We at Dr. Kresse International Law Firm and its consulting arm KME Consulting specialize in corporate taxation advisory – from income and value added (VAT) tax compliance to special tax regimes, such as I-Gaming taxation.
We also advise private clients on tax optimisation via Malta specific residency tax schemes.
The Maltese Company Taxation
Malta’s Corporate Tax System is based on a well-regulated jurisdiction and conforms to international best practice.
A company is considered resident in Malta if it is incorporated in Malta or, in the case of a foreign body, if its control and management are exercised in Malta. 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.
Full Imputation Tax System
Malta has adopted a full imputation tax system wherein tax paid by a company in Malta is, on the distribution of dividends, imputed to the shareholders 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.
This tax credit to the shareholders upon distribution of dividends results in avoiding any double taxation of corporate profits.
Applicability of Imputation System
The system of tax refunds applies to:
- Companies incorporated in Malta
- Companies carrying out activities in Malta
- Companies operating through branches in Malta
General Rules relating to Tax Refunds
The tax refund, which is not itself taxable, is:
- to be paid by the Commissioner of Inland Revenue on production of appropriate support documentation (e.g. dividend warrant)
- to be paid by the fiscal authorities regularly in around 3 months, after the end of the month of a valid application being submitted; thus negative impacts on the cash flow of the company are avoided. Still, due to a considerable backlog at ITU (International Tax Unit) no guarantee can currently be given that this timing will be kept by the Tax Authority.
- to be paid in the same currency in which the relevant profits were charged to tax (= share capital and accounting reporting currency)
The shareholders are entitled to a refund of a significant part of the tax paid by the company. The amount of the refund will vary depending on the source and nature of the company’s taxed income.
Shareholders are generally entitled to a refund of 6/7ths of the total tax paid at the level of the company, when no claim for double tax relief is made. The total effective tax rate payable in Malta after claiming this refund then amounts to 5%.
The tax refund is reduced to 5/7ths where the dividends are distributed out of profits derived from passive interest or royalties and to 2/3ths when a claim to double tax relief has been made by the company.
The Maltese Holding Regime
A special treatment is offered to Maltese Holdings, giving the choice of a full tax refund or a total tax exemption on any dividend income or capital gains, provided it qualifies as a “participating holding”.
The introduction of the participation exemption in 2007 has enhanced Malta’s position as a premier EU holding company location.A company registered in Malta would have a “participating holding” in a company incorporated abroad, where the following conditions are satisfied:
The shares held by the Malta company in the non-resident company qualify as ‘equity shares’, i.e. shares which carry the right to any two of the following:
- Right to vote
- Right to dividends
- Right to surplus assets in the event of the winding up of the resident and non-resident company
The definition of participating holding as included under Article 2 of the Income Tax Act provides six alternative situations in which a holding would be treated as a Participating Holding
- The most common being where a company holds directly at least ten (10) per cent of the equity shares of a company not resident in Malta whose capital is wholly or partly divided into shares
Details and conditions concerning the other five alternatives, in the cases of which a shareholding of less than 10% may still qualify as a “participating holding” will be discussed with interested clients on an individual case to case basis.
If the participating holding has been acquired after 1st January 2007, the following anti-abuse provisions apply additionally.
The foreign subsidiary must:
- Be resident or incorporated in an EU country or territory; or
- Be subject to any foreign tax of at least 15%; or
- Not have more than 50% of its income derived from passive interest or royalties.
Malta Double Taxation Treaties (DTT)
The fact that Malta has meanwhile entered into over 70 Double Taxation Treaties leads to the result that the use of Maltese Companies can be considered as a valuable tool in International Tax Planning.
List of countries, Malta has signed a DTT with as of January 2016:
(* Treaty signed, but not yet entered into force)
Austria, Belgium*, Bulgaria, Cyprus, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, U.K.
Albania, Croatia, Guernsey Iceland, Norway, Isle of Man, Jersey, Lichtenstein, Moldova, Montenegro, Norway, San Marino, Serbia, Switzerland, Ukraine*
Outside of Europe
Australia, Bahrain, Barbados, Canada, China, Curacao*, Egypt, Georgia, Hong Kong, India, Israel, Jordan, Korea (Rep.), Kuwait, Lebanon, Libya, Malaysia, Mauritius, Mexico, Morocco, Pakistan, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Syria, Tunisia, Turkey, U.A.E., Uruguay, U.S.A.
DTT Germany – Malta
Double Taxation Treaties (DTT) have been concluded between Malta and its important trading partners, in order to avoid the double taxation of income and provide low withholding taxes on dividends, income and royalties for companies where foreign investors are not resident in Malta, but their business is located here and produces profits.
Germany is one of Malta’s major trading partners
In 2014, the volume of Malta’s bilateral trade with Germany for imports from Germany amounted to EUR 314 million, and for Maltese exports to Germany to EUR 300 million. Germany thus ranks fourth as a supplier of imports and second as a buyer of exports.
The DTT between Malta and Germany was concluded in March 2001 and has been in force since 17th December 2001; in June 2010 a new protocol regarding information exchange and transparency was added.
Meanwhile Malta has become one of the important hubs for German investment in the Mediterranean region. This applies particularly to the financial services, aircraft services, pharmaceutical and gaming industries. Over 150 “German” companies (companies with a majority of German shareholders) are currently registered in Malta.
Scope of the DTT
The DTT, which follows OECD standards, applies among others to income tax, corporation tax, capital tax and trade tax. It is structured into the following mean sections:
- Applicability (Art. 1,2,28)
- General definitions ( Art. 3 – 5, such as Resident and Permanent Establishment)
- Taxation of income (Art. 6 – 21)
- Taxation of capital (Art.22)
- Avoidance of Double Taxation in the State of Residence (Art. 23)
- Specific provisions (Art. 24 – 27, 28, such as non-discrimination, mutual agreement procedure, exchange of information and limitation of benefits)
- Final provisions (Art. 29 – 32)
We at Kresse International advise German clients on a case to case basis about their specific needs when it comes to the DTT.