A Maltese company may be set up with the object of holding shares in non-resident companies, or to own and manage other overseas assets and investments and can be used to receive income from the investments and to distribute income generated by such investments in a tax-efficient manner to its shareholders.
Typical uses
There is unlimited scope for integrating a Malta based company within tax driven corporate structures and commercial activities. A Maltese holding company can be adopted to:
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Hold and manage overseas assets;
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Hold shares in overseas companies;
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Hold real estate overseas;
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Hold overseas patents, trademarks and other intellectual property rights;
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Hold and manage other overseas assets;
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Receive income generated by its overseas holdings: royalties, dividends, interest, capital gains, rents etc.
Participating Holding
For a Maltese resident company to hold a ‘participating holding’ in a company incorporated abroad, it must hold at least 10% of the equity shares in such company. In the case of a shareholding of less than 10%, such holding may still qualify as a ‘participating holding’ if:
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The holding company enjoys the option to purchase, or the right of first refusal on a disposal of the balance of the equity shares of the overseas company;
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It is entitled to be represented on the board of the overseas company;
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The shareholding exceeds EUR1.2m (or the equivalent in any foreign currency) for a minimum holding period of at least 183 days;
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The shares are held in the overseas company for the furtherance of the business of the Maltese registered company while not being as trading stock for the purpose of a trade.
A participating holding may also be extended to include certain partnerships of a nature similar to a partnership ‘en commandite’ in terms of local Maltese law.
Participation Exemption
Dividends and capital gains derived by a Maltese holding company from a participating holding in the above sense should be exempt from tax subject to any of the following conditions being satisfied.
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The foreign entity in which the participating holding is held is resident of or has been incorporated in a country or territory which forms part of the European Union, or;
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The foreign entity is subject to foreign tax at a rate of at least 15%, or;
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The foreign entity derives less than 50% of its income from passive interest or royalties, or;
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The participating holding does not constitute a portfolio investment as defined in Maltese law and the body of persons, or;
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its passive interest or royalties have been subject to foreign tax at a rate not less than 5%.
Passive interest or Royalties is defined in terms of local law as interest or royalty income not being derived either directly or indirectly from a trade or business provided that such income has not suffered.
Full Imputation System of Taxation
Malta has adopted a full imputation system of taxation. The characteristics of the full imputation system of taxation imply that a shareholder, whether resident in Malta or not, in receipt of a dividend from a Maltese company is entitled to a refund of the tax paid by the Maltese company in respect of the distributed profits, if the shareholder’s liability to tax on the dividend is less than that levied on the distributed profits. Usually, the Maltese tax liability of a foreign shareholder receiving dividends from a Maltese company is zero%, also because of the absence of any withholding tax over dividends in Malta.
A foreign shareholder claiming a refund of the tax on a dividend distribution is required to be registered for tax purposes with the Maltese tax authorities. Dividends distributed out of profits derived from a ‘participating holding’ entitle the shareholder to the ‘participation exemption’, meaning full tax exemption at the level of the Maltese holding company for benefits from foreign subsidiaries, or a full refund of the tax paid by the Maltese company on the distributed profits. As mentioned, withholding taxes are not levied on dividend distributions by Maltese companies.
The Maltese Inland Revenue is obliged to issue the refund of the tax by not later than the fourteenth day of the month following that in which the company’s tax liability has been settled, provided that all compliance requirements have been adhered to.
Relief of Double Taxation
Relief from double taxation is available to Maltese companies unilaterally in terms of local fiscal legislation or by virtue of Malta’s vast double taxation agreements concluded with third countries.
Double Taxation Agreements
Malta has concluded 45 double taxation agreements with third countries for the relief of double taxation on income and capital gains.
Maltese companies are in general fully entitled to the benefits under Malta’s double taxation agreements and may also benefit from application of the EU Parent Subsidiary Directive and the EU Interest and Royalties Directive. These Directives under circumstances provide for withholding tax exemption for dividend-, interest- and royalty payments made by companies resident in the EU to Maltese companies.
Unilateral Relief
Malta allows relief from double taxation on a unilateral basis where overseas tax is suffered on income received from a country with which Malta does not have a double taxation agreement. The foreign tax suffered is allowed as a credit against the tax chargeable in Malta on the gross amount of foreign income. The credit may not exceed the total tax liability in Malta on that income.
When claiming unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner:
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that the income is foreign source income
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that the income been levied to tax abroad; and
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the amount of tax levied on that income.
Advance Revenue Rulings
Revenue Rulings give the comfort of legal certainty to international investors. A Revenue Ruling from the Maltese tax authorities may be requested to confirm Maltese tax treatment of any international business transaction involving Maltese companies. It is valid for a period of 5 years from the date of issue and is renewable for a further 5 years.
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