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The Corporate Tax System In Malta

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The Corporate Tax System In Malta

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A company registered under the laws of Malta is deemed to be ordinarily resident and domiciled in Malta and subject to tax on a world-wide basis. Any expenses incurred in the production of the income may be deducted from the income and gains derived by such company. Any gains and profits derived by a Maltese company are subject corporate income tax at the rate of 35%. The accounting profit adjusted for tax purposes is used as a basis to determine the taxable income derived by a Maltese company.

Tax accounting and tax refunds

The income tax system utilises different tax accounts for different sources of income namely the Final Tax Account (FTA), the Immovable Property Account (IPA), the Foreign Income Account (FIA), the Maltese Taxed Account (MTA) and the Untaxed Account (UA).

The attribution of chargeable income to the different tax accounts is an important aspect of the Maltese tax system as this determines the possibility of tax refunds upon a distribution of profits. Distributions from the FTA, the IPA and the UA do not give rise to any tax refunds in the hands of the shareholders, however, a distribution from the FIA and MTA entitles the shareholder to claim a refund which is equivalent to either 2/3rds, 5/7ths, 6/7ths, or 100% of the company income tax. The examples illustrate the mechanics of the full imputation system and these tax refunds.

Profits attributed to the FTA include income that has been subject to a final withholding tax, profits arising from capital gains on immovable property which has suffered the property transfers tax, certain investment income and certain tax free profits. Profits attributed to the IPA are those profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, profits from the rent, accommodation revenue by hotels and similar establishments, management fees and annual rental value of immovable property in Malta.

A company’s trading or passive income which is not attributable to the FTA and IPA, is attributed to the FIA or the MTA depending on the source of such income. A distribution from the FIA or MTA enables the shareholder to apply for a tax refund of the company tax. The refund is equivalent to 6/7ths in the case of trading income and to 5/7ths in the case of certain passive interest and royalties. A company deriving foreign source income may also utilize the Flat Rate Foreign Tax Credit (FRFTC) by increasing the net foreign source income or gains by 25% and then deducting the FRFTC from the Malta tax. Upon a distribution of such foreign source income a shareholder may avail himself of a 2/3rds refund of the Malta tax.

Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements. The tax refund is also paid in the same currency, thus eliminating any currency exchange risks. In terms of the provisions of the income tax legislation, a tax refund must be paid by the Inland Revenue Department within 14 days from the end of the month in which it falls due.

A tax refund is considered to fall due when the company’s audited financial statements (showing the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on a prescribed form, together with the dividend certificate is submitted by the shareholder or his attorney or representative. The tax refund system and the application of the tax accounting is applicable to both companies incorporated in Malta as well as foreign companies resident in Malta and registered as such with the tax authorities.

The Malta Trading Company (MTC)

Given that a Maltese company eligible for tax refunds is not required to obtain any special status for tax purposes, no restrictions are imposed on the type of activities which may be carried out by such company. This implies that a Maltese company may carry out all types of trading and holding activities both with persons resident in Malta and persons resident outside Malta.

Taxation of MTC

Although the Maltese Company would be subject to the normal corporate tax of 35% levied on their chargeable income for the year of assessment, certain fiscal incentives are available to non-resident shareholders (who may even be a Maltese company 100% owned by non-residents -- the so-called ‘Dividend-Feeder Company’), upon a distribution of dividends by the Maltese company, which render the effective tax rate 5%.

Example

A Maltese Company makes a profit of €1,000 on trading activities and is taxed on these profits at 35% corporate tax. Dividends are then distributed to the non-resident shareholders of the Trading Company without payment of withholding taxes. Shareholders in receipt of dividend income emanating from trading activities and whose profits are allocated to the FIA or MTA may apply for a tax refund equivalent of 6/7ths of the company tax paid. The example illustrates the mechanics of the full imputation system and the tax. This would leave an effective tax rate of 5%.

A mathematical example will demonstrate better this tax efficient structure:

Malta Company

Profits of the company

1,000

Less Corporate Tax @ 35%

350

Profits available for distribution (dividend)

650

Non-Resident Shareholder’s point of view

Distributable dividend to non-resident

650

Gross dividend (650 + 350)

1000

Tax at 35% (i.e. 35% of 1,000)

350

Less tax paid by Maltese Company available as credit

350

Balance due

Nil

Refund of 6/7ths of Malta tax (6/7ths of 350)

300

Total received – Dividend + Tax refund (i.e. 650 + 300)

950

Total tax suffered

50

Net effective rate of tax

5%

The refunds are not taxable in Malta, to be paid by the Tax Department not later than 14 days after the end of the month in which they become due on production of an appropriate documentation; and to be paid in the same currency in which the relevant profits were charged to tax.

Malta Holding Company as shareholder of MTC

It often happens that the tax treatment of the tax refunds in the home jurisdiction of the non-resident shareholder of the MTC is rather unclear. In order to mitigate this problem, it is very common to interpose between the non-resident ultimate beneficial owner and the MTC a Holding Company. This latter company would have the sole use of receiving the dividend from the MTC, and claiming for the income tax refund on the dividends received. This company is typically referred to as the Dividend Feeder Company (DFC). In the example above the total received of €950 (Dividend + tax refund) would be received by this holding company

By adding this additional company, the non-resident ultimate beneficial owner would be able to receive a final dividend that includes the taxed MTC profits and the income tax refund. The global effective tax rate would still remain of 5% since no withholding taxes would be levied on any dividend distributions of the ITC or DFC.

Holding companies and the participation exemption

Holding companies that derive dividend income or capital gains from a ‘participating holding’ may apply for a participation exemption. Alternatively, the Maltese holding company may elect to be subject and pay income tax and upon a distribution of profits the shareholder is entitled to claim a full refund of the company income tax.

‘Participating Holding’

A shareholding in a non-resident company qualifies as a participating holding if the Maltese company holds equity shares in a non-resident company or a qualifying body of persons and it:

(i) has at least 10% of the equity shares in the non-resident company; or

(ii) is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident company, or it has the right of first refusal to purchase such shares; or

(iii) is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or

(iv) is an equity shareholder which invests a minimum in the non-resident company of Eur 1,164,000 (or the equivalent in a foreign currency) and such investment is held for a minimum interrupted period of 183 days; or

(v) holds the shares in the non-resident company for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Furthermore the non-resident company in question must either satisfy any one of the following three conditions:

• it is resident or incorporated in the EU,

• it is subject to foreign tax of a minimum of 15%,

• it does not derive more than 50% of its income from passive interest and royalties, or must satisfy both of the following conditions:

(a) the shares in the non-resident company must not be held as a portfolio investment; and

(b) the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

A ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company. Furthermore, it is important to note that the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment.

Other important benefits:

· Malta does not levy any withholding taxes;

· Malta has no thin capitalisation rules or debt-to equity ratios;

· Malta has no specific transfer pricing rules;

· Malta has no capital duty and wealth taxes;

· No stamp duties on share transfers in companies owned by non-residents;

· Non residents are exempt from any capital gains on certain share transfers;

· Malta has an extensive treaty network with 45 treaties in force and 12 initialed but not yet ratified;

· As an EU Member State Malta has adopted the EU’s Parent-Subsidiary Directive and the Interest and Royalties Directive;

· Under the re-domiciliation provisions it is possible to migrate companies into and out of Malta without the need of winding up;

· No exchange control regulations and business may be conducted freely in any currency;

· Malta’s financial services legislation and tax laws are compliant with EU directives;

· Malta’s has strong and effective Money Laundering Laws and Regulations

· Malta’s legislation offers regulated professional trustees which may provide fiduciary and trust services.

The following table illustrates and summarises the tax treatment and possibilities for companies having passive or trading income and the tax refunds available to shareholders:

1 Participating Holding (PH)

2 Flat Rate foreign tax credit (FRFTC)

 

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