The Malta alternative Tax planning opportunities using

Maltese corporate structures

Moscow 4 June 2013

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About Malta

• Malta is located 93 km south of Sicily and 288 km to the north of Africa

• Population around 415,000

• English is an official language in Malta and is the language of business.

• EU Member since 1 May 2004 and part of Eurozone since 1 January 2008.

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Characteristics of Maltese companies • Companies Act of Malta based mostly on English Law and

EU directives • Main form: the Limited Liability Company. • Also partnerships en commendite and en collectif • Incorporation time: two to three working days • Full due diligence required • Minimum authorised share capital is €1200 or equivalent in

any convertible currency • Shares may have different classes and rights • Must have at least one director which can be a body

corporate • Must have a company secretary • Annual accounts and audit required

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Basis of Taxation • Taxation on a world-wide basis - Companies that are incorporated in Malta are deemed resident and domiciled

in Malta and are taxable on their world-wide income at the flat rate of 35%.

• Source and remittance basis of taxation - Companies that are incorporated outside Malta but are managed and

controlled in Malta or vice versa (resident but not domiciled) are taxable on income arising in Malta and income arising outside Malta that is remitted to Malta. Capital and capital gains arising outside Malta are not taxable even if remitted to Malta. Rule applies also to individuals. This creates various tax planning opportunities.

• Source only basis - Persons who are neither resident not domiciled are taxable only on Maltese

source income

• Full Imputation system - Income tax paid by the company is a prepayment of tax due by the shareholder

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Double Taxation Relief • Treaty or Unilateral Relief based on an Ordinary Credit - Applies to foreign taxes suffered on foreign income – for resident companies

and registered branches

- Credit for withholding and underlying tax (for dividends) of direct subsidiaries and 10% sub-subsidiaries.

- If foreign taxes ≥ Malta tax charge (35%), Malta tax is NIL

• Flat Rate Foreign Tax Credit (FRFTC) - Applicable to foreign income account (FIA) income deemed to have suffered

foreign tax of 25% of foreign income received

- Reduces tax suffered to between 7.47% and 18.75% (note interaction with 2/3rds refund)

- FIA: royalties and similar income arsing outside Malta; income/gains derived from a participating holding, dividends, interest, rents, capital gains and other income derived from investments situated outside Malta; PE profits; profits from foreign assets/liabilities of Malta licensed banks and financial institutions; profits of Malta licensed insurance companies related to risks situated outside Malta.

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The Special Tax Refund System

• Malta operates a unique tax refund system under which the Maltese tax authority refunds generally 6/7ths of the corporate tax to (duly registered) shareholders upon request following a distribution of dividend by the Maltese company.

- This results in an overall effective tax rate of 5%.

- This is the lowest effective tax rate on trading profits in the EU

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Example: 6/7ths Tax Refund

Taxation of MaltaCo

Chargeable Income 100 Tax at 35% (35)

Distributable profits 65

Taxation of the Shareholder

Gross Dividend 100

Tax at 35% (35)

Full Imputation Credit for Tax Paid by MaltaCo 35

Net Dividend 65 Refund of 6/7ths of Malta Tax Paid 30

Income from MaltaCo (Dividend + Refund) 95

Overall Malta Effective Tax 5%

Shareholder

MaltaCo

Income from MaltaCo

(95)

6/7ths Tax Refund (30)

Tax (35)

Income (100)

Dividend (65)

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The Special Tax Refund System • If underlying profits of the Maltese company are generated from certain

passive interest or royalties, the tax refund is 5/7ths.

- Overall effective tax rate is 10%.

• 2/3rds refund applies where double tax relief has been claimed on certain foreign source income.

- Malta tax suffered reduced to between 2.49% and 6.25% when FRFTC is claimed, or to zero when other type of DTR claimed is 11.67% or more

• Applications for tax refunds may be made within up to four years from the date of the distribution of profits.

• Tax refunds are guarantied by law and must be paid within 14 days of the filing of a request for refund.

• The tax is paid in the currency in which the share capital of the distributing company is denominated and tax refunds are also paid in the same currency.

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Malta two-tier trading structure

Foreign Shareholders

Income from International trading activities ex. Provision of services, intermediation, active financing activities,

purchase and sale of goods.

Equity

Dividends

Malta tax at company level :

35%

Tax treatment:

• Malta Trading Co taxed at 35%

• Foreign Shareholders may claim 6/7ths refund (effective overall tax burden reduced to 5%)

• 2nd Malta Holding may be interposed, in case of taxation refunds in shareholder’s country of residence, to collect dividends and refunds.

• Malta Holding is not taxable on dividends received from Malta Trading Co (imputation credit). Tax refunds are exempt from tax.

• Malta Holding may hold on or re-invest money or distribute dividend to Foreign Shareholders.

• No withholding taxes apply on distribution of dividends from Malta Trading or Malta Holding.

6/7ths tax refund

Malta Hold Co

Malta Trading Co

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Malta Holding Companies

Benefits of Malta as a holding jurisdiction: (60+) double tax treaties based on OECD Model Treaty with Russia signed not yet in force

Effective system of double taxation relief Efficient participation exemption regime with light anti-

abuse provisions No withholding tax on outbound dividends, interest or

royalties to any country No CFC, transfer pricing or thin-cap legislation Access to EU treaty freedoms and EU Directives Excellent international reputation and relations with

OECD Not restricted to holding activities

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The Participation Exemption Participation exemption applies on income or gains derived by a Maltese company from a participating holding i.e. a holding in another company (or the transfer thereof) which confers at least two of the following:

1. The right to vote; 2. The right to profits available for distribution; 3. The right to assets available for distribution on a winding up

and:

(a) it is a direct holding of at least 10% of shares of company; or (b) holding company entitled to entire balance of the shares not held; or (c) holding company entitled to first refusal on shares not already held;

or (d) holding company entitled to a seat on the board of directors; or (e) investment is equivalent to €1.2 M and held for 183 days; or (f) shares held for the furtherance of business (not held as trading

stock). 11

Participation Exemption (anti-abuse)

One of the following criteria must also be satisfied by company held in the case of a dividend:

1. It is an EU company; or

2. it is subject to foreign tax of at least 15%; or

3. it does not have more than fifty per cent (50%) of its income derived from passive interest or royalties;

Where none of the above conditions are satisfied the participation exemption would still apply if :

a. the holding by the Malta company in the non-Maltese resident company is not a portfolio investment; and

b. the non-Maltese resident company or its passive interest or royalties have been subject to any foreign tax of at least 5%:

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Holding w. Participation Exemption

Foreign Hold Co

Dividends and gains derived from a

participating holding

Participating Holding Dividends

Malta tax: 0% participation exemption

No withholding tax on dividend paid to

Foreign Hold Co (even if offshore or low tax jurisdiction) Malta Hold Co

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EU Exit Route via Malta

Participating Holding

Dividends

Malta tax: 0% participation exemption

No WHT on dividend paid to Offshore/Non-EU Co

Malta Hold Co

EU Co

Offshore/Non-EU Co

Dividends

No WHT: application of Parent Subsidiary Directive

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Resident non-Domiciled companies Remittance basis of taxation:

A foreign incorporated company that has shifted its residence / effective management to Malta (becomes resident but not domiciled) is only subject to Malta tax on:

• Income and gains arising in Malta; • Income arising outside Malta which is

remitted (received) in Malta; and

No Malta tax on: • Foreign source Capital Gains • Foreign source Passive Income not remitted to

Malta Applications: Financing/Passive foreign investments/Aircraft leasing or operation

Foreign Hold Co

Foreign co. managed and controlled in Malta

Foreign Passive Income or

Gains/Financing activities

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Substance requirements

• Company incorporated in Malta is deemed resident in Malta

• No formal substance requirements from a Maltese perspective/Required from foreign country perspective

• Management and control in Malta: Meetings of BOD held in Malta. Directors with sufficient experience based in Malta

• Employees/premises/technical resources commensurate with activities of the company

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Professional Investor Funds (PIFs)

PIFs are non-retail funds aimed at financially literate, high-net-worth-investors.

Subject to quicker regulatory procedure and less investment restrictions than retail funds

May take form of a limited liability company SICAV or INVCO

PIFs may be self-managed

May take form of an umbrella fund with multiple-sub funds with different investment objectives and segregated patrimonies

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Self-managed PIF (SICAV) Structure

PIF Fund

Administrator

SPV

BOD

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Investment Committee

Foreign Target Company/Investment

Promoter (controlling

shares

Unit Holders

Investors

Advantages:

• PIF income is exempt from tax

• Redemption and transfer of units in the Fund quicker and simpler than transfer of shares in normal company

• Investors can invest through regulated financial intermediaries

• PIF may be divided into sub-funds held by different investors and pursuing different investment objectives

• PIF is a regulated entity: Adds substance to the structure

Disadvantages:

• More expensive to run than normal holding company

• Subject to regulatory oversight and restrictions

Custodian

Dividends

Dividends

Redomiciliation of Companies to Malta • Malta allows the re-domiciliation of companies (including funds) to

Malta from approved jurisdictions.

• A company established in another jurisdiction may be transferred and continue to exist in Malta without having to wind up in its country of incorporation.

• The assets, rights, obligation and liabilities the company had in its original country of registration are retained

• A fund can also move to Malta without having to re-negotiate contracts with service providers in the country of origin (provided these are approved by MFSA).

• Likewise, companies incorporated in Malta may redomiciled out of Malta to another jurisdiction.

• Possibility of ‘step-up’ of base-cost of assets situated outside Malta

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Other Reasons to Choose Malta

Its proximity to most European and Middle Eastern capitals with many direct flights available

Convenient time zone (GMT+1) English is the language of business. A sophisticated, European business environment Highly educated and productive local work force Reasonable set-up and operational costs A solid banking system largely unaffected by global financial crisis A stable political situation State-of-the art communications infrastructure Good weather and high standard of living Well-equipped ports and Freeport Excellent international schools

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THANK YOU FOR LISTENING!

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Dr Silvio Cilia silvio.cilia@cclegal.com.mt

Dr Jonathan Corrieri Jonathan.corrieri@cclegal.com.mt

Level 1, Blue Harbour Business Centre, Ta’ Xbiex Yacht Marina, Ta’ Xbiex XBX1027 Malta

Tel: (+356) 21491840/1 Fax (+356) 21499920

www.cclegal.com.mt |

Contacts

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