Holding and Trading Companies
in Malta
By George Farrugia
Updated: 25 October 2007
 Malta
has been establishing itself as a serious and well regulated Financial
Centre since 1988 when various pieces of legislation were enacted
to provide the international investor with an alternative location.
Since that time great strides have been made and today this island
nation can proudly boast of being a well-respected player in this
field.
Advantages when using a Maltese vehicle
• A well educated and multi-lingual work force
• All legislation is published in English
• A stable legislative framework in compliance with EU primary
and secondary legislation
• Low compliance costs
• Highly regulatory and anti-money laundering standards
• No controlled foreign company Legislation
• No thin capitalisation rules
• Flexible transfer pricing rules
• Timely advanced revenue rulings
• A wide tax treaty network with 45 countries
The International Trading Company Regime
The international trading company (ITC) regime was introduced
in 1994 through the enactment of new provisions in the Income Tax
Act and Income Tax Management Act. The regime allowed certain Maltese
companies, subject to various conditions, to obtain the status of
an ITC.
Maltese companies which obtained an ITC status were only allowed
to carry on trading activities with persons outside Malta. Activities
which were permitted to be carried out by an ITC included the following:
• Purchases for export of goods manufactured, assembled
or processed in Malta provided that such purchases are not made
from a person who owns directly or indirectly more than fifteen
per cent of the ordinary share capital of the said international
trading company
• Trading with companies registered in Malta under the Malta
Financial Services Authority Act
• Trading with other ITCs
• The management of companies resident in Malta whose business
is restricted to affiliated insurance
• The provision of management, administration or other services
to collective investment schemes resident in Malta where such schemes
are marketed exclusively outside Malta
• The provision of ship management services by companies whose
activities and objects solely comprise the management of ships
Fiscal Benefits of an International Trading Company
Income derived by an international trading company was subject
to tax at the normal corporate rate of tax of 35%. However, when
the ITC distributed profits to its shareholder, these were entitled
to claim refunds of tax.
Refund under the imputation system
Non-resident shareholders were subject to tax on the dividend received
at the rate of 27.5% but received a full imputation credit of the
tax paid by the company. The corporate tax rate of 35% resulted
in a refund of 7.5%.
Refunds of Corporation Tax
Shareholders were further entitled to claim a refund of 2/3rds
of the tax paid by the ITC
The two combined refunds resulted in an effective rate of tax on
profits derived and distributed by an international trading company
of 4.17%.
In March 2006, the EU Commission formally requested Malta
to abolish the international trading company regime. In response
to this formal request, Malta abolished this regime effective as
from 1st January 2007. No Maltese company incorporated on or after
1st January 2007 can obtain the status of an international trading
company.
Amendments to the Income Tax Act in 2007
In March 2007, with retrospective effect as from 1st January 2007,
various changes were enacted to the Maltese Income Tax Act. These
changes:
• Aligned Malta’s fiscal legislation with the requests
of the EU Commission
• Granted further fiscal benefits to non-residents
• Extended all fiscal benefits to resident shareholders of
Maltese companies
The new tax refund system
Malta’s new legislation has introduced legal stability, increased
flexibility and extended the refund system to all shareholders of
companies registered in Malta on or after 1st January 2007.
The new system does not constitute a complete departure from the
old system. It is based on the same concepts of the old system but
has been revamped to remove the ring-fenced regime and the discrimination
against resident shareholders. Companies which qualify for a tax
refund are no longer restricted to carry out trading activities
only with persons outside Malta. This amendment has opened up the
gateway for Maltese companies to carry out multiple holding and
trading activities, both in Malta and abroad, without the possibility
to lose their claim for refund.
The legislative changes have also introduced new types of refunds
and eliminated the need to obtain the status of an international
trading company in order to validate a claim for refund. The new
system entitles both resident and non-resident shareholders of companies
registered in Malta on or after 1st January 2007 to claim one the
following refunds:
• 6/7ths of the Malta tax
• 5/7ths of the Malta tax
• 2/3rds of the tax payable in Malta
• Full refund of the tax payable in Malta
The new refund system has been extended to Maltese branches of
overseas companies. Foreign companies who may opt not to operate
through a subsidiary may structure their activities through a Maltese
branch and yet claim refunds of tax upon the distribution of profits.
The use of a Maltese branch may create various planning opportunities
particularly in the light of anti-avoidance rules.
Types of Maltese companies used in cross-border operations
Financing companies
Companies used to enter into inter-company financing agreements
to finance the operations of the group. Investors must ensure that
funds are transferred in the most efficient manner and that income
from financing and treasury operations arise in a jurisdiction characterised
with a stable and efficient tax system.
Advantages
• Low capital requirements
• No thin capitalisation rules
• Flexible transfer pricing rules
• No withholding tax on outbound interest payments
• Access to EU Directives
• Treaty Protection
• Entitlement to Tax Refunds
IP Companies
IP companies are typically used to hold and/or license intangible
assets to related or non-related affiliates.
Advantages
• Low capital requirements
• Flexible transfer pricing rules
• No withholding tax on outbound royalty payments
• Access to EU Directives
• Treaty Protection
• Entitlement to Tax Refunds
Asset Leasing Companies
Asset leasing companies are typically used to hold and/or lease
assets to related affiliates.
Advantages
• Low capital requirements
• Flexible transfer pricing rules
• Access to EU Directives
• Treaty Protection
• Entitlement to Tax Refunds
Other Trading Companies
• Gaming
• Ship management
• Captive Insurance
• Real estate
• Personal services
• International sales and invoicing (International Trading)
• Management service
Investment Holding companies
Investment holding companies are used to hold participations in
resident and non-resident companies or other forms of entities.
A holding company should be located in a jurisdiction with excellent
legal and financial infrastructure where the tax system ensures
that repatriation of profits suffers minimum or no exposure to tax
and creates an efficient exit route for the profits of its subsidiaries.
Full Tax Refund
Prior to the 2007 legislative changes, a full refund of tax could
be claimed for the tax suffered on income derived from a ‘participating
holding’. The full refund system only applied to non-resident
shareholders of Maltese companies. On March 2006, the EU Commission
requested Malta to abolish this regime.
The legislative changes in 2007 have retained the possibility to
claim full refund of tax on income derived from a ‘participating
holding’ however, it now applies to both resident and non-residents
shareholders of Maltese companies.
The full refund system has also been extended to Maltese branches
of overseas companies.
Participation Exemption
In addition to retaining the possibility to claim a full tax refund,
the legislative changes have introduced a participation exemption
for ‘participating holdings’. The participation exemption
achieves a 100% exemption from tax on any income received from a
‘participating holding’.
Maltese branches of overseas companies may also claim a participation
exemption.
Anti-abuse provisions may apply for participations held in low-taxed
jurisdictions.
‘Participating Holding’
A holding will qualify as a ‘participating holding’
if the Maltese company holds at least 10% of the equity shares in
a non-resident company.
A participating holding may nonetheless qualify as a ‘participating
holding’ where the participation represents less than 10%
of the equity shares, provided that at least one of the following
conditions is fulfilled:
• The investment in the non-resident company amounts to Lm
500,000 (EUR 1,164,687) or more, subject to a time duration test
of 183 days;
• The Maltese company has the option to acquire the remaining
balance of the equity shares in the non-resident company;
• The Maltese company is entitled to first refusal in the
event of the proposed disposal, redemption or cancellation of the
remaining balance of the equity shares in the non- company
• The Maltese company is entitled to sit on the Board of the
non-resident company
• The holding of shares in the non-resident company is for
the furtherance of the business of the Maltese company provided
that the shares in the non-resident company are not held for trading
purposes
Advantages of using a Maltese Holding Company
• Low capital requirements
• No funding restrictions
• No Thin capitalisation rules
• May carry out trading activities in parallel to the holding
of participations
• Participation exemption or full refund of tax
• 0% withholding tax on outbound dividend payments
• Access to EU Directives
• Wide Treaty Network
• Domestic relief from double taxation
• Exemption from stamp duty
Advanced Revenue Rulings
An investor may apply for an advanced revenue ruling to establish:
• Whether a participation qualifies as a ‘participation
holding’
• The tax treatment of any transaction which involves international
business
• The tax treatment of any transaction which concerns any
financial instrument
• Whether a particular transaction falls within the scope
of the anti-avoidance provisions of the Income Tax Act
Advanced revenue ruling are issued by not later than 30 days from
application and are binding for 5 years. Rulings may be renewed
for another period of 5 years at the option of the applicant and
remain valid for 2 years from the time of any relevant changes in
the Income Tax Act.
Relief from Double Taxation
Persons resident in Malta can claim the following types of relief
against double taxation:
Double Tax Relief
A person resident in Malta may claim double tax relief where a tax
treaty is in force between Malta and country where the income has
been sourced
• 45 double tax
treaties currently in force
• Based on the OECD Model
• Favourable withholding tax rates on dividends, interest and
royalties
Unilateral relief
Unilateral relief is a domestic type of relief which may be claimed
on any income which has suffered tax in a foreign jurisdiction.
This type of relief ensures that relief from double taxation is
obtained when income is sourced in a country with which Malta does
not have a treaty.
In addition to a credit for withholding tax, the unilateral relief
allows a credit for the underlying tax levied abroad.
Flat Rate Foreign Tax Relief (FRFTC)
FRFTC is available to Maltese companies which receive income and
capital gains from abroad. It is assumed that tax at the rate of
25% has been levied in the foreign jurisdiction. FRFTC is fully
available as a credit against the tax payable in Malta.
Nomineeships
Through the relevant provisions in our Companies Act, shareholding
and directorships in any company can be held in the name of Nominee
companies. To ensure that this nominee service is of the highest
professional standard, the Act provides for a licensing procedure
for companies intending to provide Nominee services. Shareholding
in such nominee companies is restricted to Lawyers, Accountants
and Bankers. The divulging of the final beneficiary by a Nominee
company can only be ordered by the Maltese Courts and only in case
of three pre-determined international crime situations.
How can MGI (Malta) help?
Our firm can proudly boast that it has been instrumental in attracting
to Malta a sizable number of such companies and we are very well
equipped to provide all services involved, including:
• Preliminary consultancy
• International tax planning
• Company formation
• Registration procedures
• Back office duties
• Registered office
• Nominee services
• Statutory Audit
• Tax returns and refund claims
• Advance Revenue Rulings
• Vat consultancy
Disclaimer
The above information is being provided as a general guide only and
should not be considered as a substitute for professional advice.
George
Farrugia is the founding partner of MGI Malta. He can be reached
at
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