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Information on the incorporation and management of Maltese companies:
Regarding a Maltese company formation, a limited liability company may be incorporated in Malta for the purpose of carrying on any activities in Malta or internationally and whether such activities are of a “trading” or “holding” nature. Such limited liability companies can therefore trade in any sector and may hold assets whether tangible or intangible and whether movable or immovable.
In terms of Malta law, a company which is incorporated in Malta is deemed to be “ordinarily resident and domiciled” in Malta for tax purposes and would be taxable on its income and chargeable gains in Malta on a worldwide basis, irrespective of where its management and control is situated.
A company incorporated outside of Malta may still be considered tax resident in Malta (albeit not ordinarily resident and domiciled in Malta), where it is managed and controlled in or from Malta. In such situation, the company’s liability to tax would be limited to chargeable income or gains earned in, derived from or realized in Malta. Foreign source would not be taxable in Malta.
Rate of Tax
There is no corporate taxation in Malta and companies are subject to income tax rate at a flat rate of 35% (equal to the marginal rate at which individuals are taxed). The combined overall Malta effective tax rate can however be lowered substantially either by virtue of the refundable tax creditor by application of the participation exemption (as explained below).
A Malta company’s taxable income would include gains or profits derived from trade or business, dividends, premiums, interest or discounts; rents, royalties and other profits arising from property; any charge, annuity or annual payment; and certain chargeable capital gains.
For Malta tax purposes, all companies registered in Malta are required to maintain five tax accounts to which all of the profits must be allocated, namely:
- The Final Tax Account
- The Immovable Property Account
- The Foreign Income Account
- The Maltese Taxed Account; and
- The Untaxed Account
Any profits (income or gains) derived by a company registered in Malta would be allocable to these five tax accounts based on their nature and source and in order to determine the tax treatment thereof.
A Malta company in receipt of income (dividend income) derived from a “participating holding”, or gains derived from the disposal of shares in a participating holding, may at its option elect to exempt such profits applying the participation exemption (as opposed to taxation at 35% with a full refund of tax at the level of the share holder as explained further below).
A Malta company is deemed to have a “participating holding” in an entity if:
- It holds at least 10% of the equity shares in such entity which holding confers the right to any two of the following: the right to vote, profits available for distribution, assets available for distribution upon winding up;
- It has a minimum equity investment of EURO 1,164,000 which it holds for an uninterrupted period of 183 days;
- It holds one or more equity shares with the option of acquiring the balance
- It holds one or more equity shares which together offer the right of first refusal in the event of a disposal, redemption or cancellation of the balance
- It holds one or more equity shares and an entitlement to sit on the Board of Directors of such non-resident entity or to appoint a person on such Board
- It holds one or more equity shares in furtherance of its business but not as trading stocl for the purpose of a trade.
Although the above exemption would apply in all cases with regards to gains derived from the disposal of shares in a “participating holding”, certain conditions must be satisfied in order for dividend income derived from a “participating holding” acquired on or after 1st January 2007 (or any participating holding with effect from 1st January 2011) to qualify for exemption. Such dividends would only qualify to be exempt if the “participation holding” is held in an entity which is either:
- Resident or incorporated in an EU country or territory or
- Is subject to foreign tax rate at a rate of at least 15%; or
- Derives less than 50% of its income from “ passive interest or royalties”
Where none of these three alternative conditions are satisfied, two cumulative conditions may be satisfied instead, namely:
- The equity holding in the non-resident entity must not be a “portfolio investment”, and
- The non-resident entity or its passive interest or royalties must be subject to foreign tax at a rate of at least 5%
Income from Royalties
Royalties and similar income derived from patents in respect of inventions, whether in the course of a trade, business, profession or vocation or otherwise subject to the satisfaction of certain terms and conditions, as well as any dividends distributed out of profits derived from such royalty income may likewise fall to be exempt
Income from Aviation
Income derived from the ownership or the leasing or operation of aircraft or of aircraft engines shall, be deemed to arise outside Malta for Malta tax purposes. This deeming provision shall also apply when the aircraft and/or aircraft engine is registered in Malta; and/or has called at, or is operated from, any airport in Malta. This entails that payments made to non-Maltese resident owners, lessors or operators of such aircraft or aircraft engines should not be subject to tax in Malta allowing for some interesting tax planning opportunities.
Double Taxation Relief
In computing its taxable profits, a Malta company would be able to claim double taxation relief. In terms of Malta law, the three main ways in order to claim relief from double taxation are as follows:
- Treaty relief
- Unilateral relief
- Flat Rate Foreign Tax Credit (FRFTC)
The foreign tax credit is an ordinary tax credit with per-country and per-source limitations. In the case of the FRFTC is a notional flat rate foreign tax credit of 25% for companies specifically empowered to receive foreign source income.
SHAREHOLDERS OF MALTA COMPANIES
Dividend income-The Full Imputation System
Malta operates a full imputation system for the taxation of dividends. A shareholder (whether an individual or a corporate entity) in receipt of a dividend distributed by a company registered in Malta would be entitled to claim a tax credit equal to the amount of underlying income tax paid by the distributing company on the profits out of which the dividends was distributed. Hence no further tax would be payable at the level of the shareholder.
Shareholders in receipt of a dividend from company registered in Malta are therefore not required to declare such dividend in their tax return.
Shareholders of a company registered in Malta are generally also entitled to a refund of all or part of the tax paid on the profits out of which such dividend was distributed. Such refunds of tax have bet the approval of the EU Commission and are applicable to all shareholders in Maltese companies regardless of their legal form, status, or tax residence.
Refunds of tax
A shareholder in receipt of a dividend paid out of profits allocated to the Maltese Taxed account (typically trading income or local passive income)or the Foreign Income Account (typically passive foreign source income)of a company registered in Malta would be entitled to claim a refund of part or all of the tax suffered by the company on the said profits. The refunds would as follows:
Full (100%) refund: such refund would be available upon receipt of a dividend paid by the Maltese company our of the profits (dividend income or gains) derived from a participating holding (as an alternative to the participation exemption)
I. 6.7ths refund: this is the most common refund available on profits (generally trading income) which do not constitute “passive interest or royalties” or upon which the company has not claimed double taxation relief.
II. 5.7ths refund: this refund applies upon receipt of a dividend distributed out of profits which constitute “passive interest or royalties” as defined.
III. 2.3rds refund: this refund applies upon receipt of a dividend out or profits allocated to the Foreign Income Account and upon which the Maltese company has claimed double taxation relief.
There is no withholding tax on dividends in Malta. Insofar as Malta operates a full imputation system, no further tax is payable on dividends irrespective of where the shareholder is tax resident and irrespective of whether the shareholder is an individual or a corporate entity.
There is no withholding tax on outbound interest or royalties from Malta with some exception.
Although stamp duty is gener5ally levied on documents evidencing a transfer of marketable securities at a rate of 2% or at 5% on the transfer of marketable securities in a company where 75% or more of the company’s assets consist of immovable property situated in Malta. Exemption from stamp duty can apply.
Apart from a general anti-abuse provision and a number of specific anti-abuse provisions addressed at particular activities, it should be noted that in Malta there are currently:
- No controlled Foreign Companies (CFC) legislation
- No Thin-capitalization riles
- No Transfer-pricing legislation/guidelines
- No Transfer taxes
- No Capital duty
Publications on Maltese companies: