determine whether this condition has been met.

There is some anti-avoidance legislation, but this does not apply where any one of the following conditions in respect of the holding are met:

• the company in which the participation is held (the “Investee”) is resident or incorporated in a country or territory which forms part of the EU, or
  
  
• the Investee is subject to a foreign tax rate of 15% or more, or
  
  
• the Investee does not derive more than 50% of its income from passive interest or royalties.

2. Use of a Malta Based Holding Company to own Real Estate in Portugal



Malta is not listed on the Portuguese Tax Haven List. Malta companies therefore pay the normal Portuguese Municipal Property Taxes, which range from 0.2% to 0.5% for urban properties and 0.8% for rural properties. Where real estate is held through a company incorporated in a jurisdiction on the Tax Haven List, such as the British Virgin Islands (BVI), higher tax rates of between 1% and 2% apply.

Properties held by companies on the Tax Haven List are also subject to a 15% income tax charge on deemed gross rental income, which is calculated as 1/15th of the registered value of the property. There is no deemed rental income charge for a Malta company.

It is possible to migrate companies incorporated in countries not on the Financial Action Task Force (FATF) Blacklist to Malta. This is subject to the laws of the country in which the company was originally incorporated permitting such migration.

3. Use of a Malta Company as an Intellectual Property Holding Vehicle


An advance tax ruling on the amount of profit taken on the royalty income stream can be agreed with the Malta tax authorities.

Using unilateral double taxation relief in Malta, the net Malta tax to be paid by the overseas shareholder (in this example the Isle of Man company) on the profit will range between 2.5% and 6.25%.

A financing company could be structured in much the same way as the intellectual property holding company illustrated in this example.

4. Use of a Malta Company for International Trade


As Malta is in the EU, a Malta company will therefore have a VAT number. This will ensure that there will be a zero VAT obligation for the parties involved in the transaction detailed above, provided that they are all VAT registered.

Where the Malta company’s income arises from trading activities, as in the following example (this includes the buying and selling of goods and the provision of services), its shareholders, following receipt of the dividend, may claim a refund of 6/7ths of the Malta tax suffered at the company level.

Company Level
Profit before tax = € 1,000
Malta tax of 35% = € 350

Profit distributed as dividends = € 650

Shareholder Level
Gross dividend receivable = € 1,000

Malta tax suffered at company level = € 350
Refund of 6/7ths of the Malta tax suffered = € (300)

i.e. an effective Malta tax of € 50, i.e. 5% = € 50

5. Use of a Malta Company as a Dividend Feeder Company
Where the foreign company to which the dividend is being paid does not want to have to claim a tax refund, it is possible to insert an additional Malta company, as shown in the diagram below, to act as a holding company to the first Malta company.

In these circumstances the Malta holding company receives a dividend from its subsidiary Malta company and claims the tax refund. Assuming it qualifies for the participation exemption, the dividend will not be taxed within the holding company and can be paid on to the foreign shareholder without further withholding tax.



This structure therefore achieves tax deferral at the level payable by the Malta holding company. In addition, for tax purposes, the tax refund is re-characterised as a dividend.

Malta's Doube Tax Treaties

Existing Double Tax Treaties with Malta.

Relevant for income paid to Malta.



Notes

• The majority of the treaties detailed above provide for lower withholding taxes for certain types of interest and royalty payments.
  
• Domestic legislation within the country paying the income to Malta may reduce the withholding tax on royalty payments in certain instances.

Additional Information

If you require any additional information, please speak to Laurence Binge at the Dixcart office in the United Kingdom or contact us.