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Malta: Offshore Legal and Tax Regimes

Introduction

The term 'offshore' is used in Malta only in the 'Offshore Company' which was phased out in favour of the International Trading and Holding Company (ITC and IHC) forms. Non-residence is a key criterion for obtaining offshore tax treatment in most situations. The main forms useful for offshore operations apart from the ITC and IHC are the Limited Partnership and the Trust. Normally, non-resident tax treatment is given to foreign income, while income arising in Malta is taxed more highly.

Following Malta's acceptance into the EU in 2004, there was doubt about which parts of the country's offshore regime would be allowed to continue. In August, 2003, the European Commission described seven 'harmful' tax measures that it wanted the Maltese government to abolish as part of its attack on tax measures in the ten acceding nations that it feared would distort the single market.

The first three measures identified by the Commission concerned offshore trading and non-trading companies, offshore insurance firms and offshore banking companies. In fact, Malta acted to abolish 'offshore' companies as such in 1996, although a transition period allowed the continuance of existing companies until 2004.

Other measures singled out by the Commission as harmful included International Trading Companies, which create an effective tax rate of 4.2% for non-residents, the beneficial tax treatment of dividends from companies with foreign income, the tax treatment of Investment Service Companies, and the deferral of tax on foreign income for non-resident companies.

In March, 2006, the European Commission formally requested Malta under EC Treaty state aid rules to abolish the tax regime for Maltese Companies with Foreign Income (CFI) and the International Trading Companies (ITC) regime by the end of 2010 at the latest.

Competition Commissioner Neelie Kroes observed that: "The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy."

In May 2006, the Maltese government formally decided to gradually abolish the existing aid schemes.

Competition Commissioner Neelie Kroes announced: "I welcome the abolition of Malta's preferential regimes as a further important step towards eliminating selective tax incentives that significantly distort the location of business activities in the Single Market."

Malta's acceptance of the EC recommendation meant that:

  • The existing ITC and CFI schemes were effectively abolished by 1st January 2007;
  • A new refundable tax credit system was to be enacted by Malta provided that it does not effectively favour foreign-owned companies over domestic-owned companies;
  • The tax status of ITC is prohibited to any new company registered in Malta after 31st December 2006;
  • The existing ITCs benefit from the current system only until 31st December 2010; and
  • The number of newly created ITCs between the date of acceptance of the appropriate measures and 31st December 2006 was limited to the yearly average number of ITC companies created in the last five years.

The Business Promotion Act 2003 offers worthwhile tax concessions to many types of manufacturing and other businesses.

 

 

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Malta Tax – CSB Advocates