International Trading & Holding Companies
Before 1st January 2007, Maltese law allowed the formation of International Trading Companies (ITCs) and International Holding Companies (IHCs) which restricted the tax advantages of Malta companies to non-resident shareholders.
The Maltese Company is an onshore company paying tax on a worldwide basis at the normal corporate tax rate of 35% with significant tax refunds to shareholders based on the imputation tax system and with the possibility of confidential beneficial ownership.
This presents favourable tax planning opportunities for:
• dividends received from a participating holding
• capital gains made from the disposal of a participating holding
• dividends from non-participating holdings
• trading income
• passive income (interest, royalties etc)
A Malta Holding Company is a company resident in Malta formed with the object of holding shares in other companies as well as any other asset including real estate, cash, moveable valuables, shares and securities, and intellectual property whether in or outside Malta. Malta holding companies can be used to distribute income generated by such assets in a tax-efficient manner to shareholders.
A Malta Company is a very effective international tax-planning vehicle. Malta holding companies are onshore holding companies taxed on a worldwide basis at the normal corporate tax rate of 35% reduced to an effective tax rate of 0% in the hands of shareholders, and with the possibility of confidential beneficial ownership.
Malta Companies can perform specific active or passive holding activities or a mixture of holding and trading activities. The following are the typical but not the only uses of Malta Companies:
Typical Uses of Holding Companies
property ownership & project management
hold aircraft, motor cars, yachts, ships
hold assets of all kinds: real estate, shares & securities,
intellectual property, bank accounts
hold patents, copyrights, franchises & other intangible rights.
Participating Holding & Participation Exemption
Shareholders of Malta holding companies qualify for a full refund of the Maltese tax paid by the company on profits and gains arising from “participating holdings” when such profits are distributed. From 1st January 2008, Malta holding companies also qualify for an outright participation exemption subject to light anti-abuse provisions introduced from that date.
For a Maltese resident company to hold a “participating holding” in a company incorporated abroad, it must hold at least 10% of the equity shares in the non-resident company. In the case of a shareholding of less than 10%, such holding may still qualify as a “participating holding” if the Malta Company:
• holds 10% or more of the shares of the foreign company; or
• is entitled at its option to purchase or has the first right of refusal on a disposal of the balance of the equity shares of the foreign company; or
• is entitled to be represented on the Board of Directors of the foreign company; or
• holds a shareholding exceeding EUR1,165,000 or equivalent or an uninterrupted period of 183 days; or
• holds equity shares in the foreign company for the furtherance of the business of the Maltese company (not trading stock).
At the option of the taxpayer, dividends and capital gains derived from a PH are exempt from Malta tax.
Light anti-abuse provisions apply if the PH is acquired after 1/1/2007:- the foreign subsidiary must:
• be resident or incorporated in an EU country or territory; OR
• be subject to any foreign tax of at least 15%; OR
• not have more than 50% of its income derived from passive interest or royalties;
Where none of the conditions set out above are satisfied then both of the following two conditions must be satisfied for the income to be eligible for the participation exemption:
• the equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment and for this purpose the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment; AND
• 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%.
100% refund for participating holdings / participating exemption
Under the Maltese tax system, the income and capital gains derived by a Maltese registered company from a ‘participating holding’, qualifies for a full refund of the Maltese tax paid by the company when distributions are made to company shareholders.
The latest amendments to Maltese tax laws have enhanced this tax treatment through the introduction of the notion of the ‘participation exemption’ whereby such income may be exempted from Maltese tax provided certain conditions are satisfied.
Dividends derived from a participating holding acquired after 1 January 2007 by a Maltese company may qualify as a ‘participation exemption’ provided certain anti-abuse provisions are satisfied.
In those instances where the participating holding qualifies as a ‘participation exemption’, the Maltese company has the option not to declare the income in its tax return resulting in no tax being payable in Malta.
If the company, however, elects to include the income from its participating holding in its tax return, it will then still qualify for a full refund of the tax paid by the Maltese company. The refund is payable by the fourteenth day following the end of the month in which the claim is made.
For companies having income derived from non participating holdings or from passive interest and royalties, the Maltese tax system still provides for refunds of the tax paid by the Maltese company when distributions are made to shareholders.
5/7ths refund for passive interest and royalties
When distributions are made out of profits earned from passive interest and royalties, the shareholders of a Maltese company may claim a refund of five-sevenths of the tax paid by the company when distributions are made to them.
The six-sevenths and five-sevenths refunds only apply when the distributions are made by the company which did not claim any form of double tax relief. When dividends are paid out of profits allocated to the foreign income account and in respect of which profits the company has claimed double tax relief, the shareholders may apply for a refund of two-thirds of the tax paid by the Maltese company.
Procedure for Refund
These statutory refunds (available since 1994) are legally guaranteed and are payable efficiently by the Inland Revenue Department to the shareholders within 14 days from the last day of the month in which the request made to the Department.
Relief from Withholding Taxes
Maltese companies enjoy exemption from, or reduced withholding taxes on, income paid from another jurisdiction.
There are no withholding taxes on dividends distributed. The amount retained is equivalent to the company tax (35%) and is fully imputed to the shareholder.
Likewise, there are no withholding taxes on interest and royalties accruing to or derived by any person non-resident in Malta provided the debt claim in respect of which the interest accrues and the royalty is not effectively connected to a permanent establishment in Malta through which such person carries on a trade or business.
Other tax benefits
No withholding taxes, stamp duties or exchange control restrictions apply on distribution of the profits or dividends to the shareholders and there are no taxes or restrictions on the exportation of the dividends from the Malta company. Malta has:
• No thin-cap rules or debt : equity ratios
• No transfer pricing rules
• No withholding taxes on interest and royalties to non-residents
• No withholding tax on dividend payment
• No capital duties or wealth taxes
Double Tax Relief for Maltese Companies
In the case where Malta has a double tax treaty and the treaty provides for the relief of double taxation, then the treaty relief will apply.
Income received from Foreign sources may have been liable to foreign taxes and may also be subject to Withholding taxes. Mitigation of these taxes can be obtained by claiming unilateral relief.
Foreign tax suffered is allowed as a tax credit against the tax chargeable in Malta. The credit allowed must not exceed the total tax liability in Malta and to claim the unilateral relief the company must demonstrate:
• The income arose from a foreign source
• The income was subject to foreign tax
• The amount of the foreign tax suffered
Flat Rate Foreign Income Tax Credit
An alternative option to claiming double tax relief is to claim a flat rate foreign income tax credit.
The flat rate foreign tax credit is calculated at 25% of the foreign income or gain before allowable expenses.
The effective tax rate on net income after expenses is therefore 13.38%.
On distribution of the profits, the shareholder can claim a 2/3rds tax refund on the tax suffered by the Maltese company, effectively reducing the overall tax rate even further.