Malta is fast becoming a significantly important financial centre within the European Union. A long history of fiscal and investment incentives for foreigners wishing to set up shop in Malta have led to a very attractive package for both investors as well as for non residents wishing to use Malta in their international tax planning structures.
MAIN ADVANTAGES OF THE NEW TAX REFORM
• Net tax payable of 5% on company profits.
• NIL tax payable on incoming dividends from subsidiaries situated outside Malta (subject to certain conditions)
• Possibility to opt to be taxed at 35% on incoming dividends and subsequently apply for a full refund or 6/7 refund on the Malta tax paid (ie: 5% net tax). This might be beneficial in cases where the foreign shareholders would need to show that income has suffered tax.
• Net tax payable of 10% on passive income received from outside Malta (such as interest and royalties)
• A Maltese Company can act as both a holding company and a trading company with no negative tax consequences thus eliminating the need to open separate companies.
• A branch of a non resident company carrying out activities in Malta will be treated in the same way as a resident company with resultant tax planning opportunities, and benefitting from the same net tax rate of 5% as companies
• No Withholding taxes on outbound dividends, interest or royalties
• Three or more tier Malta companies are now possible.
• Relief on tax suffered abroad on incoming dividends possible up to full amount of Malta tax payable (35%) (if such dividend does not satisfy the conditions for exemption mentioned above)
• Possibility to claim relief on Malta tax payable on income received from outside Malta even if such income has not been subject to tax abroad or if such income has suffered tax at a lower rate.
• Full exemption on stamp duty and capital gains upon the transfer of shares between non residents (Subject to certain conditions)
• Possibility of re organization relief, wherein a company can be amalgamated, split, or merged without loosing any accumulated tax losses. (In fact tax losses can be surrendered or claimed within a group and set off against any other type of income . Such claimed losses can be carried forward indefinitely.)
• All costs incurred in the production of the income is allowed as a tax deductable expense, there are no disallowed expenses. (except for formation expenses)
• Possibility to hold shares under fiduciary(nominee). In order to hold shares under fiduciary a fiduciary agent must be a specially licensed company. Such company is bound by law NOT to reveal the identity of the ultimate beneficiary owners of a company to ANY party including the financial regulatory body (Malta Financial Service Authority) Indeed the only authority who has the right to ask for this information are the Courts of Malta and then only in cases of serious suspicion of Fraud or Money laundering.
• Malta currently has over 50 double taxation agreements in place including with all EU countries and with the US. Moreover the number is increasing yearly.
Other Benefits:
• Member of the EU
• Member of the Euro Zone
• A sound banking system with representatives of some major banks like HSBC and Lombard Plc. ( the banking sector has been practically unaffected by the current crisis due mainly to their low exposure to international finance)
• Maltese Legislation conforms fully to EU law, EU code of conduct of business and abides to the Organization for Economic Co-operation and Development (OECD) standards.
• Possibility of redomiciliation of companies from anywhere in the world as long as such redomiciliation is allowed in the jurisdiction of the country of incorporation of the company and the country is not a black listed country.
• English being one of the two official languages.
• A democratic and stable government.
• A well established legal system based on UK law.
• A professional English speaking work force with a European mentality .
• A relatively low cost base.
• One of the best IT infrastructures in the EU.
• Good flight connections to all Major EU cities.
The Benefits in more detail:
From 1st January 2007 a new set of provisions to the income tax act and the income tax management act have come into force further strengthening Malta’s bid to become a 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 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 is being 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:
A. The foreign entity in which the PH is held must be resident or incorporated in a country or territory which form part of the EU. OR
B. Is subject to any foreign tax at a rate of at least 15% OR
C. 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:
A. the PH must not constitute a portfolio investment AND
B. either the body of persons not resident in Malta or
C. 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 (might be beneficial in cases where the foreign shareholders would need to show that income has suffered tax). In such 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%).
Passive Income
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 (ie: 10%)
The possibility exists to ask the Inland revenue department for an advance revenue ruling on whether such income falls under these provisions or not.
Besides the refund system which we have just discussed, Malta also has a number of mechanisms of relief from tax suffered abroad on foreign income. Thus income brought into Malta from dividends, interests, or royalties which have suffered tax at source can claim this tax by way of relief from Malta’s tax due.
In certain situations where it might not be possible to proof that tax has been suffered abroad or even in situations where no tax has been suffered abroad it is possible to apply what is known as the flat rate foreign tax credit (FRFTC) , whereby a relief is applied on a notional tax rate suffered abroad even if that income has not suffered any tax at all.
This type of relief can also be applied where tax has been suffered abroad and it is deemed more beneficial to use the FRFTC as in the two examples shown above.
INVESTMENT INCENTIVES
Besides tax advantages the Maltese Government also gives a number of extremely beneficial investment incentives for Companies wishing to invest in Malta. All investment incentives have been incorporated under one authority in order to streamline operations and to remove any bureaucracy. In fact It is now possible for investors to know to which benefits they are entitled in a very short span of time. The main incentives can be listed under the following categories:
The six pillars of investment incentives:
Investment Aid
Companies engaged in specific activities can benefit from tax credits on capital investment and job creation.
SME Development
Grants targeting the creation and development of innovative start-ups, and the development of forward looking small and medium-sized enterprises.
R&D and Innovation
Various incentives will be offered to stimulate innovative enterprises to engage in research & development.
Access to Finance
Companies may be assisted through loan guarantees, soft loans, loan interest subsidies or royalty financing in the case of highly innovative projects.
Enterprise Support
Assistance to businesses to support them in developing their international competitiveness, improving their processes and networking with other businesses.
Employment and Training
These incentives are administered by the Employment & Training Corporation. Enterprises are supported in recruiting new employees and training their staff.
Conclusion
Multinational companies and individuals seeking to lower costs and increase the return on their investment should seriously consider Malta in their international tax planning structure.
Malta encourages foreign investment and the Government has made it his goal to make Malta a financial centre of excellence within the EU by 2015. With this in mind bureaucracy has been reduced to a minimum and all efforts are being made to make the move to Malta as simple and cost effective as possible.
All related services have been grouped under one authority to improve efficiency and cut on bureaucracy and all professionals involved in the financial sector are heavily regulated and monitored to ensure a high level of professional service.
At Ciantar Associates we are dedicated to offering a range of services to foreigners wishing to set up shop in Malta. Amongst our range of services are the following:
• Company incorporation
• Company redomiciliation
• Accounting
• Auditing
• Taxation
• Corporate services
• Fiduciary Services
• Trustee services
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