The Inward Investment and International Taxation Review: Malta
According to the major credit agencies, Malta has held on to its economic and political stability, with the country being known for its attractive tax environment, a government embracing innovation, and a multilingual, multinational workforce. Malta remains a domicile of choice, confident that its reputation as a stable economy and top jurisdiction for investment as organisations transform for the new reality ahead will hold with a prospective positive assessment for its upcoming MONEYVAL evaluation. Malta retains its magnetism acting as a gateway to the European Union (EU)'s Single Market, especially in the light of the Organisation for Economic Co-operation and Development (OECD)'s base erosion and profit shifting (BEPS) project and Brexit. Such evolving international tax developments have given rise to Malta attracting increased business presence, because tax efficiencies can only be achieved where a business has credible substance and business rationale. Economically, following four consecutive years of surplus, a deficit amounting to 9.4 per cent of the GDP is expected for 2020 as a result of the impact of the covid-19 pandemic on the government revenue, and increased expenditure to fund the various support measures. During the first half of the year, GDP decreased by 7.7 per cent, compared to that of the Eurozone rate of 9 per cent and public debt is expected to increase to 55 per cent of GDP. Real GDP is expected to fall by 7.4 per cent in 2020 and recover by 5 per cent in 2021. To alleviate the economic disruption, a number of tax recovery measures were introduced, including extensions to filing and payment deadlines and reductions on real estate transfers. Meanwhile, tax services by the revenue have gone on unperturbed, as most services are available electronically.
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 have 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. It is also one of the first jurisdictions to have issued tax guidelines clarifying the tax treatment of transactions in distributed ledger technologies and cryptocurrencies.
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.
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 because of 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.
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.
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.
Intra-group transfer of capital assets is governed by a tax deferral until final disposal to unrelated parties. Dividends move intra-group in a tax-neutral fashion attracting no double or multiple economic taxation owing to the full imputation system.
Following the issue of the Consolidated Group (Income Tax) Rules, 2019, Malta introduced fiscal unit rules enabling, for the first time, the formation of a tax group for Maltese income tax purposes. Members of the fiscal unit may be either Maltese companies or foreign entities that fall within the definition of 'company' for the purposes of the Income Tax Act, provided that the parent company (the principal taxpayer) holds at least 95 per cent of two of the following rights: voting rights, profits available for distribution, or assets available for distribution upon winding up, in its subsidiaries (the transparent subsidiaries). Such election is possible provided that the accounting periods of all the members are the same and subject to the consent of minority shareholders, if any. While the election is at the option of the principal taxpayer, once made, any underlying qualifying subsidiaries will join the fiscal unit automatically. On the other hand, the fiscal group may be unwound by the principal taxpayer, and any subsidiary may leave the group.
Unlike the group relief provisions, tax consolidation provides for a full integration of the tax position of its members. As a result, intragroup transactions (excluding transfers related to immovable property situated in Malta) are disregarded for tax purposes. The main benefit of the fiscal unit arises from the cash flow advantage when compared to the current operation of the partial shareholder tax refunds. Through the fiscal unit the group may achieve an identical effective tax rate without the time lapse between the payment of the standard corporate income tax rate of 35 per cent and the receipt of the shareholder refund at the level of the shareholder as the new rules will immediately reduce the tax due by the principal taxpayer to the lower effective tax rate. From a practical perspective, tax shall be payable by the principal taxpayer on behalf of all members of the group and only one tax return will be filed. Principal taxpayers are also responsible for the preparation of a consolidated balance sheet and consolidated profit and loss account covering all the companies in the fiscal unit. The fiscal unit is subject to certain anti-abuse measures.
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. VAT grouping is available, where two or more legal persons, at least one of which operates within the financial or gaming sectors, may opt to be treated as a single taxable person for VAT purposes.
Malta has stamp duty legislation. However, exemptions are available, for instance, for intra-group 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.
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 (2014) definition of the term permanent establishment with certain variations, and thus afford the corresponding protection of the permanent establishment threshold and tiebreakers for establishing treaty residence.
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 5 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. There is a proposal for a further restriction of the exemption in cases of a body of persons resident in a country included in the EU's list of non-cooperative jurisdictions for tax purposes (for a minimum of three months).
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. This 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.
Malta has nexus-based patent box deduction rules, which allow taxpayers actively involved in the development and exploitation of IP to opt for the application of special rules on calculating deductions ('Patent Box Deduction'). The Maltese Patent Box Deduction allows taxpayers that exploit qualifying IP to deduct their expenses related to such IP in terms of more favourable conditions than provided by the general deduction formula. The Patent Box Deduction is calculated based on the following formula: 95 per cent (qualifying IP expenditure / total IP expenditure) × income or gains from qualifying IP. Where:
- total IP expenditure includes all expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP; and
- qualifying IP expenditure is equivalent to total IP expenditure excluding certain types of expenses, particularly acquisition cost of IP and costs paid to related parties for the development of qualifying IP.
Only income or expenses from IP that meet the definition of 'qualifying IP' are eligible for the Patent Box Deduction. Qualifying IP includes the following categories of intangibles, provided that in any case the qualifying IP is granted legal protection in at least one jurisdiction:
- patents, including patents pending issuance/extension;
- non-patent IP protected by legislation (including those related to plant and genetic materials and plant/crop protection products);
- orphan drug designations, utility models and software protected by copyright; and
- intellectual property assets that are non-obvious, useful, novel and that have features similar to those of patents. Only those holders who are regarded as 'small entities' (i.e., entities with group turnover of up to €50 million and gross IP revenue of up to €7.5 million) are eligible to use such IP for the purpose of the Patent Box Deduction.
Marketing-related IP assets including brands, trademarks and tradenames are not considered as qualifying IP, and thus fall outside the scope of the rules. Moreover, companies that are involved purely in holding and marketing IP without active development will have to set up R&D activities to be eligible to benefit from the Patent Box Rules.
The Patent Box Deduction rules target taxpayers that are involved in the active exploitation of IP. The eligible beneficiary should satisfy the following conditions:
- be able to demonstrate that all important functions in relation to creation, development, improvement or protection of the qualifying IP are carried out by such beneficiary, solely or in cooperation under the terms of a cost sharing agreement, either directly; or
- through a permanent establishment situated in a jurisdiction other than that of the beneficiary (provided that income of such permanent establishment is subject to tax in the jurisdiction of residence of the beneficiary); or
- through other enterprises (and employees of other enterprises) provided that such functions are performed under the specific directions of the entity claiming the benefit.
- legally own qualifying IP or hold an exclusive licence in respect of such IP. If the IP is developed under a cost sharing agreement, the entity must own a share in the ownership of the qualifying IP or be the holder of an exclusive licence;
- the entity must be specifically empowered to receive income from qualifying IP; and
- have a sufficient level of substance in the jurisdictions where activities in respect of the qualifying IP are being carried out.
The Patent Box Deduction rules are based on the nexus approach as developed by the OECD, which requires a direct link between the benefits derived from favourable taxation and actual R&D activities. Only taxpayers engaged in the development of IP (either themselves or through independent subcontractors) may benefit from the Patent Box Deduction. The Patent Box Deduction rules exclude the application of the deduction formula by taxpayers whose functions do not go beyond pure holding, deriving passive royalty income without contributing (directly or indirectly) to the development of the IP.
As of 1 January 2021, a flat final 15 per cent rate will apply to royalties earned on copyright for qualifying literary works.
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. In terms of the R&D Regulations enacted in 2020, assistance in terms of a tax credit or a cash grant calculated as a percentage of the eligible costs has been introduced.
On 17 December 2017, the European Commission conditionally approved the Maltese tonnage tax rules for a period of 10 years. The compatibility of the Maltese tonnage tax rules with EU state aid rules will further strengthen the reliability and confidence of shipowners and ship managers towards the Maltese flag and its supporting legislative framework. Such rules bring clarity with respect to those activities eligible under the tonnage tax exemption, now distinguishing shipping activities from ancillary services. Moreover, further clarity is brought with respect to ship management activities through the possibility for these to operate non-EU flagged vessels from the EU. The activity of dredgers and tonnage boats together with a definition of intra-group bareboat out activities was an additional novelty. The Maltese flag of confidence, and not convenience, at present has the largest fleet in Europe and the sixth-largest worldwide.
iv Blockchain and cryptocurrencies
The government of Malta created the Malta Digital Innovation Authority for robust and investor-friendly oversight in relation to Blockchain, distributed ledger technology and artificial intelligence. The Maltese tax authorities have issued guidelines to address and clarify the income tax, VAT and stamp duty implications arising in connection with digital assets and cryptocurrencies. Foundations established in Malta may as of 2018 issue and deal in digital tokens.
v Insurance and funds
Malta has a long history in the insurance business dating to covering maritime risks, and in more recent times it has become a domicile of choice for setting up insurance undertakings, serviced by global insurance managers present locally, especially in the light of Brexit. Similarly, it is a preferred domicile for investment funds, be they retail funds or alternative investment 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. 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.
vi Notional interest deduction
Notional interest deduction (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 1.37 per cent) years plus a premium of 5 per cent. The NID would thus currently be expected to be about 6.4 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. Malta's NID has been declared as not constituting a harmful practice by the EU's Code of Conduct Group (Business Taxation).
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 around 75 tax treaties currently in force, which are mainly drafted in accordance with the OECD Model Tax Convention (2014), while further treaties are being negotiated. Malta has signed the MLI with approximately 75 per cent of its treaty network potentially affected. Depending on the other Contracting State, the MLI could enter into effect for Malta as early as 1 January 2020. 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 5 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.
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 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. Malta implemented the EU's Anti-Tax Avoidance Directive (ATAD, 2016/1164), and specifically the interest limitation rules where exceeding borrowing costs are deductible in the tax period in which they are incurred only up to 30 per cent of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA). Exceeding borrowing costs refer to net interest expense (broadly, interest income less interest expense on all forms of debt and other costs economically equivalent to interest and expenses incurred in connection with the raising of finance).
The legislation includes opt outs in relation to a de minimis threshold (exceeding borrowing costs up to €3 million can be deducted), a stand-alone entity exemption (not being part of a group of companies), grandfathering of loans concluded before 17 June 2016, an exclusion from scope of long-term infrastructure projects that are considered to be in the general public interest, as well as allows a group to equity ratio carveout. This limitation will also not apply to financial undertakings (credit institutions, insurance and reinsurance companies, occupational retirement pension funds, EU social security pension schemes, alternative investment fund managers, alternative investment funds, undertaking for collective investment in transferable securities funds and over-the-counter derivative counterparties).
Taxpayers may carry forward, without time limitation, exceeding borrowing costs and, for a maximum of five years, unused interest capacity, which cannot be deducted in the current tax period.
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 for the purpose of the trade or business 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.
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 intra-group 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. However, ATAD contains exit tax rules that came into force on 1 January 2020 in Malta. The rules provide the taxation of capital gains arising upon the transfer of assets, and the subsequent loss of right to tax any arising capital gains, in the following circumstances:
- a transfer of assets from a head office located in Malta to a permanent establishment in another jurisdiction and vice versa;
- a transfer of residence of a Maltese resident entity to another jurisdiction (to the exclusion of assets that remain effectively connected to a Maltese permanent establishment); and
- a transfer of business carried on in Malta by the taxpayer's permanent establishment, to another jurisdiction.
The transposed law, in an identical manner to ATAD, prescribes an immediate payment of the due tax with the possibility of payment in instalments over the period of five years in cases of transfers to an EU Member State or to a party to the European Economic Area Agreement, which might possibly require providing a guarantee.
The introduction of exit taxation in Maltese corporate income tax law is novel; however, coupled with the application of the step up of the value of assets at time of transfer to or from Malta, there should be no resultant double taxation.
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-abuse rule (GAAR) 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.
The transposition of ATAD has widened the application of the existing GAAR by including an additional rule, addressing any arrangements that are put into place with the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are thus not genuine when having regard to all the relevant facts and circumstances. The ATAD GAAR will therefore target all non-genuine transactions (to the extent that they are not put in place for valid commercial reasons that reflect economic reality) performed in a domestic or a cross-border situation.
Albeit the wording of the ATAD GAAR is broader, reflecting the wording used in the long-standing GAAR in the Merger Directive, an analysis of case law construing the latter conveys that the Court of Justice of the EU has applied a strict interpretation thereof, requiring an essential or sole purpose. The result is that such interpretation may assimilate its effect to that under the current existing GAAR at least to the extent coupled with economic substance.
ii Controlled foreign corporations (CFCs)
In view of ATAD, Malta introduced CFC rules. Based on the CFC rules, income derived by subsidiaries or attributed to permanent establishments may in certain circumstances be taxed in Malta as the jurisdiction of the parent or head office. The formal cumulative conditions for the CFC rule to apply are:
- in the case of an entity, where the Maltese taxpayer alone or together with associated entities holds a direct or indirect participation of more than 50 per cent of the voting rights, or of the capital or is entitled to receive more than 50 per cent of the profits of such entity;
- the corporate income tax (CIT) paid by the non-resident entity or permanent establishment is less than 50 per cent of CIT payable if it were resident in Malta; and
- exceeding the minimum thresholds (non-resident entity or permanent establishment with accounting profits less than €750,000 or with accounting profits equal to less than 10 per cent of its operating costs).
If the above-mentioned conditions are fulfilled, the non-distributed income of the CFC may be included in the tax base of the Maltese parent, or Maltese head office, where the income arises from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage. There should be no CFC charge where there are no significant people functions in Malta that are instrumental in generating the income of the CFC.
iii Transfer pricing
To date, Malta does not have transfer pricing legislation, but certain anti-abuse provisions may be applicable, and an understanding that transactions between related parties should be carried out at arm's length. Also, Malta participates in Advance Pricing Arrangements with other treaty countries.
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, because 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.
Year in review
While ATAD guidance was published in August 2020, when considering anti-BEPS rules, in particular Pillars 1 and 2, Malta considers that before bringing in further new rules that fundamentally alter international tax principles, agreement on a global level ought to be reached to ensure a harmonious global rule system, otherwise Malta considers that a substantial risk of having a disjointed system ultimately will stifle business recovery post-covid-19. Meanwhile Malta is focusing on compliance and enforcement, by among others having implemented the Anti-Tax Avoidance Directive 2 (2017/952) and the Mandatory Disclosure Directive (2018/822), with guidance on both Directives expected in due course. Malta has taken a number of relief measures for covid-19, measures that have helped Malta maintain the unemployment rate at around 4.1 per cent (as at August 2020).
Outlook and conclusions
Malta is turning ever more to economic diversification, focusing on technology and digitally based activities. Driving and implementing innovation is an ongoing strategy for Malta, which is continually updating its laws to retain its rightful place as an attractive option for investment. 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.
1 Juanita Brockdorff is a partner and Michail Tegos is an associate director at KPMG Malta.
2 For more information on Maltese withholding tax rates, see home.kpmg.com/mt/en/home/insights/2016/02/malta-double-tax-treaties.html.