Malta to attract foreign CEOs with 15% tax on salary contracts up to €5 million

Malta is working to attract the highest-paid executives in the world with a 15% fixed tax rate for chief executives who earn not less than €75,000 in a year, or up to €5 million over the course of their employment in Malta.

Additionally, there will be a zero-rate tax on any additional income above the taxable €5 million received over the duration of their contracts.

The ‘highly qualified persons rules’ were published this week in yet another new move by the government to attract high-profile industries, hedge funds and financial services practitioners, seeking cheaper tax bases.

The eligible offices for the 15% tax rate will be foreign-domiciled chief executives, investment traders and analysts, actuarial professionals, and marketing and investor relations heads.

But the law includes a vague ‘safety clause’ that allows the government to withdraw the tax rate if the beneficiary’s stay in Malta is “not in the public interest” – which apart from public safety and national security also includes ‘morals’.

It will be the minister responsible for justice – in this case, Carm Mifsud Bonnici – to determine whether a beneficiary’s stay in Malta is not in the public interest.

Malta has a favourable tax regime for foreign companies but is often criticised for acting as a tax haven.

The island levies a 35% corporate tax on the income of Maltese companies, but the tax paid to the inland revenue department is allowed to be marked down as a credit to the shareholders who receive dividends. So when dividends are paid to shareholders, they can claim as much as 85% in refund from that tax.

For example, if a company’s subsidiary in Malta makes €100 million in profits and is taxed at 35%, leaving €65 million, shareholders get six-sevenths of the tax – €30 million – refunded: effectively leaving €95 million for the parent company.

But finance minister Tonio Fenech has in the past vehemently dismissed press reports in Der Spiegel that Malta was used as a tax haven by major German corporations like Lufthansa and BASF.

Fenech says Malta’s tax regime is EU-compliant but Der Spiegel has claimed Malta is one of German industry’s preferred tax locations ever since it joined the EU in 2004. In addition to BASF, Lufthansa and Puma, who already have Maltese branches, Deutsche Bank was also said to be considering opening a subsidiary on the island.

Der Spiegel's infographic on how Malta's offshore tax regime works.

Malta’s tax haven image

Malta’s ongoing struggle with its “tax haven” image was also featured in a report carried by The Australian, which said the Commonwealth Bank of Australia (CBA) had clawed back €38.9 million from its offshore tax rate in Malta.

Using its Malta-based subsidiary Newport, which controls CommBank Europe, CBA employed just six members of staff and recorded a net profit of €181 million after a tax credit of almost €12 million.

Additionally, the financial services authority (MFSA) had employed American lobbyists SNR Denton to “polish Malta’s image” with the US government because the island risks blacklisting in an as-yet-unratified Senate bill on tax haven abuse.

Malta is listed in the bill as one of 34 tax jurisdictions. In 2009, the US lobbyists were paid €69,875 in consultancy fees.

The ‘Stop Tax Haven Abuse Act’ seeks to authorise the US government to use “special measures against foreign jurisdictions, financial institutions, and others that impede US tax enforcement”.

Carl Levin, the co-sponsor of the proposed law, claims the 34 countries, including Malta, peddle “secrecy in the way other countries advertise high-quality services… That secrecy is used to cloak tax evasion and other misconduct.”

Malta feared the proposed legislation could jeopardise ratification by the Senate of a tax treaty with the US, which was signed last year. SNR Denton director Ron Platt was quoted as saying: “The country also believed it should not be on the blacklist anyway… If it was a straight-out vote on Levin, I think it would be tight, but if there’s an alternative that the Treasury Department doesn’t object to, then that would prevail.”

The Financial Times says Malta held as much as €28 billion in foreign assets in 2010 according to Central Bank statistics. “Maltese private bankers claim the pick-up in interest in their country’s banking system stems in part from an exodus of money leaving Switzerland where banking secrecy laws are under threat due to UK and US authorities’ scrutiny of offshore accounts.

“The wealthy are coming out of Switzerland. They’re worried about appearing on a list somewhere,” Mediterranean Bank chief executive Mark Watson was quoted as saying.