Language

Tax Treatment of Income Streams of Malta Companies

In view of the fact that a company incorporated in Malta is deemed to be both (ordinarily) resident and domiciled in Malta for Malta tax purposes, such company will be liable to tax in Malta on a world-wide basis, entailing that it will be liable to tax on all chargeable income and gains whether in Malta or elsewhere and whether remitted to Malta or not.

Following the 2007 legislative changes to the Malta Income Tax Acts, a Malta company registered on or after 1 January 2007 may carry out international activities which can be both 'trading' and 'holding' in nature. Furthermore, for tax purposes, every company resident in Malta, or a branch of a company registered outside Malta, is required to allocate its income or gains to five separate taxed accounts depending on the type of income or gains.

These five tax accounts are:

• the Final Tax account;
• the Immovable Property account;
• the Foreign Income account;
• the Maltese Taxed account; and
• the Untaxed account

The allocation of income or gains to the different tax accounts, which allocation generally depends on the nature and source of the income or gains, is relevant for the purpose of determining the tax treatment at the level of the company including the forms of double taxation relief that may be claimed, and in particular, the tax treatment at the level of the shareholder/s upon a dividend being distributed out of such profits.

Dividend Income and Capital Gains

Participating holdings
A company resident in Malta in receipt of income (dividends) deriving from a participating holding or capital gains realised from the disposal of such holding may, at its option, have this income treated in any one of the following manners:

1. apply the participation exemption whereby the dividends or capital gains received by the Malta company are exempt from tax in Malta;

or

2. declare the income or gains as part of its chargeable income, and pay tax thereon, at the rate of 35% . Upon a distribution of dividends by the Malta company, its shareholder/s may claim a full refund (100%) of the Malta tax suffered on such dividends.

In terms of Malta tax laws, a participating holding is deemed to exist where the investment by the Malta company satisfies at least one of the following criteria:

1. an equity holding of at least 10% of the shares in a company not resident in Malta; or
2. an equity holding of less than 10% but which entitles the shareholder to call for and acquire the entire balance of the equity in a company not resident in Malta; or
3. an equity holding of less than 10% but which entitles the shareholder to right of first refusal on disposal of the balance of the equity in a company not resident in Malta; or
4. an equity holding of less than 10% but which entitles the shareholder to either sit on the Board or appoint a member to sit on the Board of a company not resident in Malta; or
5. an equity holding of less than 10% but which represents an investment of not less than Euro 1,164,686.70 in a company not resident in Malta provided that the investment is held for an uninterrupted period of not less than 183 days; or
6. an equity holding in a company not resident in Malta in the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

In order to qualify as a 'participating holding', the Malta company must have an equity holding in a body of persons constituted, incorporated or registered outside Malta, which is not resident in Malta, and which is of a nature and form equivalent to a limited liability company or a partnership en commandite the capital of which is not divided into shares and where the holding grants the shareholder the right to vote, the right to profits available for distribution and the right to a share of the assets available for distribution upon winding up.

The above may be illustrated as follows:

Anti - Abuse Provisions

In order for a Malta company to make use of the participation exemption, or for the shareholder to claim a full refund of tax, in respect of dividends received from a participating holding acquired on or after 1 January 2007, further conditions would need to be satisfied as set out below. Where a Malta company holds a 'participating holding' (as defined above) in a 'foreign body of persons', acquired on or after 1 January 2007, such entity must be either:

1. Resident or incorporated within EU territory; or
2. Subject to any foreign tax at a rate of at least 15%; or
3. Derive less than 50% of the income from passive interest or royalties, as defined

Where none of the alternative three conditions are satisfied, then two further conditions should both be satisfied for the participation exemption/full refund system to apply:

• The holding by the Malta company must NOT be a portfolio investment;

and

• The foreign body of persons or its passive interest or royalties must have been subject to any foreign tax at a rate of at least 5%.

Portfolio investment' is an investment in securities such as shares, bonds and such like instruments and which is held as one of many such investments for the purpose of investment by risk spreading where such an investment is not a strategic investment and is made with no interest in and without the intention of influencing the management of the company invested in and in addition is made only to follow the share price and dividend policy of the company invested in to maximise investment returns and to sell the investment as soon as it appears the shares may lose value.

Income or gains not derived from a participating holding
Where income or gains derived by a company registered in Malta are not derived from a participating holding or where such participating holding does not satisfy the conditions set out under the anti-abuse provisions, such income or gains will be taxed at the level of the Malta company, however a shareholder in receipt of a dividend paid out such profits may claim a refund of the Malta tax paid on the said profits. The refund is generally of 6/7ths of the Malta tax paid, however the refund may be reduced to 5/7ths or 2/3rds where certain circumstances prevail, as explained below.

Trading income

Generally, where a company registered in Malta distributes a dividend out of profits allocated to its Maltese taxed account or its foreign income account, a shareholder in receipt of the said dividend will be entitled to claim a refund of 6/7ths of the Malta tax paid on the profits out of which the dividend was distributed. The 6/7ths refund will only be reduced where the said profits out of which the dividend is paid consists of passive interest or royalties or where the company has claimed double taxation relief on the said profits, as explained below.

This may be illustrated as follows:

Passive Interest or Royalty Income

Where a company registered in Malta distributes dividends out of profits which consists of “passive interest or royalties”, the refund which a shareholder in receipt of such dividends may claim, is reduced to 5/7ths of the Malta tax paid by the company on the profits out of which the dividend was distributed.

“Passive interest or royalties” is defined as interest or royalty income which is not derived, directly or indirectly, from a trade or business, where such interest or royalties have not suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%).

This may be illustrated as follows:

Tax Treatment where Double Taxation Relief is claimed

Where a dividend is distributed out of profits allocated to the foreign income account and in respect of which the Malta company has claimed double taxation relief, the refund which its shareholder/s may claim is 2/3rds of the Malta tax paid by the company.

Calculation of Tax Refunds

Refunds are calculated on the gross amount of dividends received by a company registered in Malta before deducting any credits relating to treaty relief, unilateral relief or commonwealth relief, but are limited to the actual Malta tax paid at company level.

Malta Branch

'A company registered in Malta, is defined as a company which is resident in Malta or a company which is not resident in Malta but carries on an activity in Malta .

The definition of 'a company registered in Malta' therefore includes a branch or place of business in Malta of a company not incorporated in Malta. Such non resident company will likewise have to keep the five tax accounts, however the shareholders of the non-resident company carrying on business in Malta will be treated equally to shareholders of company resident in Malta and will likewise generally be entitled to a refund of part of the Malta tax suffered on the profits out of which a dividend is distributed.

Francis J. Vassallo & Associates Limited
259, St. Paul Street, Valletta VLT1213, Malta
Tel: +356 2299 3100 Fax: +356 2299 3101 Email: info@fjvassallo.com
Disclaimer
2008 © FJVA All rights reserved. Made by Square Concept