Tax Advisory Services and Consultancy on Company Restructuring

Malta made changes to its fiscal legislation in view of its membership of the European Union on 1 May 2004.  Salient features of Malta’s tax systems which are in line with its agreement with the EU include:

Retention of the full imputation tax system wherein tax paid by a company in Malta is, on the distribution of dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability;
Extension of the refundable tax credit system to dividend payments made by all Maltese companies out of all sources of income (with the exception of profits derived from Maltese immovable property) and to all shareholders irrespective of their tax residence;
Extension of the refundable tax credit system to Malta tax paid on profits attributable to a Malta branch;
Retention of the definition of a “participating holding,” but with the introduction of certain anti-abuse provisions for holdings acquired after 31 December 2006; and
Introduction of a participation exemption that will exempt from Malta tax dividends and capital gains from a participating holding.

Further details on these changes as enacted in Maltese tax law are provided below:

Refunds of Tax

Subject to the transition provisions outlined below, the refundable tax credit system applies to dividend distributions by all companies resident in Malta and registered on or after 1 January 2007, out of all sources of income (with the exception of profits derived from immovable property situated in Malta), to both resident and non-resident shareholders provided the tax compliance requirements have been fully adhered to.

The rate at which company profits are taxed is 35% while the available refund amounts to 6/7ths of the Malta tax paid on the profits out of which the dividend distribution is effected with the exception of the following circumstances

Where the dividend is distributed out of profits emanating from passive interest or royalties; the available refund is 5/7ths
Where the dividend is distributed out of foreign-source income and in respect of which the Maltese company effecting the dividend distribution has claimed double taxation relief the available refund is 2/3rds

Participating Holding

Under Malta tax law, a participating holding exists where a Maltese company holds at least 10% of the equity share capital of a non-resident company whose capital is divided into shares or:

The Maltese company is an equity shareholder in the non-resident company and is entitled to purchase the balance of the shares of the non-resident company or has a right of first refusal over such shares; or
The Maltese company is an equity shareholder in the non-resident company and is entitled to sit (or appoint a representative to sit) on the board of the non-resident company; or
The investment in the non-resident company is at least Eur1,164,687 and the investment is held for at least 183 days; or
The investment in the non-resident company is held for the furtherance of the Maltese company’s own business and the holding is not held as trading stock for the purposes of a trade.

The above conditions for participating holding status apply without limitation where the non-resident company is resident in another EU Member State or is subject to tax at a rate of at least 15% in any other jurisdiction.

However, where more than 50% of the income of the non-resident company consists of passive interest or royalties (and the company is not resident in another EU Member State or is not subject to tax at a rate of at least 15%), the following conditions also must be satisfied to qualify for participating holding status:

The investment must not qualify as a portfolio investment; and
The non-resident company must be subject to foreign tax at a rate that is not less than 5%.

The above limitation is immediately applicable for holdings acquired on or after 1 January 2007, the limitation will only apply with effect from 1 January 2011.

For the above purposes:

“Passive interest or royalties” are defined as interest or royalty income that is not derived, directly or indirectly, from a trade or business, where such interest or royalties have suffered any foreign tax, directly, by way of withholding or otherwise, at a rate of tax that is less than 5%.

“Portfolio investment” is defined as an investment in securities such as shares bonds and like instruments and which are held as one of many investments for the purposes of investments by risk spreading where the investment is not strategic investment and is made with no interest in and without the intention of influencing the management of the company invested in and, in addition, is made only to follow the share price and dividend policy of the company invested in to maximize investment returns and to sell the investment as soon as it appears the shares may lose value.

Participation Exemption

With effect from 1 January 2007, Malta has introduced a participation exemption, as a result of which income derived (i.e. dividends and/or capital gains) by a company resident in Malta from a participating holding will be exempt from tax in Malta.

Branches

As a result of the changes, the refundable tax credit system has been extended to Malta tax paid by branches of companies not resident in Malta on profits attributable to their Malta branch.

With effect from 1 January 2007, upon a dividend distribution by a non-resident company out of profits attributable to the Malta branch of the non-resident company, the recipient shareholder will be entitled to claim a refund of Malta tax paid on the profits in the same manner and subject to the same limitations as described above.

Conclusion

From an international business perspective, Malta’s tax refund system on dividends should place the compatibility of the tax system with EC law beyond discussion, given the EU’s endorsement of the changes.