Strategically located just 90 km south of Italy and 290 km north of Libya, Malta’s advantageous geographical position, as well as its equitable climate, rich historical heritage and famed friendliness of its people have long been charming its visitors. The country has had strong shipping traditions and a manufacturing base which has evolved into a high value added proposition. Yet Malta is today making a name for itself for other reasons.
The island is a cosmopolitan meeting point of cultures and languages partly through its location and also because of its evolution into a trade and financial centre. Its accession to the European Union in 2004 and the Eurozone in 2008, served to firmly consolidate its position as the ideal location for efficient international business and as one of Europe’s most stable and innovative finance domiciles. Suffice to say the number of funds on the island has grown significantly post accession and at the end of 2013, Malta was awarded ‘Most favoured domicile in Europe’ by Hedge Funds Review. The number of fund managers is also increasing sharply.
Excellent flight connections, a sophisticated ICT infrastructure, a high broadband penetration and a competitive market with the latest technologies, Malta offers a premium environment for business. A high standard of living as well as comparatively low daily running costs present a refreshing change from other busy, chaotic and high-cost business centres. Furthermore English is universally spoken and written and is the language of education and business. This, together with the high level of education and training level of the Maltese labour force are key competitive factors.
An excellent regulatory framework covering areas as diverse as banking, fiduciary and corporate services, trusts, insurance, funds and securitisation amongst others, as well as an extensive double tax treaty network has attracted major players and also spawned successful start-ups which now have a regional or global reach.
International Tax Planning
The ‘offshore’ regime was signalled out in 1995 and in 2004 with Malta’s accession to the EU, the tax legislation was amended to conform with EU law and was approved by the Commission.
Malta boasts a double tax treaty network with around 70 double tax treaties signed not only with EU Member States, but extending also to a wide range of jurisdictions around the world ranging from the EU Member States and extending further afield to South America (such as Mexico and Uruguay) to Asia (including China, Hong Kong, Korea and the United Arab Emirates) and Africa (notably Libya, Egypt, Morocco and South Africa).
Malta is particularly interesting as a stepping stone for dividend distributions out of the EU in view of the fact that it does not impose any withholding taxes on outbound dividends, royalties and interests. Consequently Malta is an ideal jurisdiction to extract profits out of the EU and as a member of the EU, the EU Parent Subsidiary Directive and Interest and Royalties Directive can be availed of. Malta also provides unilateral relief and underlying tax credit relief.
A company incorporated in Malta is deemed to be resident and domiciled in Malta. It will be taxed at the standard corporate rate of 35 per cent on its worldwide income. However, when the Malta company makes a dividend distribution to its shareholders, the shareholders will be entitled to claim a refund of 6/7th of the tax payable by the Malta company, reducing the effective tax rate.
Given Malta’s strategic location, in the middle of the Mediterranean Sea, a Malta trading company can be used for logistic purposes. Furthermore, Malta traditionally has strong business relationships with North Africa – for example a number of Maltese businesses operate in Libya. Foreign companies, some from outside the EU, are seeking to capitalize on the market knowledge and location to set up a base in Malta to penetrate North Africa or even Europe itself.
Where a holding of shares by a Maltese company in a foreign company whose capital is divided into shares qualifies as a ‘participating holding’, the Maltese company may claim a participation exemption from Maltese tax on income and capital gains derived from such participating holding. In the event one avails of the Parent Subsidiary Directive or a zero per cent withholding tax rate applies, using a Maltese holding company results in a complete clean through.
As outlined earlier, Malta is a popular jurisdiction for non-EU investment into the EU although its treaty network is also interesting for investment into other jurisdictions. For example, a recent treaty with Israel can attract investment into Israel via Malta.
A participating holding arises where there is a holding of 10 per cent or more of the equity shares of a foreign company, which holding confers an entitlement of at least 10 per cent of any two of the following:
Right to vote
Right to profits available for distribution AND
Right to receive assets available for distribution on a winding up
Eligibility is possible if the 10 per cent holding is not met subject to satisfying other criteria: for example if the holding is in excess of €1.2 million euros.
Dividends distributed by the foreign company will be exempt if one of the following conditions is met:
It is an EU company or
It is subject to a foreign tax rate of a minimum of 15 per cent or
It does not derive more than 50 per cent of its income from passive interest and royalties, so that trading or holding companies would qualify.
If none of the above criteria are met, a company must satisfy both of the following conditions:
the shares in the non-resident company must not be held as a portfolio investment
the non-resident company or its passive interest or royalties as defined have been subject to tax at a rate which is not less than five per cent.
The dividend article in Malta’s treaties is generally based on the OECD model tax convention with the foreign withholding tax imposed by foreign jurisdictions upon a distribution of dividend ranging between zero and 15 per cent. A 10 per cent withholding tax rate applies in the treaties with Egypt and Tunisia, whilst a 5 per cent withholding tax rate applies in the new treaty with China, Croatia, Czech Republic, Romania and Slovakia. A zero per cent withholding tax rate applies in the case of Malaysia, Singapore, Syria, United Kingdom, Bulgaria and Israel.
In recent years many jurisdictions, including Malta, have created tax incentives in order to encourage the owners of intellectual property rights to set up structures and locate their assets within their territory. The local tax system provides for specific incentives aimed exclusively for the benefit of profits deriving from intellectual property with several options available.
Malta offers a specific exemption on royalties and similar income derived from qualifying patented IP. The exemption may be requested by any person owning IP rights and receiving royalties or similar income. This exemption benefits IP developed as a result of R&D activities performed anywhere in the world and which would be patentable in Malta. The licensee must prove that the patent is used in a productive economic activity such as manufacturing, software development or data processing, for example.
In the structure below therefore, the Malta Company, as the holder of the patent, will receive royalties from a licensee situated outside Malta. If the company decides to opt for the tax exemption applicable to patents, then the income at Malta level will be exempt from tax. In addition, since Malta does not apply any outbound withholding tax on dividends paid by the Malta Company to its shareholder, the profits from the license agreement may be repatriated through Malta tax-free.
In the event the exemption cannot be availed of, other options are available depending on the nature of the business of the company.
The foreign withholding taxes on royalties in terms of Malta’s double taxation treaties range from zero per cent to 18 per cent. No withholding tax is levied on the distribution of royalties from Croatia, Denmark, Finland, Georgia, Korea, Spain, Sweden, UAE and Israel which paves the way for international tax planning out of the EU.
Apart from the advantages mentioned above, one cannot ignore the practical advantages Malta has over a lot of other jurisdictions advantages: English being an official language along with Maltese, with legislation enacted in both languages. Its flexible and accessible regulator, the solid reputation of its banks, a highly educated and well-trained labour force and cost competitiveness make it a very appealing jurisdiction indeed.
EMCS International is a boutique professional services firm and forms part of the EMCS Group of Companies, which has been providing advisory services to an international client base for the past thirty years. Our specialist area of expertise is international business structuring with a strong emphasis tax advisory, company incorporation accounting and compliance services.
Geraldine Schembri, Rachel Saliba and Melanie Ciappara – EMCS International