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EJZ Co - Malta Tax Brochure 2007
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Malta’s Imputation and Tax Refund Systems to Stay
Introduction
Malta has for some time now been in discussion with the EU regarding its fiscal treatment of company profits.
On the 9th November 2006 it was announced that the EU’s Code of Conduct Group for Business Taxation has approved the recommendations of the Maltese Government for changes indicated in the pre-budget document dated 5 August 2006, which will mean that Malta will remain an attractive destination for financial services.
The final agreement with the EU is that Malta’s current refundable tax credit system will be extended to all shareholders of Maltese companies so that with effect from 1 January 2007 these tax refunds will be available to all shareholders (whether resident or non-resident) receiving dividends distributed by Maltese companies.
The approved system will help to give extra certainty to international investors.
Our Tax System
Malta’s tax system is a full imputation tax system which avoids the double taxation of company profits. The tax paid by the company is essentially only a prepayment of the tax, which is ultimately borne at the shareholder level on dividend income, depending on each shareholder’s tax status and position.
The Proposed Tax Changes
The proposed changes to our tax system as agreed with the EU Commission can be categorized into the following 5 broad headings:
1) Profits from Immovable Property
2) Maltese Taxed Account and Foreign Income Account
3) International Trading Companies (ITC’s)
4) International Holding Companies (IHC’s)
5) Participating Holding
1) Profits from Immovable Property
Profits from immovable property will be excluded from the tax refund system agreed to with the EU Commission. These profits need to be treated differently from other businesses profits, since land is not a mobile factor and such profits do not only arise as a result of the inputs of capital and labour, but because land has an inherent value relative to its location. For this purpose such profits will, for tax purposes, be allocated to an immovable property account and treated in the same manner as they have been treated to date.
2) Maltese Taxed Account and the Foreign Income Account
Company profits will be allocated to the taxed accounts called the Maltese Taxed account and the Foreign Income account. Upon the payment of a dividend from such profits shareholders, resident or non-resident, may claim a refund of part or the whole of the tax paid on the distributed profits. The refund will generally be equal to 6/7ths of the Malta tax paid on the distributed profits. When the distributing company claims double taxation relief these provisions remain unchanged. Upon the distribution of profits the tax refunds will remain at the current level of 2/3rds of the Malta tax paid.
3) International Trading Companies (ITC’s)
Maltese companies will no longer be classified into Onshore or International Trading Companies i.e. the term ITC will no longer be part of Maltese Tax legislation.
No distinction will be made between resident and non-resident shareholders.
Thus shareholders of the currently called ITC’s, will still be entitled to a tax refund upon a distribution of profits by the company.
4) International Holding Companies (IHC’s)
IHC is a company which receives income from investments outside Malta whether in the form of dividends, capital gains, royalties, interest or otherwise. IHC’s are thus suitable for holding shares in other companies, immovable property, loan rights and intellectual property rights, receiving income there from, and mitigating the impact and incidence of capital gain taxes as well as withholding taxes on dividends, interest income and royalties.
Furthermore, certain equity shareholdings of a Maltese IHC in a foreign non-Maltese company are treated for Maltese tax purposes as participating holdings in terms of law.
A participating holding by an IHC gives rise to further tax benefits over and above those applicable to holdings which do not qualify as such.
5) Participating Holding
The 2/3rds tax refund is increased to 100 per cent when the profits distributed were derived by the distributing company from a participating holding. The definition of a participating holding will essentially remain as it is today. However as is the case in other EU member states, certain anti abuse provisions will be introduced aimed at distributions received from companies having mainly passive income where such income would not have been taxed at more than 5 per cent.
Currently a shareholding in a non-resident company will qualify as a participating holding of a Maltese company if:
(a) The Malta company holds equity shares in a non-resident company and it:
(i)Has at least 10% of the equity shares in the non-resident company; or
(ii)Is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident, or it has the right of first refusal to purchase such shares; or
(iii)Is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or
(iv)Is an equity shareholder which invests a minimum in the non-resident company of LM500,000 (or the equivalent in a foreign currency); or
(v)Holds the shares in the non-resident company for the furtherance of its own business.
(b) The holding is not held as trading stock for the purpose of a trade.
It should be noted that the rules in (a) will remain applicable for participating holding existing at 31 December 2006 until the end of 2010.
With regards to acquisitions of participating holdings made on or after 1 January 2007, where the non resident company, having mainly passive income, is not resident or incorporated in a tax treaty, EU or EEA jurisdiction or a country which levies a tax on corporate profits at a rate which is at least 50% of the Maltese corporate income tax rate, the following additional conditions much be satisfied:
(a) The shares in the non-resident company must not be held as a portfolio investment. In any event a participation of at least 25% in the capital of a non-resident company 90% of the assets of which consist of portfolio investments and non-trading financial assets shall be deemed to be a portfolio investments; and
(b) The non-resident company or its passive income much have been subject to tax at a rate which is not less than 5 %.
5.1) Participation Exemption
In addition to the above, as from 1 January 2007 Malta will also introduce a participation exemption which will exempt from tax dividends and capital gains derived from participating holdings.
Effective Date
Under the agreement the proposals will take effect from 1 January 2007.
The existing tax refunds will be retained up to 2010 for beneficiaries existing as at 31 December 2006.
It is presumed (subject to imminent legislation being tabled by the Malta Government) that after 2010 the proposed system starting 1st January 2007 will apply.
The tax refunds under the extended system will not be materially different from those currently applicable.
Conclusion
The talks had taken several years but the outcome meant that the advantages which the Maltese financial centre offered would be maintained with no fear that anyone would question the financial status of companies which came to Malta.