Taxation in Malta

Agenda

1. The Malta Company

2. Dividend Income and Capital Gains

3. Anti-Abuse Provisions

4. Passive Interest and Royalty Income

5. Trading Income

6. Elimination of Double Taxation

7. Elimination of Double Taxation: The Flat Rate Foreign Tax Credit

The Malta Company

• Any Malta Company registered on or after 1 January 2007 may carry out international activities whether ‘trading’ or ‘holding’ in nature.

• Tax treatment would depend on the allocation of income to the different

taxed accounts depending on its nature and source.

• The five taxed accounts are the:

1. Final Tax Account;

2. Immovable Property Account;

3. Foreign Income Account;

4. Maltese Taxed Account; and the

5. Untaxed Account.

• The current income tax rate applicable to Malta companies is 35%.

Dividend Income and Capital Gains

A Malta Company in receipt of dividends deriving from a participating holding or capital gains from the disposal of such holding may, at its option, have this income treated in any one of the following manners: • Apply the participation exemption whereby the dividends or capital

gains received by the Malta Company are exempt from tax in Malta;

OR

• Declare the income or gains as part of its chargeable income, and pay tax thereon, at the rate of 35%. Upon a distribution of a dividend by the Malta Company, its shareholder may claim a full refund (100%) of the Malta tax suffered on such dividends.

Definition of “participating holding”

1. A holding of at least 10% of the equity; or

2. Shareholder entitled to call for and acquire balance of equity; or

3. Shareholder entitled to “first refusal” in case of disposal of shares by others; or

4. A holding which entitles shareholder to a seat on board of directors; or

5. Minimum investment of Euro 1,165,000 – but holding for uninterrupted period of 183 days; or

6. Any shareholding in furtherance of “own business” – not held as trading stock.

A participating holding may also exist where the Malta Company has a holding in a body of persons constituted, incorporated or registered outside Malta, which is not resident in Malta, and is of a nature similar to a partnership en commandite the capital of which is not divided into shares.

Dividend Income and Capital Gains

Participation Exemption

Full Refund

Company Level Euro Euro

Dividends/Capital Gains from Participating Holding 1,000 1,000

Malta Tax Suffered 0 0

Profits Distributed as Dividends 1,000 1,000

Shareholder Level

Gross Dividends Received 1,000 1,000

Malta Tax Suffered at Company Level 0 350

Refund of Malta Tax Suffered at Company Level 0 350

Anti-Abuse Provisions

In order for a Malta Company to apply the participation exemption or for the shareholder to claim a full refund of tax, in respect of dividends received from a participating holding acquired on or after 1 January 2007, further conditions may need to be satisfied as set out below. This means that where a Malta Company holds a participating holding in a ‘foreign body of persons’, in order to apply the participation exemption/full refund, one of the following three criteria should be met: • The ‘foreign body of persons’ is resident or incorporated within

EU territory; or

• The ‘foreign body of persons’ is subject to any foreign tax at a rate of at least 15%; or

• Less than 50% of the income of the ‘foreign body of persons’ is derived from passive interest or royalties.

Anti-Abuse Provisions

Where none of the aforesaid three criteria are met: Two further conditions would need to be satisfied for the participation exemption/full refund system to apply:- 1. The holding by the Malta Company must NOT be a portfolio

investment;

2. The foreign body of persons or its passive interest or royalties must have been subject to any foreign tax at a rate of at least 5%.

Passive Interest or Royalty Income

“Passive interest or royalties” is defined as:

• Interest or royalty income which is not derived, directly or indirectly, from

a trade or business;

• Where such interest or royalties have not suffered, or, suffered any

foreign tax, directly, by way of withholding, or otherwise, at a rate of tax

which is less than five per cent (5%).

Where the Malta Company’s income constitutes “passive interest or royalties”, the shareholder/s of the Malta Company may: • Claim a refund of 5/7ths of the Malta tax suffered at company level on this

income. Applicable to dividends distributed from the Foreign Income Account only where the Malta company has not claimed double taxation relief.

.

Passive Interest or Royalty Income

Euro

Company Level

Profit Before Tax 1,000

Malta Tax Suffered at 35% 350

Profits Distributed as Dividends 650

Shareholder Level

Gross Dividends Received 1,000

Malta Tax Suffered at Company Level 350

Refund (5/7ths) of Malta Tax Suffered at Company Level 250

Trading Income

Where the Malta Company’s income arises from trading activities (where trade is widely interpreted to include both actual buying and selling of goods, and also the provision of services), the shareholder/s of the Malta Company may: • Claim a refund of 6/7ths of the Malta tax suffered at

company level on this income.

Elimination of Double Taxation

1. Over 70 Double Taxation Agreements • Includes Egypt and most of the major European jurisdictions; • Mainly follow the OECD model; • New DTAs sought continuously.

2. Unilateral Relief - virtual DTA with the entire world

• Any overseas taxes allowed as credit against the income tax chargeable in Malta subject to proof of tax at source

3. Flat Rate Foreign Tax Credit (FRFTC)

• 25% “deemed” tax allowed as credit against Malta tax

Elimination of Double Taxation: The Flat Rate Foreign Tax Credit

• In the absence of evidence of tax at source... • Malta will deem all income to have suffered tax at source... • ...and allows a credit for such deemed tax against Malta tax

Elimination of Double Taxation: The Flat Rate Foreign Tax Credit

FRFTC Euro

Company Level

Net Foreign Income 800

Deemed Tax – 25% of Net Foreign Income 200

Gross Income 1,000

Tax at the rate of 35% 350

Credit for Deemed Foreign Tax (200)

Tax Payable in Malta 150

Profits Distributed as Dividends 650

Shareholder Level

Gross Dividends Received 800

Malta Tax Suffered at Company level 150

Refund (2/3rds) of Malta Tax Suffered at Company Level 100

Elimination of Double Taxation

Euro Euro Euro

Income before Tax Overseas 1,000 1,000 800

Tax at Source (Overseas) 320 300 0

Net Income Remitted to Malta 680 700 800

680 700 800

Flat Rate Foreign Tax Credit (Deemed Tax)

Grossing Up – Overseas Tax 320 300 0

1,000 1,000 1,000

Malta Tax at 35% 350 350 350

Credit(s) for Overseas Taxes 320 300 200

NET PAYABLE IN MALTA 30 50 150

Elimination of Double Taxation • Where double taxation relief is claimed by the Malta company on income

allocated to the Foreign Income Account (FIA), then…

• The shareholder may, following receipt of dividends from the FIA, claim a refund of 2/3rds* of the tax suffered at company level.

Treaty Relief Unilateral Relief

FRFTC

Company Level (Previous Slide) Euro Euro Euro

Net Tax Paid by the Malta Company 30 50 150

Shareholder Level

Refund of Tax Suffered at Company Level 20 33.33 100

* Where the participation exemption/full (100%) refund system does not apply.

Thanks for your attention

Reuben Buttigieg rmb@erremme.com.mt www.erremme.com.mt Erremme Business Advisors C 300153 113, Paola Road, Tarxien, TXN 1807 (+356) 21 661 273