Malta: Tax haven or frontier market?

Malta is this year expected to register the fastest growth rate in the EU, with property prices rising year after year and local banks recording bigger turnovers.

However, over the years Malta has gained an undesirable reputation as an offshore haven for all the hot money within the eurozone.

Since joining the single currency in 2008, successive governments have championed an investor-friendly economy, to the degree that other EU countries, including Germany, France, the UK and Italy, view Malta as a tax haven, similar to Luxembourg.

On a global level, this race to the bottom often irks larger economies and the EU’s economic powerhouses are less than pleased with Malta’s lax tax regime. This has led Germany and other countries to attempt to curtail Malta’s tax benefits.

Traditionally dependent on tourism and manufacturing, the Maltese economy has become service-based, with an emphasis on financial services and banking.

In order to maintain a competitive edge, Malta offers wealthy individuals and corporations advantageous tax rates, using tax breaks to attract investment or hot money, which could originate from criminal activities.

But what makes Malta so attractive?

The law

Maltese legislation on banking, mutual funds, insurance and trust services underwent an overhaul upon EU accession in 2004 and although Malta has moderately high internal taxes, the country offers low-tax regimes to companies and individuals.

Malta shrugged off its reputation as a fiscal paradise by adopting a “full-imputation” tax system where corporate profits are taxed at 35%.

However, Maltese registered companies do not pay inheritance tax or wealth tax. Moreover, companies are exempted from paying an annual property tax and other benefits include zero tax on interest and dividends.

Tax

Companies registered in Malta are considered as resident and domiciled in Malta. But companies incorporated outside Malta are considered resident in Malta only if the management and control of the company is exercised in Malta.

The term ‘management and control’ is not defined in Maltese tax law but if a company’s board meetings and general meetings are held in Malta the Inland Revenue Department would consider the company as resident in Malta.

Such companies are subject to tax on income arising in Malta and foreign income – excluding capital gains – received in Malta. The same applies to individuals who are resident but not domiciled in Malta.

The statutory rate of tax for corporations is 35% and when dividends are distributed to shareholders out of the company’s taxed profits, it carries an imputation credit on the tax that has already been paid by the company. After the tax refund, a shareholder’s tax burden decreases to 0% - 5%.

Under Malta’s tax law all income coming from a company that qualifies as a “participatory holding” company also qualifies for a full refund of the taxes paid by the company, when distributions are paid back to the company’s shareholders.

However, there is a Value Added Tax rate of 18% applicable to those companies that are trading within the EU.

Income or gains from participating holdings in foreign companies are exempt from tax and there is no tax on gains realised from transfers of corporate securities by a non-resident, as long as the recipient is the beneficial owner of the gains and the securities are not held in a company whose assets consist principally of immovable property in Malta.

Corporate tax

International Trading Companies, International Holding Companies, companies licensed under the Malta Freeports Act and the Business Promotion Act may benefit from tax holidays of 10 years or more.

International Holding Companies operating foreign income account where they receive income from abroad, pay 35% tax on net income but can make use of four levels of abatement of the tax.

A Maltese registered company owning 10% or more in a foreign company effectively pays zero tax.

Trusts

Malta does not keep a public register of trusts and private foundations. Under the Trusts and Trustees Act, foreign owned trusts are exempted from paying tax. Maltese residents can also form trusts but the trust is a taxable entity unless both the beneficiaries and the income are foreign, in which case the trust remains exempt from tax.

Furthermore, foreign trusts do not have to file tax returns given that a Professional Trustee company which is acting as their trustee makes an annual declaration of conformity with the law.

In order to receive tax-exemption, registration is obligatory.

Foundations

For tax purposes, foundations are treated in the same manner as a company but these could also be taxed in the same manner as a trust in accordance with the applicable provisions dealing with trusts which would be applicable to a founder, the foundation and the beneficiaries.

The law also allows the establishment of segregated cells within a foundation in such a way that the foundation may be divided into various cells and each cell would, for tax purposes, be deemed to be a separate foundation and taxed accordingly.