Centre of commerce and investment
The Maltese Archipelago is composed of five islands. Malta is the largest, followed by Gozo, its sister island. Throughout the centuries, many nations have availed themselves of the strategic, central position of the Maltese islands and their impressive natural harbours in the centre of the Mediterranean.
Today, Malta has become a centre of commerce and investment. Maltese and English are the two official languages in Malta. Most business correspondence, commerce and trade are conducted in English.
Malta joined the EU on 1 May 2004 and this provided additional stability and potential for growth. The euro was adopted as the country’s currency as from 1 January 2008. The financial services sector already accounts for 12 per cent of GDP and is expanding both in terms of front office and back office support services.
Maltese law is historically a civil law system, however it has been strongly influenced by other legal systems, particularly English Common Law and, more recently, European Union legislation.
Since 1994, Malta has moved from being an offshore to an onshore financial services jurisdiction. It has completed a programme of reforming all its finance sector legislation in line with international best practice, has EU approval in respect of its tax system, is seen in a favourable light by key international bodies, such as the IMF, and was one of the first six countries in the world to reach an advanced accord on fiscal matters with the Organisation for Economic Co-operation and Development (OECD).
Malta has implemented the EU Parent Subsidiary and Interest and Royalties Directives and the EU Third Prevention of Money Laundering Directive. It has a comprehensive network of double taxation agreements.
Today, Malta has become a centre of commerce and investment
Malta’s finance industry has benefited significantly from a ‘comprehensive and robust legal framework and a particularly well-regulated financial sector.'1 A single financial regulator, flexible, approachable and close to the industry participants has led to increased efficiency, streamlined procedures, lowered compliance costs and a more consistent implementation of standards, which is a clear advantage for the jurisdiction.
Malta companies have proved to be popular in the structuring of international business and provide investors with a tax efficient corporate vehicle in a well-regulated EU jurisdiction that is compliant with international standards and regulation.
Companies registered or resident in Malta pay tax on their chargeable income at the standard corporate income tax rate of 35 per cent, while individuals are taxed at progressive rates up to a maximum of 35 per cent. Historically, imputation systems were used in countries such as the UK, France and Finland, however Malta is currently the only country within the EU that operates a full imputation system of taxation. As with all full imputation systems, the tax paid by the company is imputed to the shareholders once a distribution is made. Shareholders whose personal tax rate is lower than 35 per cent are given a refund of the amount of tax paid by the company that is in excess of their personal tax rate.
A shareholder in receipt of dividends from a Malta company may claim a refund of all or part of the Malta tax paid on the profits out of which the dividend is being distributed. The amount of refund to which a shareholder is entitled depends on the nature and source of the income. Trading income distributed to the shareholder by way of dividend entitles the shareholder to a refund of six sevenths of the Malta tax paid, whereas a distribution derived from passive interest or royalties gives rise to a refund of five sevenths of the Malta tax paid.
Amendments to Malta’s tax legislation, effective from 1 January 2007, introduced the concept of a participation exemption whereby the company may opt for qualifying income or gains derived from a Participating Holding (PH) as defined below, to be exempt from tax in Malta.
An investment held by a Malta company in a non-resident company may qualify for classification as a PH. Such qualification is relevant to determine whether the income is eligible to be exempt from tax in Malta in terms of the participation exemption provisions or the amount of refund which a shareholder may claim when in receipt of dividends distributed out such investment income. A range of criteria exist to determine whether an investment qualifies as a PH or not. The most commonly satisfied criteria is a 10 per cent holding of the equity shares2 in the non-resident company, or an equity investment of at least EUR1,164,000, or foreign currency equivalent held for an uninterrupted period of not less than 183 days.
Where the Malta company disposes of an investment which qualifies as a PH, the company may opt for the gain arising from such disposal to be exempt from tax in Malta in terms of the participation exemption provisions, alternatively the shareholder in receipt of dividends paid out of such gain is entitled to claim a refund of 100 per cent of the Malta tax paid on the same.
Where the Malta company receives dividend income from such qualifying investment, the company may opt for the income to be exempt from tax in Malta in terms of the participation exemption provisions, alternatively the shareholder in receipt of a distribution out of such dividends will be entitled to claim a refund of 100 per cent of the Malta tax paid on such dividends, provided the non-resident company in which the qualifying investment is held:
- is resident or incorporated in the EU; or
- is subject to any foreign tax at a rate of at least 15 per cent; or
- derives less than 50 per cent of its income from passive interest or royalties.3
Should the investment not fall within one of the above safe harbours, a shareholder is still eligible to claim a refund of 100 per cent of the Malta tax paid where both the conditions below are satisfied:
- the equity shares held in the non-resident company do not represent a portfolio investment;4 and
- the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5 per cent.
Where a PH does not fall within the safe harbours or satisfy the anti-abuse provisions outlined above, the amount of refund which the shareholder may claim is limited to five sevenths of the Malta tax paid.
Relief from double taxation may be obtained through Malta’s comprehensive network of currently 51 double taxation agreements and the granting of tax credits.
Malta applies a system of unilateral relief, which, provided that evidence of tax suffered overseas can be made available, operates as a virtual double taxation agreement with all jurisdictions.
Where relief from double taxation is claimed, the amount of refund which the shareholder may claim upon receipt of a distribution from the Malta company, as outlined above, is limited to two thirds of the Malta tax paid.
The Maltese government is targeting a growth in Financial Services from 12 per cent of GDP to 25 per cent of GDP by 2015.
- 1. Report of the Council of Europe Money-laundering Committee, April 2003.
- 2. Equity shares refers to a holding of the share capital in a company when the shareholding entitles the shareholder to a right to vote, to profits available for distribution to shareholders and to assets available for distribution on a winding up of the company – article 2(1) Income Tax Act.
- 3. Interest or royalties are deemed to be passive when they are not derived directly or indirectly from a trade or business and where such interest or royalties have suffered foreign tax at a rate of less than 5 per cent – article 2(1) Income Tax Act.
- 4. A portfolio investment is an investment in securities 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 that the shares may lose value – article 2(1) Income Tax Act.
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