Tax Refunds And Participation Exemption

Maltese law contains international tax measures which make Malta a very competitive, cost and tax efficient basis for setting up structures to carry out international trading, investment and holding activities. Besides being the only EU member state with a full tax imputation system, Malta’s tax laws allow shareholders of Maltese companies to claim a refund of tax paid by the Maltese company. Furthermore, Maltese law provides for a Participation Exemption on certain profits or gains derived from qualifying equity holding.

The shareholder’s tax refund regime and participation exemption are approved by the EU and represent an interesting and long-term business opportunity.

  • EU-approved tax refund and participation exemption regime (see below)
  • no withholding tax on dividends paid by a Maltese company
  • tax exemption on interest and royalties derived by non-residents
  • exemption from tax on transfers of shares and securities held by non-residents (except for shares in companies owning real estate in Malta)
  • extensive double taxation treaty network (including all EU Member States) and other forms of double taxation relief
  • no thin capitalisation or CFC rules, no express transfer pricing rules
  • advance revenue rulings on international tax issues

Maltese companies pay tax at the rate of 35% but upon a distribution of profits, the shareholders are entitled to claim a refund of tax paid at corporate level. The extent of the refund depends on the nature and source of profits and on the account out which the profits are paid (companies are required to allocate profits to various tax accounts).

Types of Refunds

  1. 6/7ths refund – refund of 30% out of 35% tax thus producing a tax liability of 5%. This is the typical refund due on trading profits.
  2. 5/7ths refunds (refund of 25%) due in respect of passive interest & royalties.
  3. 2/3rds refund due where the company has claimed double taxation relief.
  4. 100% refund due where the profits derive from a Participating Holding (see below)

Profits deriving directly or indirectly from immovable property situated in Malta do not give a right to tax refunds.

Participation Exemption

Profits deriving from a Participating Holding (PH) or from gains realised on the disposal of such holding are, subject to certain conditions, exempt from Maltese tax. A Participating Holding exists where a Maltese company holds at least 10% equity shareholding in a non-resident company or similar entity level of equity holding may be less than 10% subject to certain conditions. A Participation Exemption is also available in respect of gains derived from the disposal of qualifying equity in a Maltese company.

The exemption is available where the non-resident company or similar entity (in which the Maltese company owns the holding) is resident or incorporated in the EU, or is subject to foreign tax of at least 15% or does not have more than 50% of its income derived from passive interest or royalties. Where none of the above 3 conditions are met, the exemption is subject to an alternative test where both of the following 2 conditions must be satisfied:

(1) the holding is not a portfolio investment and (2) the non-resident company or entity or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

A Maltese company receiving gains or profits from a PH or its disposal has an option not to claim the tax exemption but to pay tax at 35% instead. In such case, the company’s shareholders may (following a distribution of profits derived from the holding) claim a 100% refund of the tax paid by the company. This option affords flexibility in planning holding structures.

An interesting feature of Malta’s tax system is that foreign companies are allowed to claim a refund of tax paid by their Maltese branch. This rule represents interesting tax planning opportunities for foreign companies wishing to operate from Malta through a branch rather than through a subsidiary.

Apart from relief in terms of a double taxation treaty Maltese tax legislation contains domestic rules aimed at ensuring that income originating from overseas is not subject to double taxation even if there is no double taxation agreement in existence. Relief is provided on a unilateral basis (Unilateral Relief), through a Flat Rate Foreign Tax Credit (FRFTC), underlying relief and Commonwealth Relief.

Unilateral Relief is available where treaty is not available. With regard to investments held by Maltese companies in foreign companies, the relief also extends to underlying taxes suffered abroad, that is, the taxes suffered by the foreign company on the profits distributed to the Maltese company.

The FRFTC may be claimed instead of treaty relief and the unilateral relief. The FRFTC assumes a deemed foreign tax of 25% of the income received in Malta, regardless of the amount of tax actually paid abroad and this may be claimed even where no tax abroad has actually been suffered. The 25% deemed foreign tax is allowed as a credit against the Malta tax due on the gross income after allowing for any deductible expenses. The combination of the FRFTC and tax refunds available to shareholders (see above) may produce very interesting tax-efficient results.

Companies incorporated in Malta are treated as domiciled and ordinarily resident in Malta and taxable on world-wide income. Companies incorporated outside Malta that are managed and controlled in Malta are treated as resident (but not domiciled) in Malta and taxed on income arising in Malta and income (but not capital gains) arising abroad and received in Malta. Companies incorporated outside Malta that are not managed and controlled in Malta are taxed only on income arising in Malta.

It is possible for foreign companies to set up a branch in Malta and carry on business through a branch. The profits attributable to the branch are taxable in Malta and the overall tax burden can be significantly reduced through tax refunds available to the head office. Foreign companies can be re-domiciled to Malta

Companies are taxed at a flat rate of 35% on their chargeable income and capital gains. There is no separate capital gains tax or corporate tax. Gains realised from the transfer of shares, securities, intellectual property and certain other intangible property are treated as part of the income for the year and are taxed at 35%.

The transfer of immovable property situated in Malta is taxed at 12% of the transfer price but the law provides for an option (applicable in certain cases) for tax to be charged at 35% on the capital gain realised. Local bank interest and other investment income are taxed at source at 15%.

Maltese tax legislation contains measures aimed at attracting the setting up of companies operating internationally and and holding structures. These measures take the form of refunds of tax paid to the shareholders of a Maltese company and to a foreign company having a Maltese branch as well as in the form of Participation Exemption on proceeds or profits derived by a Maltese company.