Malta Offshore Company Set Up | Tax Structures

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We specialize in Malta Company Formation. We help you with Malta company formation, company set up and incorporation, management services, bank account opening and taxation in order to obtain Malta Company Tax Advantages.

Malta provides unique advantages and constructive use of Malta state incentives can give you significant benefits. Tax, residency, safety and lifestyle advantages.

We are leading Company Formation professionals who are part of the FBS Kotsomitis Global Network. We will be your Partner in Malta for ALL your Malta Company Formation Needs.

This section is an indicative, but not exhaustive list and summary description of specific Malta tax structures that are presently used extensively by international clients due to the Malta’s exciting tax planning potential and in particular its tax, commercial and legal system.

These structures can legally mitigate one’s tax liabilities. More information can be provided on request (contact us). However, it must be noted that since some of the Malta tax structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors.

Note: Our Directors are continuously travelling to a number of countries meeting existing and potential clients and associates.

Malta Holding Companies

With holding companies being pivotal in international tax planning, the choice of a holding which is best suited to the structure, is crucial to minimise any tax leakages on income and gains.

In order to appreciate the merits of Malta as a holding company jurisdiction, it suffices to compare the main typical holding company “optimality criteria”  and the benefits provided by the Malta Holding Company Regime. Read more

Malta Group Finance Companies

The use of Malta Entities for group finance are extremely attractive. Malta Finance Companies can fulfill intra-company and inter-company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Malta Financing Company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.

These structures are particularly attractive for investment into high-tax countries where, local rules permitting, high debt structures are widely used. Read more

Malta Royalty Routing Structures

Royalties and licensing rights for intellectual property can be owned by or assigned to a Malta Company. Intellectual Property may include computer software, technical knowledge, patents, trademarks, trade secrets & methods, and copyrights.

Royalties and licensing fees for intellectual property can be owned by or assigned to a Malta Company.

The use of the Malta’s Wide Double Tax Treaties Network and EU Directives reduces or eliminates the withholding tax on the collection of the Royalty payment. Read more

Malta Company Tax Treatment

All companies resident in Malta are subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system, wherein tax paid by a company in Malta is, on the distribution of a final dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company.  In most cases, the ultimate tax leakage can be as low as 5% or less.

The full imputation tax credit thereby renders Maltese companies highly efficient tax vehicles, with a number of possible applicable refunds to shareholders. Read more

Malta Company Management and Control

A Company which is registered in Malta shall be deemed to be tax resident in Malta from the date of its incorporation. However, in terms of Article 2 of the Maltese Income Tax Act ‘”resident in Malta” …when applied to a body of persons, means any body of persons the control and management of whose business are exercised in Malta….’

The wording of the aforesaid Article 2, right implies that a company established abroad shall become a resident of Malta if it is managed and controlled in Malta, and shall therefore be deemed to be tax resident in Malta.

As a general rule, the most manifest indication of where central management and control of the company is exercised, is the seat where the board of directors meets and resolves business. However, substance prevails over form and other factors should be assessed, for the location for the central management and control to be inferred. Read more

Contact one of our officers to initiate the incorporation of a Maltese registered company and start reaping the full benefits of an onshore, low-tax, EU jurisdiction. Simply fill in the contact box below or contact us by email on enquiries@fbsmalta.com or by calling at +356 2338 1500

We are committed to providing you with a swift solution best suited to your needs.

Malta Holding Companies

With holding companies being pivotal in international tax planning, the choice of a holding which is best suited to the structure, is crucial to minimise any tax leakages on income and gains.

Malta has, pursuant to the enactment of reforms to the Income Tax Act, and to the introduction of a Participation Holding and Participation Exemption regime, gained significant clout as a holding company jurisdiction.

In order to appreciate the merits of Malta as a holding company jurisdiction, it suffices to compare the main typical holding company “optimality criteria” (set out below) and the benefits provided by the Malta Holding Company Regime (also set out below):

Optimality Criteria for Malta Holding Companies

Holding companies perform the following functions within a group:

• Asset ownership / participation interest in operating (“opcos”) & non-operating group companies;
• Accumulation of capital and shareholder value;
• Consolidation of business segments (including consolidated IFRS financial statements);
• Asset protection / mitigation of risks;
• Receiving dividends from operating companies (“opcos”);
• Distribution of profits to shareholders;
• Reinvestment of capital into new projects.

For illustration purposes, the company should ideally be resident in a jurisdiction which:

(only some of the main tax related criteria are listed – the following is not meant to be an exhaustive list).

• Enables the extraction of foreign sourced dividends at mitigated or preferably zero rates of foreign withholding tax – In choosing a holding company jurisdiction, one needs to take into account the benefits of a particular country’s Double Tax Conventions (Treaties) in order to reduce the incidence of foreign withholding tax. High tax jurisdictions generally do not enter into Double Tax Conventions with offshore jurisdictions. For this reason, if offshore (non-Malta) Companies are used to own shares in high tax jurisdictions, it is likely to increase the burden of tax, via the imposition of high withholding taxes, rather than reduce it;
• Enables foreign dividends received to be taxed at low or preferably zero rates of domestic corporation or other taxes in the country of residence of the holding company – Not only one should plan to have a holding company in a jurisdiction which can receive foreign dividends with reduced withholding taxes, but one also needs to ensure that those dividends are not highly taxed in the holding company’s country of residence;
• Permits the distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax – Care needs to be taken that the jurisdiction chosen for a holding company is not one that will impose excessive withholding taxes on distributions of income to the shareholders of the company;
• Allows for the realisation of capital gains from the disposal of shares in foreign companies at low or preferably zero rates of both foreign and domestic corporation tax on the gains – All the leading holding company jurisdictions provide, for an exemption from taxation on holding companies realized gains, the disposal of shares in foreign companies;
• Enables the tax-free liquidation of the holding company itself.

Malta Holding Companies Regime

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Malta Holding Companies are the following:

• Shares held by a Maltese company in another corporate company may qualify as a “participating holding” and would result in a tax-efficient regime for the Maltese company;
• The shareholders of the Maltese company would thus be able to claim a full refund on any tax paid upon any income or gains derived by the Maltese company from a participating holding or from the disposal of such holding and distributed to such shareholders;
• A Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever any income or gains derived by it from the participating holding or from the disposal of such holding, thereby having cashflow benefits.

For this purpose, a ‘participating holding’ arises when there is a holding of equity shares in another company (Maltese or foreign) which satisfies any one of the following six (6) conditions;

1. holds directly at least five percent (5%) of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least five percent (5%) of any two (2) of the following:

(i) right to vote;
(ii) profits available for distribution; and
(iii) assets available for distribution on a winding up.

2. is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or

3. is an equity shareholder in a company and the equity shareholder company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or

4. is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or

5. is an equity shareholder which holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of (€1,164,000) (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days; or

6. is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade:

Apart from satisfying the conditions of the Participating Holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions:

• it is resident or incorporated in the EU; or
• it is subject to foreign tax of a minimum of fifteen (15) percent; or
• it does not derive more than fifty (50) percent of its income from passive interest and royalties.

Alternatively, if none of the abovementioned three (3) conditions are satisfied, the satisfaction of both two (2) ancillary conditions would need to be satisfied. These two additional criteria are that-

• (i) the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment.

In this respect, a ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company; and

• (ii) the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

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%.

In conclusion, the Malta Tax System Enables:

• The extraction of foreign sourced dividends, at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable);
• The receipt of foreign dividends at zero rates of corporation tax or any other local taxes (subject to conditions – anti avoidance provisions that are easy to satisfy), i.e. “an EU Holding Company with no domestic tax leakage on holding activities”;
• The distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions);
• Allows for the realisation of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains”, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.

Contact one of our officers to initiate the incorporation of a Maltese registered Holding company and start reaping the full benefits of an onshore, low-tax, EU jurisdiction. Simply fill in the contact box below or contact us by email on enquiries@fbsmalta.com or by calling at +356 2338 1500

We are committed to providing you with a swift solution best suited to your needs.

Malta Group Finance Companies Functions

Malta Group Finance Companies perform the following functions:

• Sourcing external debt finance;
• Accumulation of interest income and tax optimisation of high tax country group operating companies;
• Redistribution of funds within the group.

Such companies may take advantage of the Malta Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.

The use of Malta Entities for group finance are extremely attractive. Malta Finance Companies can fulfill intra-company and inter-company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Malta Financing Company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.

These structures are particularly attractive for investment into high-tax countries where, local rules permitting, high debt structures are widely used.

Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to the Malta Group Finance Companies are the following:

• Absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest withholding tax;
• Low overall tax burden;
• Possibility of deducting interest expenses from taxable income;
• Absence of thin capitalisation rules or their inapplicability in the case of “back to back” financing;
• Absence of interest withholding tax in connection with interest paid on loan financing, irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions);
• Reasonable level of “margin” permitted by tax authorities;
• Low expense levels for professional / financial fees.

Malta Group Finance Companies Tax Relief

The Malta Income Tax Act permits tax consolidation and sets forth circumstances in which members of a group of companies may surrender trade (but not capital gains) losses to one another.

In order for companies to be considered to form part of the same group:

(i) Both must be resident in Malta and not resident for tax purposes in any other country;

All Maltese companies are deemed to be resident in Malta, except when they are managed and controlled outside Malta.

(ii) One is the fifty-one percent (51%) subsidiary of the other or both are fifty-one percent (51%) subsidiary of a third party resident in Malta.

Group relief is applicable both with regard to direct and indirect groups as well as horizontal and vertical groups. In order to qualify for relief, thereby permitting allowable losses to be surrendered to a member of the same group, the following two cumulative conditions must be met:

(i) The surrendering company and the claimant company must have been members of the same group thorough the year preceding the year of assessment for which the relief is claimed;

(ii) Both companies must have identical accounting periods.

An exception is made with regard to newly incorporated companies, if such newly formed company, after its incorporation satisfied the aforesaid conditions, like any other company in the year preceding the year of assessment and has the same accounting period end date as that other company in that year preceding the year of assessment.

Allowable expenses which may be surrendered include any losses incurred in any trade, business, profession or vocation during the year preceding the year of assessment, which had it been profitable would have been subject to assessment in Malta, with the exception of allowances relating to the wear and tear of plant and machinery, and initial capital allowances.

Other important rules applicable for tax relief are the following:

• Claimant companies may not, in respect of any one loss, obtain more relief than could be obtained by a single claimant company;
• A surrendering company may surrender allowable losses by way of group relief in excess of the total income of the claimant company in the year preceding the year of assessment. The claimant company may carry forward and set off losses, as if incurred in its own trade.
• The relief does not necessarily be for the full amount available;
• The express consent of the surrendering company must be provided;
• The demand for relief must be made not later than twelve (12) months from the end of the company’s accounting period (default 31st December) which date falls within the year immediately preceding the year of assessment for which the claim is made;
• Where the allowable loss (had it been a profit) would have been allocated to the Immovable Property Account, Foreign Income Account or the Malta Taxed Account of the surrendering company, the claimant company may deduct such loss from its income which stands to be allocated to either its Immovable Property Account, Foreign Income Account or its Maltese Taxed Account and such loss may only be carried forward against the claimant’s total income arising in subsequent years as would stand to be allocated to any of these taxed accounts.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors. For bespoke tax advice, please click here to contact our tax advisors or send us an email on enquiries@fbsmalta.com or by calling at +356 2338 1500

Benefits and use of Malta Royalty Routing Structures

Due to the low withholding tax rates for royalties provided in most of Malta’s Double Tax Treaties and the use of the EU Directives, establishing a royalty company in Malta can be a very attractive proposition.

Royalties and licensing rights for intellectual property can be owned by or assigned to a Malta Company. Intellectual Property may include computer software, technical knowledge, patents, trademarks, trade secrets & methods, and copyrights.

Royalties and licensing fees for intellectual property can be owned by or assigned to a Malta Company.

The Malta Company can then enter into license or franchise agreements with other companies interested in exploiting these rights. Royalty payments would normally be deductible expense insofar that they are used in the production of the income.

The receipt of passive income from royalties, would entitle the shareholders of the Maltese Company to a tax credit, typically the 5/7ths income, ultimately resulting in a 10% tax leakage in Malta.

The use of the Malta’s Wide Double Tax Treaties Network and EU Directives reduces or eliminates the withholding tax on the collection of the Royalty payment.

Apart from the tax system’s generic features, the DTT Network and the adoption of EU Directives, other important tax system features beneficial to Malta Royalty Companies are the following:

• Absence or reduction (under a Double Tax Treaty or the Interest and Royalty Directive) of withholding tax on royalties paid to Malta Company.
• Low overall tax burden.
• Tax deduction of royalty payments.
• Effective tax depreciation of investments in intellectual property.
• Absence of withholding tax on royalty payments (including to offshore companies) for rights used outside Malta – the usual case.
• Neutral VAT treatment.
• Reasonable level of “margin” required by tax authorities.
• Effective protection of intellectual property rights by Legislation and the participation of Malta in international agreements.

Royalties Derived from Patent Rules

In 2010, by means of Legal Notice 429 of 2010, the Deduction on Royalties derived from Patent Rules (“the Rules”) were enacted.

The Rules provided a tax exemption on royalties and similar income derived from patents and inventions on or after 1 January 2010.

In order to qualify for this tax exemption, the qualifying patent (registered in Malta and in relation to which the research, planning, processing, experimenting, testing, devising, designing and developing was carried out in Malta or elsewhere), an application, together with the supporting documentation must be submitted to Malta Enterprise, a Government agency responsible for the promotion of foreign investment and industrial development in Malta. Upon satisfaction of the aforesaid criteria of eligibility, Malta Enterprise shall issue a determination, which upon filing to the Maltese Commissioner of Inland Revenue, shall entitle the holder of such qualifying patent to the aforesaid tax exemption.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors. For bespoke tax advice, please click here to contact our tax advisors.

Malta Company Tax Treatment – Applicability and Tax Refunds

The tax treatment of a company is undoubtedly one of the most pivotal considerations which an investor should consider when making up a decision of whether to incorporate a company in a particular jurisdiction. The Maltese company has proven to be a very tax effective tool, often resulting in a tax leakage of just 5% – or even less. This is undoubtedly the most tax efficient structure within the EU – achieved by means of an onshore jurisdiction, with full access to EU directives and access to double tax treaty provisions.

The Maltese system is a credit imputation (or tax refund) system, and has been long entrenched in the Maltese tax system for over fifty years. The corporate tax rate of a Maltese company is always set at 35% of taxable income (turnover less deductible expenses). However, upon a final distribution of dividends, the immediate shareholders of the company are entitled to a number of tax refunds on the distributable profits, the default tax refund being 6/7ths of the 35% – effectively leaving a tax leakage of just 5%.

The 6/7ths refund is effectively, the default tax refund, which shall apply, unless it is shown that the applicable tax rate (dependent on the income source) is such that a different tax rate should apply. To illustrate how the 6/7ths refund works, the following is a concise illustration.

The column of the right is also extremely important, since effectively foreign tax suffered by the Maltese company is also taken into account for the purposes of the refund calculation – albeit the tax refund grossed up to the foreign tax rate cannot exceed the Maltese tax paid. In other words, it is not possible to claim a tax credit by claiming back the refund on the foreign tax suffered. However, it is possible to take the foreign tax rate into account, to actual level the ultimate tax leakage to less than 5% – in the illustration below to 0%.

Having established the workings and the fact that the 6/7ths refund is the default tax refund, what about the other forms of tax refunds available?

Having established the workings and the fact that the 6/7ths refund is the default tax refund, what about the other forms of tax refunds available? There in effect a total of four (4) possible tax refund. Discounting the 6/7ths refund set forth above, the other tax refunds are the following:

5/7ths tax refund;

2/3^rd tax refund; and

100% tax refund

5/7ths refund

The pivotal concept to keep in mind when applying the 6/7^th refund mechanism is the fact that it is based on ‘active trading income’. The 5/7ths refund is based on ‘passive interest’ or royalties, which are derived by the company not as a result of its trade or business.

However, there is an additional safeguard in place. Even if the income derived by the company is of a passive nature, if the foreign tax suffered is in excess of 5% – then automatically, the 6/7ths refund shall apply. The rationale is once again to ensure that the most tax beneficial result to the shareholders of the company.

As set forth in the example above, the foreign tax suffered, may once again be aggregated in the final tax calculations, set forth below:

2/3^rd refund

Another important factor to consider for the investor is the access to double tax treaty agreements, which may apply to the country of incorporation of the company. Malta has, over the years, in a constant diplomatic effort, effectively undertaken a wide network of double tax treaties. These treaties are relevant to the 2/3^rd tax treaty mechanism, since this form of tax refund shall apply on foreign passive income on which the Malta Double Tax Relief is claimed.

This form of refund is typically availed of by financial and credit institutions carrying out business outside of Malta or by foreign passive institutions on which double taxation relief is claimed.

As with the case of all forms of tax refund, the tax refund may once again be included with the taxable income, to effectively provide scenarios where the tax leakage is effectively zero. A concise illustration better explains the underlying mechanics of such tax refund

100% tax refund

Lastly and very importantly is the 100% tax refund – which applies out of profits derived by a Maltese company from its equity exemption in a subsidiary are received or disposed of (capital gains exemption). Effectively, this features a scenario whereby a Maltese holding company holds shares in a subsidiary and receives dividend income from such subsidiary. Likewise, it envisages a scenario whereby a Maltese company holds equity in a subsidiary and decides to sell off that equity (disposal). In this case, income arising from such disposal, would typically be subject to capital gains tax. However, by availing oneself of such refund, it is possible to obtain a 100% tax refund.

In order to qualify for such tax refund, it is necessary for the Maltese company to qualify to a series of criteria called ‘participating holding’. There are six criteria which may be availed of to qualify for such ‘participating holding’ exemption, which criteria are non-cumulative. Effectively, only one criterion needs to be satisfied. The criteria that the Maltese holding must satisfy are the following:

1. To hold at least ten percent (10%) shares in a subsidiary or any entity whose capital is divided into shares, insofar that those shares are entitled to any of the following rights (i) right to vote; (ii) participating rights (to dividend income); and (iii) receive assets upon an eventual winding up of the subsidiary; or
2. The monetary investment of the holding is of EUR 1,164,000 or equivalent value in any currency, and that holding is held for an uninterrupted period of at least 183 days; or
3. It is entitled to call for and acquire the entire balance of the shares not held by itself to the extent permitted by the law of the country in which the equity shares are held; or
4. It has the right of first refusal in the event of a proposed disposal, redemption or cancellation of all the equity shares of that company not held by that equity shareholder company; or
5. It is entitled to either sit on the board of directors or appoint a person to sit on the board of directors of that company as a director; or
6. It is the equity shareholder in a company and the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Effectively, the main reliance is often made on grounds (a) and (b) since they are objective in nature, and may be easily determined without recourse to any interpretation of legal interpretation. The copies of the Memorandum and Articles of association or register of members will in most cases suffice to establish the fact that the Maltese holding has 10% of the equity in a foreign company, and this equity allows it to exercise voting and participating rights. Likewise, in the case of ground (b) above – the monetary value of such holding may be established by management or audited financial statements and the duration of the holding established by bank movements, register of members and share certificates. The other grounds (c) to (f) are more subjective – but may nevertheless be availed of, to take full advantage of this tax refund. As discussed, it is merely sufficient to prove one (1) ground out of the six (6).

The participating holding applies to (i) dividend income; and (ii) capital gains upon a disposal of the participating holding. However, limitedly with regard to dividend income, there are additional conditions to be satisfied to claim the tax refund, limitedly that the participation must be held in a company which:

1. Is resident or incorporated in the EU; or
2. It is subject to a foreign tax of 15% or more; or
3. It does not derive more than fifty percent (50%) of its come from passive interest or royalties.

Only one of the aforesaid criteria need to be satisfied. Effectively, these are relatively easy to achieve. However, if they were not achievable, there would still be a possibility to claim the refund, if any two (2) of the following three (3) conditions are satisfied, these being:

1. The shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income form portfolio investment (this being defined as securities held as na investment and with no intention of influencing the management of the underlying company; and
2. The non-resident company or its passive interest of royalties have been subject to a tax at rate which is not less than 5%

Interestingly, there is also a participation exemption regime. This applies under the same identical rules to the ones set forth above (satisfaction of any of the aforesaid six (6) principles and rules on dividend income) but instead of paying the 35% tax rate and receiving the 100% refund, the participation exemption allows the Maltese company not to pay tax at all. This is an election which is submitted in the tax return of the company, and dispenses any tax payment outright.

Underlying Principles and Considerations

• The aforesaid refunds will apply not such to participating holding held in companies but also to corporate entities whose capital is divided into shares. This will therefore allow similar refund also to forms of partnerships whose capital is divisible into shares;
• Likewise a Maltese branch of a foreign company has the exact tax refund mechanism applicable to a company;
• The said tax refund is applicable to all shareholders – irrespective of their tax residence; and
• The tax refund will also apply to companies carrying out activities in Malta. This ensures that there is no artificial segregation of the common market.

The tax refund mechanism is therefore a very effective tax planning tool. Tried and tested for over fifty (50) years it is indeed the cornerstone of the Maltese tax system, and puts the Maltese company as a considerable advantage over all its EU counterparts, and indeed not too far off, for offshore jurisdictions, whilst preserving important precepts of access to double tax treaty provisions and full compliance.

Given that most investors are more common with a flat rate forms of taxation, it is indeed a common question, posed by several of our clients, as to rationale behind the tax refund mechanism. If the tax leakage can be of just 5%, then why go through the mechanics of having the company pay 35%, with the shareholder receiving the 6/7ths refund shortly after? And is this tax refund safe / guaranteed? How long does it take to access the tax refund? All of this questions are legitimate ones, and certainly merit a thorough examination.

What is the rationale behind the tax refund?

A very important notion that has to be carved out at the first stages of discussion is that whilst the corporate tax rate is paid by the company, the tax refund is claimable not by the company, but by the immediate shareholders of the company. There is therefore a distinction between the corporate income tax, and the corporate residence of the recipient – the immediate shareholder.

The tax refund system has been part of the Maltese fiscal heritage for over fifty (50) years and has endured the test of time. However, there was a short period, when the tax refund mechanism was abandoned in favour, or what it was perceived, a simplified flat rate taxation system.

The results of this change however were very poor and backfired spectacularly. Jurisdictions which had signed double tax treaty provisions threatened to retract or renegotiate the terms of the tax treaties, since the flat rate tax rendered many provisions of the treaties unworkable. Furthermore, this was deemed incompatible with CFC rules of many of Malta’s trading partners. After a few short years, the flat tax rate was quietly shelved, and the tax refund mechanism swiftly reinstalled, without injury to the island’s reputation, cementing its position as a fully regulated onshore jurisdiction.

Is the tax refund mechanism safe?

The short answer is – very. The tax refund is in itself guaranteed by law, and is issued directly by the Maltese Income Tax Unit by means of a bank wire or bank draft. The tax refund is in itself not further taxable. There are no withholding taxes payable upon the remittance of the tax refund upstream to the immediate shareholders.

Furthermore, the tax refund mechanism was probed severely by the EU Commission as a condition precedent to Malta’s accession to the EU. The tax refund mechanism has been approved and sanctioned by the EU Commission – and this is the ultimate seal of approval which may be bestowed on any fiscal system.

Previous to EU membership, the tax refund mechanism was applicable, conditional to the understanding that the tax refund be applicable solely to International Trading Companies (ITCs) – which were precluded from undertaking any strictly local trading. This distinction, which would have provided an unnatural fragmentation to the EU common market was abandoned by means of sunset provisions, which had to be implemented in 2007, and the tax refund mechanism now places no distinction between the recipient and the source of the tax refund (with the sole exception being that income arising out of immovable property in Malta is outside the scope of the tax refund).

The tax refund mechanism has truly endured the test of time. It is not only sanctioned by the Maltese government but has also been approved by the EU Commission and has endured, the first ten (10) years (as of 2014) of EU membership, with no foreseeable plan to amend this mechanism, nor to substitute it outright. Investors can therefore rest assured that the aforesaid rules, shall still be applicable for several years.

Who is eligible for the tax refund?

The recipient of the tax refund is the immediate shareholder of the company, without any distinction in the form (physical or legal entities) can apply for the tax refund, and without any distinction based on the grounds of residence.

The tax refund is preceded by an application which is submitted to the Commissioner or Inland Revenue (international tax unit). The shareholder of the company, and the percentage of equity is submitted in this form.

Once the shareholder has been registered with the Maltese tax man, the corporate tax rate is paid, and the request for a refund must be accompanied by means of all supporting documentation (typically a dividend warrant) signed off the directors – endorsing the distribution of the dividend, and the percentage of dividend payment to each shareholder – regard being had to the percentage of equity held by each shareholder.

How fast is the tax refund mechanism processed?

A common misconception is that the tax refund may take long to process, and is dependent on bureaucratic whims. The reality is entirely different. The tax refund is paid regularly and swiftly. It is in effect payable not later than fourteen (14) days after the end of the month in which it becomes due. In other words, if the corporate tax rate is paid in September, the tax refund is payable by the 14^th October. This ensures that the shareholders can manage their cash flow efficiently, without putting unnecessary strain to their finances. The tax refund is payable directly by bank wire or by bank draft and is due in the same currency in which the relevant profits were charged (this being the currency of denomination of the share capital).

Can fiduciary shareholders be used to obtain the tax refund?

Yes – the tax refund is applicable to the immediate shareholder and this includes fiduciary shareholders who hold shares for and on behalf of the beneficiaries of the Company. Fiduciary shareholders are used for confidentiality purposes, for beneficiaries who do not wish to appear on the company statutes (the Memorandum and Articles of Association effectively being public documents and accessible to any interested party).

Can Trusts and Foundations be used a shareholders in a Maltese company?

Yes – trust and foundations can hold shares in a Maltese company. In the case of a foreign trust, a ‘qualified person’ is rendered necessary which must be pre-approved by the Maltese regulatory authorities. A qualified person is a licensed fiduciary company, which acts as a point of liaison between the foreign trust and the regulator, and ensures that all compliance matters are fully adhered to. FBS Trust can act in such function, being licensed to such an effect by the regulator – the Malta Financial Services Authority.

Do the beneficiaries have to declare their tax refund in their country of tax residence?

Yes – this is the hallmark of the tax refund mechanism. The company pays tax, yet the shareholder receives the tax refund. Once company income exits the corporate sphere (dividends) it no longer belongs to the company, but effectively is the property of the shareholder. Likewise, the tax refund mechanism which is attributable solely to the immediate shareholder of the Company. Being personal income, the shareholder should, if owning the shares in a personal capacity, declare the dividend and tax refund in accordance to the tax rules of his country of tax residence.

It is however possible to use a second holding company, as an effective tax deferral tool. The effect of a holding company is to be the tax recipient of the dividend and tax refund, thereby receiving all the proceeds from the company. Since the holding company is imbued with a separate legal personality, any proceeds received, are effectively the property of the holding company, thereby allowing the beneficiary thereof to better manage his tax obligation in accordance to the rules of his country of residence. This means that he can decide in which proportion he wishes to remit the dividends to his country of tax residence, thereby being in a better position to determine the applicable tax brackets of such a remittance.

Alternatively he may decide to distribute such tax refund, upon establishment of his tax residence in a more favourable jurisdiction – thereby ensuring an effective and important tax saving.

Or simply, the holding company may retain possession of the tax refund and tax dividends, indefinitely, without distributing the dividends upstream to the beneficiary, and instead acquiring assets, such as immovable property, equity, bonds etc; in its own name.

Can the company elect not to distribute dividends?

Yes – the decision to distribute dividends is entirely dependant on the Company’s economic performance. If the company has not registered any profit, there logically is not dividend to distribute to the shareholders.

The distribution of dividends is, barring any matter set forth in the Memorandum and Articles of Association to the contrary, determined by the board of directors. The directors are entrusted with the day-to-day management of the company and therefore better versed to determine whether it is apt to distribute dividends to the shareholders and in which proportions.

The tax refund however, is only applicable on the amount of dividends distributed to the shareholders. If the directors distribute only part of those dividends, then the tax refund shall be payable only on the amount of dividend distributed.

In reality, the Maltese system gives a marked incentive towards the full distribution of dividends, to ensure that the tax refund mechanism is exploited to its full benefit. This however, does not mean that the full distribution of dividend, runs contrary to correct corporate governance, and is a disincentive towards the creation and maintenance of company reserves.

Rather, the advice is that the full dividends are distributed to the immediate shareholders, who can then, once in receipt of the tax refund and dividends, plough back the proceeds into the company by way of shareholders’ loan (interest payment is tax deductible) or by way or capitalization. The directors may allocate such reinvestment as company reserves.

Is the tax refund payable on interim dividends?

No – the final tax refund is only payable on a final distribution of dividends and not interim ones. The rationality for this is clear. Interim dividends follow no clear and fast rule. The frequency of interim dividends is an entirely internal matter and decided by the board of directors. It is therefore, simply not possible for the Maltese Commissioner of Inland Revenue to undertake the payments of interim dividend payments by each company.

Furthermore, interim dividends are of their very nature revocable. If for any reason, the directors believe that the company is in a precarious financial position, they can, and should recommend that the shareholders reinvest in the company, which reinvestment may include the reversal of interim dividend payments received. Naturally, if tax refund were to be paid to interim dividend payments, which would then be reversed, this would unleash a whole sequence of events, to ensure that that tax refund would also be reversed to the Maltese Commissioner of Inland Revenue. This is not a sustainable model.

For this reason, the tax refund is given only upon a final distribution of dividends, after the corporate tax has been paid, and the final tax return, filed with the Commissioner of Inland Revenue. Once the precise figures are unequivocally known, then the tax refund mechanism is executed swiftly and seamlessly.

Of course this does not mean that the shareholders of a Maltese company cannot request interim dividend payment. They are free to do so, however, in recommending such interim dividend payment, the directors are minded, that, in the interest of correct corporate governance and to avoid unnecessary reversal of tax refunds, interim management accounts be drawn up to give an exact and precise figure to the Company’s finances and a decision is undertaken based on the figures presented to the general meeting. The directors, are, in any case, minded, that even if the financial figures are favourable, to always allow a contingency for final tax payment. Therefore, if the company shows distributable income, the directors should recommend that all times the company retains a minimum of 35% tax contingency for final tax payment. Finally, there should be a commitment from the shareholders that the interim dividend income be revocable if the conditions of the company deteriorate and the directors recommend such capital injection. Naturally, the shareholders are naturally inclined towards ensuring the long term viability of their investment (the company) and should follow the recommendations of the board of directors.

What if a new shareholder is introduced after tax payment?

The underlying principle is that in order for any shareholder to be eligible for the tax refund, this details must first be communicated formally in the claim for tax refund form. Therefore, only after this procedural matter has been expedited would the new shareholder be eligible for a tax refund. If the new shareholder has taken possession of equity within the company after the closing of the financial year end of the company and the claim for the tax refund, it is strongly advisable that the existing shareholders resolve internally and contractually, whether the new shareholder shall be entitled to any dividends and tax refund, emanating from a period which precedes his equity participation.

It is not infrequent for this right to be excluded in a share transfer agreement or a shareholders’ agreement, but this are contractual obligations that are negotiated within the internal parameters of the company. It is strongly advisable, that this aspect of the company be clearly spelt out.

This is also relevant in other scenarios such as the insertion of tag-along and drag-along rights with the company statutes. The insertion of these clauses are included in the case of a potential acquisition of the Company. In this case in order to avoid fragmentation of the company, the acquirer of shares would have an option to buy out the existing shareholders within the company. Existing shareholders are therefore minded to agree contractually, whether the triggering of such clauses would include the rights to dividend rights accrued, or whether this would be outside the scope of the share transfer.

Other situations may include the death of the shareholder. In this case it is possible for the rightful heirs of the deceased shareholder to undertake the dividend income which would have accrued to the shareholder, either individually, as a collective estate (‘estate of the deceased’) or if the heir is a minor, interdicted or otherwise precluded from receiving dividend income, through an appointed curator or administrator of the rightful heir.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors.  For bespoke tax advice, please click here to contact our tax advisors or send us an email on enquiries@fbsmalta.com

Note: Our Directors are continuously travelling to a number of countries meeting existing and potential clients and associates.

Malta Company Management and Control – Tax Rules and Issues

Management and Control

A Company which is registered in Malta shall be deemed to be tax resident in Malta from the date of its incorporation. However, in terms of Article 2 of the Maltese Income Tax Act ‘”resident in Malta” …when applied to a body of persons, means any body of persons the control and management of whose business are exercised in Malta….’

The wording of the aforesaid Article 2, right implies that a company established abroad shall become a resident of Malta if it is managed and controlled in Malta, and shall therefore be deemed to be tax resident in Malta.

Factors Which Determine Central Management and Control

As a general rule, the most manifest indication of where central management and control of the company is exercised, is the seat where the board of directors meets and resolves business. However, substance prevails over form and other factors should be assessed, for the location for the central management and control to be inferred.

Management and control is not established on the basis of clauses contained in the company’s Articles of Association but on the basis of the actual running of the company. If the central management and control of the company rests with an entity other than the board of directors (e.g. shadow directors) or the shareholders, the company would be managed and controlled in the country of residence of the aforesaid shadow directors / shareholders, irrespective of the clauses in the company’s Articles of Association.

It is possible for a body corporate to change its residence from one jurisdiction to another, insofar that the transition in management and control is done in good faith and can be clearly evidenced. Factors, which would typically indicate that the choice of residence where the company is effectively managed and controlled, is Malta, would be:

• Copies of Board minutes attesting that board meetings were held in Malta;
• Evidence that the company possesses an office in Malta;
• Evidence that the company’s accounts are audited in Malta;
• Evidence that the Company operates a Maltese Bank account (through bank statements etc.)

No factor is decisive on its own, and a thorough assessment of all criteria, cumulatively, should be entertained.

Malta Tax Rules

Malta asserts its right to tax on the basis of source jurisdiction and residence jurisdiction. All income that is deemed to arise in Malta, shall be taxable in Malta, irrespective of whether such income arising in Malta is remitted to Malta or not.  With regard to foreign source income, the taxation of such income, is subject to socio-economic considerations (notably residence and domicile rules).

The basic rules relating to jurisdiction to tax derive from Article 4 of the Maltese Income Tax Act:

• Foreign source income derived by persons who are both ordinarily resident and domiciled in Malta is taxable in Malta, irrespective of whether such foreign source income is remitted to Malta (worldwide basis of taxation);
• Foreign source income derived by persons who are either not ordinarily resident but domiciled in Malta or domiciled in Malta but not ordinarily resident in Malta is taxable if received in Malta (remittance basis of taxation);
• Foreign capital gains derived by persons who are either (i) not ordinarily resident but domiciled in Malta or (ii) domiciled in Malta but not ordinarily resident in Malta, are not taxed in Malta even if remitted to Malta.

Tax Issues

Having set the benchmarks, there are fiscal advantages to be reaped if the effective place of management and control of companies is satisfied. A company registered abroad that shifts its management and control seat to Malta is deemed to be resident in Malta and would be able to apply the tax credit imputation mechanism, taking full advantage of refunds which would be applicable to the shareholders of the company, on a final distribution of dividends.

Click here for more details on the credit imputation mechanism and the applicable tax refunds of a Malta Company.

Furthermore, a company registered abroad which is effectively managed and controlled in Malta, would only suffer tax in Malta on a remittance basis. Moreover, such company may ‘break off’ previous residence, if there are for instance, adverse Controlled Foreign Company (CFC) rules in its country of registration, that would not apply if the company were resident in Malta.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors.  For bespoke tax advice, please click here to contact our tax advisors or send us an email on enquiries@fbsmalta.com or by calling at +356 2338 1500