Tax in Malta

Following the requests made by the European Commission malta has become fully complaint with Eu Laws. The changes brought about a New Tax refund System. The new Tax regime introduced tax benefits to all shareholders of companies registered in Malta.

Maltese companies can carry out various holding and trading activities in Malta and overseas and shareholders can claim a tax refund. The legislative changes have also introduced various modes of refund. All companies in Malta are subject to 35% tax on profits generated. Once Profits are distributed to shareholders, they are entitled to a tax refund. Tax is refunded on all or part of the tax paid by the company incorporated in Malta.The types of refund are the following:

  • 6/7ths refund or
  • 5/7ths refund or
  • 2/3rds refund or
  • A full refund of tax Paid in Malta.

There are 5 different taxed Accounts in which profits are allocated.

  • Final Taxed Account – a company would allocate tax exempt profits (where the exemption is retained at shareholder level upon distribution) and profits subject to a final tax
  • Immovable Property Account – profits allocated to this account and which are subject to tax. Such profits would be derived directly or indirectly from Immovable situated in Malta
  • Foreign Income Account – profits subject to tax and were such profits are derived from investments outside of Malta
  • Maltese Taxed Account – income which is subject to tax and does not fall under any of the following Accounts – MTA –FIA –IPA
  • Untaxed Account – to which a company would allocate the difference between total profits/losses and those amounts allocated to any of the other taxed accounts.

Profits exempt from tax are allocated to the Untaxed Account. Residents which are paid a dividend from the untaxed accounts pay a withholding tax or 15%.

Income which suffer a tax at source are not subject to Corporate Income tax. Such Income is allocated to the final taxed Account or Immovable property Account. Shareholders which are paid a dividend from the Final taxed account are not subject to tax.

Moreover shareholders can claim refund when income is allocated and distributed from the Maltese taxed Account and Foreign income account. However income allocated to the final taxed Account and immovable property account attract no refund.

  1. Shareholders of the following companies can claim a refund.
  2. Companies which are incorporated in Malta
  3. Companies not incorporated in Malta but which are managed and controlled in Malta
  4. Companies which are not incorporated in Malta and not managed in Malta but which operate through a branch in Malta.

 

When does the 6/7ths tax refund apply?

This type of refund may be claimed on the distribution of Income allocated to the FIA (Foregin Tax Income) and MTA (malta taxed account). However there are several conditions:-

  1. The company is not entitled to claim double tax relief on income allocated to FIA.
  2. Income is not qualified as Passive interest or royalties.

 

When does the 5/7ths tax refund apply?

Where the profits out of which a dividend is distributed consists of Passive Interest or royalties the refund is reduced to 5/7ths of the Malta tax suffered on these profits.

 

When does a 2/3rds tax refund apply?

A tax refund at this rate is applicable to dividends out of Profits which are allocated to the foreign Income Account in respect of which the company distributing the dividends has claimed double tax relief.
In most cases the the tax refund would be of 6/7ths of the Malta tax suffered by the Malta company on the profits out of which the dividend is distributed.

 

Full tax refund

Moreover a Participating holding company which receives income from an investment which qualifies as a participating holding may either apply the participation exemption or include such income as part of the taxable income of the malta company and this would entitle the shareholder who received the dividend to a full refund of the malta tax paid by the company.

 

Malta Holding Company

Company registered in Malta with the object of holding shares, assets which include real estate, cash, movables, shares and royalties, securities and intellectual property whether in or outside of Malta.

Being a maltese company and having income arising out of malta, a holding company can benefit from various forms of relief from double taxation available under Malta’s laws. Moreover a holding company may suffer significant tax advantages to non-residents.

 

Participating holding Company

A Maltese resident company which holds 10% shares in the non-resident company set up abroad.
A participating holding holds can hold less then 10% shares in an overseas company provided that:
a) the company has the option to acquire the shares (ie the minimum 10%) in the overseas company
b) is entitled to be represented on the board of Directors of the foreign Company
c) Holds a shareholding exceeding Euro 1, 165,000 or equivalent for an uninterrupted period of 183 days

What are the Tax Advantages in relation to Malta Holding Company:

Malta operates a full imputation system of Taxation and tax paid by the company is imputed to the shareholder in the event of a refund to Non-Resident shareholders.

The normal tax rate is of 35% and is imputed at a Corporate level however there are various refunds that a shareholder can be entitled to. This means that a shareholder in receipt of a dividend;

a) Dividends paid out of the ForeignIncome Account entitle a Non-resident shareholder to a 2/3 refund of the tax paid by the company.
b) When a company distributes dividends out of profits which are derived out of a participating holding the non-resident shareholder is entitled to 100% refund.

For Further information in relation to tax planning kindly contact us.

 

Financial Institutions in Malta

The relevant legislation in relation to Financial instituitions are Financial Institutions Act and the Financial Institutions Rules. Financial institutions are precluded from taking any deposits from the public (unlike Credit Institutions).

The activities can include the following: lending, Financial leasing, Venture or risk Capital, Trading for won account or for account of customers in, transferable instruments, money market instruments, foreign exchange, exchange and interest rate instruments. Inadditon, Financial Institutions can also carry the following activities; underwriting share issues, Money broking, Issuing of Electronic money.

 

Applications

License Applications shall be submitted to the Malta Financial Services Authority. The Application procedures consist of 2 processes. Primarily there will be an analysis of the business plan of the Financial Institution and following this there will be a due diligence assessment of the Directors, management and shareholders of such Institution.

All applications for a license shall be in such form and accompanied by such information and shall conform with such conditions as shall be prescribed from time to time by a Financial Institutions Rule and an application may only be withdrawn by written notice to the competent authority at a time before it has been granted or refused.

The documentation required, as listed in the Financial Services Rules include the following:

(a) a programme of operations, setting out in particular the type of activities envisaged to be undertaken;

(b) a copy of the Memorandum and Articles of Association of the proposed institution;

(c) proposed level of initial capital;

(d) a business plan including the structure, organisation, management systems, governance arrangements and internal control systems of the institution which demonstrates that these arrangements, control mechanisms and procedures are proportionate, appropriate, sound and adequate; and a forecast budget calculation (financial projections) for the first three financial years which demonstrates that the applicant is able to employ the appropriate and proportionate systems, resources and procedures to operate soundly. The plan shall incorporate all relative financial information required by the authority to enable it to establish the initial capital requirement, in terms of paragraph 25 above. Moreover, the business plan should also include a description of the measures to be taken to safeguard payment service users‟ funds in line with conditions laid down in paragraph 56;

(e) a description of the internal control mechanisms which the applicant will establish in order to comply with obligations in relation to money laundering and terrorist financing under the Money Laundering and Terrorist Financing under the Prevention of Money Laundering Act and the Prevention of Money Laundering and Funding of Terrorism Regulations;

(f) a description of the structural organisation, including, where applicable, a description of the intended use of agents and branches and a description of outsourcing arrangements, and of participation in a national or international payment system. For the purposes of this sub-paragraph and (d) above, the applicant shall provide a description of its audit arrangements it has set up with a view to taking all reasonable steps to protect the interests of its users and to ensure continuity and reliability in the performance of payment services;

(g) Audited Financial Statements for the last three years, if applicable;

(h) the identity of all officers and controllers of the institution as defined in Article 2 of the Act;

(i) the identity of all shareholders holding directly or indirectly a qualifying shareholding and the size of their holdings and evidence of their suitability, taking into account the need to ensure the sound and prudent management of the institution;

(j) the identity of the individuals who will be effectively directing the business of the institution and, where relevant, persons responsible for the management of the activities of the institution, as well as evidence that they are of good repute and possess appropriate knowledge and experience;

(k) where applicable, the identity of statutory auditors and audit firms;

(l) the applicant‟s legal status;

(m) the address of the applicant‟s head office; and

(n) for applicants for a financial institution‟s licence for the provision of any of the activities under paragraph 2 of the Second Schedule to the Act, a description of the measures taken for safeguarding payment service users‟ funds as referred to in paragraph 56 below.

 

Electronic-Money Institutions in Malta

E-money Institutions are regulated by the Financial Instituions Act and Rules. These Instituions are allowed to engage in the following activities:

Issuing of Electronic money, the provision of certain payment services, operation of payment systems, operational services and closely related ancillary services in respect of the issuing of electronic money or to the provision of payment services referred above, business activities other than the issuance of electronic money, having regard to the applicable law regulating such activities.

Requirements:

  • Must have own funds that amount to 350,000 Euro
  • There must be at least 2 individuals who will effectively direct the business of the institution.

Apart from the above mentioned requirements, the Malta Financial Services Authority must also be satisfied with :
Adequate flow of Information, prudent Conduct and fit and proper Persons that direct the Institiution.

The Licence Application is the same as that of a Financial Institution.

For futher Information contact our Law Firm. We advise Clients on the procedure and all relevant documents that must be submitted to the MFSA.