Malta's Corporate Taxation System. Form a Company in Malta

Malta boasts a corporate income tax rate of 35%, among the highest in Europe. However, the effective tax rate for shareholders based in foreign countries could be significantly lower. This reduction is possible through a tax refund on distributed dividends (or free shares) from a Maltese company. Moreover, companies can leverage a yearly notional interest deduction against their equity capital, providing further tax relief.

The tax refund rate available to shareholders varies depending on:

• The nature of the underlying profits from which dividends are distributed, and
• The double taxation relief claimed by the Maltese distributing company on the distributed profits.

Typically, a shareholder is entitled to a 6/7 refund on the taxable amount paid by the Maltese company. In essence, the company pays its taxes, but the shareholder is reimbursed a portion of the tax. If profits distributed as dividends originate from interests or royalties, the tax refund decreases to 5/7. Dividends paid from profits allocated to the Foreign Income Account and subject to double taxation relief entitle the shareholder to a 2/3 refund. Furthermore, dividends derived from specific investments may qualify for a 100% tax refund.

Here’s a quick rundown of potential tax refunds based on income types:

• Non-resident shareholder or resident holding: 6/7
• Dividends from profits consisting of interests and royalties: 5/7
• Foreign income subject to double taxation: 2/3
• Dividend participations: 100%

Note that for profits comprising interests and royalties, if the company's operations include collecting such revenues, or if they are taxed outside Malta at a rate of 5% or higher, the income is considered active and eligible for a 6/7 refund.

In the case of dividend participations, the option to pay tax in Malta and receive a full refund is seldom used due to the alternative of applying for a participation exemption to exclude these dividends from taxation altogether.

This guide highlights the strategic tax planning opportunities in Malta, positioning it as an attractive jurisdiction for international investors and businesses seeking efficient corporate structures.

***

Leveraging a Two-Tier Corporate Framework in Malta for Enhanced Tax Efficiency

Malta's favorable tax regime presents a unique opportunity for tax optimization through what is known as a "two-tier corporate framework." This approach is particularly effective when there's an involvement of an overseas shareholder or a Maltese-based holding entity. The structure encompasses the following participants:

• Alfa LTD: An enterprise engaged in Malta's commerce sector;
• Beta LTD: The parent holding entity based in Malta, owning a full stake in Alfa;
• Maltese Government: The fiscal authority responsible for tax collection and issuing refunds;
• Investor: An individual or entity based outside Malta, holding shares in Beta LTD.

Here's a walkthrough of the two-tier system's workings, illustrated with dollar amounts:

1. Profit Generation: Alfa LTD conducts business, accruing earnings that are initially taxed at a flat rate of 35%. For illustrative purposes, if Alfa LTD earns $1,000, it pays $350 in taxes.
2. Profit Sharing: Post-tax, Alfa LTD shares its net profit of $650 as dividends to its sole shareholder, Beta LTD.
3. Tax Reclamation: Beta LTD then requests a tax rebate from the Maltese authorities. Standard procedure involves a refund of 6/7ths of the tax paid, which would be $300 in this instance.
4. Refund Issuance: The Maltese tax body is then mandated to disburse this refund to Beta LTD within a pre-defined time frame.

The dual-structure setup is engineered to ensure that the tax rebate - typically subject to income tax in other jurisdictions - is rerouted as dividend income. While this setup is highly beneficial for certain commercial contexts, it's also applicable to various financial activities, such as investment holdings, leasing operations, management of intellectual properties, and the establishment of captive insurance firms.

The crux of the two-tier framework is that the tax refund from the Maltese government is not passed directly to the foreign investor but is retained within Beta LTD. This mechanism ensures that both the initial profits and subsequent tax refunds are kept within the Maltese economic ecosystem, circumventing further personal tax obligations for the shareholders.

Malta's Exemption Regime on Disposal of Holdings

The framework surrounding Malta's double taxation treaties typically presumes that profits gained by a Maltese company from the disposal of shares in a foreign subsidiary are taxable in Malta. Nevertheless, the holding exemption regime provides a 100% tax relief for Malta-registered companies on capital gains arising from the sale of shares. More significantly, the holding exemption regime also exempts from tax any dividends received from a shareholding in a foreign company by a Malta-registered company.

Criteria for Holding Disposal Exemption

The holding exemption regime requires the following criteria to be met for dividends or capital gains to qualify:

• The dividends or gains must be derived from a shareholding.
• A shareholding implies that a Malta-registered company holds equity interests in a non-resident company.
• At least one of the following conditions must be satisfied concerning the non-resident company:
  • The Malta-registered company can purchase the remaining equity interests in the non-resident company.
  • The investment by the Malta-registered company in the non-resident entity amounts to an uninterrupted period of at least 183 days and a minimum of €1,164,700.
  • The Malta-registered company has the right of first refusal in the event of a sale, redemption, or cancellation of the remaining equity interests of the non-resident company.
  • The Malta-registered company is entitled to a seat on the Board of Directors of the non-resident company.
  • The holding of shares in the non-resident entity by the Malta-registered company is for the purpose of furthering its own business, and not held for trading purposes.
  • Holdings in certain types of partnerships may also be deemed a shareholding.

Criteria for Dividend Receipt Exemption

For dividends, the exemption regime applies if any of the following conditions are met:

• The parent entity is based and incorporated within an EU member state, or
• The holding entity is subject to tax and a minimum tax rate of 15%, or
• At least 50% of the holding company's income, or a lesser percentage, is derived from passive interest or royalties.

If none of the above conditions are met, the exemption on dividends still applies provided the investment in the non-resident company is not held as a portfolio investment, and the passive interest or royalties derived from such a company have been subjected to a tax rate of at least 5%.

Malta's Non-Domiciled Resident Companies Framework

Malta's taxation system accommodates externally incorporated enterprises that are administratively operated from its shores. These entities are considered tax residents of Malta and benefit from a distinctive taxation method known as the "remittance basis." According to this system, taxation is imposed exclusively under certain conditions:

1. If the enterprise generates income or realizes capital gains within Maltese territory, and
2. If income originating from foreign sources (with the exclusion of capital gains) is received into a Maltese financial institution.

This taxation framework is particularly beneficial for several types of business models, including:

• Enterprises with substantial investment-oriented cash flow;
• Entities engaged in lending and financing activities, which are not subject to domestic transfer pricing regulations in Malta;
• Organizations where the primary income stems from royalty earnings.

Read also 

The global residence program of Malta​

Disclaimer: Always speak directly to an attorney; blog posts are not a sufficient source of information to make decisions, may not be appropriate for your situation, may not be well researched, and may not be current at the time you read them, always speak directly with an attorney.

Contact us today to learn more about how we can assist you in achieving your goals and securing a prosperous future.

§§

TO CHECK OUR BOOK SECTION CLICK HERE

YITL Books (click on the title to see it on Amazon)

Expand Your Wealth with Tax Havens, YITL Network, 2023

Books published by the lawyers of our network

The secrets of international tax optimization: To always live as "free" entrepreneurs, and never find yourself at the mercy of a single government

§§

BOOK A HIGHLY CONFIDENTIAL CONSULTATION VIA MAIL

International Tax Lawyer

§§

HOW CAN YOU USE OUR SERVICES?

If it is your first time, here are some examples of the results our tax lawyers and international tax optimization experts can help you achieve:

- international tax optimization;

- creation of Personalized Plans and Worldwide Tax Optimization Plans tailored on your situation, to identify the best solutions for your situation and businesses;

- protect your assets;

- acquire multiple residences;

- acquire new passports;

Check our main page now and contact us https://yourinternationaltaxlawyers.net