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Malta
Company formation in brief
Malta is legitimately one of the largest modern international business centres and one of the most attractive jurisdictions of the European Union in terms of taxation. Malta’s law provides for the establishing of entities of various organizational and legal forms, including those which may be highlighted from a potential foreign investor’s perspective:
• Private limited company;
• Trust
Private limited company (or “partnership anonyme” in civil law terms) may be established by one physical or legal person and is characterised as follows:
• the minimum charter capital is €1’250, including 20% to be paid to one of the local banks’ account before the company is registered;only registered shares may be issued;
• the company may be managed by one director (a physical entity, resident or non-resident of Malta);
• the company needs a secretary, resident of Malta (a professional company to be duly licensed in the country);
• the company reports to the local tax authorities and files annual financial statements to be certified by a local auditor.
The residence & domicile concepts lay the foundation for the approach to calculating and collecting taxes in respect of physical and legal persons in Malta.
For a legal entity, domicile is a country where the company was registered or duly established (incorporated).
Maltese companies, as well as local entities of other organizational and legal forms (whether incorporated or unincorporated) obtain tax residence on the basis of their domicile (establishing) in Malta.
A foreign company (established outside Malta) obtains tax residence in Malta if the company's management body is located in Malta. Accordingly, any company incorporated in Malta is a Maltese taxpayer in respect of its global income generated in Malta or in another country, unless such income is exempt from Maltese income tax under the Malta Income Tax Act.
In turn, a company being Malta resident but not registered in Malta (for example, a company established in the UK with actual management body located in Malta) pays taxes here on:
• income received from a Maltese source;
• income realised (both within and outside Malta) as a result of managing the company from Malta
regardless of whether such income is actually received in Malta or elsewhere. Meanwhile, capital gains realised outside Malta, regardless of whether they were received in Malta or elsewhere, are exempt from taxation in Malta.
Finally, a company being non-resident in Malta and having no domicile here (not registered in Malta), for example, an English company’s branch in Malta, pays only income tax and tax on capital gains realised in Malta.
Taxation in Malta is based on the use of three fundamental systems:
1. Full imputation tax system;
2. Refundable tax credit;
3. Cross-border double taxation relief
The full imputation tax system provides that a company’s shareholders receiving dividends after the company has paid income tax also receive benefits in the form of tax credit for repaying income tax that the shareholders further pay from their dividends. Since Malta's corporate tax rate is 35% and physical persons’ tax rates range from zero to 35%, the shareholders – physical persons are not subject to additional Maltese tax on income from those dividends, provided that shareholders are taxed at the maximum rate of 35%.
However, if the tax rate applicable to shareholders’ dividends is less than 35%, the shareholders may file a tax reclaim for a part of the tax paid, except for the tax on profits generated directly or indirectly from immovable property located in Malta. Shareholders may file a Maltese tax reclaim regardless of their country of residence.
In practice, a part of taxes paid earlier is paid back in Malta in the following three ways:
- generally, 6/7 of the Maltese tax is paid back; this entails application of the so-called Combined overall Malta effective tax rate (COMET rate) of 5%;
or
- 2/3 of the Maltese tax is paid back; this is the case when the dividend distributing company appeals to the double taxation agreement and when dividends are paid from profits received outside Malta and accounted for as “foreign source income”. This approach entails application of the COMET rate of 2.5% to 6.25%;
or
- 5/7 of the Maltese tax is paid back provided that dividends are paid from passive income (interests and royalties) not received directly or indirectly as a result of any other active business activity; this entails application of the COMET rate of 10%.
This part of the tax has to be paid back within a legal period of 14 days from the date of filing a tax reclaim. The amount paid back to a recipient is not subject to Maltese tax.
The Maltese double taxation relief provides for a taxation relief for any foreign tax imposed on profits received by the Maltese taxpayer regardless of whether the tax is received in a jurisdiction having or not having a double taxation agreement with Malta.
Double taxation relief in Malta is applicable in the following practical forms:
(a) Relief under a relevant agreement. The relief may be obtained by filing a relevant tax credit application given that the amount which may be deemed subject to tax credit may not exceed the tax amount due in Malta in respect of such income.
(b) A unilateral relief provided to a company - resident in Malta by crediting against tax liabilities in respect of income from a foreign source. In addition, a Maltese resident (physical or legal person) may apply for a double taxation relief on multi-tier basis in respect of any taxes due upon distribution of dividends. And an amount that may be subject to credit may not exceed the tax payable in Malta imposed on profits subject to double taxation.
c) Imputation of a flat-rate foreign tax credit (FRFTC rate) arbitrarily equal to 25% on net income received abroad. Such amount may be credited in accordance with the Maltese tax law against a relevant income. In this case, taxes already paid abroad are not accounted for.
Other features of the Malta tax law that are of interest to a foreign investor include:
• No thin capitalisation rules;
• No withholding tax at source on dividends in the context of the full imputation tax system;
• No withholding tax at source on interests or royalties received by a Malta non-resident (not to be owned or controlled, directly or indirectly, by physical persons domiciled in Malta) provided that relevant income is not related to the formation of a “permanent establishment” in Malta;
• The Maltese law provides for migration of companies to approved jurisdictions (the countries not blacklisted by the Financial Action Task Force on Money-laundering - FATF) and back.
• The Advance Revenue Rulings system formally adopted in Malta allows to agree in advance that the tax regime would continue its operation for two years after the law has been changed not for a taxpayer benefit. In addition, Malta has an informal Revenue Guidance system which creates for the taxpayer a legally effective basis deemed to be binding for the tax authorities;
• No capital and wealth tax;
• No tax for changing the company’s domicile;
• No specific regulation for intra-company pricing application, given, however, that the Maltese tax bodies are authorised not to take into account artificial or fictitious schemes created for the sole or primary purpose of obtaining a benefit to enjoy the right not to pay or to reduce taxes or to delay tax payment in Malta;
• Authorisation to increase the value of assets located outside Malta (in transferring the domicile to Malta or in merging with a Maltese company) up to the market value as at the date of such change, if the assets owner has not had the Malta resident status before such change.
Trust in Malta is registered in writing in the form of a will or another document which includes its name, all material terms and conditions, as well as names of the beneficiaries or information required to identify them. The trust is private, if the number of beneficiaries is limited, and charitable - if their number is not limited.
In accordance with the law, private trust may be established in any of the following four forms:
• Fixed trust — where investments are strictly restricted and beneficiaries’ income or share is predetermined by the trust agreement;
• Discretionary trust – where the trustees may decide whether to distribute income among beneficiaries, and if so, between which ones and in what quantity. It is clear that the trustees have a duty to act in the best interest of all beneficiaries and therefore must treat them all as a body. Please, note that until a particular beneficiary is elected, no part of the distributed property may be claimed;
• Protective trust is usually established to protect the beneficiary from his/her overspending. The founder may, for example, form trust relations in favour of beneficiaries "A" and "B” in such a way that they will be valid until the end of "A” life, but if "A" tries to independently dispose of or mortgage the property, it will completely pass to "B" or another charitable organization.
• Accumulation and maintenance trust — where the income and capital are used for “training, maintaining and benefiting the beneficiary.” Any additional income must be accumulated and added to the trust’s capital.
A trust agreement in Malta may last no more than 100 years from the date it comes into force, unless it is cancelled earlier.
Trusts are not legal entities and are not subject to taxation in Malta.
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