Malta Company Tax
Malta’s corporate income tax rate is 35%, however its full imputation tax system and associated tax refunds can reduce the effective tax rate to as low as around 5%. This regime has been approved by the European Commission, while Malta is also included on the so-called ‘white list’.
Malta has become a preferred vehicle for corporate structures among other competitive jurisdictions such as Dublin, Luxembourg and Hong Kong to many investors, entrepreneurs and hedge fund managers. As a member of the European Union, the country is now a hotspot for efficient international transactions and international tax planning.
One of the most common types of business entity when incorporating a company in Malta is the limited liability company. A Malta company is the ideal vehicle for a wide range of business activities such as holding or trading companies, iGaming operations and eCommerce activities.
Malta’s network of 70 double taxation treaties allow companies to claim double taxation relief under certain conditions. For instance, this might be a solution to many where the foreign income is exempt from tax or the foreign income has been taxed at a reduced rate.
Tax on dividends in Malta
Companies are chargeable to tax in Malta at a rate of 35%. However, the Malta tax system operates a full imputation tax system and associated refunds can reduce the effective tax rate to as low as around 5%.
Malta participation exemption
A full (100%) Malta participation exemption applies when dividends and capital gains are derived from a participation holding or from the transfer of part or all such participating holding based on the Income Tax Act.
A participation holding constitutes where a company resident in Malta holds equity shares in another entity and the former:
• Owns at least 5% of the equity shares in the non-domiciled company;
• Right to vote;
• Right to profits available for distribution;
• Right to assets available for distribution on a winding up; or
• The investment in a non-resident entity amounts to at least EUR 1.164 million or more, subject to a time duration test of 183 days; or
• Has the option to acquire the remaining balance of the equity shares in the non-resident company; or is entitled to first refusal to purchase such shares in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in non-resident company; or
• Is entitled to sit on the Board of the non-resident company; or
• Holds shares in the non-domiciled entity that are for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes.
Participations in certain forms of partnerships may also be considered to be a “participating holding”.
Dividends and capital gains from a “participating holding”
As an alternative to claiming a participation exemption, the holding company may choose to pay tax at the normal corporate income tax rate of 35%. When such profits are distributed, shareholders may claim a full-refund of the Malta tax paid on those profits.
When the participation in the non-resident company does not involve a “participating holding”, then the income is subject to tax at the normal corporate income tax rate of 35%. Consequently, dividends distributed by the holding company entitles shareholders to claim one of the following refunds of tax:
• 6/7ths of the Malta tax; or
• 5/7ths of the tax paid in Malta; or
• 2/3rds of the tax paid in Malta.
As an example, a trading income, may qualify for a 6/7th refund on the tax paid if it satisfies certain conditions and thus bring the effective tax rate down to around 5% whilst a 5/7th refund is generally available on passive income such as interest or royalties.
The Advantages of a Holding Company in Malta
Malta is increasingly attractive as a holding company jurisdiction because it allows for tax efficient planning and may entitle owners to a certain tax refund, without getting taxed on dividends and on capital gains. As an EU member state businesses in Malta can take advantage of the Parent Subsidiary Directive which allows for the transfer of profits between one EU Member State to another to not be taxed twice by granting either a full exemption or a tax credit.
Holding company as a choice for doing business in Malta?
The Mediterranean islands are becoming a popular jurisdiction for setting up a Malta holding company not only because holding companies benefit from the application of all EU directives but also because of:
• flexibility a Malta holding structure has;
• various forms of double taxation relief;
• tax rate may be reduced to a possible 0% by benefiting from the Participating Holding or the Participation Exemption;
• no withholding taxes on payments of interest and royalties to non-resident persons.
Why starting a business in Malta?