Malta

Kevin Valenzia and Mirko Rapa
PricewaterhouseCoopers
Malta

Kevin Valenzia and Mirko Rapa of PricewaterhouseCoopers say Malta's fiscal support for two industries is a good example of how it has adapted to take advantage of international investment trends

Malta has on a number of occasions proved to be an EU jurisdiction with a reputable and efficient regulatory regime, with a supply of qualified resources at competitive prices. In this context, the recently published progress report on jurisdictions surveyed by the OECD Global Forum on Taxation recognised Malta's efforts in the field of exchange of information and international fiscal cooperation through being listed on the OECD white list among the jurisdictions that have substantially implemented the internationally agreed tax standard.

Malta managed to move seamlessly from a manufacturing based economy, driven mainly by cheap labour and skilled workmanship, to a mostly high-end manufacturing and services based economy, particularly with the help of technology, membership of the EU and the introduction of the Euro. In an increasingly virtual world, Malta's small size and its geographical limitations as an island are no longer a barrier and it is positioning itself increasingly in niche industries of funds, captive insurance, information and communication technology, and pharmaceuticals.

In the case of Malta, it may be said safely that small is beautiful and successful. Though this may sound like a cliché, the island's small size and interdependencies of different sectors of the economy foster close links and communication among the country's professionals, business community, regulatory authorities and legislature. This ensures that the legislative framework necessary to support important sectors of the Maltese economy is continuously scrutinised and strengthened to immediately address new developments and maintain flexibility.

An added bonus is the fact that the majority of the people involved in providing high value added services, such as lawyers, accountants, software programmers, lab analysts, fund and insurance managers, are trained within a UK or UK-influenced education system and are fluent in many European languages. Also, the setting up of a technical college has helped to introduce specialised courses at a non-tertiary educational level aimed at ensuring a ready supply of skilled workers for new industries such as aircraft engineering and pharmaceutical companies.

Malta's taxation system

In the late 1980s the Maltese government tried to establish a typical offshore financial centre. However, after OECD criticism and EU membership, the country changed tack and today Malta's legal system is fully integrated into that of the EU and the tax system has passed all tests for onshore probity.

In terms of the Income Tax Act, any person (including corporates) who is both domiciled and ordinarily resident in Malta is subject to tax on a worldwide basis. Companies incorporated under Maltese laws are deemed automatically to be both resident and domiciled in Malta. Companies incorporated under foreign laws are regarded as resident in Malta only if their control and management are exercised in Malta. Such companies are subject to tax only on Malta source income (including capital gains) and income arising outside Malta (excluding capital gains) remitted to Malta.

Companies that are redomiciled to Malta from another jurisdiction would be considered incorporated in Malta from the date of redomiciliation and should be deemed to be resident and domiciled in Malta with effect from such date.

Companies are taxed on their business profits at the normal corporate rate of 35%. Profits are arrived at after deducting expenses. The general rule is that tax deductions are allowed only with respect to expenses incurred wholly and exclusively in the production of the income but the law contains special rules on various items of deductions including capital allowances (in lieu of depreciation) on industrial buildings and structures, and on plant and machinery. Amortisation for business expenses on scientific research, patents, royalties and other intellectual property is also available.

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

Furthermore, tax refunds are available for distributable profits allocated to the Foreign Income Account (FIA) and Maltese Taxed Account (MTA). Income allocated to the FIA consists of an exhaustive list of distributable profits resulting from taxable income arising or closely connected with income arising outside Malta. On the other hand, the MTA consists of taxed profits that have not been allocated to the Final Taxed Account (FTA) or the Immovable Property Account (IPA).

Subject to certain conditions, tax refunds are available without discrimination both to Maltese and non-Maltese resident shareholders. The refund is typically of six-sevenths of the Malta tax paid – this is defined as the Malta tax paid grossed up with any amount of foreign tax actually suffered on foreign source profits. Other refunds are the fifth-sevenths refund where the profits derive from passive interest and royalties and the two-thirds refund where the distributable profits are allocated to the FIA and the company claims double taxation relief for such income or where the income is derived by an international trading company. Refunds are increased to 100% where the profits are derived from a participating holding or its disposal. A participating holding is commonly satisfied through a direct holding of at least 10% in the equity capital of a foreign company/ limited partnership. In lieu of the refunds, a direct exemption may apply for income derived from a participating holding or its disposal. The result after the distribution of profits and tax refunds is an effective tax burden in Malta ranging from 0% to 10%.

Some of Malta's fiscal advantages

Apart from a low effective tax burden Malta's tax system offers a number of other attractive features:

a network of about 50 double-tax treaties concluded both with developed and developing countries;
as an EU member state, access to parent-subsidiary, interest and royalties and mergers directives;
no withholding taxes on dividends, interest, royalties and capital gains (other than capital gains arising from transfer of shares in property companies) paid to non-residents, irrespective of the existence of a double tax treaty or not, subject to certain straight-forward conditions;
availability of unilateral tax sparing relief in respect of foreign tax – in case of foreign source dividends unilateral relief extends to underlying tax;
no thin-capitalisation rules;
no controlled foreign company regime;
no capital duty on share issues and exemption from duty on transfers of shares in companies having the majority of their business interests outside Malta (this is subject to a number of other conditions).

Though a tax-efficient system is definitely a big incentive for attracting inward investment and business, growth in the high-end manufacturing and financial services sectors cannot be maintained or sustained without a solid regulatory and legislative framework and the backbone of necessary human resources. Various features have helped to consolidate Malta's position in the captive insurance and pharmaceuticals industry, for example.

Captive insurance

Volkswagen, Vodafone and RWE are just a few of the international companies that have recently located their in-house or captive insurance operations to Malta in recent years.

The captive industry in Malta was significantly boosted by the introduction of the Protected Cell Regulations and the Continuation of Companies Regulations 2002 (and the Continuation of Insurance Business Companies Regulations, 2003).

The Protected Cell Regulations provide for the segregation and protection of the cellular assets and liabilities. The Continuation Regulations allow companies incorporated in foreign jurisdictions to be continued in Malta without going through costly and complex procedures of dissolution in the original country of incorporation and reincorporation as a new legal entity in Malta. The Continuation Regulations also provide an easy exit route from Malta.

Captive insurance companies being continued into Malta would still need to apply for a licence from the Malta Financial Services (MFSA). Typically, licence applications are processed within three months and the regulator would in particular need to satisfy itself that all the persons involved with the running of the business, including shareholders and controllers of the captive company, are fit and proper to ensure that the captive is managed soundly and prudently.

Though captive insurance companies are regulated in the same way as indigenous insurance companies, due to the nature of captive insurance businesses as in-house insurances, certain exemptions apply. Thus for example a captive is not required to contribute a percentage of its premium to the Protection and Compensation Fund and are exempt from asset-localisation requirements. Insurance policies are also exempt from stamp duty in so far as they concern risks situated outside Malta.

European Union membership has bolstered Malta's attractiveness for companies established outside the EU seeking a foothold in the EU. Once established in Malta such companies may avail themselves of the passporting rights in terms of the insurance passporting directives and offer cross-border services in other EEA countries or establish a branch there without the need to obtain a licence or comply with the regulatory requirements of the host country.

Captive insurances pay tax in Malta on the same basis as any other insurance company carrying on general insurance business. The major components of the income tax computation would include:

Gross premiums written less reinsurance premiums;
Investment income;
Movement in technical provisions including equalisation reserves;
Deductions for claims paid less reinsurance recoveries and administrative expenses.

The company will be taxed on its profits at the rate of 35%. However, on the assumption that all taxed profits are distributable and are in fact distributed, the company's shareholders should, when the distribution is made be entitled to a total refund of around 30% of the Malta tax suffered. The overall effective Malta tax leakage may, in certain circumstances, be reduced even further if the captive company suffers any foreign tax on its profits, given that the refunds are calculated on the Maltese tax paid gross of any credit for actual foreign tax suffered.

Pharmaceuticals

The flight of textile manufacturing companies to cheaper locations such as North Africa and Eastern Europe, has forced the Maltese manufacturing industry to reinvent itself by diversifying the local industry base and moving upmarket. The production of generic pharmaceuticals, for example, has proven to be a big success.

Malta's patent legislation protects the interests of proprietors of a patent against third parties. However, Malta's patent legislation contains the Bolar provisions which define the circumstances in which the registered patent proprietor still may not prohibit third parties from analysis and experimentation on the drug while under patent protection. Furthermore, given that comparably few patents are registered under Maltese law, pharmaceutical firms may still develop and produce generic versions ready to be marketed immediately as soon as the patent protecting the drug under foreign legislation expires.

Malta's membership of the EU gives these pharmaceutical firms a gateway to the EU and easier penetration in the traditional North African markets, since the production process still complies with the highest industry standards and practices.

Pharmaceutical firms establishing themselves in Malta benefit from advantageous fiscal and non-fiscal measures. The fiscal measures include tax investment credits on qualifying capital expenditure, which includes both expenditure on tangible fixed assets such as industrial building, plant and machinery as well as capital expenditure for the acquisition or development of technology or know-how irrespective of whether patented or not. Furthermore, the application of provisions in a number of Maltese treaties together with provisions in domestic income tax law result in a comparably low tax rate on profits derived by pharmaceutical companies and their shareholders.

Nimble adaptation

After independence, Malta has proved to be a jurisdiction that is capable of adapting its legislative frameworks and of diverting its financial resources to key industries rapidly and depending on the needs of the international markets effectively. Malta's small size and the island's lack of natural resources makes such flexibility vital for its continued success in attracting high-value added activities to its shores. Malta should continue to retain its position as one of the most attractive jurisdictions within the EU from where to conduct international business.

Kevin Valenzia (kevin.valenzia@mt.pwc.com) & Mirko Rapa (mirko.rapa@mt.pwc.com)