Malta Trading Operations

Shareholder

Malta Co

Foreign country

Malta

TC

Full tax credit

Tax at 35% on profits

Dividend

No withholding tax over dividends

Malta, an EU Member State since May 2004, has developed into a leading and reputable financial centre and offers an attractive and competitive environment for international business and investment. Its culture, multilingual population, geographical position,  qualified professionals, opportunities for efficient tax planning, relatively low costs for management and administration, and its state of the art telecommunications, gives the added advantage over other jurisdictions.
 
Taxation of Companies
 
Companies registered in Malta are in principle subject to tax at the standard rate of 35% on income chargeable to tax. However, Malta operates a full imputation system of taxation. In the event of a dividend distribution, the tax paid by a company on its profits out of which a dividend has been distributed, is credited in full to the shareholder in order to avoid the economic double taxation of profits. Refunds of the applicable tax credit are available to shareholders in respect of profit distributions by Maltese companies and branches of foreign companies, resident in Malta and registered on or after 1 January, 2007 out of all sources of income (with the exception of profits derived from immovable property situated in Malta) and provided that tax compliance requirements have been fully adhered to.
 
As Malta operates a full imputation system of taxation, the dividend and refund received by the shareholder would not be subject to any further tax in Malta.  
 
Tax Accounting
 
The allocation of a Maltese company’s distributable profits between the five accounts being the Final Tax Account, the Immovable Property Account, the Foreign Income Account, the Maltese Taxed Account and the Untaxed Account is an important aspect of the Maltese tax system as this determines the possibility of tax refunds upon a distribution of profits.
 
Payments and Refunds of Tax
 
A company is assessed and must pay tax due in the currency in which its share capital is denominated. Refunds of tax are made in the same currency as the tax payment, thereby eliminating foreign currency exchange exposure.
 
Shareholders making a refund application are required to be registered with the Inland Revenue and refund applications must be made within 4 years from the date on which the shareholder becomes entitled to the refund.
 
The tax authorities are bound to issue refunds of tax by not later than the fourteenth day of the month following that in which the tax payment has been made, provided that a valid refund application is submitted and all compliance requirements have been adhered to.
 
Advance Revenue Rulings
 
The International Tax Unit within the Inland Revenue Department is responsible for providing advance revenue rulings.
 
Revenue Rulings give the comfort of legal certainty to international investors. A Revenue Ruling may be requested to confirm the tax treatment or tax position such as: 

• The position regarding general anti-avoidance provisions;
• The tax treatment of any particular financial instrument ;
• The tax treatment of any transaction which involves international business.

Revenue Rulings may be obtained for a period of 5 years and are renewable every five years thereafter  The Revenue Rulings survive a change in legislation giving a grace period of 2 years from the date of entry into force of any such new law.
 
Other important considerations

• No withholding taxes on dividend, interest or royalty payments; 
• No thin capitalisation rules;
• Malta has no specific transfer pricing regulations;
• No stamp duties on disposals/ acquisitions of securities in companies owned by non-residents; 
• Under re-domiciliation provisions it is possible to migrate companies into and out of Malta 
• Malta’s financial services legislation and tax laws are compliant with EU Directives; 
• Malta has strong and effective Anti-Money Laundering Laws and Regulations;

Tax Treaties
 
In order to encourage the growth of international trade, including that of financial services, double taxation treaties have been concluded by Malta with important trading partners as well as with emerging countries. This network of tax treaties is constantly being expanded. The treaties are generally based on the OECD model convention, in terms of which Malta grants relief from double taxation under the credit method.

The following table illustrates the treaty and non-treaty withholding tax rates when dividends, interest and royalties are paid from treaty countries to Maltese residents (as per August 2008).
 

*Switzerland and USA – treaty limited to income derived from the operation of ships or aircraft in international traffic
Treaties signed but not yet in force: Morocco, Russia,  United Arab Emirates, United States of America
Treaties awaiting signature: Greece, Ireland, Jordan, Serbia, Montenegro, Thailand, Turkey, Ukraine
 

Dividend, Interest and Royalty payments from Malta
 
Unlike many other countries, Malta does not levy withholding tax on dividend, interest and royalty payments or similar payments by a Maltese company. As a result, in many tax treaties Malta has negotiated low withholding tax rates with third countries, adding to the attractiveness of the Malta tax treaties.
 
EU Parent-Subsidiary Directive, Interest & Royalty Directive and Mergers Directive
 
Malta has implemented all the above EU Directives into its domestic legislation. These Directives have great significance for international groups. The Parent-Subsidiary Directive under circumstances eliminates withholding taxes on profits distributed by an EU subsidiary to its EU parent company.r The Interest- Royalty Directive also seeks to eliminate the double taxation of interest and royalty payments between companies which are resident in different EU Member States. The Mergers Directive ensures that pan-European group re-organisations (mergers, de-mergers, share for share exchanges etc) can be structured with minimal tax incidence.
 
National legislation to eliminate double taxation - Unilateral Relief
 
The Maltese tax system governing double taxation relief includes treaty relief and also 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 treaty.
 
The overseas tax suffered may be allowed as a credit against the tax chargeable in Malta on the gross amount, limited to the total tax liability in Malta on the particular income.

When claiming unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner of Inland Revenue:

1. That the income arose from overseas;
2. That the income suffered overseas tax; and 
3. The amount of that tax.  

Financing, Licensing and Similar Activities
 
International groups often find it useful to have financial flows of individual group companies managed by a central treasury unit. Inevitably, the specific features of such a centralised finance company will depend on the structure of the group in question.
 
Standard group finance companies are not regulated by banking law and are therefore not subject to special licensing or reporting requirements.
 
Withholding taxes on interest and royalty payments to a Maltese company are often reduced in terms of Malta’s double tax treaties or the EU Interest and Royalty Directive. Malta does not itself levy withholding taxes on interest and royalty payments making Malta an ideal location for group financing and licensing activities.
 
At the same time, interest on group financing activities and royalty income is taxed at the standard rate of 35%. Upon a dividend distribution by the Maltese company, the shareholders may generally apply for a refund of 6/7ths of the tax levied on those profits out of which the dividends have been distributed. 

The provision of banking services, deriving rent and premiums from assets held abroad, leasing and managing overseas assets are examples of other activities which can be performed in Malta in a tax efficient manner.
 
Passive Interest and Royalty Income
 
When a Maltese company’s income constitutes ‘passive interest or royalties’, its shareholders may, upon a dividend distribution out of that income, claim a refund of 5/7ths (instead of 6/7ths) of the Malta tax levied on the profits out of which the dividends have been distributed. This treatment would apply to dividends distributed out of foreign source passive interest and royalty income where the Maltese company does not claim any double taxation relief on that income.
 
Passive interest and royalties are defined as interest or royalty income which is not derived, directly or indirectly, from a trade or business, where such interest or royalties have suffered any foreign tax, directly by way of withholding or otherwise, at a rate of tax which is less than 5%. Interest and royalties which have been subject to foreign tax at a rate of 5% or more, would no longer be considered to be passive and shareholders receiving a dividend distribution out of these streams of income would be eligible to apply for the 6/7ths refund as explained above.

Trade, Marketing, Distribution and Service Activities
 
Malta has some considerable advantages as a location from which to establish a trading base. Companies that do not opt to use Malta as a regional base for trading and distribution may use a Maltese company to conduct the following activities:

• E-commerce activities for retail or wholesale distribution of material or non-material goods;
• Licensed online gaming activities;
• Licensed investment services;
• Central management or consultancy services;
• Perform re-invoicing operations. 

A Maltese company’s income arising from trading activities is included as part of the company’s income for the year and charged to tax at the rate of 35%. Upon a distribution of a dividend, the shareholders may generally apply for a refund of 6/7ths of the tax levied on those profits out of which the dividends have been distributed, leading to an effective tax rate on the profits of 5%. The example illustrates the mechanics of the full imputation system and tax refunds:

Profits derived by a Maltese company may be distributed as a dividend to a Maltese corporate shareholder, which corporate shareholder would not be subject to any further tax on the refund or dividend received. Cash derived by the company may be re-invested without any additional tax liability in Malta.