MALTA MEMO 2014 Copy Layout 1

VASSILIADES & CO (MALTA) LTD CGV

Maltese Companies and Tax Rules

JANUARY 2014 VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

Table of Contents

1. Introduction to Malta...... 2 2. Types of Companies in Malta...... 2 3. Formation of a Limited Liability Company...... 2 4. Annual Accounts and Annual Returns...... 3 5. Main Advantages of a Maltese company...... 3 6. Taxation of Shareholders in Maltese Companies...... 4 7. Tax Refunds...... 4 8. Payment of Refunds...... 5 9. Salient Features of Maltese Companies...... 5 10. Double Taxation Agreements...... 10 11. Conclusion...... 11 12. Disclaimer...... 11 VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

1. Introduction to Malta

Malta is an ideal location for multinationals seeking cost and tax-efﬁcient jurisdictions within the European Union. The

legal, regulatory and ﬁscal framework in Malta, the use of English as business language, its qualiﬁed work force including

the professionals in the legal, tax and ﬁnancial services ﬁelds, and the relatively low operating costs are some of the in-

gredients that have contributed to the Malta being ranked among the top ﬁnancial centers.

2. Types of Companies in Malta

A limited liability company is the most common form of business entity in Malta. It may have the status of a public or private company.

A private company is a company that must by its Memorandum and Articles:

a) restrict the right to transfer its shares;

b) limit the number of members to ﬁfty; and

c) prohibit any invitation to the public to subscribe for any shares or debentures of the company.

A public company is a company which does not qualify as a private company.

Thus, a public company may offer shares or debentures to the public but it may not issue any form of application for its

shares or debentures unless the company is registered and the issue is accompanied by a prospectus.

A limited liability company is validly constituted in accordance with the Companies Act once a memorandum of association

is entered into and subscribed by at least two persons and a certiﬁcate of registration is issued in respect thereof by the

Registrar of Companies.

3. Formation of a Limited Liability Company

The procedure to form a company involves the following steps:

• the drafting of the Memorandum and Articles of Association which must be signed by the subscribers. A limited li ability company must have at least two (2) shareholders and one (1) director.

• The opening of the share capital account at a bank corresponding to the payment of the paid up issued share capital;

• The ﬁling of the Memorandum and Articles of Association together with the supporting documents as well as the payment of the registration fees which is calculated on the authorised share capital. The minimum registration fee due to the Registry of Companies is € 245 and rises to a maximum of € 2,250.

Once the Registrar of Companies has all necessary information and documentation, the process may take as little as 24 hours.

- 2 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

4. Annual Accounts and Annual Returns

All duly incorporated companies must prepare an annual return in the prescribed format to be made up, upon each an- niversary of its registration. The return must be filed with the Registrar of Companies within 42 days after the date of its drawing up. A payment between € 100 and € 1,400 depending on the authorized capital is to be submitted along with the return.

Companies are also required to file a copy of the annual accounts. These must generally be accompanied by a copy of the auditors’ report and the directors’ report. The annual accounts must be filed within 10 months from the end of the financial year, with a grace period of 42 days.

5. Main Advantages of a Maltese Company

A company incorporated under the laws of Malta is automatically deemed to be tax resident in Malta. Companies incorporated outside Malta may still be considered to be tax resident in Malta, if they are managed and controlled in Malta. Com- panies ordinarily resident and domiciled in Malta are subject to income tax on their worldwide income and chargeable gains.

Malta has adopted the full imputation system concurrently with the introduction of income tax legislation in 1948. Accord- ingly, a Maltese company has to deduct tax at a flat rate of 35%. However, a shareholder in receipt of a dividend distributed by a Maltese Company out of its profits, will be then entitled to claim a refund of the Malta tax on those profits. In this manner, double taxation upon both the company and the shareholders is avoided.

The tax advantages emanating from a Maltese Company mainly consist in the following:

➢ Net tax payable on company proﬁts equals to 5%; ➢ Possibility to be taxed at 35% on incoming dividends and subsequently apply for a full refund or 6/7 refund on the Malta tax paid (i.e. 5% net tax)[N.B. please see details further below]; ➢ No withholding taxes on outbound dividends, interest and royalties; ➢ Full exemption on stamp duty and capital gains upon the transfer of shares between non-residents (subject to certain conditions); ➢ All costs incurred in the production of the income is allowed as a tax deductible expense. There are no disallowed expenses except for those expenses relating to company formation; ➢ Over 60 double taxation arrangements in place including with all EU countries and with the US. Such number of double taxation arrangements is increasing on a yearly basis.

Other advantages of forming a company in Malta are the following features of the Island:

➢Member of the European Union; ➢ Member of the Euro Zone; ➢ A sound banking system; ➢ English being one of the two ofﬁcial languages; ➢ A democratic and stable government; ➢ A professional English speaking work force; ➢ A relatively low cost base; ➢ One of the best IT infrastructures in the European Union; and ➢ Good ﬂight connections to all major EU cities.

- 3 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

6. Taxation of Shareholders in Maltese Companies

In addition to the above, shareholders of Maltese companies (irrespective of whether the shareholders are Maltese or not) are entitled to a tax credit for the tax suffered by the company paying a dividend.

This also means that the shareholders’ tax liability in respect of the dividends is offset by the amount of tax withheld by the company when making the dividend payment. Thus, no further tax is payable by the shareholders. Indeed, individual share holders do not need to declare their dividend in their tax return.

Shareholders of Maltese companies are also entitled to refunds of all or part of the tax paid by the Maltese company. In order to qualify for the refunds, the shareholders need to be registered with the Malta Commissioner of Inland Revenue in the prescribed manner.

7. Tax Refunds

There are 4 types of tax refunds that shareholders of a Maltese Company are able to avail themselves of in the appropriate circumstances when they receive a dividend from a Maltese Company. These are classiﬁed as follows:

a. A full refund – shareholders of a company in receipt of a dividend from proﬁts derived from income or gains from the holding or disposal of any ‘participating holding’ may claim a 100% refund of the tax paid by the company, however the 100% refund is only granted if the abuse-tests are satisﬁed;

b. A six-sevenths (6/7ths) refund - this 6/7ths refunds is available in all other cases except where the Maltese Company:

i. Receives ‘passive interest or royalties’; or

ii. Claims double taxation relief in respect of its income from investments outside Malta.

The above mainly refers to the refund of the corporate tax (35%) paid by the Maltese Company and will become available to the shareholder of a trading company. Furthermore, the tax shed in Malta and which is not recoverable by the shareholders totals 5% of the total taxable income of the Maltese Company.

c. A five-sevenths (5/7ths) this refund applies limitedly to those cases where the Maltese company receives the following:

i. Passive interest or royalties which are not derived from a trade or business and have suffered tax at a rate of less than 5%; and

ii. Dividends from a holding of shares which does not satisfy the anti-abuse test for a participating holding.

The above refers to the refund of the corporate tax (35%) paid by the Maltese Company. Furthermore, the tax shed in Malta and which is not recoverable by the shareholders totals 10% of the total taxable income of the Maltese Company.

d. A two-thirds (2/3rds) refund – this refund applies only in those cases when the Maltese Company claims double taxation relief in connection with the proﬁts derived from its passive investments outside Malta. The tax shed in Malta that is not recoverable by the shareholders of the Maltese Company totals 6.25% of the total taxable Income of the Maltese Company.

- 4 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

8. Payment of Refunds

The activities carried out by the Maltese Company determine the applicability or otherwise of the refunds. The refund itself is not taxable in Malta in the hands of the shareholder and is paid by the Commissioner of Inland Revenue on production of the appropriate dividend voucher. In brief, a tax refund is:

➢ Given as a tax credit to the shareholder, whether corporate or individual, of the Maltese Company; and is

➢ Calculated as a percentage of the corporate tax (at 35%) suffered by the company – hence the shareholder will get a refund of a percentage of tax which was paid at company level.

The relevant refund must be paid by the Commissioner to the respective shareholder by not later than fourteen (14) days from when the refund becomes due, and no longer than fourteen (14) days from the end of the month when the application for the refund is submitted. Furthermore, in order for the refund to be provided in a timely manner, the following documentation must be presented to the Inland Revenue Department in Malta:

➢ A copy of the Company’s tax return for the year in which the proﬁts being distributed were made and a copy of the receipt acknowledging submission of such return;

➢ A copy of the dividend certiﬁcate or warrant made out in the required format, showing the dividend being paid out by the Company;

➢ Evidence of tax paid by the Company paying out the dividend;

➢ A formal application form by the recipient of the dividend requesting the particular type of refund.

Furthermore, the shareholder claiming the refund must be registered with the International Tax Unit in Malta whereas, the refunds are paid out in the same currency in which the proﬁts were charged to tax. Claims for the payment of refunds are time-barred after four (4) years.

9. Salient Features of Maltese Companies

Maltese companies are particularly tax-efﬁcient corporate vehicles and can be (and have proven to be) advantageously utilized in an unlimited variety of:

a) Trading, commercial and service activities in any sector: particularly in the provision of commercial, management, tech nical and other services, group treasury operations and the international purchase and sale of goods; and / or

b) Holding activities, including the holding of shares in other companies, intellectual property rights, loan rights, bank accounts and other assets, whether tangible or intangible, movable or immovable.

- 5 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

The below is a detailed description of the beneﬁts and uses of Trading and Holding Companies:

A. Basic Trading Structure

Foreign Shareholder 6/7ths refund - Eur 30

Dividend of Eur 65 →

Maltese Trading Corporate Tax at 35% on net proﬁts of Eur 35 Company

Dividend of Eur 65 →

B. Two-Tier Trading Structure

Such two tier structure can be beneﬁcial for the following circumstances:

➢ To mitigate the risk of tax liability which is to be generated at the shareholder level on the amount of refund received ; and ➢ To maintain conﬁdentiality since the foreign shareholder will not be obliged to register with the Tax Authorities in Malta.

Foreign Shareholder

Dividend of Eur 95 →

Maltese Holding 6/7ths refund - Eur 30 Company

Dividend of Eur 65 →

Maltese Trading Corporate Tax at 35% on net proﬁts of Eur 35 Company

Dividend of Eur 100 →

- 6 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

➢ The above Maltese Trading Company generates income from its trading activities; ➢ A rate of 35% tax is applied to the net proﬁts of the Maltese Trading Company; ➢ Upon distributions of dividends to the Maltese Holding Company, the latter may claim a 6/7ths refund of the 35% tax paid by the Maltese Trading Company; ➢ Dividend income and the tax refund received by the Maltese Holding Company is not taxed any further in Malta; ➢ The Maltese Holding Company can distribute in full both the ax refund and the dividend income received to its foreign shareholder; ➢ No withholding taxes on dividends paid to the foreign shareholder;

C. The Maltese Holding Company – 100% tax exemption

A Maltese Holding Company may beneﬁt from a total exemption on corporate tax in Malta, provided that certain require- ments are satisﬁed. Additionally, Malta imposes no withholding tax on dividends distributed from a Maltese Company to its shareholders.

i. A Participating Holding

A Maltese Holding Company may avail itself of either a full refund or a total tax exemption on any dividend income or capital gains, provided it qualiﬁes as a participating holding. Therefore, a Maltese Company will only qualify as a Participating Holding (total tax exemption) in a non-resident entity if:

➢ It holds directly at least 10% of equity shares of an entity; or ➢ It is an equity shareholder in a company and is entitled to acquire the entire balance of shares; or ➢ It holds equity shares in an entity and is entitled to ﬁrst refusal in the event of the proposed disposal, redemption or cancellation of all the equity shares; or ➢ It holds equity shares in an entity entitling it to either sit on the Board of Directors or to appoint a person to sit on the Board of that Company as a director; or ➢ It holds equity shares in an entity having an investment value of Eur 1,164,000.00 and held for an uninterrupted period of not less than 183 days; or ➢ It holds equity shares for the furtherance of its own business and is not held as trading stock for the purposes of a trade.

The full refund of exemption will only be made available to the Maltese Participating Holding if the non-resident entity held, paying the dividend satisﬁes anyone of the below 3 conditions:

➢ Is resident or incorporated in the European Union; ➢ Is subject to a minimum of 15% foreign tax; or ➢ Does not derive more than 50% of its income from passive interest and royalties.

- 7 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

The below structures are amongst the most common Holding structures: ii. Holding of Overseas Investments

Foreign Parent

Dividend →

Maltese Holding Company More than 10% shareholding

Dividend →

Foreign Subsidiary

The above structure involves the following: ➢ The investment in the foreign subsidiary qualiﬁes as a participating holding; ➢ There are low or no withholding taxes on dividend received in the Maltese Holding Company using the treaty net work of the EU Directives; ➢ Dividend income is exempt from Maltese taxation or full refund available on the tax paid on the dividends received; ➢ No withholding tax in Malta on dividends paid to the foreign parent; ➢ Foreign parent may be resident anywhere in the World; ➢ No capital gains tax on potential sale of the investment; ➢ Effective tax rate in Malta is 0%. iii. Entry Route into the EU

Dividend →

Maltese Holding More than 10% shareholding Company

Dividend →

Low Tax Company 2 →

Low Tax Company 1 with Passive Income - 8 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

The above structure involves the following: ➢ If the low tax company 1 is not subject to a minimum of 5% tax or if it derives more than 50% of its income from passive interest or royalties, the low tax company 2 may be inserted since the holding of shares does not qualify as passive interest or royalties; ➢ The investment in low tax company 2 will therefore qualify as a participating holding; ➢ 100% tax exemption applies on dividend income from low tax company 2; ➢ No withholding tax in Malta on dividends paid to the EU shareholder; ➢ Effective tax rate in Malta is 0%. iv. Exit Route from the EU

NON-EU

Dividend →

Maltese Holding More than 10% shareholding Company

Dividend →

EU Subsidiary

The above structure involves the following: ➢ The investment in the EU subsidiary qualiﬁes as a participating holding; ➢ No withholding tax on dividends paid by the EU subsidiary to the Maltese Holding Company given that the Par ent-subsidiary Directive conditions are met; ➢ Dividend income received by the Holding Company from the EU subsidiary is exempt from ➢ taxation in Malta; ➢ No withholding tax in Malta on dividends paid to the non-EU shareholder; ➢ Effective tax rate in Malta is 0%.

- 9 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

10. Double Taxation Agreements

Malta currently has comprehensive Double Taxation Agreements in force with the countries indicated hereunder:

➢ Albania ➢ Norway ➢ Australia ➢ Pakistan ➢ Austria ➢ Poland ➢ Bahrain ➢ Portugal ➢ Barbados ➢ Qatar ➢ Belgium ➢ Romania ➢ Bulgaria ➢ San Marino ➢ Canada ➢ Saudi Arabia ➢ China ➢ Serbia ➢ Croatia ➢ Singapore ➢ Cyprus ➢ Slovakia ➢ Czech Republic ➢ Slovenia ➢ Denmark ➢ South Africa ➢ Egypt ➢ Spain ➢ Estonia ➢ Sweden ➢ Finland ➢ Switzerland ➢ France ➢ Syria ➢ Georgia ➢ Tunisia ➢ Germany ➢ Turkey ➢ Greece ➢ United Arab Emirates ➢ Guernsey ➢ United Kingdom ➢ Hong Kong ➢ United States of America ➢ Hungary ➢ Uruguay ➢ Iceland ➢ India ➢ Ireland ➢ Isle of Man ➢ Italy ➢ Jersey ➢ Jordan ➢ Korea ➢ Kuwait ➢ Latvia ➢ Lebanon ➢ Libya ➢ Lithuania ➢ Luxembourg ➢ Malaysia ➢ Montenegro ➢ Morocco ➢ Netherlands - 10 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

Other treaties which have been signed but are not yet in force are:

➢ Barbados – the Protocol amending the Convention between the State of Malta and Barbados for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at London on 05.12.2001; ➢ Belgium – the Protocol amending the agreement between the State of Malta and the Kingdom of Belgium for the avoidance of double taxation and the prevention of fiscal evasion, and the protocol signed at Brussels on 28.06.1974 as amended by the supplementary agreement signed at Brussels on 23.06.1993; ➢ India – Agreement between the Government of Malta and the Government of the Republic of India for the avoid ance of double taxation and the prevention of fiscal evasion with respect to taxes on income; ➢ Liechtenstein – Convention between the Government of the Republic of Malta and the Government of the Princi pality of Liechtenstein for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital; ➢ Mexico – Convention between the United Mexican States and Malta for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income; ➢ Russia – Double Taxation Relief (taxes on income) (Russian Federation Order); ➢ South Africa – Protocol amending the agreement between the Government of Malta and the Government of the Republic of South Africa for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income signed at Rome on 16.05.1997; ➢ Ukraine – Convention between the Government of Ukraine and the Government of the Republic of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

Other signed tax information agreements:

➢ Bahamas – Agreement between the Government of Malta and the Government of the Commonwealth of the Ba hamas for the exchange of information relating to tax matters; ➢ Bermuda – Exchange of Information relating to tax matters; ➢ Gibraltar – Agreement between the Government of Malta and the Government of Gibraltar for the exchange of in formation relating to tax matters.

- 11 - VASSILIADES & CO (MALTA) LTD CGV A Guide to the Formation of Maltese companies

11. Conclusion

All related services have been gathered under the Malta Financial Services Authority in order to avoid bureaucracy and improve the efﬁciency. Furthermore, all professionals involved in the ﬁnancial sector are heavily regulated and monitored to ensure a high level of professional service. For all of the above reasons, multinational companies and individuals seeking to lower costs and increase the return of their investment should seriously consider Malta in their international tax planning structure.

12. Disclaimer

This memo is to be used as a general guide and must not substitute professional advice. Vassiliades & Co. (Malta) Limited hereby disclaims any and all responsibility and/or liability that may be asserted or claimed arising from any loss occasioned by acting or refraining from acting on the basis of this memo.

Contact Details:

DR. ABIGAIL BUGEJA Address : 83, Market Street, Floriana, Malta Telephone Number : +356 21224185 Fax Number : +356 21224242 Mobile Number : +356 79225566 Email Address : [email protected]

CAUTION: The information in this booklet does not create a prece- dent. It is intended only as a general Guide and is not to be relied upon as the basis for any decisions or outcome on the subject matter. Professional advice and consultation by Lawyers as appli- cable to the speciﬁc matter in question and in accordance to the laws and regulations in force at that time, must be obtained.