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05/05/14 - TAX REGIME IN MALTA

TAX  REGIME  IN MALTA

The standard corporate rate of tax in Malta is 35% of the chargeable income for the fiscal year. Maltese companies are required to allocate profits after tax to various tax accounts, namely, the final tax account, the immovable property account, the Maltese taxed account, the foreign income account and the untaxed account. Profits deriving directly or indirectly from immovable property situated in Malta and allocated to the immovable property account do not qualify for tax refunds. Whenever distributions are made from the Maltese taxed account or the foreign income account, shareholders receiving such distributions become entitled to claim a refund of the Malta tax paid by the company on those profits out of which distributions are made. Tax refunds also apply where a company operates through an oversea branch in Malta.

 

The refunds currently available are:

6/7ths refund:   This type of refund is generally due on those profits earned from trading activities. Taking into account such refund, the effective rate of tax works out at 5%.
5/7ths refunds: This type of refund is generally due in respect of income derived from passive interest and royalties. The effect rate of tax works out at 10%.
2/3rds refund: Available in those instances where the company has claimed double taxation relief. The refund depends on the type of double taxation relief availed of and is limited to the tax paid in Malta.
100% refund:  Applies when profits are derived from a participating holding.

 

Malta operates a full imputation system of taxation: When a company distributes dividends out of profits on which it had paid tax, no further tax is due by the shareholders and a credit for the tax paid by the distributing company is available to the shareholders.
 

Allocation of profits: Companies are to allocate distributable profits to one or more of 5 tax accounts, depending on the nature/source of the profits: Foreign Income Account (FIA), Maltese Taxed Account (MTA), Final Tax Account (FTA), Immovable Property Account (IPA), and Untaxed Account (UA).
 

Tax refunds: Distributions of profits from either of the FIA or the MTA trigger refunds of Malta tax paid by the company.  The effective tax rate after refund will generally range from 0% to 10%. The standard refund (e.g. generally for business profits) is 6/7 of the Malta tax (grossed up with any relieved foreign tax – subject to certain conditions – in relation to the MTA), going up to 100% in the case of profits derived from a participating holding and down to 5/7 on profits derived from passive interest and royalties. Where the company has claimed double tax relief on profits allocated to the FIA, a tax refund of 2/3 of the Malta tax paid (grossed up with any relieved foreign tax – subject to certain conditions) on the distributed profits may be claimed. Tax refunds are Malta tax exempt and payable within a statutory deadline of a few weeks.
 

Non-resident companies’ branches: A non-resident company with a Maltese branch may allocate the profits from the branch activities to the various tax accounts, thus enabling the company’s shareholders to operate the tax refund regime.
 

Participation Exemption: Income deriving from a participating holding (generally a 10% equity holding or partnership interest – there are alternative tests) in a non-resident entity or from the disposal thereof are exempt from tax (alternatively they may be taxed at 35% and the shareholder may, following distribution, claim a full refund of the Malta tax paid by the company thereon) – subject to certain anti-abuse provisions being satisfied.  Malta’s holding company regime may thus offer an effective Malta tax rate of 0% either through the workings of the tax refund regime or, alternatively, at the level of the holding company through the Participation Exemption.
 

Withholding tax (WHT): There is (a) no WHT on outbound dividends, (b) no WHT on interest payable to non-residents (subject to certain conditions being satisfied), (c) no WHT on royalties (subject to certain conditions being satisfied), (d) no branch remittance tax.

 

PARTICIPATION EXEMPTION & PARTICIPATION HOLDING

 

PARTICIPATION HOLDING

A participating holding exists where a company holds directly at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares and where such holding confers at least 10% of any of following:  (i) a right to votes; (ii) a right to profits available for distribution and (iii) a right to assets available for distribution on the winding up of the company. The taxation authorities in Malta may also establish that an equity holding exists even where there is no holding of shares but where it is proven that at least two of the condition rights exist. A participating holding also exists when the following criteria are met:

The investment in the non-resident company amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days
The Maltese company has the option to acquire the remaining balance of the equity shares in the non-resident company
The Maltese company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in the non- company

The Maltese company is entitled to sit on the Board of the non-resident company
The holding of shares in the non-resident company is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes


PARTICIPATION EXEMPTION
Profits derived from a participating holding or from gains realized on the disposal of such holding may, subject to certain conditions, be exempted from tax in Malta. 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 participating holding or its disposal has an option not to claim the participation exemption but may 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.

 

COMPANY RE-DOMICILIATION 

The re-domiciliation of companies in Malta is regulated by the ‘Continuation of Companies Regulations 2002’ (Legal Notice 344 of 2002) which came into effect on the 26 November, 2002. In terms of the regulations, foreign companies formed and incorporated under the laws of an approved country other than Malta may be continued in Malta in terms of the Companies Act.  Similarly, a company incorporated in Malta may be continued in a jurisdiction other than Malta as permitted by the laws of the other jurisdiction. The ‘Continuation of Companies Regulations 2002’ are indeed relevant to all types of companies including those companies carrying out certain licensed activities. The approved countries are EU members, EEA members (Norway, Iceland, Liechtenstein), O.E.C.D. countries, British Virgin Islands, Cayman Islands, Bermuda, Guernsey, Jersey, Gibraltar, Isle of Man, Bahamas.


A body corporate formed and incorporated or registered under the Laws of an approved jurisdiction other than Maltamay, provided that certain conditions are met, request the Registrar of Companies to be registered as being continued in Malta. This would allow the body corporate to continue its operations in Malta without having to wind up the Company in its jurisdiction. Redomiciliation is governed by Legal Notice 344 of 2002, Continuation of Companies Regulations, 2002.
The regulations are divided into two parts. Part 1 deals with the Continuation in Malta of a Foreign Company, while part 2 deals with the continuation outside Malta of companies incorporated in Malta.


A number of conditions need to be satisfied for a foreign Company to be able to continue its operations in Malta. The country of original registration must have the appropriate legislation in place allowing company’s domiciled within its territory to effectively re-domicile their activity to another country. The charter, statutes or memorandum and articles or any other instrument constituting or defining the Company must also authorize the Company to do so. A request to the Registrar to be considered for registration as continuing in Malta under the Act must be submitted together with supporting documentation.
Recent changes enacted to Malta Law also provide for ‘Step-up’ provisions which allows a Company being re-domiciled to Malta or a Company resulting following a merger which meets the EC Merger Directive, to claim a step up in the tax base costs of any assets held outside Malta. Effectively, this will enable the Company to revalue its overseas assets to fair market value at the time the re-domiciliation process is undertaken. The re-valued cost, which should be notified to the IRD, will constitute the new acquisition cost of the assets when calculating any subsequent gain. It is also worth noting that capital allowances available under the Income Tax Act will henceforth be calculated on the stepped-up value of the assets.
Capstone provides specialized advice in connection with re-domiciliation procedures.

 


CONTINUATION IN MALTA OF A FOREIGN COMPANY
A formal application is to be submitted to the Registrar of Companies in Malta requesting that the foreign company may be continued in Malta. The request is to be accompanied by a resolution of the shareholders evidencing the decision to re-domicile in Malta and authorizing the directors of the company to proceed with the necessary formalities. A copy of the Memorandum and Articles of Association, or a similar constitutive document, in the English language is required which may in certain cases require amendments in order to comply with the provisions of the Companies Act. This document is to be accompanied by a certificate of good standing issued by the country where the company is incorporated.
In addition to the documents mentioned in the foregoing paragraph, the directors of the company are required to make certain declarations. These declarations will include the name of the company and the name under which it is to be registered in Malta, the name of the country where the company is presently incorporated and the date of incorporation. The directors are to confirm the decision taken by the members to re-domicile in Malta and that the company has notified the foreign jurisdiction of its intention to migrate to Malta. The directors’ declaration is to confirm that there are no proceedings for any breach of law in the country of incorporation. They are further to state that the company is solvent and that they are not aware of any circumstances which could negatively affect in a material manner the solvency position of the company within the period of the next twelve months. A list of the present directors is also to be provided.


The Registrar of Companies may also require confirmation that the continuation of the company in Malta is permitted by the laws of the country in which it was formed. The Registrar may also require evidence relating to the consent of such number, or proportion, of the shareholders, debenture-holders and creditors of the company so that it may be continued in Malta.

 

UNILATERAL RELIEF

Unilateral relief is only given if no relief is available in respect of treaty relief or Commonwealth income tax relief. Unilateral relief applies to income which arises outside Malta, has been subject to tax by a foreign body and comprises the income of a person resident in Malta. The relief is only given provided that tax authorities are satisfied that the foreign income has been taxed abroad. The overseas tax may be allowed as a credit against the Malta tax chargeable on the gross amount provided that it does not exceed the Malta tax liability on that income. Unilateral relief is also available where the taxpayer is a Maltese company which holds at least 10% of the voting powers of the overseas company paying the dividend.

 

PERMANENT RESIDENCE PERMIT
A Maltese Permanent Residence Permit entitles the holder to reside in Malta without any restriction on the amount of time actually spent in Malta. Entry visas are not required to travel to Malta and therefore permanent residents have complete freedom of movement to travel in and out of the country and within EU borders.
Benefits – Permanent resident holders are taxed at a flat rate of 15% on income remitted to Malta, subject to a minimum annual tax liability of EUR 4,150 per annum after relief from double taxation. The tax payable is worked out on income and capital gains arising in Malta and on foreign income, excluding capital gains, remitted to Malta. Therefore no tax liability is created on any capital gains arising outside of Malta irrespective of whether they are remitted to Malta or not. Any excess income brought to Malta, proceeds from the sale of the principal residence in Malta (subject to conditions), encashments of investments and any income accumulated during the resident’s stay may be repatriated, provided that there are no outstanding tax liabilities payable in Malta. There are no estate duties to be paid but duty is levied on the transfer of immovable property situated in Malta as well as shares held in Maltese companies. The duty payable on the purchase of immovable property is fixed at the rate of 5%.
Permit holders are not to engage in any gainful occupation or any form of business activities in Malta and import duty or VAT on the importation into Malta of used household and personal effects, motor vehicle, furniture and other domestic articles is waived if such goods are imported within the first 6 months of obtaining the residency license.
Application conditions and procedure – When applying for a Permanent Residence Permit, candidates may include dependants, namely children under18 years of age, their spouse, parents and grandparents if being maintained by the applicant.
A prospective permanent resident must provide evidence that he/she either owns assets outside Malta worth at least EUR 349,000 or is in receipt of an annual income of at least EUR 23,000 arising outside Malta.
The applicant will be required to remit to Malta at least EUR 13,950, plus EUR 2,330 per each dependent annually and must, within one month from taking up residence, either purchase residential premises in Malta at a cost of not less than EUR 116,000 in the case of a house, or EUR 69,000 for a flat, or rent/lease suitable accommodation at a cost of not less than EUR 5,150 per annum.
An application for a Permanent Residence Permit must be supported by the following documents:

  • evidence that applicant has an annual income of Eur23,000 or capital assets of at least Eur349,000 and that he is in a position to remit to Malta a minimum annual income of Eur13,950 plus Eur2,330 for each dependent. This evidence can take the form of a bank reference, bank statements or certificates of deposit or securities or income tax returns.
  • a Police or Judicial Good Conduct Certificate, in respect of each adult (18 years and over) whose name appears on the said application, issued from the place of residence of the individual. This certificate should confirm that applicant/dependants has never had any convictions (save for minor traffic offences) and is not undergoing any criminal proceedings. If the certificate issued by the Authorities does not contain wording to this effect, the applicant is required to make a sworn declaration (affidavit) attesting same facts.
  • a copy of the Marriage Certificate in the case of a married couple (where applicable)
  • a copy of the Birth Certificate of applicant and dependants (where applicable)
  • A written declaration by the applicant stating that parents and/or grandparents are financially dependent on the applicant (where applicable).
  • 3 Passport-sized photos of applicant and each dependant;
  • certified true copy of Passport of applicant and each dependant;
  • brief curriculum vitae of applicant;
  • tax identification number of applicant in country of current residence;
  • if applicant has already acquired or rented property in Malta, a copy of the deed of purchase of property or of the lease / rental agreement should be submitted. If property has not yet been acquired, such deed of purchase of property or of the lease / rental agreement should be submitted to the Inland Revenue Department within 12 months of taking up residency in Malta.

 

The application process may take up to three months. The applicant is to take up residence in Malta within 12 months of the issue of the permit.

 

Chryssa Tsiotsi
 
Advocate 
 
LL.M in Information Technology and Telecommunications Law 
 
University of Strathclyde in Glasgow- U.K
 
chryssa.tsiotsi@gmail.com  or info@aacasinosoulutions.com
 
 

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