Holding Companies - International Tax Revie · 09 Ireland as an attractive holding company jurisdiction post-BEPS Ireland remains one of the most attractive jurisdictions in the world

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T A X R E F E R E N C E L I B R A R Y N O 9 2

Holding Companies 10th edition

W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 1

04 Cyprus companies and the importance of substanceThe need for tax-efficient structures has magnified with the recent global economic downturn andthe increased scrutiny from tax authorities worldwide, says Zoe Kokoni of Eurofast.

09 Ireland as an attractive holding company jurisdiction post-BEPSIreland remains one of the most attractive jurisdictions in the world in which to establish a holdingcompany, explain Peter Vale and Sarah Meredith of Grant Thornton.

17 Malta: More than just a holding company locationA stable economy and a mature workforce with a strong work ethic make Malta a preferred locationfor investors looking for a sustainable alternative for setting up their business, explain André Zarband John Ellul Sullivan of KPMG. Over the years, Malta has continued developing as a hub forinternational business thanks to its infrastructure.

25 Switzerland and its positive corporate tax reformIn a changing environment, Switzerland is for once no exemption as it is undergoing an importantreform of its corporate tax law. Stefan Kuhn and Sébastien Maury of KPMG believe that theupcoming changes will be positive for Switzerland and explain why their country will remain high-ly attractive for investors and multinationals, not least as an ideal holding location.

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Editorial

Ralph CunninghamManaging editorInternational Tax Review

W elcome to the new edition ofInternational Tax Review’s HoldingCompanies guide.

Governments will cling to the right to organ-ise their tax systems in ways that will attract themost foreign direct investment.

Creating the tax environment to make yourcountry attractive as a holding company locationis a key tool for governments around the world.The OECD-led discussions on BEPS are likelyto lead a tightening of tax rules around theworld. However, governments are unlikely topush through changes that will reduce their abil-ity to encourage multinational companies tolocate holding companies on their territory.

Jurisdictions who compete for multinationalsto establish holding companies in their territorydo so through a range of different measures,such as low tax rates, lenient or non-existent

controlled foreign company rules and limitedtransfer pricing regimes.

Cyprus is clear that the days of brass-platecompanies are over and a tax-competitiveregime, backed up by support for substance, isthe future of investment there.

Ireland is also intent on ensuring investors areaware that they must have substance. Indeed, theconsensus is that the outcomes from the BEPSproject will be positive for jurisdictions such asIreland, that follow this approach.

While Malta has many attractive tax attrib-utes, they are not the only reasons why investorslike the jurisdiction as their holding companylocation.

And Switzerland appears confident that theimpending third tranche of corporate taxreforms will not affect its ability to attract over-seas investment.


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Cyprus companies and theimportance of substance

The need for tax-efficient structures hasmagnified with the recent globaleconomic downturn and the increasedscrutiny from tax authorities worldwide,says Zoe Kokoni of Eurofast.

C ompanies need to carefully select the jurisdiction they use for imple-menting such structures as well as implement their structuring with acareful look at substance so they can mitigate risks and taxes.

Cyprus is an established international business and financial centre becauseof incentives, good infrastructure and its extensive network of double tax treaties(DTTs). Its EU membership and compliance with EU and OECD standards,in line with its most favourable tax regime and transparent legal system, placesCyprus amongst the most favourable holding and IP company jurisdictions.Cyprus is also a vehicle for investment for many countries such as

Russia, Poland, Ukraine, the Balkans, India and China. It could easily besaid that the country functions as a connecting hub for Europe to Centraland Eastern European countries, and Asia.

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Advantages of Cyprus holding and IP companies• The provisions of the EU Parent – Subsidiary Directive, aswell as the Interest and Royalties Directive, have full appli-cation in Cyprus, resulting in the elimination of withhold-ing tax obstacles.

• Dividend income received by a company which is a tax res-ident of Cyprus is exempt from corporation tax (CIT) andin most cases is also exempt from the Special DefenceContribution (SDC).

• Outgoing dividends/royalties/interest paid by the CyprusCompany to the ultimate non-resident beneficial ownerare exempt from any withholding taxes irrespective of theexistence of any DTTs and irrespective of the applicabilityof the EU Parent – Subsidiary Directive.

• Interest income is taxed under CIT at the rate 12.5% in themajority of cases. Where back-to-back loans exist, the12.5% tax is levied on the interest spread (that is on the dif-ference between interest payable and receivable).

• A non-offshore jurisdiction that offers a flat tax rate of 12.5%only on 20% of the royalty income from IP rights or profitsfrom the sale of the IP, resulting to an effective rate of 2.5%.

• Cyprus provides unilaterally for a tax credit in the absenceof a DTT, for any withholding taxes levied at source in theother country.

• Profits from the sale of titles are generally exempt from tax-ation in Cyprus. The definition of titles includes ordinary

shares, founder’s shares, preference shares, bonds anddebentures, units in collective investment schemes, optionsand futures.

Management and control and the substanceconsiderationThe tax residency of a company is determined by the princi-ples of management and control. In the absence of a formaldefinition regarding the establishment of management andcontrol in Cyprus, companies should take these parametersinto account:• the majority of the directors of the company are residentsin Cyprus,

• important company decisions are taken in Cyprus by thelocal directors,

• the headquarters of the company are maintained in Cyprus,• the company has an economic substance in CyprusEconomic substance has become an extremely important

issue. More and more countries are looking deeper into thesubstance over form doctrine. It is a rather dangerous exer-cise to try to codify what actions need to be taken by anycompany to enhance its substance. It simply cannot be as anexercise of generality. Careful planning and sophisticatedtax advice is needed to determine the extent of enhancingthe substance of a company. A number of important con-siderations and factors must be taken into account by an

C Y P R U S


experienced tax adviser in this context. Indicatively, theseshould be considered:• the nature and operation of the company and that of thegroup the company belongs to.

• the business strategy of the group. • the legal and management structure of the group as awhole.

• the country where the group’s head office is located. Thisis important to understand the approach and the taxrequirements of the tax authorities of the head office.

• the country in which the investment is taking place.A different approach and emphasis on different relevant

matters is needed for a trading structure, an IP or intra-groupfinancing structure or a holding structure, for example. However, as a general comment, there are some common

elements of substance usually referred to by most tax advisersthat a company needs to have. These are:• a real physical presence in Cyprus, whether an owned dis-tinct office or via leasing space in a serviced business cen-tre;

• people working in the company’s offices (part-time or full-time);

• dedicated telephone, fax, internet lines, a website andemail addresses; and

• at least one bank account opened in a Cypriot bank, oper-ated by a Cypriot member of the board of directors;

Zoe KokoniEurofast Taxand

Tel: +357 22 699 [email protected]

Zoe Kokoni is director in the international business services divi-sion at Eurofast Taxand. With more than 20 years of experiencein taxation issues, she is the head of the domestic tax depart-ment of the firm. Zoe has specialised for many years in estateduty and internal tax legislation and its applicability for a greatnumber of years. Her extensive wealth of experience concerningadvanced domestic taxation matters has enabled Zoe to providethe firm with strong administrative heritage incentives. She is a regular participant and speaker in various internation-

al and local conferences concerning tax related matters.


http://www.eurofast.eu

C Y P R U S


• at all times, proper accounting books in Cyprus, preparedon-time without delays and submitted with their annualfinancial statements;

• a properly capitalised company, with any share purchaseagreements prepared in Cyprus and in accordance withCyprus law.These are only general guidelines since enhancing substance

is a rather tailor-made, case by case exercise. As a final point oneshould also keep in mind that Cyprus has its own similar rulesas well. The tax authorities may very well disregard a transac-tion or a company based on substance over form or because atransaction is not within the arms-length principle. However,

the source country tax authorities will naturally be more con-cerned in this respect.

Substance in the futureClearly, Cypriot holding and IP companies offer a competitiveadvantage for tax planning. Nevertheless, a foremost consid-eration in using these holding companies is substance. Itseems that the days where a brass-plate inexpensive companybought off-the-shelf in Cyprus, with a standard registeredoffice and local directors common with 500 other companiesin Cyprus are starting to become a thing of the past.Substance is the solution and the way forward.


http://www.eurofast.eu

I R E L A N D


Ireland as an attractive holdingcompany jurisdiction post-BEPS

Ireland remains one of the mostattractive jurisdictions in the world inwhich to establish a holding company,explain Peter Vale and Sarah Meredithof Grant Thornton.

I reland was the only country ranked among the top 15% of countries inthe world in every one of the 11 metrics Forbes recently examined in itsstudy on the best countries for business. Ireland leads the way in terms

of having a low tax burden and offering investor protection. Even many non-tax practitioners will at this stage have some knowledge

of the OECD’s BEPS project. Substance is going to be a key focus of thepost-BEPS tax environment and we expect this to be broadly positive forIreland. Multinational companies (MNCs) will look to house employeesand key assets in a country with a stable political environment, solid infra-structure, availability of labour and, importantly, a low tax environment.Ireland ticks all the boxes in this regard.Is the above relevant to the holding company decision? Very much so,

I R E L A N D

W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 1 0

as having both a favourable holding company regime andother positive tax attributes enables Ireland offer a full suite oftax advantages to the overseas investor.This is borne out when you consider the number of glob-

al MNCs in Ireland, most with both an Irish holding compa-ny and substantial trading operations:• Nine out of the top 10 global pharmaceutical companiesare located in Ireland;

• Eight of the top 10 medtech companies are located inIreland;

• Three of the top six game publishers are based in Ireland;• 13 of the top 20 medical devices companies are operatingin Ireland; and

• 50% of all leased aircraft are managed in Ireland.In terms of composition, US investment constitutes 73%

of all Ireland’s foreign direct investment FDI.The ability to offer a complete package of tax benefits has

meant that Ireland has been used by many multinationalslooking to launch into Europe or further afield.They are many reasons why Ireland is ranked as a popular

holding company jurisdiction. Capital gains tax (CGT) exemptionA full participation exemption from CGT is available to com-panies in Ireland for disposals of shares in a company residentin the EU or a tax treaty jurisdiction. Certain conditions must be met before the exemption will

apply. In particular:

Benefits available to foreign investors looking to establishan Irish holding company

• Share disposals generally tax-free• Tax exemption for Irish dividends and effective exemptionfor foreign dividends in most cases

• Extensive and expanding tax treaty network• Interest / dividend / patent royalty withholding taxgenerally nil

• Limited transfer pricing regime• Tax relief for IP acquired • Valuable R&D tax credits/refunds, even for loss makingcompanies

• Low corporation tax rate on trading profits (12.5%)• No controlled foreign companies (CFC)/sub-part F equivalent• No thin capitalisation rules

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• the Irish parent company must hold a minimum of 5% ofthe investee company’s ordinary share capital for a periodof more than 12 months over the preceding 24 months;

• the investee company must be resident in an EU state(including Ireland) or tax treaty country; and

• at the time of disposal, the investee must exist wholly ormainly for the purposes of carrying on a “trade” (or thegroup and investee taken together must be regarded as atrading group).While the activities of most companies would be regard-

ed as trading, the receipt of rental income from buildings isan example of a non-trading activity. However, in manycases the “group trading” exemption can be used to ensurethat disposals of non-trading companies are tax free. Thegroup trading exemption can also be used to liquidate cashbox subsidiaries and return the cash tax-free to the Irishparent company.

Tax relief on dividend incomeIreland operates a foreign tax credit system rather than asystem of participation exemption in relation to foreigndividends.Broadly, dividends paid out of the trading profits of a

company tax resident in an EU member state or in a countrywith which Ireland has a double tax treaty will be taxable inIreland at 12.5%. In qualifying listed-group situations, qual-

ifying dividends from subsidiaries in non-treaty / non-EUlocations can also qualify for the 12.5% rate. As a result of recent EU cases, new legislation was intro-

duced in Ireland on the taxation of foreign dividends from2013. In essence, a system now applies whereby a tax credit isgiven for the overseas tax at the foreign nominal tax raterather than the effective tax rate. The system provides for anAdditional Foreign Tax Credit (AFTC), further boosting thetax relief position for foreign dividends. This AFTC may top-up any existing tax credit to a maxi-

mum 12.5% / 25% rate (depending on the nature of the div-idend) where a dividend is received from a company residentin a ‘relevant Member State’ (that is, EEA, being the EU,Norway and Iceland). In the majority of cases, the 12.5% rate, when combined

with credits for withholding or underlying taxes, shouldensure that no further Irish tax is payable on such income.

Dividends paidIreland generally applies a 20% withholding tax on dividendsand other profit distributions. However, in practice dividendwithholding tax is rarely an issue as exemptions within Irishdomestic legislation generally result in a nil withholding taxrate applying.

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Access to treaties and EU directivesIreland has an extensive treaty network, with 68 double taxtreaties in effect. These agreements allow the elimination ormitigation of double taxation. Ireland in particular has very favourable tax treaties with a

number of Asia Pacific jurisdictions such as China, HongKong and Korea, which can often make Ireland an attractivelocation from which to invest into these countries.Where a double tax agreement does not exist with a juris-

diction, unilateral provisions within domestic Irish tax legisla-tion may result in credit relief against Irish tax for any foreigntaxes paid. Irish legislation may also provide for an exemption from

Irish withholding taxes on payments to treaty residents, with-out the need to refer to the provisions of the specific treaty.And Irish companies may access the EU directives, which canbe beneficial from a tax perspective.

R&D tax credit continues to encourage innovationFor many multinationals, there is a desire to expand the scale ofactivities in the holding company jurisdiction beyond the mereholding of shares. In some cases, this can involve the relocationof R&D functions to the holding company jurisdiction.Ireland has an attractive R&D tax credit regime. Broadly,

it entitles companies to a refund of 25% of their R&D expen-diture, regardless of whether they pay tax on profits (subject

to certain limits). Combined with the standard corporate taxdeduction for R&D expenditure (valued at 12.5%), compa-nies incurring qualifying R&D expenditure can claim a taxbenefit of €37.50 ($50.38) for every €100 expenditure. Finance Act 2014 extended the outsourcing limit to 15%

(from 10%) of the in-house spend, with the first €100,000qualifying for the credit regardless of this limit. There was alsoa change in relation to the base year spend such that the first€300,000 of qualifying R&D spend will qualify for the cred-it regardless of the base year (that is, 2003) spend.The credit is also available for buildings used wholly or

partly for R&D purposes, subject to certain conditions.A company’s R&D tax credit may also be surrendered

against “key” employees’ income tax, providing an attractiveincentive for those employees.It is worth noting that one-third of new R&D projects are

in collaboration with Irish third-level institutions and researchinstitutes backed by research funding and grants.

Intellectual property reliefIntellectual property (IP) is also often located in the holdingcompany jurisdiction. For example, a US multinational look-ing to expand into Europe may use an Irish tax resident com-pany, with the European IP rights located there. From 2009,the tax rate on the IP related profits can be as low as 2.5%(see below).

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To avail of the IP relief, a company must be “trading” inIreland, meaning that there must be sufficient substance inIreland, that is, the company should actively seek to exploit itsIP and employ/subcontract expert individuals to carry out itsactivities.The allowances available for tax purposes will generally fol-

low the standard accounting treatment applicable to theamortisation of intangible assets; however, if it results in a bet-ter answer, an irrevocable election can be made to spread theexpenditure over a 15-year period (7% in years 1 to 14 and 2%in year 15).The aggregate of the allowances and any related interest

incurred on acquisition of the intangibles cannot be morethan 80% of the trading income from the intangibles trade(which is treated as a separate trade). Where either allowancesor interest is restricted, the excess can be carried forward.The combination of the 80% maximum relief and the

12.5% corporation tax rate can mean the effective tax rate onIP-related profits is as low as 2.5%.A broad stamp duty exemption also applies to the acquisi-

tion of IP, which ensures that stamp duty is not a barrier tocentralising IP in Ireland.

Employee incentivesThe decision to relocate a holding company often means thephysical movement of key individuals to that location. Income

tax rates for individuals vary depending on salary but a target-ed relief from income tax was introduced to attract top talentto Ireland.This is known as the Special Assignee Relief Programme

(SARP) and is designed to incentivise key employees locatingto Ireland. The relief is broadly aimed at higher earners and,while there are various conditions attached, it can offer a valu-able tax break to senior executives locating in Ireland.And relief known as the foreign earnings deduction applies

to workers being posted to BRICS (Brazil, India, China andSouth Africa) and certain African countries. A deduction isavailable from taxable income which will reduce the charge toIrish income tax where the requisite conditions have been sat-isfied.

Irish tax rate – corporation taxHolding companies will often provide management servicesto group companies. Profits from such activities will general-ly be taxable at the lower 12.5% rate. The lower corporationtax rate (which applies to trading activities) represents one ofthe lowest onshore statutory corporate tax rates in the world.Even with international pressure, the Irish governmentremains committed to retaining the 12.5% rate to ensure ithas a competitive corporate tax strategy to attract job-richFDI into Ireland. It remains a cornerstone of Irish taxationand economic policy.

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CFC / thin capitalisationImportantly from a holding company perspective, Irelanddoes not have CFC or thin-capitalisation rules. There are cer-tain restrictions on related-party borrowings but these aregenerally manageable.

Transfer pricing and financing structuresLimited transfer pricing legislation has been introduced inIreland. The law applies to both domestic and cross-bordertrading transactions between group companies and alsoapplies to Irish branches of foreign companies that are withinthe charge to Irish tax on their trading activities. However, there is a full exemption for small and medium

sized entities. A small or medium sized entity is one with astaff head count of less than 250 and an annual turnover of€50 million or less, or an annual balance sheet total of €43million in assets or less, with the figures assessed annually ona group-wide basis.The transfer pricing legislation applies only to trading

activities. This is an important feature as many tax-efficientfinancing structures through Ireland are thus unaffected.

Managing Irish tax residence keyIt is important that the Irish incorporated holding company isalso regarded as Irish tax resident. As a general rule, to ensureIrish tax residence, it is important that an Irish company iscentrally managed and controlled in Ireland. The location ofall board meetings of the company should be Ireland and keystrategic decisions should be made at these meetings.

Investment for the long termIreland remains an extremely favourable location in which tolocate holding companies. The suite of factors supporting thisinclude easy access to key markets, low corporate taxes, pro-motion of innovation, a young, educated workforce and anexcellent business environment. We know that the tax landscape of today will look very dif-

ferent in the future. Groups making investment decisions noware taking a long-term perspective, based on an assessment ofthe likely future global tax climate once the dust settles. While this in itself is a difficult task, we believe Ireland’s

transparent and favourable tax regime make it exceptionallywell placed to attract foreign investment for many more yearsto come.

I R E L A N D


Peter ValeGrant Thornton

24-26 City QuayDublin 2Tel: + 353 (0)1 680 5952Mobile: + 353 86 855 5232Fax + 353 (0)1 680 [email protected] www.grantthornton.ie

Peter Vale is a tax partner in Grant Thornton’s Irish tax practice.He specialises in international corporate tax structuring includ-

ing financing structures, company migrations and M&A projects.His clients include both large Irish domestic and multinationalcorporations. He also specialises in financial services taxationand has advised many clients on Ireland’s financial services taxregime.Before joining Grant Thornton, Peter spent 12 years in the tax

department of a big-four firm in Dublin.Peter is a member of the Institute of Chartered Accountants in

Ireland and an associate of the Irish Taxation Institute. He holds abachelor degree in international commerce. He is also a councilmember of the Leinster Society of Chartered Accountants in Ireland.

Sarah MeredithGrant Thornton

Tel: +353 1 680 [email protected]

Sarah Meredith is a manager in Grant Thornton’s Irish tax prac-tice. She joined Grant Thornton in 2010 having worked for morethan four years in a big-four firm.Sarah has international tax experience and has also been

involved in a number of group restructuring and acquisition proj-ects. Her clients include both Irish and multinational groups andcorporates. She also has experience on a diverse number offinancial services clients and has provided both tax complianceand advisory services to these clients.Sarah is an associate member of both the Institute of

Chartered Accountants in Ireland and the Irish Taxation Institute.She holds a first class honours degree in economics from TrinityCollege, Dublin.


http://www.grantthornton.ie



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M A L T A


Malta: More than just aholding company location

A stable economy and a matureworkforce with a strong work ethic makeMalta a preferred location for investorslooking for a sustainable alternative forsetting up their business, explain AndréZarb and John Ellul Sullivan of KPMG.Over the years, Malta has continueddeveloping as a hub for internationalbusiness thanks to its infrastructure.

T he discussions on BEPS have taken the tax world by storm, however,with respect to holding companies, they have resulted in the re-hash-ing of the usual issues – no surprise there.

A holding company location is not merely chosen on the basis of themost tax efficient jurisdiction: the most common holding company juris-dictions all offer some form of exemption on the receipt of dividends fromsubsidiaries, though the flexibility of these rules may vary. Within the EU,an exemption on the receipt of dividends from EU subsidiaries is oftentaken for granted in view of the Parent-Subsidiary Directive. Therefore, inchoosing a holding company location the distinguishing factor cannot be taxalone. Of course a good treaty network is also one of the fundamental fea-tures of a holding company location, however, again all the main holding

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company locations boast a large and diverse treaty network –of course some more than others. And given the age-old dis-cussion on the meaning of beneficial ownership (and as ofrecently the BEPS discussion) in choosing a holding compa-ny jurisdiction, one also needs to take a holistic approach.

More often than not, in choosing the location of theirholding company investors and multinationals will look into avariety of other economic, legal and socio-economic issues.Taxation will be a factor in the equation; however, if it is theonly factor, the sustainability of the structure will easily bequestioned.

While from a tax perspective Malta’s development as aholding company jurisdiction and financial services centrestarted in the early 1990s, the groundwork may be attributedto the 160 years of British colonisation. As a result of Maltabeing part of the British Empire, Malta inherited a legalframework based on UK principles, a work ethic largely influ-enced by the British and English as an official language; withall laws being drafted in both English and Maltese (with theEnglish version often being prevalent), the memorandum andarticles of association of a company being drafted in Englishand even the financial statements being presented in English.

Some factors companies should consider when choosingtheir holding company location include:• The stability of the economic and political landscape;• The legal framework;

• Access to finance; and• Availability of a professional workforce.

We will consider how Malta measures against the abovecriteria thereby quashing the idea that Malta is just a holidaydestination or just another tax efficient island – stigmas thatthe Maltese industry has to live with, in view of our gloriousweather, geographical location and wrong decisions taken inthe past – where for a very brief period the government of thetime believed Malta could be an offshore jurisdiction. A deci-sion quickly reversed.

Of course, as well as the taxation of holding companies inMalta, other tax issues are also fundamental, as they are for allholding company jurisdictions, such as:• The tax implications of carrying out other business activi-

ties in Malta;• Withholding tax implications upon a distribution of divi-

dends to shareholders; and• Tax issues to consider upon exit from Malta.

The economy and political landscape Malta boasts a varied economy; tourism still accounts forabout 33% of GDP, manufacturing industry for about 18% andfinancial services for 15%. The financial services industry haskept on growing in recent years and was hardly affected by theEuropean financial crisis, given that Malta’s debt is mostly heldlocally and Maltese banks, which are notoriously conservative

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about investments, have a very low exposure to the sovereigndebt. Tourism is obviously increasing year after year and themanufacturing industry is also stable. In recent years the gam-ing industry has also seen a large increase, from online bettingto digital game and software development, with the develop-ers of some of the Angry Birds games setting up shop in Malta.

As further proof of the stability of the economy, the latestEurostat statistics at time of writing show Malta having thethird lowest unemployment rate in the EU, standing at 5.6%,after Austria and Germany. The political landscape is as inter-esting as in most other EU jurisdictions. There are two mainpolitical parties in Malta. The previous government was inpower since 1987, except for a two year stint, and the currentgovernment, which came into power in early 2013, kept upthe good momentum of that administration. While, naturally,the two political parties disagree on a number of issues, theimportance of the financial services industry brings consensusto the political divide.

The legal frameworkMalta is both a common and a civil law jurisdiction. Our civillaw is based on Roman law and was further developed by theCode Napoleon. Our public law is, like our tax law, largelybased on UK principles. The first Maltese Income Tax Actwas enacted in 1948 and was modelled on an income taxmodel ordinance produced by the British Colonial Office in

1920s. Our corporate law is mainly based on the EU compa-ny law directives, but is also influenced by the UK CompaniesAct. In fact, the courts often refer to UK principles and UKauthors when interpreting corporate and tax law.

Nowadays, being an EU member state since 2004, meansthat our legal framework is largely based on EU principles.

Access to financeThough the smallest EU jurisdiction, Malta’s ship register isthe largest in the EU and seventh largest in the world. Giventhe huge ship financing industry, it is clear that Malta is wellknown for access to finance with all major banks.

Reporting standardsThe reporting standards in Malta are the InternationalFinancial Reporting Standards (IFRS) as adopted by the EU.As more countries move to IFRS, this enables multinationalsand investors to keep a homogenous reporting standard fortheir financial statements without the need for conversion.Malta’s sound financial reporting and audit system ensure theactivities of the group are transparent to all shareholders, allin a cost-effective jurisdiction.

Availability of trained professional workforceMalta boasts a mature, growing, professional workforce with agood percentage of it having obtained masters degrees, or

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worked outside Malta. The main international accounting firmsare present in Malta (including the big 4), and Malta also boastsfirst-class law firms, and though none of the Magic Circle are inMalta, the larger law firms work closely with them. This ensuresthat all companies or investors are well serviced in Malta.

The professionalism of the workforce is evidenced in thespeed in which a company may be set up, often within a cou-ple of days. This proves not only the effectiveness of serviceproviders but also of the authorities in dealing with the grow-ing industry. The industry has also benefited from a largemulti-origin expatriate community, which has not onlybrought further ideas and expertise to the market, but alsocontributes to a more cosmopolitan way of life on the island.

Taxation of companies in MaltaIn the past, when choosing a holding company location, onewould simply focus on the taxation of the holding activities.However, this is no longer true as very often while a compa-ny may be the group holding company, it will often also carryout other activities, and therefore determining the taxation ofother activities is of great importance. While the headline taxin Malta is 35%, through the operation of the tax refund sys-tem, the effective tax rate may be as low as 5%.

Since 1994, Malta has embedded in its fiscal legislation asystem of tax refunds. Upon EU accession, the tax refund sys-tem was broadened to its existing form to be in line with EU

principles. Maltese resident companies, including a foreigncompany with a branch in Malta, deriving income, other thandividends from qualifying companies, first pay tax on their prof-its at 35%. Upon the distribution of taxed profits, whetherderived from local or foreign sources (other than from immov-able property situated in Malta), the shareholders would be enti-tled to a full or partial refund of the tax paid by the company.

The amount of the tax refund is dependent on the natureof the income, whether local or foreign sourced and whetherdouble taxation is claimed. Generally, the refund is six-sev-enths of the 35% underlying tax, resulting in a 30% tax refundof the taxable profits (six-sevenths of 35%).

Malta is in fact often used as a hub for various activitieswith holding and trading activities or other intra-group activ-ities being carried out from Malta. The application of the taxrefund system, together with the participation exemption,results in a low effective tax, without any recourse to any baseerosion techniques or use of hybrid instruments / entities.

Taxation of holding companies in MaltaMalta adopts a flexible 100% participation exemption on prof-its (that is, dividends) derived from a qualifying company orfrom the transfer thereof (that is, gains on transfer). To ben-efit from the participation exemption, the Maltese company’sholding must entitle it to any two of these rights (known as‘equity holding rights’):

M A L T A


• a right to vote;• a right to profits available for distribution; and• a right to assets available for distribution on a winding up

of that company.A qualifying company is one which satisfies one of a series

of tests. Typically, as with most participation exemption juris-dictions, Malta has an ownership test which is set at 10%.However, this test does not require a minimum holding peri-od. And where the ownership test is not fulfilled, the partici-pation exemption may be acceded to by satisfying other lessonerous conditions including: a holding with an acquisitionvalue of €1.164 million ($1.5 million) held for an uninter-rupted period of 183 days; or one which entitles the holder toa right to sit or appoint a director to the board or to a rightto purchase the remainder to the capital.

While the participation exemption is typically availablewhere a Maltese company holds shares in a subsidiary, it mayalso be availed of when the Maltese company is a partner in alimited partnership similar to a Maltese partnership en com-mandite, the capital of which is not divided into shares, orwhere the Maltese company is an investor in a collectiveinvestment scheme which provides for limited liability of theirinvestors, provided the Maltese company has any two of theequity holding rights and one of the above tests are satisfied.

With respect to dividends, the participation exemption isapplicable if the qualifying company:

• is resident or incorporated in a country or territory whichforms 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 has been sub-

ject to tax at a rate of at least 5%.As is evident from this, unlike many other EU jurisdic-

tions, the subject-to-tax clause is not a sine qua non for theapplicability of the participation exemption and the exemp-tion may be availed of even if the qualifying company is notsubject to tax.

Taxation of permanent establishments (branches)Though Malta generally relieves juridical double taxation bymeans of the credit method, from January 1 2013, Malta hasadopted an exemption method for any income or gains derivedby a company registered in Malta which are attributable to apermanent establishment (including a branch) situated outsideMalta or to the transfer of such permanent establishment.

No withholding taxes Given that there are no withholding taxes on dividend distri-butions (or on payments of interest or royalties, or liquidationproceeds) to non-residents, the repatriation of dividends toshareholders is easy and free of any tax.

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This withholding tax exemption is not dependent ondouble tax treaties, or the application of any EU directive,but is determined in terms of Malta’s domestic law. Itapplies no matter whether the shareholder is a company, anindividual or any other entity, and no matter where theshareholder is resident.

Ease of exitFrom a tax perspective, a Maltese structure may be wounddown with the same ease as setting it up and operating it. Infact, if the Maltese company does not own, whether directlyor indirectly, or have any real rights over, immovable proper-ty situated in Malta a non-resident shareholder will not betaxable on any gains derived from the transfer (including liq-uidation) of a Maltese company.

The same will apply if the shareholder of the Maltese com-pany is another Maltese company, ensuring a tax neutral exitfrom Malta without unnecessary burdensome tax planning.

Companies incorporated outside Malta but tax residentin MaltaMalta’s tax rules applicable to companies incorporated out-side Malta that are tax resident in Malta, that is having itsmanagement and control in Malta, make such entities versa-tile and powerful vehicles for any tax planning structure.

Such companies are only subject to tax in Malta on incomeor capital gains arising in Malta. Income arising outside Maltais only taxable in Malta if it is received in Malta whereas cap-ital gains arising outside Malta are not taxable in Malta evenif received in Malta.

Such companies are widely used to receive foreign sourceincome outside Malta. However, where a relevant treaty isapplicable which includes specific anti-avoidance provisionsaimed at such companies which are taxable on a receipt basis,receipt of the income in Malta would be required to ensuretreaty protection. In any case, in these situations, the taxrefund system would apply anyway.

M A L T A


John Ellul SullivanKPMG

Tel: +356 2563 1154Mobile: +356 7940 [email protected]

John Ellul Sullivan is an associate director in the tax function ofKPMG in Malta, focusing mainly on international tax structures.He mainly focuses on international tax issues, advising multina-tionals, pension schemes and high net worth individuals on theirexisting, planned or potential operations in Malta and beyond.

John read for a masters of advanced studies in internationaltaxation at the International Tax Centre in Leiden, where he alsoworked as a teaching assistant, giving workshops on the funda-mentals of international taxation and tax treaties, and lecturingon issues of domestic and international taxation across variouscourses in Malta.

André ZarbKPMG

Tel: +356 2563 1004Mobile: +356 7942 [email protected]

André Zarb has headed the tax function of KPMG in Malta since1994. He advises several clients on international tax issues,including investments undertaken by such companies in Maltaand investments by such companies in other countries throughcorporate structures in Malta.

André has been crucial in the development of Malta’s tax sys-tem, having advised the government on its development since1994. His involvement ranged from advising on Malta’s incentivelegislation to ensure it is compliant with EU state aid rules, aswell as with the development of Malta’s tax refund system andparticipation exemption.



Malta is increasingly being recognised as a financially stable, cost efficient jurisidiction of choice for investing in and out of Europe.

KPMG offers a one-stop shop solution through a dynamic team of professionals to assist you with all your needs.

Leverage our technical skills and wealth of experience to your advantage today.

Contact Us:

Tonio ZarbSenior Partner, Head of Advisory [email protected]

André ZarbPartner, Tax [email protected]

Juanita BenciniPartner, Risk Consulting Advisory [email protected]

Hilary Galea Lauri Partner, Head of Audit Services - Technicaland Quality [email protected]

Malta: Your Port of Call in Europe

www.kpmg.com.mt





http://www.kpmg.com.mt

S W I T Z E R L A N D


Switzerland and its positivecorporate tax reform

In a changing environment,Switzerland is for once no exemption asit is undergoing an important reform ofits corporate tax law. Stefan Kuhn andSébastien Maury of KPMG believe thatthe upcoming changes will be positivefor Switzerland and explain why theircountry will remain highly attractive forinvestors and multinationals, not leastas an ideal holding location.

T ax transparency and tax morality are the hot topics in the world of tax-ation. Multinationals are under strong public pressure due to theirlegal tax practices enabling them to pay little or no taxes. Moreover,

due to budget deficits and economic turbulence in recent years govern-ments are using the increasing public interest in taxation to further increasethe pressure on multinationals. However, the question is rather about legit-imacy as legality. Official bodies such as the OECD or EU are engagingintensely in the discussions; the OECD action plan on BEPS (Base Erosionand Profit Shifting), especially, contains the most pressing agenda items.

In recent years Switzerland has been able to manage its economy in anotable way, while many other European countries were rather sailing instormy waters. The Swiss economy with its wide range of industries is highly



competitive. Its excellent network of free trade agreements anda vast number of investment protection agreements and doubletax treaties make Switzerland a very attractive business and hold-ing location. Under international pressure, Switzerland wascompelled to reform its tax system. The priority in this processis clear: ensure the country’s competitiveness in the futuredespite the international pressure and current turmoil in theworld of taxation. At the same time, the Swiss government hasmade clear that its proposed changes shall be in compliance withthe initiated OECD reforms as well as EU regulations.

From this model to the next oneAt a glance, the specificities and advantages of the existingSwiss holding regime can be summarised here:

Low income tax rateSince a holding company is exempt from income tax at the can-tonal and communal level, the effective income tax rate appli-cable to such company amounts to 7.83% (federal tax rate).

Beneficial participation reduction systemThe participation reduction applies to:• Dividend income: either a participation of at least 10% in a

company’s equity or a fair market value of at least SFr1 mil-lion ($1.05 million) is required. No minimum holdingperiod applies.

• Capital gains: the sale of a participation of at least 10% of acompany’s equity that has been held for a minimum holdingperiod of one year is required. The SFr1 million thresholdalso applies provided at least 10% of the share capital has beenheld once in the past. The participation reduction applies tothe gain exceeding the acquisition costs (recapture of previ-ous value adjustments do not benefit from the reduction).

• No further test applies (such as minimum taxation or per-forming active business at the subsidiary’s level). Thisallows tax-free repatriation of profits resulting from off-shore subsidiaries or passive investments.The exemption is an indirect one. Income tax is calculated

on the basis of total taxable profit (including the participationincome) and then reduced in the proportion of the net par-ticipation income (gross income less allocable administrationand financing expense).

No controlled-foreign company (CFC) rulesSwitzerland does not have any CFC legislation. Income fromforeign subsidiaries is never subject to tax in Switzerlandbefore actual distribution if the subsidiary’s effective place ofmanagement is not in Switzerland.

Deductibility of capital losses/goodwill treatmentAmortisations on participations (that is, unrealised capitallosses) are deductible if they are commercially justified and



booked in the financial statements of the company. Realisedcapital losses on the sale of participations are deductible forincome tax purposes.

Deduction of costsAcquisition costs and costs on disposal are deductible forincome tax purposes. Interest payments can be deducted ifthey are at arm’s length.

Transfer pricingSwitzerland has no specific transfer pricing rules. There is nospecific documentation legislation and, as a general rule, thearm’s-length principle in line with OECD guidelines applies.

Reduced net wealth taxSwiss holding companies are subject to an annual net wealthtax ranging between 0.001% and 0.176% of the equity at yearend, depending on the location. The net wealth tax will mostlikely be abolished through the amendments of the corporatetax reform III (see below).

Capital contribution principleCapital contributions made by shareholders are no longersubject to withholding tax at the time of the actual repatria-tion. This principle, introduced in 2011, offers interestingplanning opportunities especially in terms of foreign group

relocations to Switzerland. At the time of the relocation, thegroup assets can be contributed to the Swiss (holding) com-pany at fair market value against high equity value (share cap-ital and share premium) and distributed in the future, freefrom withholding tax, as dividend payments out of the equi-ty created at contribution (limited in time, however a longexertion period applies).

No withholding tax on interest and royaltiesInterest (except for bonds and collective fundraising vehicles),royalties, management fees, service fees, and technical assis-tance fees are not subject to Swiss withholding tax.

Beneficial VAT treatment Swiss holding companies are regarded as subject to VAT.Dividend income and sales of investments do not result, inmost cases, in a reduction of the input tax deduction.However, a holding company can take the business activitiesof its subsidiaries into account to determine its own inputVAT relief, which most likely optimised its input VAT quota.

As indicated above, since 2007 Switzerland has been putunder pressure by the EU about its tax regimes – such as itsholding or mixed company regimes – because of their incom-patibility with the proper functioning of the free trade agree-ment concluded between the European EconomicCommunity and Switzerland in 1972 (EC State aid decision



C (2007)411)). After lengthy negotiations and discussionsbetween Switzerland and the EU in recent years, both partiessigned a memorandum of understanding on July 1 2014,which commits Switzerland to the abolition of certain taxregimes, especially those incorporating different treatment ofdomestic and foreign income (ring fencing). In particular thisimplies an abolition of the holding and mixed companyregimes. The abolition of these tax regimes will be linked withthe introduction of new measures compatible with interna-tional legislation and aimed at replacing the benefits availableunder the regimes. This package is under preparation in thecourse of the so-called corporate tax reform III.

Trends in corporate taxation and upcoming amendmentsEU on tax regimes – corporate tax reform IIIIn the course of the corporate tax reform III, the Swiss gov-ernment is clearly committed to induce necessary changes inthe domestic tax law to remain one of the most attractivebusiness locations. Given the legal process needed at a politi-cal level, the abolition should not be approved by the FederalParliament before 2018. With respect to the experience inother countries (see Luxembourg 1929 holding regime orBelgium coordination centres) it is most likely that transition-al measures for the existing regimes be implemented.

Regardless of the new developments, certain attractive reg-ulations of the Swiss tax system will certainly persist and new

regulations implemented within the corporate tax reform IIImight even enhance the attractiveness of Switzerland as abusiness location. In any case the holding locationSwitzerland will remain attractive because: • The most attractive aspects of Switzerland as a holding

location which are listed above, including a very favourableparticipation exemption, no CFC rules and one of themost extensive treaty networks will not be affected by theexpected abolition of the holding tax regime. Indeed,these discussions only concern the applicable income taxrate on a cantonal/communal tax level for non-participa-tion income. Hence, the core beneficial aspects of theholding company regime – if at all – will not be affected bythese negotiations.

• Due to the announced abolition of certain cantonal taxregimes, Switzerland is working on alternative solutions toremain competitive in the long run. Under the considera-tion of attractive solutions applied in EU member states, areport prepared by an expert group was issued inDecember 2013. This report recommends the introduc-tion of these measures, for example: incentives for innova-tive business activities (IP box and R&D incentives) as wellas a notional interest deduction on equity. The so-calledconsultation processs is going on with the 26 cantons andthe resulting detailed report is expected in September orOctober 2014. It should mean that Switzerland will be



able to reengineer its tax system to EU compatibility butactually outrun its competition within Europe.

• As an accompanying measure to the one mentioned above,the general trend in terms of corporate income tax inSwitzerland is a decrease of the applicable rates. Variouscantons, such as Neuchatel, Lucerne, Vaud and Glarus,have already lowered their corporate income tax. Recently,the canton of Geneva has proposed a decrease of its ordi-nary effective tax rate to 13%. Furthermore, there are signsthat various cantons are preparing significant tax reformsbehind the scenes.

OECD on BEPS, tax transparency and tax moralityThe recent developments in the world of taxation have beenhighly concentrated on the discussions around BEPS, taxtransparency and tax morality. Whereas the OECD within itsBEPS action plan aims to increase tax transparency and equipgovernments with the domestic and international instrumentsto avoid harmful tax competition, governments, non-govern-mental organisations (NGOs) and especially the media andthe public are rather demanding discussions that refer to taxmorality, too. Besides having to be in line with legality, multi-nationals are confronted by a new challenge of achievinglegitimacy when applying tax practices to reduce their overalleffective tax rate. However, which measures of the BEPSaction plan will actually be implemented is still vague.

Moreover, implementation will be challenging given thewidely differing national rules, policies and objectives of eachOECD member and especially also considering each coun-try’s own agenda for improving its attractiveness as a location.

The recent discussions as well as the possible implemen-tation of respective BEPS measures will likely increase theattractiveness of Switzerland. Unlike other jurisdictions,headquarters of multinationals in Switzerland usually havereal substance. Swiss tax regimes are in general far lessaggressive with reference to possible effective tax rates thanrespective regimes applied in certain member states of theEU or elsewhere. This shows that Switzerland has more tooffer to holding or headquarter location than its attractivetax regimes.

International tax, free trade agreements and investmentprotection treatiesSwitzerland is party to more than 120 investment protectionagreements and therefore has – after Germany and China –the third-largest such network worldwide. Besides beinghighly active in entering into new free trade agreements,Switzerland has one of the largest double tax treaty networks,with more than 90 double tax treaties in force or signed. Newdouble tax treaties recently signed include those withArgentina, Hungary, Australia and China. These will enterinto force upon approval of the national parliaments. Double



tax treaties with Peru and Kazakhstan have also entered intoforce recently.

Maintaining and improving attractivenessThe tax world is changing towards more tax transparencyand a higher sensitivity about tax matters. However, theexact outcome of the discussions under way is not pre-dictable yet. In recent years Switzerland has been, more than

once, put under political and economical pressure. However,it has proven itself as being able to handle the tax and eco-nomic turmoil remarkably. Hence, Switzerland is withoutdoubt capable of handling future challenges resulting fromthe planned changes in domestic tax law as well as from dis-cussions in the wider world of taxation and thereby improveits attractiveness, not only as a holding but also as a generalbusiness location.



Stefan KuhnKPMG

Tel: +41 58 249 54 14Mobile: +41 79 438 88 08Email: [email protected]

Stefan has had a career of almost 18 years in tax law. Afterworking for some years as a scientific assistant in tax law at theUniversity of St Gallen he joined one of the large internationalaccounting firms in 2000. Stefan joined KPMG in October 2006and became a partner in 2008. He heads the corporate tax prac-tice in Switzerland.

Stefan’s area of work covers, in particular, international taxstructuring and M&A transactions. He has vast experience inconsulting multinationals as well as private equity investors inSwiss and international tax law. Stefan is also a frequent lecturerat the Swiss Tax Academy and the University of Applied Sciencesin Zurich.

Sébastien MauryKPMG

Tel: +41 58 249 53 77Mobile: +41 79 693 41 86Email: [email protected]

After a master’s degree in law, Sébastien Maury started his pro-fessional career in January 2003 with KPMG in Zurich. In 2006he became a Swiss certified tax expert. In 2007 and 2008,Sébastien has been working in-house with an airline cateringand logistics provider with dual headquarters in the US andSwitzerland. After rejoining KPMG, he worked from January 2010to July 2011 with the US firm where he headed up the Swiss taxcentre of excellence in New York.

Since his relocation to Switzerland, he has been a member ofthe international corporate tax team in Zurich, where he advisesvarious corporate clients on international as well as Swiss taxmatters, focusing on Swiss inbound business. Sébastien is fluentin French, German and English.



Switzerland – your future business location

The right business location is one of the essential factors in today’s global and dynamic economic

environment. Switzerland is a global leading location for international and regional business.

kpmg.ch/InvestCH

http://kpmg.ch/InvestCH

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