The discussions on BEPS have taken the tax world by storm, however, with respect to holding companies, they have resulted in the re-hashing of the usual issues – no surprise there.
A holding company location is not merely chosen on the basis of the most tax efficient jurisdiction: the most common holding company jurisdictions all offer some form of exemption on the receipt of dividends from subsidiaries, though the flexibility of these rules may vary. Within the EU, an exemption on the receipt of dividends from EU subsidiaries is often taken for granted in view of the Parent-Subsidiary Directive. Therefore, in choosing a holding company location the distinguishing factor cannot be tax alone. Of course a good treaty network is also one of the fundamental features of a holding company location, however, again all the main holding company locations boast a large and diverse treaty network – of course some more than others. And given the age-old discussion on the meaning of beneficial ownership (and as of recently the BEPS discussion) in choosing a holding company jurisdiction, one also needs to take a holistic approach.
More often than not, in choosing the location of their holding company investors and multinationals will look into a variety of other economic, legal and socio-economic issues. Taxation will be a factor in the equation; however, if it is the only factor, the sustainability of the structure will easily be questioned.
While from a tax perspective Malta's development as a holding company jurisdiction and financial services centre started in the early 1990s, the groundwork may be attributed to the 160 years of British colonisation. As a result of Malta being part of the British Empire, Malta inherited a legal framework based on UK principles, a work ethic largely influenced by the British and English as an official language; with all laws being drafted in both English and Maltese (with the English version often being prevalent), the memorandum and articles of association of a company being drafted in English and even the financial statements being presented in English.
Some factors companies should consider when choosing their holding company location include:
- The stability of the economic and political landscape;
- The legal framework;
- Access to finance; and
- Availability of a professional workforce.
We will consider how Malta measures against the above criteria thereby quashing the idea that Malta is just a holiday destination or just another tax efficient island – stigmas that the Maltese industry has to live with, in view of our glorious weather, geographical location and wrong decisions taken in the past – where for a very brief period the government of the time believed Malta could be an offshore jurisdiction. A decision quickly reversed.
Of course, as well as the taxation of holding companies in Malta, other tax issues are also fundamental, as they are for all holding company jurisdictions, such as:
- The tax implications of carrying out other business activities in Malta;
- Withholding tax implications upon a distribution of dividends to shareholders; and
- Tax issues to consider upon exit from Malta.
The economy and political landscape
Malta boasts a varied economy; tourism still accounts for about 33% of GDP, manufacturing industry for about 18% and financial services for 15%. The financial services industry has kept on growing in recent years and was hardly affected by the European financial crisis, given that Malta's debt is mostly held locally and Maltese banks, which are notoriously conservative about investments, have a very low exposure to the sovereign debt. Tourism is obviously increasing year after year and the manufacturing industry is also stable. In recent years the gaming industry has also seen a large increase, from online betting to digital game and software development, with the developers of some of the Angry Birds games setting up shop in Malta.
As further proof of the stability of the economy, the latest Eurostat statistics at time of writing show Malta having the third lowest unemployment rate in the EU, standing at 5.6%, after Austria and Germany. The political landscape is as interesting as in most other EU jurisdictions. There are two main political parties in Malta. The previous government was in power since 1987, except for a two year stint, and the current government, which came into power in early 2013, kept up the good momentum of that administration. While, naturally, the two political parties disagree on a number of issues, the importance of the financial services industry brings consensus to the political divide.
The legal framework
Malta is both a common and a civil law jurisdiction. Our civil law is based on Roman law and was further developed by the Code Napoleon. Our public law is, like our tax law, largely based on UK principles. The first Maltese Income Tax Act was enacted in 1948 and was modelled on an income tax model ordinance produced by the British Colonial Office in 1920s. Our corporate law is mainly based on the EU company law directives, but is also influenced by the UK Companies Act. In fact, the courts often refer to UK principles and UK authors when interpreting corporate and tax law.
Nowadays, being an EU member state since 2004, means that our legal framework is largely based on EU principles.
Access to finance
Though the smallest EU jurisdiction, Malta's ship register is the largest in the EU and seventh largest in the world. Given the huge ship financing industry, it is clear that Malta is well known for access to finance with all major banks.
The reporting standards in Malta are the International Financial Reporting Standards (IFRS) as adopted by the EU. As more countries move to IFRS, this enables multinationals and investors to keep a homogenous reporting standard for their financial statements without the need for conversion. Malta's sound financial reporting and audit system ensure the activities of the group are transparent to all shareholders, all in a cost-effective jurisdiction.
Availability of trained professional workforce
Malta boasts a mature, growing, professional workforce with a good percentage of it having obtained masters degrees, or worked outside Malta. The main international accounting firms are present in Malta (including the big 4), and Malta also boasts first-class law firms, and though none of the Magic Circle are in Malta, the larger law firms work closely with them. This ensures that all companies or investors are well serviced in Malta.
The professionalism of the workforce is evidenced in the speed in which a company may be set up, often within a couple of days. This proves not only the effectiveness of service providers but also of the authorities in dealing with the growing industry. The industry has also benefited from a large multi-origin expatriate community, which has not only brought further ideas and expertise to the market, but also contributes to a more cosmopolitan way of life on the island.
Taxation of companies in Malta
In the past, when choosing a holding company location, one would simply focus on the taxation of the holding activities. However, this is no longer true as very often while a company may be the group holding company, it will often also carry out other activities, and therefore determining the taxation of other activities is of great importance. While the headline tax in Malta is 35%, through the operation of the tax refund system, the effective tax rate may be as low as 5%.
Since 1994, Malta has embedded in its fiscal legislation a system of tax refunds. Upon EU accession, the tax refund system was broadened to its existing form to be in line with EU principles. Maltese resident companies, including a foreign company with a branch in Malta, deriving income, other than dividends from qualifying companies, first pay tax on their profits at 35%. Upon the distribution of taxed profits, whether derived from local or foreign sources (other than from immovable property situated in Malta), the shareholders would be entitled to a full or partial refund of the tax paid by the company.
The amount of the tax refund is dependent on the nature of the income, whether local or foreign sourced and whether double taxation is claimed. Generally, the refund is six-sevenths of the 35% underlying tax, resulting in a 30% tax refund of the taxable profits (six-sevenths of 35%).
Malta is in fact often used as a hub for various activities with holding and trading activities or other intra-group activities being carried out from Malta. The application of the tax refund system, together with the participation exemption, results in a low effective tax, without any recourse to any base erosion techniques or use of hybrid instruments / entities.
Taxation of holding companies in Malta
Malta adopts a flexible 100% participation exemption on profits (that is, dividends) derived from a qualifying company or from the transfer thereof (that is, gains on transfer). To benefit from the participation exemption, the Maltese company's holding must entitle it to any two of these rights (known as 'equity holding rights'):
- a right to vote;
- a right to profits available for distribution; and
- a right to assets available for distribution on a winding up of that company.
A qualifying company is one which satisfies one of a series of tests. Typically, as with most participation exemption jurisdictions, Malta has an ownership test which is set at 10%. However, this test does not require a minimum holding period. And where the ownership test is not fulfilled, the participation exemption may be acceded to by satisfying other less onerous conditions including: a holding with an acquisition value of €1.164 million ($1.5 million) held for an uninterrupted period of 183 days; or one which entitles the holder to a right to sit or appoint a director to the board or to a right to purchase the remainder to the capital.
While the participation exemption is typically available where a Maltese company holds shares in a subsidiary, it may also be availed of when the Maltese company is a partner in a limited partnership similar to a Maltese partnership en commandite, the capital of which is not divided into shares, or where the Maltese company is an investor in a collective investment scheme which provides for limited liability of their investors, provided the Maltese company has any two of the equity holding rights and one of the above tests are satisfied.
With respect to dividends, the participation exemption is applicable if the qualifying company:
- is resident or incorporated in a country or territory which forms part of the EU; or
- is subject to tax at a rate of at least 15%; or
- has 50% or less of its income derived from passive interest or royalties; or
- is not held as a portfolio investment and it has been subject to tax at a rate of at least 5%.
As is evident from this, unlike many other EU jurisdictions, the subject-to-tax clause is not a sine qua non for the applicability of the participation exemption and the exemption may be availed of even if the qualifying company is not subject to tax.
Taxation of permanent establishments (branches)
Though Malta generally relieves juridical double taxation by means of the credit method, from January 1 2013, Malta has adopted an exemption method for any income or gains derived by a company registered in Malta which are attributable to a permanent establishment (including a branch) situated outside Malta or to the transfer of such permanent establishment.
No withholding taxes
Given that there are no withholding taxes on dividend distributions (or on payments of interest or royalties, or liquidation proceeds) to non-residents, the repatriation of dividends to shareholders is easy and free of any tax.
This withholding tax exemption is not dependent on double tax treaties, or the application of any EU directive, but is determined in terms of Malta's domestic law. It applies no matter whether the shareholder is a company, an individual or any other entity, and no matter where the shareholder is resident.
Ease of exit
From a tax perspective, a Maltese structure may be wound down with the same ease as setting it up and operating it. In fact, if the Maltese company does not own, whether directly or indirectly, or have any real rights over, immovable property situated in Malta a non-resident shareholder will not be taxable on any gains derived from the transfer (including liquidation) of a Maltese company.
The same will apply if the shareholder of the Maltese company is another Maltese company, ensuring a tax neutral exit from Malta without unnecessary burdensome tax planning.
Companies incorporated outside Malta but tax resident in Malta
Malta's tax rules applicable to companies incorporated outside Malta that are tax resident in Malta, that is having its management and control in Malta, make such entities versatile and powerful vehicles for any tax planning structure.
Such companies are only subject to tax in Malta on income or capital gains arising in Malta. Income arising outside Malta is only taxable in Malta if it is received in Malta whereas capital gains arising outside Malta are not taxable in Malta even if received in Malta.
Such companies are widely used to receive foreign source income outside Malta. However, where a relevant treaty is applicable which includes specific anti-avoidance provisions aimed at such companies which are taxable on a receipt basis, receipt of the income in Malta would be required to ensure treaty protection. In any case, in these situations, the tax refund system would apply anyway.
André Zarb has headed the tax function of KPMG in Malta since 1994. He advises several clients on international tax issues, including investments undertaken by such companies in Malta and investments by such companies in other countries through corporate structures in Malta.
André has been crucial in the development of Malta's tax system, having advised the government on its development since 1994. His involvement ranged from advising on Malta's incentive legislation to ensure it is compliant with EU state aid rules, as well as with the development of Malta's tax refund system and participation exemption.
John Ellul Sullivan
John Ellul Sullivan is an associate director in the tax function of KPMG in Malta, focusing mainly on international tax structures. He mainly focuses on international tax issues, advising multinationals, pension schemes and high net worth individuals on their existing, planned or potential operations in Malta and beyond.
John read for a masters of advanced studies in international taxation at the International Tax Centre in Leiden, where he also worked as a teaching assistant, giving workshops on the fundamentals of international taxation and tax treaties, and lecturing on issues of domestic and international taxation across various courses in Malta.
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