Home > Publications > Articles > Malta as a Hub for International Operations

Malta as a Hub for International Operations
By George Farrugia
Updated 25 October 2007

Whatever the industry you happen to be in and whatever the size of your operation, you are definitely subject to market forces. This means that you must provide your clients with the best product/service possible at the most economical price.

Maintaining your competitive edge may not always be possible in your current location. Transferring all or part of your operations overseas may provide you with important cost savings.

These savings may take various forms, including:

• Cheaper production / financial/ administration costs
• Greater proximity to your source of supply and/or your customer
• Direct and indirect assistance by the local authorities
• Lower taxation suffered

The above principles are nothing new. In fact the earliest inhabitants of Malta itself were the Phoenicians, who came here from the Middle East and established their trading base here to service our Southern European and North African neighbours.

Whilst transferring a manufacturing operation may mean a huge new investment and therefore requires detailed studies, service companies can achieve this objective with much more ease and less financial risk. However, experience has shown that both types of operation have much to gain from such a move.

Manufacturing companies can utilise an overseas company for one or more of the following reasons. However some of these benefits will be most tax efficient if the share capital in the home company is actually owned by the overseas company, and not vice versa in view of the general trend for parent companies to be taxed on their world wide income.

Holding Companies

Holding Companies are used to hold participations in resident and non-resident companies or other forms of entities. Ideally, 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 provides an efficient exit route for the profits of its subsidiaries. From a purely fiscal point of view, an ideal holding location:

• Levies no tax on the dividends received from a participation
• Levies no tax on the transfer/disposal of a participation
• Levies no tax when the shares in the holding company itself are transferred
• Levies no tax on outbound dividend distributions
• Has a wide double tax treaty network and unilateral relief from double taxation
• Has access to EU Directives
• Imposes no restrictions on capital requirements a holding company
• Allows the holding company to carry out other activities in parallel with the holding activities

Maltese Holding Company

A holding company may be incorporated as a normal limited liability company registered under the Companies’ Act. The absence a specific holding regime permits a holding company to carry out other activities in parallel to the holding of participations such as:

• Financing activities
• Holding and leasing of intangible property
• Providing management and related services to related and non-related affiliates

Low minimum capital requirements

The minimum paid-up share capital to incorporate a Maltese company is Lm 100 (EUR 233)

No funding restrictions and No Thin capitalisation rules

A holding company may be funded entirely by equity or by a mixture of debt or equity. No restrictions are imposed on the mixture of equity and debt, thus a holding company may be incorporated with the minimum capital requirements with the rest of the funds being injected as debt.

Participation Exemption or Full Tax Refund

Participation Exemption

Income from a participating holding is subject to a 100% participation exemption.

Full Tax Refund

Alternatively, the shareholder may opt to pay tax and claim a full refund of tax upon distributions made by the holding company.

Participating Holding

A participation constitutes as a ‘participating holding’ if at least one of the following conditions is fulfilled:

• The Maltese company owns 10% of the equity shares in the non-resident company

• 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 further that the shares are not held for trading purposes

Anti-Abuse Provisions

The participation exemption and the full refund system are subject to anti-abuse provisions:
• The non-resident company is resident or incorporated in a country or territory which forms part of the European Union; or

• The non-resident company is subject to any foreign tax of at least 15%;

• The non-resident company does not have more than 50% of its income derived from passive interest or royalties.

Advance Revenue Ruling

An advance revenue ruling may be obtained within 30 days to determine whether the participation qualifies as a ‘participating holding’.

Tax Refunds

When the participation in the non-resident company does not constitute a ‘participating holding’, the shareholder of a Maltese holding company is entitled to claim one of the following refunds:
• 6/7th of the Malta tax
• 2/3rds of the tax paid in Malta

No Withholding Tax on dividend payments

Malta does not levy any withholding tax on outbound payments of dividend to a non-resident shareholder

Access to EU Directives

Since Malta’s membership to the European Union a Maltese company has gained access to the EU Directives:

• Parent-Subsidiary Directive (90/435/EEC) - Dividends paid to a Maltese company by an EU subsidiary suffer 0% withholding tax

• Interest and Royalties Directive (2003/49/EC) – Interest and royalties paid to Maltese company by an EU associated company suffer 0% withholding tax

• Mergers Directive (90/434/EEC) – The Directive facilitates mergers between companies established in EU countries.

Wide Treaty Network and Unilateral Mechanism to Relieve Double Taxation

Withholding tax on dividends distributed by a subsidiary to a Maltese holding company may be reduced or avoided by one of Malta’s double tax treaties.
Malta’s double tax conventions are based on the OCED Model which enjoy favourable or 0% withholding tax rates on dividends received from majority holdings. Malta currently has 45 double tax treaties.

The tax levied abroad may be relieved under domestic measures granting relief from double taxation:

Unilateral Relief

In addition to a credit for the withholding tax levied abroad, the unilateral relief grants a credit for underlying tax, if any, suffered abroad;

Flat Rate Foreign Tax Credit (FRFTC)

A company claiming FRFTC may claim a tax credit of 25% assumed to be levied abroad. Certain conditions must be fulfilled.

Exemption from stamp duty

Under certain conditions, non-resident shareholders are exempted from stamp duty upon the transfer of shares in a Maltese company.

Financing

Every operation needs some type of financing. Financing may be raised in the same country of operation or in a country other than that in which the operation is located. The latter situation may arise in many cases, particularly where the country of operation has limited investors or limited access to efficient capital markets is restricted or the raising of finance is relatively expensive. Regulatory measures and the local banking system might be weak, thus the investor is forced to raise finance in another country. Investors may also be located in country other than the operating country thus using their own funds implies that their funds have to be transferred.

Financing companies are in fact a strong tool for international tax planning. They ensure 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 tax efficient system. Companies forming part of an international group may enter into intra-group financing agreement so as to ensure that the benefits of a favourable tax system are enjoyed by the whole group.

Maltese financing companies

Malta does not have a special regime for financing activities. This is particularly attractive because it allows complete flexibility on financing activities and supports a complete choice of financial instruments. Since 1st January 2007, a Maltese finance company may be incorporated as a normal limited liability company registered under the Companies’ Act and yet claim refunds of tax and benefit from other fiscal incentives granted to local and foreign investors. Financing may also be structured though a Maltese branch of an overseas company.

Different types of financing vehicles may be used to support the operations of the investor

• Group financing
• Conduit financing
• Fund Raising
• Finance Branch

Funding of a Maltese company

A Maltese financing company can be entirely funded by equity or by a mixture of equity and debt. The company cannot be entirely funded by debt however, the minimum paid-up share capital can be as low as Lm 100 (EUR 232.93). There are no limitations on the amount of debt which can be injected, thus any gearing level may be achieved to accommodate the needs of the international investor.

No Thin Capitalisation Rules, Flexible Transfer Pricing Rules and No Withholding Tax on interest payments

Malta does have any thin capitalisation rules. This ensures that no limitations are place on the deductibility of interest. No withholding tax is levied on outbound interest payments.

Presently, Malta does not have any restrictive transfer pricing rules. This ensures flexibility with regards to the rate of interest charged on intra-group financing. The absence of restrictive transfer pricing legislation potentially creates an opportunity for a very low interest rate margin accruing to a Maltese company on back-to back financing.

Access to EU Directives and Treaty Protection

Since Malta’s membership to the European Union in 2004, Maltese companies have gained access to the EU Directives. In particular, the Interest and Royalties Directive (Directive 2003/49/EC), restricts other EU Member States to levy withholding tax on interest payments made between associated companies resident therein. Financing companies resident in Malta are entitled to treaty protection, thus, withholding tax on interest in the country of source may also be avoided or reduced by one of Malta’s double tax treaties.

Entitlement to Tax Refunds

Under the new refund system, shareholders are entitled to claim one of the following refunds of the tax suffered by Maltese company:

• 6/7ths of the Malta tax
• 5/7ths of the Malta tax
• 2/3rds of the tax payable in Malta

The type of refund depends on the classification of the income and whether double tax relief has been claimed by the finance company.

Intellectual Property

Intangible assets can have a high value and a substantial amount of income may arise from the licensing of such assets. The beneficial owners must ensure that intangible assets are held in a safe jurisdiction with appropriate legal framework. In addition, they must ensure that cross-border transactions involving the use of intangible assets are structured in the most efficient as to be exposed to an optimal tax position.

Maltese IP Companies

Malta does not have special regime for IP companies. As from 1st January 2007, a Maltese IP company can be incorporated as a normal limited liability company registered under the Companies’ Act. The fact that a normal company may be used, implies that an IP company may undertake any other activities. In fact, it is possible to use a normal Maltese company carrying out financing, holding, and licensing activities.

IP Holding Company

IP assets can be transferred to and held by a Maltese company which may subsequently license the IP assets to other related and non-related affiliates.

IP Conduit Company

IP assets would be owned by a company located in a low tax jurisdiction which then licenses or assigns the intangible asset to a Maltese company. The Maltese company would subsequently sub-license the IP to related or non-related affiliates. The absence of restrictive transfer pricing rules ensures complete flexibility with regards to the value assigned to licensing activities. It also ensures that a very low royalty margin arises in Malta on the sub-leasing activities of a Maltese company.

Branches of overseas companies

When the transfer of an IP asset to a Maltese legal entity gives rise to a high capital gains tax, foreign investors may opt to transfer the IP to a Maltese branch and yet gain entire access to the fiscal advantages granted by Malta.

No withholding tax on outbound payments of royalties

Malta does not levy any withholding tax on payments of royalties to non-residents.

Access to EU Directives and Treaty Protection

Since Malta’s membership to the European Union in 2004, Maltese companies have gained access to the EU Directives. In particular, the Interest and Royalties Directive (Directive 2003/49/EC), restricts other associated EU companies from withholding tax on royalty payments made to a Maltese company. IP companies resident in Malta are entitled to treaty protection, thus, withholding tax on royalties in the country of source may also be completely avoided or significantly reduced by one of Malta’s double tax treaties.

Entitlement to Tax Refunds

Under the new refund system, shareholders are entitled to claim one of the following refunds on the tax suffered in Malta:

• 6/7ths of the Malta tax
• 5/7ths of the Malta tax
• 2/3rds of the tax payable in Malta

The type of refund depends on the classification of the royalty income and whether double tax relief has been claimed by the IP company.

Asset Leasing

Instead of owning the asset, a company may decide to its transfer ownership and lease back the asset. A company may also opt to acquire and finance an asset through a tax efficient vehicle. Cross-border asset leasing may create various advantages in the light of different tax regimes. Companies which opt to transfer their ownership of an asset to a favourable jurisdiction and leasing back the asset may achieve one or more the following benefits:

• A deduction in the operating country with lower a pick-up in the country of ownership
• Tax deferral
• Low capital gains tax on the transfer of the asset
• Benefits may be evenly distributed among different members of the group
• Protection against creditors in the country of operation

Maltese Asset Leasing Companies

An asset leasing company may be incorporated as a normal limited liability company under the Companies’ Act. Malta does not a special regime for asset leasing companies however, the benefits granted by the Maltese tax system may reap various fiscal advantages to those investors who decide to transfer ownership of their asset or sub-lease an asset through a Maltese company.
Maltese companies are allowed to acquire, own and lease any type of asset. No restrictions are imposed on the activities of a Maltese company. Tax efficient financing of an asset may be combined with the acquisition, ownership and leasing of an asset.

Asset Ownership Company

A Maltese company acquires the title of ownership of an asset. The asset is leased to an operating company in a foreign jurisdiction

Asset Conduit Company

The Maltese company is not the owner of the asset. Maltese company acquires the right to sub-lease the asset.

Branches of overseas companies

Instead of transferring title of an asset to a Maltese company, the asset is transferred to a Maltese branch of an overseas company. This may be particularly beneficial when the transfer of the asset triggers a high capital gains tax. Branches enjoy the same fiscal advantages granted to companies by the Maltese tax system.

Treaty Protection and Domestic relief from double taxation

A company resident in Malta is entitled to treaty protection which may limit or reduce the withholding tax on lease payments made by the lessee. Domestic relief from double taxation relief is also available.

Entitlement to Tax Refunds

Under the new refund system, shareholders are entitled to claim one of the following refunds:

• 6/7ths of the Malta tax
• 5/7ths of the Malta tax
• 2/3rds of the tax payable in Malta

Management and Personal Services

Management and personal services may be assigned to a Maltese company thereby achieving a deduction in the country of operation matched with a lower pick-up in another jurisdiction.

Tax refunds may be claimed by the shareholders of a Maltese company deriving income from management and personal services:

• 6/7ths of the Malta tax
• 2/3rds of the tax payable in Malta

Sales and Invoicing (International Trading)

Companies involved in international trade must ensure that profits from their international ventures crop up in a tax-efficient jurisdiction.

Maltese Trading Companies

As from 1st January 2007, Malta abolished its ‘international trading company’ (ITC) regime. Companies whose activities consist of trading with persons outside Malta are no longer required to obtain the status of an ITC, yet still entitled to claim refunds of tax. Trading companies may now be incorporated as normal limited liability companies registered under the Companies Act without the need to obtain any special status.
Using a Maltese company to carry out international trade can reap the following benefits:

• Low costs of incorporation
• Low maintenance costs
• Local directors are not required
• No substance required
• Flexible transfer pricing rules allowing profits from international trade to be shifted to Malta
• Permitted to carry out activities other than trading
• Tax refunds
• Exemption from stamp duty

Investment Incentives

Many locations offer very attractive incentives to manufacturing concerns transferring operations to their territories and thus generating employment and foreign earnings.
Servicing companies can also benefit from several of the above ideas especially in view that they are less restricted by territorial constraints.

Malta’s Double Tax Agreements

A complete list of Malta’s Double Tax Agreements

Malta’s with Switzerland and the United States but are restricted to the relief of double taxation from ships and aircrafts.

Why Malta?

• Political Stability
• EU Member as from 1st May 2004
• Strong financial services work-force
• Fluent in English and Italian
• Legal Framework in compliance with EU Law
• Attractive Fiscal Incentives
• Good reputation
• Highly regulatory money laundering regulations
• Strong and well-regulated banking system

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