MALTA: A JURISDICTION OF CHOICE LONDON - September 2012 Doing business from Malta can make a huge difference for your business UHY BUSINESS ADVISORY SERVICES LIMITED Updated September, 2012
An attractive choice for companies. Malta has become a tried and tested ground for a number of operators relocating to the island as a base from which to conduct operations and international business. The benefits are enormous. The permutations are equally varied. Malta's tax system, plus its extensive network of double taxation treaties, offers significant fiscal efficiency to investors and companies using the island as a base and has been recognised as one of the main drivers in creating an attractive environment for foreign investors. Malta has been classified as the fifth most tax -friendly country for companies according to the 2008 Forbes Tax Misery and Reform Index and the most attractive country in the European Union in terms of taxes and social security contributions paid out by companies. The combination of Malta s tax system and its extensive double tax treaty network means that, with proper planning and structuring, investors can achieve considerable fiscal efficiency using Malta as a base. One of the key advantages of Malta's tax system is its full imputation system. This system has been in force since 1948 when income tax legislation was first enacted. Malta is, in fact, the only EU member state with a full imputation system of taxation in force. Another key advantage is Malta s extensive network of double tax treaties with almost all the important OECD countries (44 treaties in force; 12 are initialled awaiting ratification). All Maltese companies pay tax at the rate of 35% but, as with all imputation systems, shareholders receive full credit for any tax paid by the company on distributed profits. Therefore, profits taxed at a corporate level are not subject to further tax at shareholder's level, and, depending on the rate of tax applicable to the recipient of dividends, may trigger off the entitlement to a tax refund to the recipient. As a result, shareholders of a Maltese company should, upon a distribution of profits, be eligible to claim refunds of the Malta tax paid at the corporate level. Malta grants relief from double taxation under the credit method on source-by-source and country-by-country bases. The Maltese tax regime governing double taxation relief includes not only treaty relief but also unilateral relief, and thereby ensures that income arising from overseas is not subject to double taxation, even if there is no double taxation agreement in existence. In terms of domestic legislation, no withholding taxes are imposed on dividends; interest and royalties paid to non-residents, as long as various conditions are complied with. In addition, no Maltese tax is imposed on gains realised from transfers of corporate securities by non-residents, again as long as the relevant conditions are complied with, particularly that the sole or main assets of the company whose securities are being transferred do not consist of Maltese immovable property. TAX REFUND SYSTEM UNDER INCOME TAX LEGISLATION IN MALTA Malta reached an agreement with the European Commission in January 2007 effectively preserving intact its competitive imputation tax system for business in Malta. The tax system is a general system applicable to all types of companies and to every shareholder. It is not a specific measure designed to help a specific sector. Consequently, it is a permanent agreement with the EU. P a g e 2
Current general income tax As mentioned earlier, companies resident in Malta are subject to income tax at a rate of 35%. There is no separate system of corporation tax, and a company is subject to tax in much the same way as an individual. A full imputation system is applicable which means that dividends paid by a company resident in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. This system applies to both resident and non-resident shareholders. Resident shareholders are taxed on the gross dividend at the applicable tax rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability. Individual shareholders of companies are entitled to tax refunds when their marginal tax on the dividend is less than the tax paid by the distributing company. Extended tax refund system General conditions and tax consequences Under this system, Advanced Company Income Tax (ACIT) will be payable upon distributions, by all companies, of profits which, as indicated earlier, are not derived from immovable property situated in Malta. The ACIT paid will be set-off by the distributing company against its company income tax. Once ACIT has been paid by the distributing company, shareholders, whether resident in Malta or not, may claim tax refunds as described below. The ACIT is levied at the level of the distributing company at the rate of 35% and upon distribution; the shareholder will be entitled to a refund of a part or whole of that ACIT. This refund will be reduced where the distributing company would have claimed double taxation relief. The amount of the tax refund is set at 6/7ths of the tax paid by the company (5/7ths in the case of passive interest and royalties) and the full refund with respect to participating holdings will be retained. The resident shareholder is taxable for the total amount of net dividend and refund received. The non-resident shareholder is not taxed in Malta. The full imputatuion system in a simple numeric example: At shareholder level of Maltese company Participating Holdings Other income ( Illustrative example XYZ Limited cont.) Res Coy N/R person Res Coy N/R person Net dividend received 650 650 650 650 Grossed up dividend 1000 1000 1000 1000 Tax at source 350 350 350 350 ACIT Refund 100% - Part. Holding 350 350 - - ACIT Refund other income - 6/7 - - 300 300 ACIT Refund passive income - 5/7 250 250 250 250 Imputation credit to shareholder Effective combined level of taxation of corporate profits in Malta Part. Holding - - Other income 50 50 Passive income 100 100 100 100 P a g e 3
Tax framework at a glance The following are the salient features of the Maltese Tax system that applicable to the structure under considera- tion:- The companies in the structure are normal Maltese registered Companies. All companies resident in Malta are subject to a corporate tax rate of 35% Malta operates a full imputation system of taxation whereby the tax paid by a company is credited in full to its shareholders upon the receipt by the shareholder of a dividend distribution out of taxed profits Upon distribution of a dividend by a trading company, shareholders become entitled to a 6/7ths refund of the Malta tax paid by the company on those dividends. 100% refund for participating holdings/ participating exemptions situations. The refunds only apply when the distributions are made by the company which does not claim any DTR No further tax would be payable in Malta by the shareholder in respect of the tax refunds or dividends received. Malta does not levy any withholding taxes on dividend distributions. PARTICIPATING HOLDINGS AND THE PARTICIPATION EXEMPTION REGIME Participating holdings as they are known under Malta s Income Tax Act, relate to equity shareholdings held by a company in an overseas company. For this purpose, a participating holding means:- a holding of 10% or more of the equity shares of an overseas company whose capital is wholly or partly divided into shares. If the Maltese corporate shareholder owns less than 10% of the equity shares in the overseas company, its shareholding is still eligible as a participating holding provided it satisfies any one of the following conditions:- the Maltese corporate shareholder is entitled, at its option, to purchase or has the right of refusal on a disposal of the balance of the equity shares of the overseas company; or the Maltese corporate shareholder is entitled to be represented on the board of the overseas company in which it has an equity shareholding; or the value of the equity shareholding exceeds Lm5 00,000 (Euro 1.2 million approx.) and the investment is held for at least 183 days; or the equity shares are held in the overseas company for the furtherance of the business of the Maltese company and the holding is not held as trading stock for the purpose of a trade (e.g. a strategic stake in a business with which it has a large contract). An advance ruling can be obtained from the Inland Revenue to determine whether this condition has been met. The above mentioned conditions will apply equally to a holding in a body of persons constituted, incorporated or registered outside of Malta, which is not resident in Malta, and is of a nature similar to a Maltese partnership en commandite the capital of which is not divided into shares. For acquisitions made after January, 2007 anti-abuse provisions apply in order for participating holding status to be achieved. Anti abuse will not apply if the foreign entity in which the Malta company has invested satisfies one of the following conditions: It is resident or incorporated in a country or territory which forms part of the EU; or It is subject to foreign tax at a rate of 15% or more; or It does not have more than 50% of its income derived from passive interest or royalties. P a g e 4
Participating Holdings and the Participation Exemption Regime (Cont.) Where none of the above three conditions are satisfied then the following two conditions must be satisfied for non application of the anti abuse provisions: the equity holding by the company resident in Malta in the company not resident in Malta is not a portfolio investment and for this purpose where the company concerned derived more than 50% of its income from portfolio investments it shall be deemed to be a portfolio investment; and the company not resident in Malta has been subject to any foreign tax at a rate of tax which is more than 5%. For the above purposes: Portfolio investment is an investment in securities such as shares, bonds and such like instruments and which is held as one of many such investments for the purpose of investment by risk spreading where such an investment is not a strategic investment and is made with no interest in and without the intention of influencing the management of the company invested in and in addition is made only to follow the share price and dividend policy of the company invested in to maximise investment returns and to sell the investment as soon as it appears the shares may lose value. Passive interest or royalties shall mean interest or royalty income which is not derived, directly or indirectly, from a trade or business where such interest or royalties have suffered any foreign tax, directly by way of withholding, or otherwise, at a rate which is less than 5%. Equity holding means a holding of the capital in a body of persons when the holding entitles the holder to a right to vote, to profits available for distribution and to assets available for distribution on a winding up of that company and the terms equity shareholder, equity shares and equity shareholding should be construed accordingly. An acquisition of a participating holding made prior to 1 st January 2007 that does not satisfy the additional conditions referred to above for acquisitions made after that date shall continue as a participating holding until 31 st December 2010 or earlier disposal. Income received by a Maltese company from its Participating Holding will be allocated to its Foreign Income Account and will be taxed in the normal way. However, when profits derived by a Maltese company from its Participating Holding are subsequently distributed, there will be a full repayment of the Malta tax suffered on the income or gain as opposed to the six-sevenths repayment in normal circumstances. This six-sevenths refund is reduced to a two-thirds refund where the Maltese company has claimed double tax relief. (See 4 above). Article 12 of the Income Tax Act deals with those items of income that are exempt from tax. Effective 1 st January, 2007 sub article (u) of Article 12 provides that where a taxpayer derives income or gains from a participating holding or from the disposal of such holding and such income or gain has not been shown as part of his chargeable income then this income will be exempt. As a result of this amendment to Article 12, effective 1st January 2007, Malta now has a participation exemption regime and the conditions for participation exemption status to be obtained are identical to those of participating holding status. P a g e 5
BRANCHES A company is deemed to be resident in Malta for tax purposes if: It is a company incorporated in another jurisdiction but whose control and management is exercised in Malta; or It is a company incorporated in Malta. From 1 st January 2007, the term company registered in Malta has been introduced in the Income Tax Act and covers the following entities: Companies resident in Malta; and A non-resident company which carries on an activity in Malta. With regard to the branches referred to above: These are obliged to follow the Tax Accounting rules referred to in 2 above. The shareholders of a company having a branch in Malta are entitled to tax refunds upon a distribution Audited accounts, prepared in accordance with 1FRS, need to be prepared by the non-resident company and filed with the Tax Authorities (audited branch accounts only). OTHER KEY FEATURES OF MALTA'S CORPORATE TAX LAW In addition to the considerable benefits of the full imputation system and the extensive network of double taxation treaties, Malta offers businesses other key benefits under its tax legislation, including the following aspects: As an EU member state, entities have access to the Parent-Subsidiary, Interest & Royalties, and Mergers Directives Participation exemptions An exemption from tax on income derived by collective investment schemes Advance rulings issued by the Maltese Commissioner of Inland Revenue on international transactions that guarantee the tax position for a minimum of five years and may be renewed for a further five year period An absence of "thin capitalisation" rules and no anti-controlled foreign corporation legislation No capital duty on share issues and exemption from duty on transfers of shares in, by or to companies having the majority of their business interests outside Malta The possibility for companies to denominate their share capital and their accounts in any convertible currency with the chosen currency then being used for payment of tax and tax refunds (where applicable) thus minimising exchange risks The possibility of migrating companies to and from Malta Relative ease of incorporation for non-regulated entities Low registration and maintenance costs A taxation scheme for groups of companies allowing offset of losses between group companies Only EU member state with full imputation system Extensive network of double taxation treaties Refundable tax credit scheme on revenues as dividends to shareholders Attractive tax residency status for individuals P a g e 6
MALTA FACT FILE Global Competitive Report places financial services sector at 11 th position Malta has been recognized by the World Economic Forum s (WEF) Global Competitiveness Report as being a leading financial services jurisdiction. It has ranked 11 th globally in the financial market development pillar. Moreover, the report confirmed the islands as a sound place to conduct business, and gave Malta a tap on the shoulder with regards to soundness of banks (10 th ), positive business impact of Foreign Direct Investment legislation (7 th ), and financing through local equity market (9 th ). Top credit ratings for Malta re-confirmed August 2010 has been characterized by various credit rating agencies re-confirming the top credit ratings awarded to the Maltese economic sector. Moodys awarded an A1 Rating reflecting high levels of economic and institutional strength, high government financial strength and very low susceptibility to event risk. Similarly, Fitch Ratings reconfirmed an A+ rating for Malta. Building its reputation on sound fundamentals and excellent service, Malta is today emerging as one of the fastest growing international financial services centres in the world. Financial services has become one of Malta s most important economic generators, registering impressive growth annually even at times when world economies were at a standstill. Described as a well diversified finance centre by the regulator, Malta has strong banking, insurance, investment and wealth management sectors which are under-pinned by EU compliant legislation. Accession efforts and EU membership in 2004 provided Malta with the catalyst it needed to project it as quite possibkly Europe s most dynamic and fastest growing financial centre. UHY Business Advisory Services Limited is a member of UHY International, an international association of independent accounting and consulting firms, whose organising body is Urbach Hacker Young International Limited, a UK company. Each member of UHY is a separate and independent firm. The services described herein are provided by UHY Business Advisory Services Limited and not by Urbach Hacker Young International Limited or any other member of UHY. Neither Urbach Hacker Young International Limited nor any member of UHY has any liability for services provided by other members. DISCLAIMER This publication contains general information only and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. Pierre Galea Musù FIA CPA UHY Business Advisory Services Limited Matilda Court 2, Giuseppe Cali Street, Ta Xbiex XBX 1423. Malta Tel:( 00356) 21331710 21311814 Fax: (00356) 21310461 Email pgm@uhymalta.com Web www.uhymalta.com Whilst every effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither UHY Business Advisory Services Limited nor any related entity shall have any liability to any person or entity who relies on the information contained in this publication. Any such reliance is solely at the user s risk. P a g e 7