|As a tax-compliant jurisdiction, Malta is expanding the tax incentives available to businesses to ensure it remains a competitive choice for investors in the Mediterranean|
"While we intend to continue to be one of the competitive choices in the Mediterranean for investors, we are resolute to keep to the best international standards on taxation matters," said Maltese Minister for Finance Edward Scicluna in response to the recent release of the 2017 OECD International Tax Co-Operation Report.
Aware of the importance of creating a business-friendly financial environment in Malta, the Maltese legislator has progressively introduced a framework of tax measures that aim to encourage companies to locate and develop activities within Maltese territory.
Favourable provisions of Maltese tax law include:
- Absence of Maltese withholding tax on outgoing dividends, interest and royalties;
- Beneficial participation exemption regime;
- Tax regime for highly qualified persons;
- Very extensive and further expanding tax treaty network (currently 70+ treaties in force);
- Access to EU directives; and
- A well-established ruling practice.
A recent add-on to these provisions was the so-called "notional interest deduction" (NID), making Malta an attractive location for capital-intensive companies and equity-funded headquarters.
In addition, there have been proposed changes to the "participating holding" definition and the remittance basis of taxation.
The notional interest deduction
Debt has traditionally been a tax-efficient way of financing business operations. However, tax developments are such that businesses financing their operations through back-to-back debt may be subject to certain risks and challenges.
In an effort to approximate the tax treatment of equity and debt, Malta introduced the concept of a NID.
The NID enhances the tax benefits of financing business operations through equity and offers a tax-efficient alternative to debt financing. It enables equity funded Maltese companies, partnerships and permanent establishments (PEs) to significantly reduce their effective tax rate.
Main features of the NID
The NID is a deduction from taxable income based on the qualifying equity of the Maltese company or partnership. The NID is a product of two variables:
- The reference rate: this is the risk-free rate that, in terms of the notional interest deduction rules, is determined by reference to the current yield to maturity on Malta government stocks plus a premium of 5%; and
- The risk capital on which the reference rate is applied: this includes share capital, share premium, positive retained earnings, interest-free loans and any other reserves as at the end of the year.
Permanent establishments of a company not resident in Malta are also entitled to claim the NID, in which case the risk capital will be the capital of the PE.
This measure is applicable from the year of assessment 2018 and is at the discretion of the company, partnership or PE.
The NID has no influence on the accounting figures except of course for tax provisions.
The law provides for several specific anti-avoidance provisions in relation to the NID – such specific provisions are in addition to the general anti-abuse provision contained in Maltese tax law.
Advantages of the NID
The NID has certain benefits for business, including:
- It is a recurring incentive and not just a one-off advantage;
- It provides flexibility because it is possible to carry forward any unused amount of the deduction;
- It creates a considerable tax benefit for companies that have good solvency ratios, reducing the taxable base and generating a higher return after tax;
- It strengthens the financial position of Maltese companies/partnerships/PEs by encouraging them to increase their equity;
- It is an incentive to retain earnings in the Maltese entity and to use these to finance new investments;
- For international groups, it opens possibilities for allocating new activities to a Maltese entity such as intra-group financing or central procurement.
Examples of efficient use of the NID
The NID can provide optimisation to the overall effective tax rates for all type of structures such as:
- Finance companies (intra-group bank/treasury function): taxation on the difference between the interest-income received and the NID on the qualifying equity of the Maltese finance company;
- Trading companies: for tax purposes, the profit located at the level of the Maltese company owning the assets used for trading would be partly offset by the NID; and
- Intellectual property (IP) companies: taxation on the difference between the royalty income received on IP contributed to the Maltese IP company and the combination of: (i) the NID on the qualifying equity of the Maltese IP company; and (ii) a deduction on the contributed IP over the life of the IP.
Malta's participation exemption regime
As previously mentioned, Malta's tax system provides that dividends from a subsidiary, or gains from the transfer thereof, meeting the minimum ownership requirements and subject to certain other conditions is wholly exempt from taxation, at the option of the taxpayer. This exemption is referred to as the "participation exemption".
Most participation exemption systems require that the parent company must own a significant portion of the equity of the subsidiary to qualify for the exemption.
In Malta, for the participation exemption to apply on the basis of percentage ownership, the parent company must own at least 10% of the equity of the subsidiary. In the Budget Bill being proposed for 2018, the 10% threshold will be brought down to 5%.
Apart from a participation exemption as a result of the percentage holding of the equity of the subsidiary, Malta also offers a number of other options that may trigger the right to claim the participation exemption.
Malta's participation exemption can also be applied where the holding is an interest in a partnership, units in a collective investment vehicle or a branch, subject to satisfying certain conditions. In the Budget Bill for 2018, new rules are being proposed in relation to the classification of interests in partnerships and European economic interest groupings (EEIGs).
In most cases, the participation exemption may be claimed without having to obtain an advance ruling from the Maltese Commissioner for Revenue.
The remittance basis of taxation
Another change being proposed in the Budget Bill 2018 relates to the remittance basis of taxation.
Until now, income arising outside Malta to an individual ordinarily resident but not domiciled in Malta (non-domiciled person) would only be chargeable to tax in Malta on the amount received in Malta.
As a result of the proposal that has been included in the Budget Bill, with effect from January 1 2018, non-domiciled persons will be subject to a minimum tax of €5,000 ($6,100) annually in Malta.
This minimum tax is payable if the non-domiciled person:
- Is not taxable in Malta in accordance with a scheme establishing a minimum amount of tax in Malta, including The Residence Programme, Global Residence Programme, Malta Retirement Programme and the Residents Scheme Regulations; and
- Derives income arising outside of Malta amounting to not less than €35,000 or its equivalent in another currency – in the case of a married couple, income derived by both spouses will be considered.
In computing the minimum tax, account shall be taken of any Maltese income tax paid, whether by withholding or otherwise, excluding tax paid on capital gains.
Should the income, excluding capital gains, chargeable to tax in the hands of the non-domiciled person result in a Maltese tax liability amounting to less than the minimum tax, the person shall be deemed to have received additional income arising outside Malta such that the total tax liability on the total income would amount to the minimum tax of €5,000. By way of example, if a non-domiciled person would be liable to €2,000 of tax in Malta on income arising or received in Malta, they would have to top up that tax by another €3,000.
On capital gains arising outside Malta, the rules should not change. That is, no tax would be payable on capital gains arising outside Malta irrespective of whether these are brought into Malta or not.
A business-friendly tax environment yet one of the most tax compliant jurisdictions
Notwithstanding the favourable tax provisions contained in Maltese law, a recent report issued by the OECD confirmed that Malta is a tax compliant jurisdiction.
The OECD assesses tax regimes in relation to intellectual property rights, financing and leasing, banking and insurance, distribution and service centres, shipping, holding companies and fund management regimes. In relation to Malta, this assessment shows that there are no "harmful features" for the purpose of BEPS.
"The OECD report clearly shows that Malta has been upholding the international agreed standards and providing the necessary exchange of information for investigations when it comes to tax related issues", stated Finance Minister Edward Scicluna in response to the 2017 OECD International Tax Co-Operation Report.
The OECD has recently introduced a new interactive tax map, which provides information on the results of peer reviews of more than 140 countries on how they are addressing issues related to tax transparency and base erosion and profit shifting (BEPS). The OECD's assessment is based on three main pillars, whereby it looks at the jurisdiction's cooperation when it comes to the exchange of information on request (EOIR), automatic exchange of information (AEOI) and the BEPS initiative outcomes.
As an overview, results show that Malta is quite successful in this regard (Figure 1). With regards to Malta, the OECD indicators show the absence of harmful tax practices in relation to BEPS, as well as a strong commitment in relation to tax cooperation in general. For the AEOI, Malta has commenced exchanging information in line with the common reporting standard and has an activated information exchange network in relation to country-by-country reporting for multinational enterprises. Moreover, Malta is ranked as being largely compliant when it comes to the EOIR.
|Figure 1 – Malta: Summary of results following an assessment by the OECD|
|Exchange of information on request (EOIR)|
|Global Forum Member||yes|
|EOIR rating round 1||largely compliant|
|EOIR rating round 2||scheduled 2019|
|Automatic exchange of information (AEOI)|
|Mutual Administrat ive Assistance Convention||in force|
|Commitment to AEOI (CRS)||2017/2018|
|CRS MCAA signed||yes|
|Inclusive Framework on BEPS member||yes|
|Existence of any harmful tax pract ices (Action 5)||no harmful regime exists|
|Exchange of information on tax rulings (Action 5)||review scheduled|
|Preventing treaty abuse (Action 6)||review scheduled|
|CbC - Domestic law (Action 13)||legal framework in place|
|CbC - Information exchange network (Action 13)||activated|
|Effective dispute resolution (Action 14)||review scheduled|
Nicky Gouder, tax partner at ARQ Group, completed his Association of Chartered and Certified Accountants (ACCA) course in 2010. Following that, he specialised in taxation and completed a diploma in taxation offered by the Malta Institute of Taxation in 2011 and read for the advanced diploma in international taxation provided by the Malta Institute of Management. He also graduated in business management from the University of Malta in 2007.
He is one of the three founding partners of the Capstone Group, which was set up in 2010 and specialises in accountancy, tax, audit and advisory.
Nicky specialises in international taxation with a focus on domestic legislation and has significant experience in handling a wide portfolio of local and international clients operating in various industry sectors. He also lectured the advanced taxation module for the Association of Chartered Certified Accountants course provided through the Malta Institute of Accountants and participates in a number of tax conferences both on a domestic and international level.
Luana Scicluna, tax manager at ARQ Group, specialises in international taxation and has considerable experience on corporate restructuring projects and succession planning. She assists several local and international clients with handling their tax affairs in Malta and provides advice on the tax implications of a wide range of transactions.
Prior to joining ARQ Group in April 2017, Luana worked within the tax service line of one of the Big 4 firms. Luana is an accountant by profession, concluding her Bachelor of Accountancy (Hons) at the University of Malta in 2009, following which she furthered her studies in taxation through a diploma in taxation offered by the Malta Institute of Taxation and an advanced diploma in international taxation offered by the Chartered Institute of Taxation (UK).