Malta – A Corporate Holding Jurisdiction

Malta – A Perfect Holding Jurisdiction

0% Tax

Participating Exemption   

EU Membership – Benefits

As a full member of the European Union, Malta enjoys the benefits of EU directives and in particular the Parent & Subsidiary Directive, which allows for profits and gains arising through subsidiaries in one EU member state to be repatriated to its holding company on a 0% tax basis.

Participating Exemption

Income derived from a participating holding or from the disposal of such holding will qualify for a participation exemption, which is intended to exempt from tax dividends and gains derived from such holdings. The income derived from a participating holding which qualifies for a participation exemption, may be altogether excluded from the tax return and as a result no tax will be due.

In such cases, the Malta holding company may decide either to:

• apply an outright exemption for Malta tax – the participation exemption (that is it may opt not to pay the 35% tax in the first place); or
• include such income /gains as part of the taxable income of the Malta company and pay tax at 35%. Following the distribution of dividends by the Malta holding company out of the said income/gains, the recipients’ shareholders would be entitled to a full (100%) refund of the Malta tax paid by the company on such income/gains. This scenario could be desirable in cases where, for some reason or another, the shareholder prefers to receive a part of his earnings in refunds rather than exclusively in dividends.

Participating Holding

A shareholding in a non-resident company qualifies as a participating holding if the Maltese company holds equity shares in a non-resident company or a qualifying body of persons and it:

• holds directly at least 10% of the equity shares of the non-resident company; or
• is an equity shareholder in the nonresident company and is entitled at its option to purchase the balance of the equity shares of the non-resident company or has the right of first refusal to purchase such shares; or
• is an equity shareholder in the non-resident company and entitled to be represented on the Board of directors; or
• is an equity shareholder which invests a minimum of €1,164,000 in a company not resident in Malta and such investment is held for a minimum uninterrupted period of 183 days; or
• holds the shares in the non-resident company for the furtherance of its own business of the Malta company but not held as trading stock for the purpose of trade.

A shareholder of a Maltese company may claim a full 100% refund of the tax paid on the dividends and capital gains received from a participating holding if the holding in the non-resident company satisfies at least one of the following anti-abuse provisions:

• it must be resident or incorporated in the EU;
• it must be subject to foreign tax of a minimum of 15%;
• it must not derive more than 50% of its income from passive interest or royalties.

Capital gains arising from the disposal of the participating holding would be 0% tax rated in Malta.

Foreign Income Tax Account 2/3 & 5/7 Refunds

There are two cases where the Malta tax refund is lower than the normal 6/7 refund (5% rate) enjoyed by shareholders of typical trading companies:

Example 1

Where the profits out of which a dividend is distributed consist of “passive interest or royalties”, the refund is set at 5/7 of the Malta tax suffered on those profits. There exists “passive interest or royalties” if:

• income is not derived from a trade or business; and
• such interest or royalties have not suffered foreign tax or suffered foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%). If any one of these conditions is lacking, there will be no passive interest or royalties and one would fall under the more beneficial 6/7 refunds regime; or:

Example 2

Where double taxation relief is claimed, dividends paid out of profits allocated to the foreign income account in respect of which profits the distributing company has availed itself of any form of double tax relief are subject to a 2/3 refund. In these circumstances, the relevant provision relates to profits resulting from royalties and similar income arising outside Malta and from dividends, capital gains, interest, rents, income or gains derived from a Participating Holding or from the disposal of such holding, and any other income derived from investments situated outside Malta, which are liable to tax in Malta and are receivable by a company registered in Malta.

Non – Qualifying Holdings

If a subsidiary of a Maltese company does not come within the rules of the participation exemption, dividends arising from the subsidiary, would be subject to Malta’s normal tax system, which after application of tax credits and refunds would levy a tax rate of 6.25%.

Sale of shares in a Malta Company by Non-Residents

Any gains or profits derived by non-residents on a disposal of shares or securities in a company resident in Malta are exempt from tax in Malta, provided:

• the company does not have, directly or indirectly, any rights over immovable property situated in Malta, and
• the beneficial owner of the gain or profit is not resident in Malta and not owned and controlled by, directly or indirectly, nor acts on behalf of an individual/s ordinarily resident and domiciled in Malta.

Not Withholding taxes

Malta does not levy any withholding taxes on outbound dividends, interest, royalties and liquidation proceeds.

Malta’s Tax System

Following the application of Malta’s tax refund system, Malta’s corporate tax rate is substantially reduced from 35% to:

• 6/7ths refund for trading income = 5% tax rate
• 5/7th refund for passive income = 10% tax rate
• 2/3 refund for certain passive income = 6.25% tax rate

 Imputation System 0% Shareholder Tax

As one of the few countries to still retain a full imputation system, dividends paid by a Malta company do not attract any further tax since they carry a tax credit equivalent to the tax paid by the company upon the distribution of profits. Resident and non-resident shareholders are entitled to a refund of tax paid by the company with no further tax levied on the shareholders’ income.