Taxation of Companies in Malta Pierre Mifsud pmifsud@emd.com.mt Partner EMD
Agenda (A)A brief overview of the taxation of companies in Malta (B) The imputation system of tax (C) Participating Holding (D)The refundable tax credit system (E) Relief from double taxation (F) Tax planning opportunities
Overview
(A) A brief overview of the taxation of companies in Malta
Overview (A) A brief overview of the taxation of companies in Malta
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Standard rate of tax of 35%
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Reduced by the application of: - Full imputation system of tax - Refundable tax credit system - Cross border relief from double taxation
Overview (A) A brief overview of the taxation of companies in Malta
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Other features No specific transfer pricing rules No thin capitalisation rules Unlimited carry forward of losses No CFC rules No withholding taxes on outgoing interest, dividends and royalties Limited tax on capital gains Continuation of companies
Overview (A) A brief overview of the taxation of companies in Malta Residence and domicile of companies A company is resident in Malta if: -
it is incorporated in Malta;
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it is incorporated outside Malta but its business is managed and controlled in Malta;
A company is domiciled in the country of incorporation.
Overview (A) A brief overview of the taxation of companies in Malta
- System of taxation approved by the EU - Foreign branches in Malta are treated as local companies for tax purposes - Lowest effective tax rate in the EU
- Malta has access to PSD (Parent-Subsidiary Directive), IRD (Interest and Royalties Directives) and the MAD (Mutual Assistance Directive) and the fundamentally important freedoms within the EU - Compliant with EU State Aid Regulations operating outside the purport of harmful tax competition .
Imputation System of Tax
(B) The imputation system of tax
Imputation System of Tax - A mechanism to grant relief from economic double taxation
- Same profits should not be taxed twice in the hands of different persons - Corporate tax is a prepayment of shareholder tax
Imputation System of Tax - Shareholders receive full credit for any tax paid at the level of the company on profits distributed as dividends - Company tax rate of 35% is equal to the maximum rate applicable to individuals in Malta - Tax is refundable where the shareholder is subject to tax in Malta on the dividend at a rate which is lower than 35%
Imputation System of Tax Company Level Profit before tax Tax at 35% Net Profit after tax
â‚Ź 100 (35) 65
Shareholder Level Gross dividends distributed to S/H Tax at 35% Tax at source
â‚Ź 100 35 (35) -
Participating Holding
(C) Participating Holding
Participating Holding -
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Company holding at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares; or Equity shareholder entitled to acquire the balance of the other shares not held; or Equity shareholder is entitled to first refusal in the event of a disposal; or Equity shareholder is entitled to sit on the board or appoint a person on the board; or Equity shareholding of at least Eur1,164,000 held for an uninterrupted period of 183 days; or Equity holding is not held as trading stock for resale
Participating Holding Anti-abuse provisions for PE or 100% tax refund to apply: ‌ where the body of persons in which the PH is held satisfies any one of the following conditions: (a) It is resident or incorporated in a country or territory which forms part of the EU; or (b) It is subject to any foreign tax of at least 15%; or (c) It does not have more than 50% of its income derived from passive interest or royalties 
If any of these conditions are satisfied the income of the PH is either exempt from tax or else the 100% tax refund applies
Participating Holding Anti-abuse provisions for PE or 100% tax refund to apply ‌ where none of the above conditions are satisfied, then the following two conditions must be satisfied (a) The equity holding must not be a portfolio investment; and (b) The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%
Refundable Tax Credit System
(D) The refundable Tax Credit System
Refundable Tax Credit System - 6/7ths tax refunds on the total tax Exceptions: - 5/7ths tax refunds on the total tax i.r.o passive interest and royalties - 5/7ths tax refunds on the total tax i.r.o a PH where the anti-abuse provisions are not satisfied - 2/3rds tax refunds on total tax in the case of certain foreign income on which DTR is claimed (except for FRFTC) - 2/3rds tax refunds on Malta tax paid in the case of certain foreign income where the FRFTC is claimed - 100% tax refunds or tax exemption in case of a PH where the antiabuse provisions are satisfied
Refundable Tax Credit System Passive interest and royalties -
Income which is not derived, directly or indirectly from a trade or business; and Where such income has not suffered or suffered any foreign tax, directly or by way of withholding at a rate of tax which is less than 5% Passive income from interest or royalties qualify for 5/7ths refund Interest or royalties derived from a trade or business (active income) qualify for 6/7ths refund If at least 5% foreign tax is suffered, they are no longer considered passive
Refundable Tax Credit System 6/7ths tax refunds â‚Ź
Income Malta tax at 35% Net dividend 6/7ths tax refund on total tax Net effective tax paid (35 less 30)
100 (35) 65 30 5
Refundable Tax Credit System 5/7ths tax refunds â‚Ź
Income Malta tax at 35% Net dividend
100 (35) 65
5/7ths tax refund on total tax Net effective tax paid (35 less 25)
25 10
Refundable Tax Credit System 2/3rds tax refunds â‚Ź
Income Malta tax at 35% Net dividend 2/3rds tax refund on total tax Net effective tax paid (35 less 23)
100 (35) 65 23 12
Refundable Tax Credit System 100% tax refunds â‚Ź
Income Malta tax at 35% Net dividend 100% tax refund on total tax Net effective tax paid (35 less 35)
100 (35) 65 35 0
Distributions to Maltese Residents
Individuals who are resident but NOT domiciled in Malta may benefit effectively from the tax refunds when they hold the shares in the Maltese company via a non resident company
Distributions to Maltese Residents
Resident & Non Domiciled Individual
Refund (6/7, 5/7, 2/3 or 100%) on dividends received
Dividends
Foreign Company Dividends
Malta Company
Tax at 35%
Relief from Double Taxation
(E) Relief from double taxation
Relief from Double Taxation 1. Treaty Relief 2. Commonwealth Relief 3. Unilateral Relief - including a credit system for relief of underlying tax and 4. Flat-Rate Foreign Tax Credit of 25%. Overseas income is never subject to double taxation
Relief from Double Taxation Treaty relief - Based on the OECD MC - Relief given in the form of a tax credit for foreign tax paid - The credit cannot exceed Malta tax - Malta has concluded more than 60 DTAs.
Relief from Double Taxation Commonwealth Relief Applicable in respect of foreign tax paid to British Commonwealth countries, provided that the legislature of such country has provided for similar relief to Malta-source income.
Relief from Double Taxation Unilateral relief - Unilateral relief is a domestic type of relief which may be claimed by a Maltese resident person who derives income arising outside Malta. - Relief for underlying tax is also available in case of dividends - Unilateral relief may be claimed by the following persons: - Individuals resident in Malta - Companies resident in Malta - Malta branches of overseas companies This form of relief gains importance when no treaty exists
Relief from Double Taxation Flat rate foreign tax credit (FRFTC) - FRFTC is a notional credit - FRFTC is a form of unilateral relief only available to companies, and is given where the other types of relief are not available. - Proof is required that the income in question is foreignsource income, and the claiming company must be specifically empowered to receive foreign-source income. - Net income is grossed up by 25% and a deemed credit for foreign tax is given against the Malta tax due on the income
Relief from Double Taxation Flat rate foreign tax credit (FRFTC) â‚Ź Foreign source income FRFTC @ 25% Grossed up income Malta tax at 35% Less FRFTC Tax payable
100 25 125 43.75 (25) 18.75
Withholding Tax No tax is withheld on payments of Dividends; Interest; and Royalties paid to non-residents
Advanced Revenue Rulings  Advanced revenue rulings are issued not later than 30 days from the date of application, and are binding for 5 years  Rulings may be renewed for another period of 5 years at the option of the applicant, and remain valid for a further period of 2 years from the time of any relevant changes in the Income Tax Act
Tax Planning Opportunities
(F) Tax planning opportunities
Poland
Malta
Poland
■ Participation exemption in Malta on qualifying dividends and capital gains
■ No withholding tax on dividends distributed by Malta company ■ Ultimate shareholder can be resident in Poland or any other country, including countries situated in a low tax jurisdiction
■ Effective 0% Malta tax cost 35
Poland
Malta
Offshore
An Entry Route into the EU (Slide 1) ■ Tax efficient distribution of profits from an offshore subsidiary to an EU holding company ■ Participation exemption should apply on dividend income from offshore company (assuming less than 50% of income consists of passive interest/royalties) ■ No Malta withholding tax on a dividend distribution to Poland Income
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Poland
Malta
Offshore 2
Offshore 1
An Entry Route into the EU (Slide 2) â– Should offshore company not be subject to tax of at least 15% or should offshore company derive more than 50% of its income from passive interest and royalties, a 2nd offshore company can be interposed between offshore and Malta. â– Passive income will change to dividends and therefore the participation exemption will apply Income
37
Non EU
Malta
Poland
An Exit Route from the EU â– NO WHT on dividends paid to Malta from Poland as long as (consistent with PSD): (i) Malta Co. holds at least 10% of share capital of Poland Co.; (i) Both companies must be deemed resident under the domestic law of their jurisdiction; and (iii) Shares have been held for an uninterrupted period of 24 months. â– Dividends received in Malta should be exempt from tax in Malta under the participation exemption regime 38
Non-EU
Malta
Poland
Parent Subsidiary Directive No withholding tax on dividends from Poland Co. to Malta Co. provided that: Malta Co. holds at least 10% of SC /voting rights in the Poland Co.; and Both companies must be deemed resident under the domestic law of their respective MSs; and Meet the min. holding period required : 2 continuous years
Polish Resident
Basic Trading Structure- Single Tier ■ Malta tax at 35% on the income received after allowing for deductible expenses ■ Upon a dividend distribution to Polish resident, the latter may claim a refund of tax paid by Malta (typically the 6/7ths refund) ■ No Malta tax is levied on the Malta tax refund or on the dividend distribution.
Malta
Income
40
Polish Resident
Malta 1
Malta combined Holding/ Trading Structures ■ Malta 2 subject to Malta tax at 35%
■ Malta 1 receives 6/7ths tax refund from tax authorities and dividends from Malta 2. These will not be subject to further tax in Malta in the hands of Malta 1. ■ Malta 1 distributes dividends to Polish Resident. No withholding tax on payment of dividends.
Malta 2 Income
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Non Resident
Polish Trading Company
Malta branch
Deriving ACTIVE income through a Malta branch (Slide 1) ■ Malta branch is subject to Malta tax at 35% ■ No additional Malta tax is levied when the branch profits are repatriated to the level of the Polish trading company ■ Polish trading company distributes branch profits to non-resident (incl. Polish resident) by way of dividend distribution ■ No Malta tax on dividends from foreign trading company to non-resident Active Income from Trade or Business
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Polish Resident
Polish Trading Company
Malta branch
Deriving ACTIVE income through a Malta branch (Slide 2)
â– Polish Resident claims 6/7ths refund of Malta tax paid by Polish trading company on the branch profits out of which the dividend from Trading Co was distributed. â– Effective tax rate in Malta on profits generated by Malta branch is 5%. Active Income from Trade or Business
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Deriving PASSIVE income through a Malta Branch Polish Co.
Malta Branch
â– No Malta tax liability on foreign source passive income attributed to a Malta branch of a Polish Co.
Passive foreign income or Income from Foreign Capital Gains
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Polish Parent
Tax Haven / Malta
Polish Subsidiary
Continuation of Companies from Tax Havens ■ A company registered in a tax haven re domiciles to Malta and continues to exist as a company registered in Malta ■ No WHT on dividends paid to Malta Co. provided that the conditions under the PSD are met Active income
■ Qualifying dividends and capital gains are exempt from Malta tax (participation exemption) ■ No WHT would be levied in Malta on a distribution of dividend from Malta. 45
Polish Parent
Malta resident but not domiciled in Malta
Using a Malta resident/ non domiciled entity (Slide 1) â– A company can shift its residence to Malta by transferring its effective management and control to Malta.
â– Subject to tax in Malta on - Income arising in Malta - Income arising outside Malta which is received in Malta Foreign income / foreign capital gains - Capital gains arising in Malta
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Polish Parent
Malta resident but not domiciled in Malta
Using a Malta resident/ non domiciled entity (Slide 2)
No Malta tax on â– Foreign Source Capital Gains â– Foreign Source income not received in Malta â– Dividends received in Malta from a participating holding Foreign income / foreign capital gains
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Aircraft/Ships/Road Vehicle Operations A Polish company with effective management and control in Malta: • DTT: Any income derived from the operation of an aircraft/ship/road vehicle for the international transport of goods or services is taxable only in Malta
• Malta Rules: Polish company is taxable on foreign income only if it is remitted to Malta • International Traffic: Except when aircraft /ship/road vehicle is operated solely between places in Poland
Interest/Royalty Income Double Tax Treaty: • A person resident in Malta receiving interest/royalties from Poland and vice versa • Withholding tax on the payment of the interest/royalties by the source country is limited to 5% (provided that the recipient of the interest/royalties is the beneficial owner) Malta Law: • No withholding tax on outbound payment of interest to nonResidents • Maltese resident (non-domiciled) taxable only on foreign interest/royalties remitted to Malta
Interest/Royalty Income Interest and Royalties Directive (Relevant to payments by Poland Co.) Interest/royalties paid between associated enterprises in 2 MSs is exempt provided that: Malta Co. is an associated company of Poland Co. : 1. Malta Co. has a direct holding of 25% in Poland Co. , or 2. Poland Co. has a direct holding of 25% in Malta Co. , or 3. EU Co. has a direct holding of 25% in Malta Co. and Poland Co. Recipient is the beneficial owner thereof Recipient is a company in the other MS or a PE of another company within the EU Holding maintained for an uninterrupted period of at least 2 years
Re-Domiciliation to Malta • Maltese law provides for ‘Step-up’ provisions which allows a company being re-domiciled to Malta to claim a step up in the tax base costs of any assets held outside Malta • Enables the company to revalue its overseas assets to the fair market value at the time the re-domiciliation process is undertaken • The re-valued cost constitutes the new acquisition cost of the assets when calculating any subsequent gain on the eventual disposal of the said asset • Any capital allowances available will be calculated on the steppedup value of the assets thus reducing the overall tax charge
Director’s Fees Director’s Fees derived by a Polish resident from a Maltese Company Article 16 DTT: Malta has primary (unlimited) jurisdiction to tax director’s fees Poland SHALL exempt such income from tax - Article 23(a) DTT
Waiver of Loans Polish Resident grants loan to Maltese Company Interest paid by the Maltese company to the Polish resident is a deductible expense for the company No Maltese tax is withheld on the interest paid to the Polish resident The waiver of the loan is reported as income in the books of the Maltese company Such income is not subject to tax in Malta
Waiver of Loan Maltese Company grants loan to Polish Resident
Interest paid by the Polish resident is subject to a maximum rate of withholding tax of 5% in Poland (as per the DTT) Interest income received by the Maltese company will be subject to tax in Malta at 35%, with the possibility of claiming relief for the 5% tax paid in Poland. Thus the effective tax paid in Malta will be of 30% The waiver of the loan is reported as an expense in the books of the Maltese company, which expense is not deductable for tax purposes
Dr. Pierre Mifsud Partner EMD Malta 00356 2203 0000 info@emd.com.mt www.emd.com.mt
DISCLAIMER This presentation has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy and completeness of the information contained in this presentation and the firm does not accept any liability and disclaims all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it.