Malta has been experiencing strong and consistent growth in its financial services industry and is fast becoming the jurisdiction of choice for setting up business with access to the EU’s Single Market, especially in the light of the OECD’s base erosion and profit shifting (BEPS) project and Brexit. Economically, Malta has continued to build on the success of previous years, posting an exceptionally strong performance, with real GDP growth of 5.5 per cent in 2016 and 6.3 per cent to June in 2017.
Malta’s tax system is based on UK principles, and enjoys the approval of the European Commission and Code of Conduct Group following Malta’s EU accession. In addition, Malta is a BEPS-compliant jurisdiction, being an associate in the OECD’s inclusive process and signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). It is only through the application of its imputation tax system and tax refund system that Malta offers the lowest effective tax rate in the EU, without resorting to rulings, harmful tax practices, hybrid entities or structures, or stateless companies. Such transparency and compliance has resulted in numerous multinationals setting up operations in Malta to enjoy a tax and cost-efficient onshore jurisdiction. The application of the refund system is buttressed by a flexible participation exemption that ensures that dividends derived from qualifying entities (companies, limited partnerships and collective investment vehicles satisfying the necessary conditions) will be exempt in Malta. Malta’s tax system allows for peace of mind and tax-neutral repatriation, given that there are no withholding taxes on dividend distributions to non-residents (as well as on interest and royalty payments). Over and above this, Malta enjoys a wide and favourable treaty network based on the OECD Model, with full exchange of information provisions. Malta is a transparent and cooperative jurisdiction, having implemented the automated exchange of information standard on tax matters as promoted by the OECD and adopted by the EU, namely the Common Reporting Standard (CRS), in its domestic law.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
As a general rule, businesses in Malta adopt a corporate form. The most frequently used forms are private and public limited companies. Such entities have a separate legal personality and are taxed as separate legal entities. The main difference between these two corporate forms is that the private limited company is designed for a limited number of shareholders, while the public company is not. In addition, shares in a private limited company may not be freely transferred to third parties and a private limited company may also not issue shares to the public, unlike a public company.
Limited partnerships are becoming more popular. Legislation provides for a general and a limited partnership. While a general partnership is suitable where all partners or members expect to be involved in the management of the business, a limited partnership is more commonly used when one partner (the general partner) manages the business and the other partners are passive investors. A limited partnership, the capital of which is divided into shares, is considered to be a separate legal entity. Malta has legislation that permits certain partnerships (including foreign partnerships) to opt for transparent or opaque treatment. Limited partnerships are popular for asset management structures. Foundations are becoming increasingly popular for holding business interests.
III DIRECT TAXATION OF BUSINESSES
A Maltese company or its equivalent, including a foreign company with a permanent establishment in Malta, pays tax in Malta on its profits at a rate of 35 per cent.
Should it be profitable and distribute dividends, following the distribution of dividends from taxed profits, shareholders (without distinction as to the nature of such members) are entitled to claim a partial tax refund by virtue of the operation of the imputation credit system. The most common tax refund consists of six-sevenths of the tax charge borne on the distributed profits before deducting any relief of foreign tax. This translates to an effective tax leakage of 5 per cent. Although the quantum of the tax refund depends on the nature of the income and whether double tax relief is claimed, the overall tax in Malta after tax refund will be between zero and 5 per cent.
For partnerships that opt to be treated as look-through, tax is levied on the partners at their rates reaching a maximum of 35 per cent, and subject to treaty protection.
i Tax on profits
Determination of taxable profit
Taxable profits are based on accounting profits, consisting of the profits reported in the company’s audited financial statements following adjustment for non-deductible expenses and non-taxable income. Business profits are taxed on an accruals basis, while investment income is taxed on a receipts basis.
Expenses wholly and exclusively incurred in the production of income are deductible from the taxable base. In general, business expenditure of a revenue or recurrent nature is normally deductible, while that of a capital nature is not (with the exception of depreciation for plant and machinery and industrial buildings and structures). A minimum number of years for tax depreciation and amortisation rates are established by statute and vary according to the estimated useful life of, and hence the nature of the asset, used in the business.
While a company incorporated in Malta is taxable in Malta on its worldwide income, companies incorporated outside Malta that have their tax residence in Malta when the control and management of their business are exercised in Malta (known as resident but not domiciled companies) are subject to tax in Malta on income or capital gains arising in Malta, and income arising outside Malta is taxable in Malta to the extent that it is received in Malta, whereas capital gains arising outside Malta are not taxable.
Capital and income
Capital profit is not taxed generally, but only specific items of capital gains are subject to tax, namely such as derived from the transfer of real estate and real rights, securities, business, goodwill, business permits and intellectual property; and interest in a partnership.
In general, a company’s gains on the transfer of capital assets are aggregated with its other income, and the total income and capital gains are charged to income tax at the standard rate. The basic rules for the computation of capital gains and losses require the determination of the gain realised on the transfer by deducting from the actual consideration received or deemed to have been received the cost to the transferor for the acquisition of the asset being transferred.
Trade losses may be set off against income and carried forward indefinitely and set off against the income of the following years (with the exception of losses arising due to depreciation, which can only be set off against the profits of the same and continuing trade), but no carry-back of losses is allowed. Capital losses may be set off only against capital gains. Losses can survive a change in ownership on condition that the same business is continued and no abuse is contemplated.
A Maltese company or its equivalent, including a foreign company with a permanent establishment in Malta, pays tax in Malta on its profits at a rate of 35 per cent, as explained above.
Company tax returns must typically be submitted within nine months from the financial year-end or 31 March of the following year, whichever date is the later. Companies must retain proper and sufficient records of their income and expenditure, and are required to submit together with their tax return a balance sheet and profit and loss account accompanied by a report made out by a certified public auditor. Financial statements are prepared in accordance with international financial reporting standards or the local generally accepted accounting principles.
Malta operates a self-assessment tax return regime for all taxpayers. The degree of scrutiny of returns and the likelihood of investigation will be affected by the tax authorities’ risk assessment of the taxpayer rather than by a defined cycle of enquiry.
Appeals against assessments are made by means of an objection in writing to the Commissioner for Revenue, to be submitted within 30 days from the date on which a notice of assessment is served on the taxpayer. If no agreement is reached between the taxpayer and the Commissioner for Revenue at objection stage, an appeal may then be lodged with the Administrative Review Tribunal within 30 days of the service of the notice of refusal. An appeal may be made to the Court of Appeal within 30 days from the date when the Tribunal’s decision was notified to the parties and may only be made on a point of law.
It is pertinent to note that rulings are not and cannot be obtained to establish the tax base or to negotiate a transfer price, and thus cannot be used to harmful ends. Malta also exchanges its rulings under the EU’s relevant legislation. It is possible to obtain clearance as to the law’s interpretation by means of an advance revenue ruling, which is valid for five years and can be renewed for another five-year period. A ruling will remain binding on the tax authorities for a period of two years from the time of any change in legislation affecting the ruling.
Group relief provisions allow for the surrender of tax losses between group companies. Two companies are considered to be members of a group of companies if they are both resident in Malta and not resident for tax purposes in any other country, and where one company is the 51 per cent subsidiary of the other or both companies are 51 per cent subsidiaries of a third company resident in Malta and not resident for tax purposes in any other country.
Intragroup transfer of capital assets is governed by a tax deferral until final disposal to unrelated parties. Dividends move intragroup in a tax-neutral fashion attracting no double or multiple economic taxation due to the full imputation system.
ii Other relevant taxes
Malta, as an EU Member State, is part of the harmonised EU VAT system. Malta’s standard VAT rate is 18 per cent. Malta also applies reduced rates (5 and 7 per cent) to various goods and services.
Malta has stamp duty legislation. However, exemptions are available, for instance, for intragroup transactions. Maltese stamp duty consists of a tax on documents evidencing transfers of real estate and real rights, securities or an interest in a partnership. Duty is chargeable on the higher of the amount of consideration and the market value.
There are no capital duties, net wealth or turnover taxes for incorporated businesses in Malta.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
While companies that are incorporated in Malta are considered to be resident in Malta, companies that are not incorporated in Malta are considered to be resident in Malta when the control and management of their business are exercised in Malta. While the terms ‘management and control’ are not defined in Maltese law, on the basis of UK jurisprudence, which is generally followed in Malta, a company is regarded as being managed and controlled in Malta if key strategic or commercial decisions are made in Malta. Thus, where a company would prefer avoiding becoming fiscally resident in Malta it would not hold board meetings in Malta. From a Maltese tax perspective, it is possible to transfer the tax residence of an entity by changing the place of control and management of the entity. It is also possible to transfer the legal seat in and out of Malta. On taking up tax residence in Malta or redomiciling to Malta, an entity is allowed to increase the tax base cost of its assets up to market value.
ii Branch or permanent establishment
A foreign entity can establish a tax presence in Malta where it creates a branch, agency or similar permanent establishment in Malta, in that the general rule is that income derived from trading in Malta is taxable, while trading with Malta is not. Generally, income and gains arise from trading in Malta where they are derived from the carrying on of some activity in Malta, such as providing services in, negotiating a transaction in or renting property situated in Malta. While the term permanent establishment is referred to, it is not defined under domestic law, and as such, taxation is governed by the source basis as indicated above subject to the protection and application of tax treaties. Most of Malta’s treaties currently adopt the OECD Model Tax Convention definition of the term permanent establishment with certain variations, and thus afford the corresponding protection of the permanent establishment threshold and tie-breakers for establishing treaty residence.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Malta is a popular holding domicile because of the fact that it adopts a flexible 100 per cent participation exemption on profits derived from a qualifying company (namely dividends) and from the transfer thereof (namely gains). To benefit from said participation exemption, the Maltese company’s holding must entitle it (in substance or form) to any two of the following rights (known as ‘equity holding rights’): a right to vote; a right to profits available for distribution; and a right to assets available for distribution on a winding-up of such company. Typically, as with most participation exemption jurisdictions, Malta has an ownership test that is set at 10 per cent. However, such test does not require a minimum holding period. Furthermore, where the ownership test is not fulfilled, the participation exemption may be acceded by satisfying alternative conditions, including a holding with an acquisition value of €1.164 million held for an uninterrupted period of 183 days, or one that entitles the holder to a right to sit upon, or appoint a director to, the board, or to a right to purchase the remainder of the capital.
While the participation exemption is typically available where a Maltese company holds shares in a subsidiary (or a foreign partnership that opts to be treated as a company for Maltese tax purposes), it may also be availed of when the Maltese company is a partner in a limited partnership similar to a Maltese limited partnership, or where the Maltese company is an investor in a collective investment vehicle that provides for limited liability of its investors.
With respect to dividends, the participation exemption is applicable where the qualifying company is resident or incorporated in the EU, or is subject to a 15 per cent minimum tax rate, or has a maximum of 50 per cent its income derived from passive interest or royalties, or is not held as a portfolio investment and it would have been subject to tax at a rate of at least 5 per cent. The exemption on dividends received from participating holdings in an EU Member State is available to the extent that such dividends would not have been tax-deducted by the relevant subsidiary in that other Member State.
The exemption method is extended equally to income attributable to a permanent establishment outside Malta of a Maltese company and gains derived from the transfer of such permanent establishment.
No withholding tax is levied on dividends paid to non-resident shareholders, who in addition may dispose of their shares in the holding company without incurring a tax liability where the holding company does not own, directly or indirectly, real estate in Malta.
ii IP regimes
Royalties and similar income can obtain the equivalent of an innovation or patent box exemption where by being subject to the general tax system such income is subject to tax at the standard rate, and any profits derived therefrom distributed to the company’s shareholders would benefit from the tax refund system. Such refund would allow for an ordinary foreign tax credit such that no tax leakage would occur where withholding taxes suffered on such income would amount to 5 per cent or more. In the light of the BEPS project’s modified nexus approach, it is advisable that development, enhancement, maintenance, protection, and exploitation of intangibles functions are performed in Malta.
iii State aid
To promote innovation, special R&D incentives are aimed at providing assistance to enterprises in respect of eligible expenditure incurred on industrial research and experimental development projects to develop innovative products and solutions. Eligible expenditure includes personnel costs, costs of instruments and equipment, costs of building, and costs of contractual research, technical knowledge and patents. The maximum level of assistance that may be provided varies from 25 to 70 per cent depending on the size of the company and the nature of the R&D project in line with the EU’s state aid guidelines.
Licensed shipping organisations are required to pay a tonnage tax computed by reference to the net tonnage and age of the ships operated by the organisation concerned, with profits from other activities being excluded from said treatment. Where the tonnage tax and any relevant registration fees have been paid, no further tax would be payable in Malta on the income derived from the shipping activities. In this regard, separate accounts must be kept, clearly distinguishing the payments and receipts by the shipping organisation concerned in respect of shipping activities, and payments and receipts in respect of any other business. The Maltese flag of confidence and not convenience today has the largest fleet in Europe and the sixth-largest worldwide.
Malta is a domicile of choice for setting up investment funds, be they retail funds or professional investor funds (including hedge funds). Besides the fact that funds invested overseas are completely exempt from tax, Malta does not impose any tax on the net asset value of the fund. In addition, the licensing procedure, which is based on EU norms, is mindful and reactive to clients’ needs. Similarly, securitisation vehicles are growing in number, with the special vehicle being recognised and not requiring a licence while having equal access to tax neutrality. Indeed, Malta is reportedly the fastest-growing securitisation jurisdiction within Europe, with key benefits including, inter alia, bankruptcy remoteness, limited litigious recourse, and privileged claims of investors and securitisation creditors by operation of law, not merely contract. The government of Malta has reported that it is developing a broad national strategy that will see the government embracing blockchain innovation. As of the time of writing, there is a consultation document, publishing a framework for the regulation of collective investment schemes investing in virtual currencies.
v Notional interest deduction
Notional interest deduction (NID) was introduced on 5 October 2017 and came into force with effect from the 2018 year of assessment. The NID was introduced to achieve an equal treatment of debt and equity financing, by granting an additional deduction for the return on equity financing. In addition, the NID may simplify matters within Malta’s full imputation system in view of the resulting reduction in the imputation credits resulting from claiming the NID.
The NID is optional and can be claimed by companies and partnerships resident in Malta (including Maltese permanent establishments of foreign entities) against their chargeable income for the year. The NID is calculated by multiplying the deemed notional interest rate by the balance of risk capital that the undertaking has at year end. The notional interest rate is the risk-free rate set on Malta government stocks with a remaining term of approximately 20 (which is currently approximately 2 per cent) years plus a premium of 5 per cent. The NID would thus currently be expected to be about 7 per cent. Risk capital includes share capital, share premium, reserves, interest free loans and any other item that is shown as equity in the financial statements as at year end. The maximum deduction in any given year cannot exceed 90 per cent of chargeable income before deducting the NID. Any excess can then be carried forward to the following year. Any remaining chargeable income is subject to tax at the standard rates. When a company or partnership claims a NID, the shareholder or partner is deemed (for tax purposes) to have received the corresponding notional interest income from the company or partnership. Distribution of profits relieved from tax by the NID, however, will not be charged to tax. The legislation includes an anti-abuse provision to prevent abuses of the NID.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
There are no domestic law withholding taxes for payments of dividends, interest or royalties to a non-resident to the extent that the non-resident does not have a taxable presence in Malta (either in the form of the management and control being in Malta or having a permanent establishment in Malta) and the non-resident is not owned and controlled by, directly or indirectly, or acts on behalf of, a person who is ordinarily resident and domiciled in Malta.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Relief from withholding taxes emanates from domestic law and is not dependent on tax treaties. Nevertheless, Malta has adopted the EU Parent–Subsidiary Directive and Interest and Royalties Directive.
iii Double tax treaties
Malta has more than 70 tax treaties currently in force, which are mainly drafted in accordance with the OECD Model Tax Convention, whereas further treaties are being negotiated. Given that Malta does not have withholding taxes on outbound investment income, the withholding tax rate in such treaties invariably will be zero.2 While Malta provides domestically for an ordinary foreign tax credit (in addition to a participation exemption where applicable), treaties will operate so as to match double tax relief on non-local withholding on inward payments of dividends, interest and royalties to a resident.
iv Taxation on receipt
Malta has a full imputation tax system that completely eliminates the economic double taxation of company profits. Shareholders in receipt of dividends are entitled to a tax credit equal to the tax borne on the profits out of which the dividends are paid. Although Malta is a credit country, economic double taxation relief has been extended to foreign dividends received. In addition, principles of exemption have been used as explained in the holding company regime.
Thus, Maltese tax law provides for three main forms of double taxation relief of foreign-source income, available in the following order: treaty relief, unilateral relief and flat rate foreign tax credit.
Treaty relief takes the form of a tax credit granted for foreign tax paid on income received from a country with which Malta has signed a tax treaty. The amount of the credit is the lower of Maltese tax on the foreign income and the foreign tax paid. Unilateral relief operates in a similar way to treaty relief, but it only applies where treaty relief is not available. The rationale of the full imputation tax system is also extended in relation to foreign companies by extending the unilateral relief to the underlying tax borne by the foreign company on the profits out of which dividends are paid to a Maltese resident (economic double tax relief). Relief for such underlying tax is available in respect of dividends received from any shareholding in a foreign company and also in respect of the underlying tax paid by any subsidiaries in which the foreign company holds, directly or indirectly, at least 10 per cent of the voting rights. The flat rate foreign tax credit is another form of unilateral relief available to companies, taking the form of a tax credit for foreign taxes deemed to have been suffered on qualifying income and equal to 25 per cent of the net amount received.
VII TAXATION OF FUNDING STRUCTURES
In Malta, both equity funding and debt funding are beneficial from a tax perspective. Equity funding (including non-statutory equity such as shareholders’ contributions) will maximise the notional interest deduction, while debt funding (including profit-participating loans, which are regarded as pure debt for Maltese tax purposes) will allow the deduction of actual interest expenses. Entities are commonly funded with a mix of equity and debt.
i Thin capitalisation
Malta has a general anti-avoidance rule, and while it does not have thin capitalisation or transfer pricing legislation, on loan-in loan-out arrangements a tax profitable margin is expected aligning the Maltese entity’s return with the business or entrepreneurial risks it assumes.
ii Deduction of finance costs
Finance costs can be deducted in that interest incurred in obtaining capital to generate income will be tax-deductible against the income so generated. The general rule is that expenses wholly and exclusively incurred in the production of income are deductible from the taxable base. Hence, business expenditure of a revenue or recurrent nature is normally deductible, while that of a capital nature is not.
iii Restrictions on payments
A Maltese company is only able to distribute dividends to its shareholder or shareholders if it has enough distributable reserves in terms of company law – that is, if after the distribution the company would still be solvent.
iv Return of capital
A reduction of share capital is tax neutral in Malta; however, company law requirements need to be adhered to (a lapse of three months from publication of reduction being a main requirement). Equity funding can also be achieved with other means that do not require reduction of share capital, such as a shareholders’ capital contribution.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Typically, acquisitions are structured as asset or share purchases, which have different tax consequences for the seller and purchaser. In a share deal involving a company that does not own non-business Maltese real estate, a seller who is not resident in Malta has no exposure to tax on capital gains. By contrast, an asset deal involving a Maltese business owned by a company resident and domiciled in Malta normally exposes the company to tax on capital gains from the transfer of the business and the recapture of previously claimed tax depreciation. For the purchaser, an asset deal generally may present advantages in that the tax depreciation is calculated on the amounts at which assets are acquired, avoiding the need to undertake extensive due diligence regarding the assets, liabilities and obligations inherent in acquiring a company.
Mergers, both domestic and cross-border in the EU, allow for tax deferral. Maltese legislation provides for an exemption from capital gains tax where assets are transferred between companies that are deemed to be a ‘group of companies’. A ‘group of companies’ is defined to include companies that are controlled and beneficially owned directly or indirectly as to more than 50 per cent by the same shareholders. This is further qualified for intragroup transfers of immovable property situated in Malta or securities in a property company (essentially defined as a company that owns immovable property in Malta, directly or indirectly, through its shareholdings in other bodies of persons). In this case, the ultimate beneficial shareholders of the transferor and transferee companies must be substantially the same, with only a 20 per cent variance in each individual’s shareholding in the two companies. Where the applicable conditions are met, no loss or gain is deemed to have arisen from the transfer. The cost base of the assets does not increase for tax purposes, but the tax on the capital gain is deferred until a subsequent transfer outside the group.
There are no exit taxes in Malta. Therefore, transfer of tax residence, transfer of legal seat and liquidation can be done tax neutrally in Malta.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
The taxpayer is free to choose the structure or the transaction that allows the most tax-efficient results subject to the Maltese anti-avoidance rules, which are statutory rather than judicial. A general anti-avoidance provision is intended to preserve the integrity of the Maltese income tax base by vesting the Commissioner for Revenue with broad discretion to disregard certain schemes and transactions that reduce the amount of tax payable by a taxpayer. Additionally, should a taxpayer implement any scheme with the sole or main purpose of avoiding, reducing or postponing liability to Maltese tax, or of obtaining any refund or set-off of tax, the Commissioner for Revenue is entitled, by an order made in writing, to subject the taxpayer to tax so as to effectively nullify or modify the scheme and the consequent advantage. Several specific anti-abuse provisions are found throughout the Maltese legislation in an attempt to prohibit very specific or particular forms of activity.
ii Controlled foreign corporations (CFCs)
There are no controlled foreign corporation rules under Maltese law.
iii Transfer pricing
Malta does not have transfer pricing legislation.
iv Tax clearances and rulings
Rulings are not and cannot be obtained to establish the tax base or negotiate a transfer price, and thus cannot be used to harmful ends. Although tax principles are well founded on UK tax principles, it is possible that the tax treatment of transactions and structures be confirmed in writing by the Maltese tax authorities. This is especially useful for somewhat complex transactions and structures, since it provides certainty of the tax treatment that will be adopted. An advance revenue ruling is valid for five years and can be renewed for another five-year period. A ruling will remain binding on the tax authorities for a period of two years from the time of any change in legislation affecting the ruling.
X YEAR IN REVIEW
The Maltese EU Presidency (for the first six months of 2017) placed business tax certainty at the centre of its tax agenda and was instrumental in the adoption of the Council Directive on Double Taxation Dispute Resolution Mechanisms. The notional interest deduction was introduced to eliminate the discrimination between debt and equity financing and enhance the attractiveness of Malta.
When considering anti-BEPS rules, Malta considers that before bringing in further new rules (which are changing the international tax systems), sufficient time ought to be dedicated to test the operation of these new rules, as otherwise Malta and the EU run a substantial risk of having a disjointed system that ultimately will not work and will divert businesses to third countries.
XI OUTLOOK AND CONCLUSIONS
Malta is committed to continuing and extending its role as a major European financial centre, ensuring at the same time transparency and compatibility with EU laws. Discussions have started on the implementation of the Anti-Tax Avoidance Directives (2016/1164 and 2017/952) into Maltese legislation.
In the recent Budget Measures Bill, there are proposals to extend the application of the participation exemption by lowering the percentage needed to 5 per cent (from 10 per cent currently) and extend the scope of entities in which a participating holding can be held.