By Tax-News.com Editorial
Malta, like Cyprus, has been obliged to dismantle its old ‘offshore’ companies regime as a trade-off for joining the European Union. EU membership has, however, brought about certain benefits for Maltese companies trading across borders, and, coupled with investment-friendly government policies and some interesting tax planning opportunities, Malta remains one of the most favourable places in the EU in which to locate an international holding company.
Politically stable with a parliamentary democracy based on the British model, the Maltese Islands are situated in the Mediterranean Sea, about 100 km from Sicily and 290 km from North Africa, with a total population of just over 400,000. After almost 150 years as a British colony, the Maltese islands declared independence in 1964 and ten years afterwards Malta became a republic within the British Commonwealth. As a result of Malta’s close links with Britain, English is one of the country’s official languages alongside Maltese, although Italian is widely spoken. Valletta, the administrative capital, is also the chief business centre.
In recent decades, the Maltese economy has been heavily dependent on tourism, which accounts for about one third of gross domestic product. However, in the past 10 to 20 years the government has worked hard to encourage the development of both financial services and manufacturing, and various incentive schemes have been put in place to encourage foreign investment. This strategy now appears to be paying dividends, and, while not quite in the ‘premier league’ of IOFCs, Malta has established itself as a major European financial centre. In the World Economic Forum’s Global Competitive Index 2012-2013 Malta retained 15th position, out of 144 countries, in terms of financial market development, also ranking 12th in terms of bank soundness.
At the end of September 2013, the Maltese banking sector comprised 26 credit institutions and 28 financial institutions, of which 18 were payment institutions and the remaining six were electronic money institutions. Bank deposits in the aggregate banking sector totalled EUR27.4bn or almost 52 percent of the total assets in 2012. Deposits increased by over seven per cent (or almost EUR2bn) in 2012 from the previous year after they had fallen by almost 2 percent the previous year.
In March, 2006, the European Commission formally requested that Malta, under EC Treaty state aid rules, abolish the tax regime for Maltese Companies with Foreign Income (CFI), and the International Trading Companies’ (ITC) regime (which had an effective tax rate of 4.2% for non-residents) by the end of 2010 at the latest. Competition Commissioner Neelie Kroes observed at the time that: “The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy”.
In May of that year, the Maltese government formally decided to gradually abolish the existing aid schemes, a development welcomed by Kroes as “a further important step towards eliminating selective tax incentives that significantly distort the location of business activities in the Single Market”.
Malta’s acceptance of the EC recommendation meant that the existing ITC and CFI schemes were effectively abolished by January 1, 2007 and the tax advantages of the ITC scheme were unavailable to any new company registered in Malta after December 31, 2006.
Nevertheless, with its entry into the EU in 2004, Malta seems to have strengthened its position and appeal to investors. The Malta Financial Services Authority (MFSA), which oversees Malta’s Companies Registry, reported in its 2012 annual report that 4,016 companies were registered in Malta in 2012, 16% more than in the previous year. In addition, there were 68 companies which transferred their domicile to Malta in terms of the Continuation of Companies Regulations under the Companies Act, almost 20 per cent more than the previous year. About 73 percent of the companies transferred their domiciles to Malta from non-EU countries while the remaining 27 percent from EU countries. As at end 2012, the (net) number of active companies and commercial partnerships on the Register was as follows: 39,858 companies; 907 “En Nom Collectif” partnerships; and 71 “En Commandite” partnerships. Investment funds, insurance and pension schemes are among the fastest growing sectors of Malta’s financial services industry.
Maltese holding companies can be used for a variety of purposes, including holding real assets like property, shares and securities and intellectual property, and intangible assets such as copyrights and patents, and shareholders benefit from a full imputation system under which tax can be reduced to 0% in certain circumstances. However, Malta does not operate a specific holding company regime as such, meaning that holding companies must be constituted as regular public or private limited companies.
Maltese company law derives chiefly from civil or ‘Roman’ law, rather than common law. A new Companies Act 1995 replaced the old Commercial Partnerships Ordinance, and set up a new regime for commercial entities under the Registrar of Companies. Companies set up under the old regime had until January 1, 1998 to convert themselves into the new formats, except that ‘Offshore Companies’, which can now no longer be formed, had 10 years to adapt.
The private limited company, (or ‘partnership anonyme’ in civil code terms), has the suffix ‘Limited’ or ‘Ltd’ and is formed by submission of the Memorandum and Articles to the Registrar (in English), together with the appropriate fee, which ranges from EUR245 to EUR2,250, depending on the level of share capital. Fees range from EUR210 to EUR1,900 if registration procedures are carried out in electronic format. Once all documents and information have been submitted to the registrar, incorporation may take as little as 24 hours. Annual return fees range from EUR100 to EUR1,400 for companies filing in paper format, and EUR85 to EUR1,200 for companies filing in electronic format, again depending on the size of the company.
To form a private limited company in Malta, only one member and one director is necessary, the latter being a natural person of any nationality and resident anywhere. There must be a company secretary, which must be a Licenced Maltese Nominee Company and there must be a registered office in Malta. Shares can be registered but bearer shares are not permitted. Preference or redeemable shares are allowed and shares do not have to carry voting rights.
Although low-tax offshore company forms are now no longer available to foreign investors in Malta, there remain a number of tax and other benefits to locating a holding company in the islands. These include a fairly comprehensive network of double taxation agreements with 70 countries, a flat income tax rate of 15% on remittances by permanent residents and no municipal taxes. There are also opportunities under the Maltese tax system to substantially reduce corporate tax liability.
The Maltese Income Tax Act as amended governs company taxation. The rate of income tax is 35% on chargeable income (certain types of company benefit from lower rates). Malta imposes income tax on the world-wide income of companies resident in the country; this includes all companies incorporated or registered under any Maltese law if they are ordinarily resident, and any foreign company which is managed and controlled from Malta. The definition of income includes capital gains, but there is no separate capital gains tax as such. However, capital losses can only be relieved against capital gains, so the distinction is preserved within the tax computation. Local-source income and foreign-source income are also treated separately within the computation; Maltese companies with foreign income maintain a Foreign Income Account for this purpose.
A Malta holding company is a company resident in Malta and pays tax on its net income. However, shareholders of Malta holding companies qualify for a full refund of the Maltese tax paid by the company on profits and gains arising from “participating holdings” when such profits are distributed. From January 1, 2008, Malta holding companies also qualify for a participation exemption subject to anti-abuse provisions introduced from the same date. For a Maltese resident company to hold a “participating holding” in a company incorporated abroad, it must hold at least 10% of the equity shares in the non-resident company. To qualify for the participation exemption, the foreign subsidiary must satisfy one of three criteria: be resident in the EU; be subject to foreign tax of at least 15%; and not derive more than 50% of its income from passive income.
By virtue of Malta’s tax imputation system, when dividends are paid by trading companies to the shareholders, these shareholders are entitled to claim refunds of 6/7ths of the Malta tax paid by the company, resulting in an effective Maltese tax rate of 5%. Distributions made from profits derived from passive income such as interest and royalties, entitle the shareholder to claim 5/7ths of the tax paid by the company.
In the 2012 Budget, announced by Finance Economy and Investment Minister Tonio Fenech in November 2011, royalties income derived from copyright-protected books, film scripts, music and art was made exempt from tax. This announcement followed the decision in the 2010 Budget that royalties on patents would receive an exemption. In addition, Maltese companies which commission educational digital games were given a tax credit up to a maximum of EUR15,000 by the government in the 2012 Budget.
Other advantages of Malta’s tax system include an absence of thin capitalisation and transfer pricing rules, and no exit taxes on companies when shifting their tax residence to another jurisdiction. Additionally, corporate losses may be carried forward indefinitely, and there are no exchange controls by virtue of the country’s membership of the EU.
Furthermore, Malta is regarded as having an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language and a reasonably open and efficient public administration makes the island a very convenient and effective business base.