Malta Companies and Taxation
Malta, an EU Member State since May 2004, is increasingly developing into a reputable financial services centre offering an attractive and competitive environment for international business and investment. A beneficial tax regime supported by an agreement reached with the European Union continues to enhance Malta's position as an attractive jurisdiction to those investors who want to use Malta as a base for their international activities. Companies, registered or resident in Malta enjoy a range of benefits which include comparatively low running costs, a skilled multi-lingual workforce as well as an extensive treaty network coupled with various other forms of tax incentives.
Under Malta's tax system a company is considered resident in Malta if it is incorporated in Malta or, in the case of a foreign body of persons, if its control and management are exercised in Malta. Tax is charged at a standard rate of 35% on the chargeable income of the company. However, in view of Malta's full imputation system of taxation any income tax paid by the company is credited in full to the shareholder upon a distribution of dividends, so as to avoid the double taxation of corporate profits and entitles shareholders for a refund of any tax paid by the company which is in excess of the shareholders' income tax liability.
Taxation of Malta Companies
Malta's income tax legislation provides for 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 has a direct impact on the refunds which can be claimed by the shareholders of Malta Companies upon a distribution of profits.
When a Malta Company distributes dividends, a refund of the tax paid by the Maltese company becomes due, provided that such dividends are distributed out of profits allocated to the FIA or from the MTA. Distributions from the FTA, the IPA and the UA do not give rise to any tax refunds in the hands of the shareholders.
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 profits enjoying tax credits under various incentive legislation. Profits attributed to the IPA are those profits, gains or income derived, directly or indirectly, from the ownership of immovable property situated in Malta.
A company's trading or passive income which is not allocated to the FTA or IPA, is attributed to the FIA or the MTA depending on the source of such income. Dividends distributed out of the MTA and FIA trigger refunds of Maltese tax suffered by a company registered in Malta (this may include branches in Malta). Such refunds are paid to shareholders who are specifically registered to receive them, and the extent of tax so refunded depends on the type and source of income derived by the Maltese operating company (refer to section of tax refunds).
A holding is deemed to constitute an equity holding when such entitles the shareholder to at least any two of the following rights:
- A right to vote;
- A right to profits available for distribution (to shareholders);
- A right to assets available for distribution on a winding up of that company.
Such an equity holding in companies and partnerships en commandite, the capital of which is divided into shares, qualifies as a participating holding when any one of the following conditions is satisfied:
- a company holds directly at least 10% of the equity shares of a company, whose capital is wholly or partly divided into shares. The holding ought to confer an entitlement to at least 10% of any two of the following:
- Right to vote;
- Profits available for distribution; and
- Assets available for a distribution on a winding up; or
Such is subject to certain anti-abuse provisions which require that the non-resident company in question satisfies either one of the following conditions:
- It is resident or incorporated in the EU; or
- It is subject to foreign tax of a minimum of 15%; or
- It does not derive more than 50% of its income from passive interest and royalties.
If the above tests fail, then both the following conditions ought to be satisfied:
- The holding by the Malta company must not be a 'portfolio investment'; and
- The non-resident body of persons or its passive income must not have been subject to any foreign tax at a rate of less than 5%.
Investments by Maltese companies in the capital of partnerships en commandite, the capital of which is not divided into shares, qualify as a participating holding as long as any one of the conditions set out above is satisfied.
An equity holding will not be deemed to arise if such is a holding in a property company. A property company is defined as a company which owns immovable property situated in Malta, or any rights over such property, or a company which holds directly or indirectly shares or interests in a body of persons which owns immovable property. This definition does not apply to companies that carry on a trade or business in Malta and own a factory, warehouse or office used solely for the purpose of carrying on such trade, provided that such immovable property does not exceed 50% of the total assets of the company and that the company does not carry on any activity, the income from which is derived directly or indirectly from an immovable property situated in Malta.
The definition of participating holding has also been extended to apply to the holding by a Maltese company in an overseas Collective Investment Scheme which is similar to a partnership 'en commandite', the capital of which is not divided into shares, which provides for the limited liability of investors.
Income derived from a participating holding or from the disposal of such holding will qualify for a participation exemption, which is intended to exempt from tax, dividends and gains derived from such holdings. The income derived from a participating holding which qualifies for a participation exemption, need not be declared in the company's income tax return.
Recently, the participation exemption regime has been extended to include the disposal of shares in a Maltese company. It is now possible for a Maltese holding company to transfer the shares in a Maltese operating/trading company without any incidence of taxation in Malta.
In the case of income deriving from a participating holding and which thus qualifies for a participation exemption, one may still opt to pay the tax due and claim a 100% tax refund.
Dividends or profits derived from a participating holding or from the transfer of such holding will be exempt from income tax in Malta. Dividends derived from participating holdings acquired on or after 1 January 2007 will only be exempt if they satisfy the anti-abuse provisions outlined above. The same anti-abuse provisions will, with effect from 1st January 2011, also apply to holdings acquired before the 1st of January 2007.
Upon receipt of a dividend from their Malta Company, shareholders will become entitled to a refund of 6/7 of the total tax paid (i.e. including the overseas tax). The total tax refund will however be limited to the Malta tax, so that the total effective tax rate paid in Malta will be a maximum of 5%.
The tax refund is reduced to 5/7 of the total tax paid where the dividend is distributed out of profits derived from passive interest or royalties, resulting in a maximum net tax paid in Malta of 10%.
Passive interest or royalties consist of interest or royalty income which is not derived directly or indirectly from a trade or business and which has not suffered or suffered any foreign tax (directly or withholding) at a rate which is less than 5%.
The 6/7 and 5/7 tax refund would not apply in those cases where the dividend is paid out of profits allocated to the foreign income account and in respect of which profits the company has claimed relief from double taxation.
A tax refund of 2/3 of the total tax paid will be granted if the Malta Company effecting the dividend distribution has claimed double taxation relief, other than the Flat Rate Foreign Tax Credit (FRFTC). In case the latter is claimed, tax refunds are calculated on the Malta tax paid and not on the total tax paid. The flat rate foreign tax credit reduces the initial corporate rate of tax from 35% to 18.75% (before tax refunds).
Tax refunds are calculated on the tax suffered gross of treaty relief, unilateral relief and commonwealth income tax relief. This implies that foreign tax can be taken into account for the purposes of the refund, subject to the maximum refund not exceeding the Malta tax paid. In the case of the FRFTC, tax refunds are calculated solely on the Malta tax paid.
By way of example, if a Malta Company claims the FRFTC which is one of the four forms of double taxation relief available under Maltese tax legislation, then any tax refund would be limited to 2/3 of the Malta tax, resulting in a maximum effective tax payable of 6.25%, which can be reduced further depending on the company's expenses.
A tax refund is considered to fall due when the company's audited financial statements, indicating the dividend distribution, as well as a complete income tax return are submitted to the tax authorities. The refund of tax will be paid in the same currency in which the tax is paid by the company, thus eliminating any currency exchange risks, within fourteen days from when the tax is paid by the company and a valid claim for refund is submitted to the tax authorities for processing.
A measure aimed at minimising cash flow difficulties is that any tax due on the profits allocated to the foreign income account (that is profits derived from overseas investments) will not be collected until the distribution of such profits or eighteen months after the end of the relevant accounting period, whichever is the earlier.
It may be opportune for the shareholders of a Malta company to set up a two-tier structure in Malta consisting of a holding company and a subsidiary. The subsidiary may carry out both trading and investment activities. Such an arrangement allows dividends and tax refunds to be paid to the holding company, rather than paying such dividends to the non- Maltese resident shareholders directly. An immediate tax liability in the non-Maltese resident's country of residence would thus be avoided. Such an intermediate company can also be used by the non-resident shareholder as a vehicle for other investments.
Malta companies conducting international activities are exempt from duty on documents, which means that transfers of shares in such companies are not subject to such a duty. Furthermore, capital gains derived by non-residents on the transfer of shares in Malta companies are not subject to tax in Malta, provided that the assets of the company do not principally consist of immovable property situated in Malta.
Double Taxation Relief in Malta
Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient's tax residence and status. However, income received from foreign sources may be subject to a withholding tax and suffer other foreign taxes. Consequently Malta's fiscal legislation offers four forms of double taxation relief to ensure that double taxation is avoided.
Malta has concluded over fifty double taxation agreements, mostly based on the OECD Model Convention, which provide for the relief of double taxation. Such relief is also provided through Commonwealth income tax relief, unilateral relief and the flat rate foreign tax credit.
Commonwealth income tax relief applies where double tax treaty relief is not available. This is a limited form of relief available against tax paid in Commonwealth countries and is subject to reciprocity.
Unilateral relief is available where overseas tax is suffered on income received from a country with which Malta does not have a double tax treaty and Commonwealth income tax relief is not applicable. The overseas tax suffered is allowed as a credit against the tax chargeable in Malta on the gross amount; however the credit shall not exceed the total tax liability in Malta on that income.
In multi-tier structures involving Maltese and non-resident companies, double taxation relief for underlying tax suffered on the profits out of which a dividend is distributed has been extended to tax suffered in Malta. Structures involving a Maltese holding company having a foreign subsidiary or sub-subsidiary which suffers tax in Malta are now entitled to relief granted on Maltese tax suffered by the foreign direct or indirect subsidiary.
To claim double tax treaty relief, Commonwealth relief or unilateral relief, the recipient of the income must prove to the tax authorities that the income was derived from overseas sources and suffered overseas tax, together with the amount of the overseas tax suffered.
The flat-rate foreign tax credit applies where the other forms of relief from double taxation are not available and does not require evidence of foreign tax suffered. This type of relief is available to a Malta company in receipt of income and/or capital gains from overseas which are allocated to its foreign income account. The flat-rate foreign tax credit is calculated at 25% of the amount of overseas income received by the company before deductions. The income plus the credit less deductible expenses is subject to full Maltese income tax (35%) with relief for the deemed credit.
This example illustrates that, even without expenses, the corporate rate of income tax of 35% can be reduced to an effective rate of 18.75% on the net income. Upon distribution of the profits, tax credits and refund provisions will apply, which will effectively reduce the tax rate to 6.25% or even lower.
|Passive Income||Trading Income|
|having participating holding (PH)||having PH claims FRFTC||(no PH) claims FRFTC||Passive Interests & Royalties|
|Profit before tax||10,000||10,000||10,000||10,000||10,000|
|Gross up for the FRFTC||-||2,500||2,500||-|
|Tax at 35%||3,500||4,375||4,375||3,500||3,500|
|Credit for the FRFTC||-||(2,500)||(2,500)||-||-|
|Tax charged at 35%||3,500||3,500||3,500||3,500||3,500|
|Credit for tax||3,500
|Refund of company tax to shareholders||3,500||1,875||1,250||2,500||3,000|
|Effective Tax Rate||0%||0%||6.25%||10%||5%|
Exemption on Royalties Derived from Patents and Copyrights
Royalty and similar income derived from patents linked to eligible inventions are exempt from Maltese income tax subject to certain conditions. The income in question may arise in Malta or outside Malta, with the exemption being applicable irrespective of the country of source. Furthermore, whether the income consists of trading income or is merely passive income is not a determining factor as to whether the exemption applies or otherwise. Any royalty income distributed by way of dividend will also be exempt at the level of the shareholders.
The exemption on royalties and similar income has been extended to royalties and similar income derived from copyright. Advances received from these sources are also exempt from income tax.
Maltese legislation provides for companies incorporated or constituted outside Malta to conduct business in or through Malta by using a branch or a place of business in Malta. This creates a viable alternative when companies opt not to register a separate legal entity yet carry out business in or through Malta by an extension of their foreign corporate vehicle. As a result, a branch qualifies to be considered as a company registered in Malta.
One of the implications of such is that a branch of an overseas company is treated as a permanent establishment for tax purposes. A branch would be taxable in Malta only on income arising in Malta and on income arising overseas but received in Malta. The income of the branch would be taxed at the same rate as that of a Maltese company while the computation of the income would follow that adopted by a domestic company. Shareholders of the overseas companies may qualify for refunds of tax, provided that the relevant conditions are satisfied. Furthermore, all fiscal benefits granted to companies incorporated or resident in Malta are also extended to branches.
It is relevant to note that in the case of branches which are neither incorporated nor resident in Malta, the distributable profits shall be those profits which can be attributed to the activities of the Maltese branch after deducting any profits which such company would have distributed in previous years.
Re-domiciliation (Continuance) of Companies to Malta
Maltese company law provides for the re-domiciliation of foreign companies to Malta and vice-versa. Companies which are re-domiciled to Malta are registered in Malta as Malta companies without the need to be dissolved and wound up in the jurisdiction where they were originally registered.
Companies may be re-domiciled to Malta if:
- the foreign jurisdiction permits such re-domiciliation;
- the company is authorised to do so by its charter, statute or memorandum and articles;
- it is shown that the foreign jurisdiction has been informed that the company wants to re-domicile to Malta;
- the shareholders, debenture holders and creditors of the company consented to the re-domiciliation in such numbers or proportion as required by the foreign jurisdiction's law; and
- the registration fees are paid in Malta. These vary depending on the authorised share capital of the foreign company.
Continuation will not create a new legal entity but the company shall re-domicile to Malta with all its assets, rights, liabilities and obligations intact.
Upon re-domiciliation being finalised the company becomes domiciled and resident in Malta in terms of the Income Tax Act. No tax or other levy is charged upon continuation of the company to Malta. Moreover, any undistributed profits of the company (unless, exceptionally, charged to tax in Malta at an earlier stage) will be allocated to the company's untaxed account on the date of continuation to Malta. A dividend distributed by the company from its untaxed account to a non-resident shareholder is tax exempt in that shareholder's hands and no disclosure thereof ought to be made. The company may avail itself of Malta's double tax treaty network and other forms of double taxation relief as a Malta tax resident and may become entitled to certain exemptions, including for instance, a participation exemption on certain foreign dividends and capital gains. Furthermore, foreign income that is not remitted to Malta and foreign capital gains will not be taxable in Malta.
Repatriation of Profits and Refunds
Given that in several jurisdictions the nature of the tax refund may give rise to classification problems particularly as to whether the tax refund should be considered as a dividend, income or otherwise, such problem may be remedied via the interposition of a second Maltese company. Frequently such company is referred to as a dividend feeder company. The dividend feeder company would generally hold shares in the Maltese operating/trading company. Dividends distributed by the operating company and refunds received from the Commissioner of Inland Revenue are received by the dividend feeder company as profits. In turn such profits can either be distributed in the form of dividends to the shareholders or reinvested in the operating company. As a result of the imputation system, the tax suffered by the Maltese subsidiary company will be credited against the tax due by the dividend feeder company, on the dividends received, resulting in no further tax liability for the dividend feeder company. Additionally, no withholding taxes are imposed on distributions of outbound dividends.
Other Benefits of the Maltese Tax System
- No withholding tax levied on outbound dividends, interest or royalties;
- Absence of sophisticated CFC legislation, thin capitalisation or transfer pricing rules;
- No exit or entry taxes upon a shift of domicile or residence to or from Malta;
- No wealth or capital taxes;
- Advance revenue rulings can be obtained on international tax issues;
- Capital gains on transfers of shares in Maltese companies by non-residents are generally exempt;
- Stamp duty is imposed on share transfers but exemptions exist for companies which have more than 90% of their business interests outside Malta;
- Access to the EU Parent-Subsidiary Directive and EU Interest and Royalty Directive (no withholding taxes are due over dividend, interest and royalty payments from companies resident in other EU-countries to a Malta company).
Forming a Company in Malta
The Memorandum and Articles of Association must be filed at the Registry of Companies and the registration fee must be paid. This fee is calculated on a progressive scale depending on the company's authorised share capital and ranges from €245 (if the authorised share capital does not exceed €1,500) to €2,250 (if the authorised share capital is of €2,500,000 or more). The Registry would then issue the relative certificate of registration which is required for the company to commence operations.
In the case of a private limited liability company, the minimum share capital required by law is €1250 (or its equivalent in foreign currency), of which at least 20% must be paid up upon subscription and deposited in a bank account in the name of the company.
Directors and Company Secretary
A Malta Company must have at least one director, who in certain cases may also act as company secretary. The director can also be a body corporate; however the company secretary must be an individual (subject to an exception in the case of investment funds).
Although the law generally requires that a company has at least two shareholders, it is possible to register a company with one shareholder if certain conditions are satisfied. Shareholders can be either individuals or corporate bodies. At least one members' general meeting must be held annually.
It is possible for the shares in the company to be held by an authorised fiduciary, thereby keeping confidential the identity of the beneficial owners.
A company registered in Malta must have its registered office in Malta. We provide registered office facilities should these be required.
Time required for Incorporation
The incorporation process usually takes less than a week provided all the required information, documentation and funds are provided to us.
Company Returns and Annual Fees
An annual return must be filed with the Registry of Companies. Such return includes a list of the names and personal details of the company's officers and shareholders as well as details of its capital structure together with any changes thereto throughout the year. An annual registration fee calculated on the basis of the company's authorised share capital is payable and this ranges from €100 (if the authorized share capital does not exceed €1,500) to €1,400 (if the authorised share capital is of €2,500,000 or more).
All companies registered in Malta must keep proper financial statements which must be audited by a Certified Public Accountant who must also be a registered auditor. Audited financial statements must be presented to the tax authorities and to the Registry of Companies on an annual basis. Subject to certain conditions, companies may submit abridged financial statements to the Registry of Companies.