Andre Zarb of KPMG outlines the recent tax developments in Malta and explains why it is such a popular location for doing business.
Malta's tax system
Malta's accession to the EU six years ago, coupled with the formal sanctioning by the EU Commission of Malta's beneficial tax refund system and the adoption of the Euro in 2008, have cemented Malta's leading position as an onshore jurisdiction for reputable multinational groups. The use of English as the business language (with all documentation and laws being in English) contributes to Malta's attraction and the use of a single functional currency for financial reporting, tax and company law purposes grants flexibility to the industry, thereby making Malta all the more attractive.
While the headline corporate tax rate is 35%, the application of the tax refund system positions Malta as the country with the lowest effective tax in the EU, which ranges between 0% and a maximum of 6.25%. This, coupled with a flexible participation exemption, the absence of transfer pricing rules, controlled foreign company legislation, thin capitalisation rules, exit taxes and withholding taxes on dividends, interest and royalties paid to individuals or corporates, wherever resident, continues to put Malta on the map of a number of multinationals.
Tax refund system
The system of tax refunds has been embedded in Maltese law since 1994. Upon EU accession, the tax refund system was revised to its present form after being rubber-stamped by the EU Commission. This tax refund system works in a simple three-step process which has been tried and tested by numerous multinationals. As a first step, the Maltese company, including a foreign company with a branch in Malta, pays tax in Malta on its profits at 35%. It then distributes a dividend, at which point in time its shareholders are entitled to claim a tax refund. The default tax refund is six-sevenths of the tax charge borne on the distributed profits before deducting any relief of foreign tax. This translates into an effective rate of tax of 5%. Though the quantum of the tax refund depends on the nature of the income and whether double tax relief is claimed, the overall tax in Malta after tax refund will be between 0% and 6.25%.
Malta also adopts a flexible 100% participation exemption on profits (namely dividends) derived from a qualifying company or from the transfer thereof (namely gains on transfer). A qualifying company is one which satisfies one of a series of tests. Typically, as with most participation exemption jurisdictions, Malta has an ownership test which is set at 10%. However, this test does not require a minimum holding period. Furthermore, where the ownership test is not fulfilled, the participation exemption may be acceded to by satisfying other less onerous conditions including a holding with an acquisition value of €1.164 million ($1.6 million) held for an uninterrupted period of 183 days, or one which entitles the holder to a right to sit or appoint a director on the board or to a right to purchase the remainder to the capital.
For dividends, the participation exemption is applicable if the qualifying company:
- is resident or incorporated in a country or territory which forms part of the EU; or
- is subject to tax at a rate of at least 15%; or
- has 50% or less of its income derived from passive interest or royalties; or
- is not held as a portfolio investment and it, or any of its passive interest or royalties, has been subject to tax at a rate of at least 5%.
As is evident from the foregoing, unlike many other EU jurisdictions, the subject-to-tax clause is not sine-qua-non for the applicability of the participation exemption and the exemption may be availed of even if the qualifying company suffered no tax.
The conditions for the application of the participation exemption with respect to dividends do not apply in the case of gains derived from the transfer of the qualifying company.
Taxation of resident but not domiciled persons
Malta's tax rules applicable to a resident non-domiciled company, that is, a company which is incorporated outside Malta but effectively managed in Malta, make such entities a versatile and powerful vehicle for any tax planning structure.
Such a company is only subject to tax in Malta on income or capital gains arising in Malta. Income arising outside Malta is only taxable in Malta to the extent that it is received in Malta, whereas capital gains arising outside Malta are not taxable in Malta even if received in Malta.
While the resident non-domiciled company is widely used to receive foreign source income outside Malta, where a relevant treaty is applicable which includes specific anti-avoidance provisions aimed at such companies which are taxable on a receipt basis, receipt of the income in Malta would be required in order to ensure treaty protection. In any case, in these situations, the tax refund system would anyway apply.
Aircraft leasing companies
The flexibility that Malta offers, with no transfer pricing or thin capitalisation rules as well as no withholding taxes, coupled with the comfort following EU approval that the tax refund system is here to stay, has led Malta to increasingly be seen as a cheaper and yet equally reputable alternative, or complement, to Irish aircraft leasing arrangements.
Lessor companies incorporated in Malta have access to the tax refund system as well as a flexible tax depreciation on the value of the aircraft airframe, aircraft engine or airframe overhaul over a minimum of 6 years, and on aircraft interiors and other parts over a minimum of 4 years.
Intellectual property holding companies
Besides suffering an effective rate of tax after tax refunds of between 0% and 6.25%, IP holding companies may benefit from a recently introduced royalty exemption similar to the Dutch innovation box. This however grants a full exemption on income derived from qualifying patents, irrespective of the jurisdiction in which the patent was developed or in which it is registered.
IP holding companies operating in Malta may also benefit from Malta's extensive tax treaty network and tax depreciation on IP over three years to six years, depending on IP in question.
An ever increasing number of multinationals, private equity houses and investment banks choose Malta as their preferred location for group finance and treasury activities. Where financing is provided intra-group, the financing activity falls outside the scope of any licensing requirements. In addition, Malta's attractive tax refund system, including the participation exemption, effectively means that the tax borne in Malta will range between nil and a maximum of 6.25%.
Besides the availability of highly skilled and educated people on the island, the low effective tax rate means that a larger margin is left in Malta, thus ensuring that Malta really is the beneficial owner of the proceeds.
Malta has long been attracting to its shores the establishment of funds investing in the emerging and established markets and today is recognised as an EU-based fund domicile alongside Luxembourg and Ireland. With more than 400 funds domiciled in Malta, fund service providers have followed suit with an increasing number of fund managers, fund administrators and global custody service providers establishing in Malta and besides suffering a maximum effective tax rate of 5%, these companies gain access to Malta's ever-increasing double taxation treaty network, a legal and regulatory environment that is EU-compliant and a gamut of highly-skilled professionals.
After the introduction of the Securitisation Act in 2007 and with the recent introduction of tax rules applicable to securitisation vehicles, Malta is earmarked to become an alternative jurisdiction through which securitisation transactions are structured. The allowable deductions for a securitisation vehicle effectively allow it to be tax neutral from a Maltese tax perspective.
Andre Zarb (email@example.com) is partner and head of tax of KPMG in Malta