Malta as a Holding Company Jurisdiction: Relationship between requirements for Maltese holding and its level of tax efficiency.
In an international tax-planning scenario a holding company is established in a tax jurisdiction with the idea of serving as a recipient of the profits of the other trading counterparts in the particular tax structure. The holding company is usually the final step prior to the final profit distributions to the ultimate shareholders.
Hence, the selection of the tax jurisdiction where to interpose such holding company is of paramount importance in order to maintain the tax efficacy of the particular tax structure.
A holding company has basically five requirements that assess its level of tax efficiency, viz.
- The taxation of outbound dividends by the distributing.
- The taxation of the dividends received in the tax jurisdiction of the Holding Company.
- The taxation of outbound dividends from the tax jurisdiction of the Holding Company.
- Capital Gains considerations on the disposal of the holdings by the Holding Company.
- The potential gains or profits on the transfer of shares in the Holding Company.
The elimination/mitigation of taxation in all of the aforementioned instances assesses whether a particular tax jurisdiction is advantageous with respect to holding activities. The following is an in-depth view of the Maltese Holding Company taxation, with the tax implications of the latter with respect to each of the 5 criteria.
Overview of Malta Holding Company taxation:
1. The taxation of inbound dividends by the distributing entity/ jurisdiction and Double Tax Treaties
The main source of income of a holding company is the receipt of dividends from the countries where the profits are arising. It is customary for such countries to operate a classical tax system whereby the profits are first taxed at a corporate rate, and a withholding tax is additionally levied upon a dividend distribution. This withholding tax rate, although set by the legislation of the particular tax jurisdiction, is usually reduced or eliminated by virtue of Double Taxation Treaties. Malta has concluded 80 tax treaties both with European and non-European countries.
From such treaties the major concessions with respect to a reduction or elimination of withholding tax results when a specific level of beneficial shareholding is present in the particular scenario. A case in point is on dividends distributed by a Swedish company in which a Maltese company having a shareholding of more that 10%, is not charged any withholding tax upon distribution.
Having mentioned the existence of Double Tax Treaties and their impact on the taxation of inbound dividends, Malta’s accession within the European Union on 1st May 2004 allows the latter country to benefit from the EU Parent – Subsidiary Directive.
Hence, a Maltese company holding more than a 10% beneficial holding in a company in another EU country will generally not result in any withholding taxes being levied upon inbound dividends from that EU country.
This directive, coupled with the fact that the EU comprises of 27 countries, makes the Malta Holding Company taxation very efficient when it comes to the such charges on inbound dividends.
2. The taxation of the dividends received in the tax jurisdiction of the Holding Company.
Non-resident shareholders in a Maltese holding company can benefit from the full imputation system on dividend distributions, coupled with the participation exemption available under Maltese tax legislation as from 1st January 2007. The importance of the participation exemption lies in the fact that any profits received from such holding or from the disposal thereof would not fall to be taxed in Malta.
Satisfying ANY ONE of criteria of participation exemption rules in any company suffices to qualify as a such:
A company holds directly at least five per cent (5%) of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers entitlement to at least five per cent (5%) of ANY OF TWO of the following:
- right to vote;
- profits available for distribution;
- assets available for distribution on a winding up;
A company is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held;
A company is an equity shareholder in a company and the equity shareholder company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company;
A company is an equity shareholder in a company not resident in Malta and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director;
A company is an equity shareholder which invests a minimum sum one hundred and sixty-four thousand euro (€1,164,000) (or the equivalent sum in a foreign currency) in a company and that the investment in the company not resident in Malta is held for an uninterrupted period of not less than 183 days;
A company is an equity shareholder in a company not resident in Malta and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of trade.
With regards to profits or gains received from a participating holding – and not applicable to gains or profits on the disposal of said holding – there exist further anti-avoidance provisions in order for said holding to be able to benefit from the said exemptions.
Where the body of persons in which the participating holding is held satisfies ANY ONE of the following conditions, that is to say:
— it is resident or incorporated in a country or territory which forms part of the European Union;
— it is subject to any foreign tax of at least fifteen per cent (15%);
— it does not have more than fifty per cent (50%) of its income derived from passive interest or royalties [the latter 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 or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%)]
Where none of the conditions set out in the previous paragraph are satisfied then BOTH of the following two conditions must be satisfied:
— the equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment and for this purpose the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment;
— the body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than five per cent (5%):
In the event that the gains or profits received from a participating holding would not fall within any of the above-mentioned criteria, then normal income tax provisions would apply in Malta also allowing the shareholder of the Maltese holding company to reclaim tax refunds of the tax paid by the same company upon an eventual dividend distribution.
3. The taxation of outbound dividends from the tax jurisdiction of the Holding Company and full imputation system
Malta implements a full imputation system whereby taxable profits of any Maltese registered company are generally liable to a 35% income tax rate, with the shareholders receiving a full credit for the tax paid by the company. Unlike a classical system, Malta does not levy any withholding taxes upon a dividend distribution irrespective of where the shareholder is resident or domiciled.
Hence, shareholders of a Maltese Holding Company receiving dividends from their holdings in the Maltese holding company will not suffer any withholding taxes in Malta.
4. Capital Gains on the disposal of the holdings by the Holding Company.
In the event of any disposals by the Maltese Holding Company of its foreign investments, it is important to assess the impact of such disposals on its tax liability. Maltese tax legislation does not tax capital gains separately under an ad hoc legislation, but the latter is included as part of the taxable income.
Double taxation relief provisions and unilateral taxation relief are in place so as to reduce the local tax liability in the event of the capital gain having been taxed in the non-Maltese tax jurisdiction where the gain arises.
The disposal by the Maltese Holding company of its investment – when the latter qualifies as a participating holding – would not be subject to tax in Malta (without any anti-avoidance limitations).
If the holding being disposed by the Maltese holding Company does not qualify as a participating holding, then said gain would fall to be taxed at normal rates in Malta with the possibility of the shareholders thereof claiming tax refunds as aforesaid.
5. The potential gains or profits on the transfer of shares in the Holding Company.
Persons not resident in Malta divesting their shares in the Maltese Holding Company would generally be tax exempt in Malta on any gains or profits earned on such disposal. Here it is being assumed that the Maltese Holding company is not a property company (with the property having to be held in Malta for such definition to apply) and that the Maltese Holding Company does not own, directly or indirectly, shares in a property company.
In conclusion, it is clear that the Malta Holding Company taxation is very attractive for international investors. The aforementioned tax-breaks together with the robust corporate law currently in force in Malta render Malta one of the top jurisdictions for investors when considering incorporating a holding company.