Malta: What Are The International Tax Planning Opportunities? Part 2
In Part 1 of our overview of Malta’s tax system, we looked briefly at the main features Malta can offer when considering tax planning for your clients.
In this part, we will take you through some of those benefits in more detail.
From 1st January 2007 a new set of provisions to the Income Tax Act and the Income Tax Management Act came into force, further strengthening Malta’s bid to become an important financial centre within the EU by 2015, the date set by the Maltese Government.
Malta practices a full imputation system of taxation which is unique within the EU. The basic concept of this system is that income received net of tax is grossed up in the hands of the recipient and taxed once more at the applicable rates of tax of that individual or body corporate. The tax suffered on the income is than taken as a tax credit and a refund or a topping up of the tax will then take place according to which rate of tax is the higher. This system coupled with a classical system gives rise to plenty of tax planning opportunities, which is what is making Malta so popular with investors worldwide.
The headline corporate tax rate is of 35%. However, upon a distribution of a dividend, shareholders can claim a refund of up to 6/7 of the tax suffered on the dividend bringing the net effective tax down to 5%. This refund is paid within a maximum of 6 weeks from the payment of the company tax.
If a Maltese registered company owned in full or in part by non-resident shareholders received dividend income from a Participating Holding (PH) i.e. dividend income from outside Malta, a full refund may apply to the shareholders upon distribution of a dividend . In certain cases the company may benefit from what is known as a Participation Exemption (PE) whereby a company need not pay the tax on this income from the outset.
The definition for PH is as follows:
• When a company holds directly at least 10% of the equity shares of the company, or
• Has the option to acquire up to 10% of the share capital, or
• Is entitled to first refusal in the event of a proposed disposal off all equity shares, or
• Has the right to sit on the board of directors, or
• Holds an investment of at least €1.2 Million in a company not resident in Malta and which is held for an interrupted period of 183 days or,
• Where these shares are held for the furtherance of the business, such holding should not be held as trading stock for the purpose of a trade.
The definition has been extended to include certain partnerships, thus enhancing Malta’s competitiveness as a holding company jurisdiction.
In order for a company to qualify for a PE it is enough to satisfy these provisions. However, for new companies incorporated on or after 1st January 2007 and for existing companies after 31st December 2010, the following anti-abuse provisions apply:
1. The foreign entity in which the PH is held must be resident or incorporated in a country or territory which forms part of the EU; or
2. is subject to any foreign tax at a rate of at least 15%; or
3. less than 50% of its income must be derived from passive interest or royalties.
If ALL three conditions are NOT met then BOTH of the following conditions must be satisfied:
1. The PH must not constitute a portfolio investment; and
2. either the body of persons not resident in Malta; or
3. its (the body of persons) passive interest or royalties have been subject to foreign tax at a rate of not less than 15%.
If a company satisfies the conditions for a PH and the anti-abuse provisions, it can opt not to declare this income in its tax return outright and no tax will be due.
Alternatively, the company may opt to declare this income, which might be beneficial in cases where the foreign shareholders would need to show that income has suffered tax. In this case, the company will benefit from a full refund payable within a maximum of 6 weeks from payment of the tax.
If a company satisfies the definition of PH but not the anti-abuse provisions it will still benefit from the 6/7 refund, i.e. it will have to pay the corporate tax of 35% and upon a distribution of a dividend the shareholder will apply for the a refund of the tax paid, effectively bringing down the net tax charge to 5%.
Companies receiving passive interest or royalties from abroad, a 5/7 refund will apply on tax suffered in Malta upon a distribution of a dividend.
Passive interest or royalty income is defined as income which is NOT derived directly or indirectly from a trade or business, where such interest or royalties have not suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than 5%.
Such income will be taxed normally in the hands of the Maltese company (i.e. 35%) but will only result in 5/7 refund when distributed (i.e. 10%).
It is possible to ask the Inland Revenue department for an advance revenue ruling on whether such income falls under these provisions or not.
In this article, we have described in more detail two areas in which Malta offers exciting tax planning opportunities – simple and advantageous to individuals and companies seeking to do business in a jurisdiction making itself impossible to ignore.
In our final part, we will take a look at two more areas where Malta can be advantageous for your clients. In the meantime, if you would like any more information on why Malta could be the jurisdiction of choice for your clients’ tax planning opportunities, please do not hesitate to get in touch.