Corporate Tax Migration to Malta - Option for Hong Kong Companies
Contributed by Prospera Europe
09 September, 2019
In international corporate structuring, the issue of tax payments is becoming increasingly topical, since offshores and tax havens are no longer in style. This is both due to the global battle in fighting against tax evasion and profit shifting, and due to the banks, which are not welcoming to offshores anymore, and, basically, refuse to work with them. The trend is in line with the OECD's initiative committed to the process which is called "de offshorization". What conclusions can we make then? Taxes must be paid, the only question left unanswered, where and how much?
Tightening of Tax Regulatory on Claiming an Income as Sourced in Offshore (outside HongKong)
Hong Kong Inland Revenue Department ("IRD"), the tax authority of Hong Kong, has been sending query letters to Hong Kong corporate taxpayers who have been granted the tax exemption of their offshore incomes in the previous Years of Assessment.
The query letter demands the taxpayer to provide supplementary documents and information to the IRD, which can prove whether the taxpayer had substance outside of Hong Kong and, most importantly, had reported the offshore income in question to other jurisdictions.
The action from the IRD is supporting the global battle in fighting against tax evasion and profit shifting. Since Hong Kong is engaging in the OECD's Country-by-Country Reporting package as a component of the implementation of Automatic Exchange of Information, Hong Kong taxpayers' information is shared with other tax authorities in the participating jurisdictions while Hong Kong IRD obtains the report of its taxpayers from other tax authorities on an automatic basis, to determine if an offshore income is legally assessed.
If the taxpayer misses the IRD query, the IRD will demand the Profits Tax charged on the offshore income. The updated taxpayer's account will be shared with other tax authorities and may receive queries from them where different tax legislation may apply.
Among the international business and financial hubs, Hong Kong is one of jurisdictions, which adopts the territorial principle of taxation.
We highly recommend that advisors engaged in international corporate structuring should equip themselves toward the surge of workload linked to the regulatory tightening of customers' offshore claim of income, and other options available like proof of substance and tax presence elsewhere, outside of Hong Kong. Most importantly, that it is reporting the offshore income in question to the other jurisdiction.
Hong Kong is giving a tax rate to any firms doing business in Hong Kong, where the first HK$2 million annual profits are charged at 8.25% and 16.5% on the remaining. If this seems too high, the immediate solution is to migrate corporate tax residency from Hong Kong to more efficient tax rate country, which also has a system of taxation and substance in place which satisfies the OECD.
The long-term goal is to also provide substance to the extent that the company will be recognized as a centre of management of your business and actually "perform" these functions.
For those who can choose to move their corporate tax residency, Malta is one of the best places to consider. Over the past years, Malta proactively positioned itself not only as a competitive and tax efficient place to do business, but as an increasingly versatile and sophisticated structuring hub, with a sound regulatory framework.
In case you are using a Hong Kong company, it might be a good time for a review. One option is to upgrade your structure by moving corporate tax residency to Malta. We are pleased to offer a solution with corporate tax migration to Malta dealing with setting up Permanent Establishment (PE) of an overseas company in Malta. Corporate tax migration is particularly popular with companies registered in jurisdictions without substance, which have outgrown their environment and now seek to capitalize on Malta's business advantages and benefits.
Corporate tax migration enables companies to avoid liquidating the existing company and transfer business portfolio of trading agreements and assets to PE, registered for that purpose in a new jurisdiction which suits them better. By setting your Permanent Establishment ("PE") in Malta with a bank account in EU, you achieve those goals of tax compliance and efficiency, and banking.
Benefits of corporate tax migration into Malta include:
- Easy and simple to register PE or start a company;
- Low effective tax rate;
- EU VAT Registration, if required;
- Participation exemption on capital gains;
- Participation exemption on qualified inbound dividends;
- No withholding tax on outbound dividends or distributions;
- No withholding tax on outbound interests;
- Member of EU, Schengen and OECD;
- EURO is official currency;
- Advanced and competitive corporate tax system;
- Strong and stable political support for the financial services industry;
- Tax refund system;
- Remittance based tax system for overseas companies;
- No transfer pricing and CFC rules;
- English is the official language;
Our experience tells that Malta is the place to consider for corporate tax residency. Malta has been an EU member state since 2004. It is a country with a stable and predictable tax system, which is one of the most important factors for any entrepreneur. For years, Malta has been working on improving its tax policy, reducing bureaucracy, making its accounting simple and comprehensible. Also, communication with state institutions is simple and predictable.
So, why is no one talking about Malta as much as about Cyprus, Ireland, or Hungary? The answer is simple - the corporate income tax rate in Malta is 35%, which is quite high. However, there is a law which provides that 30% of the taxes paid is refunded, which means that the efficient corporate tax rate is 5%. The dividend tax is 0%. It is currently the lowest tax in the EU and most of the world. Malta is also the centre of online business licensing, it offers a very beneficial immigration programme, has favourable tax regimes for securitization, shipping and aircraft industries, and, its official and language of Registry of Companies is English.
The above conditions make Malta a unique place for business. Low taxes, clear accounting requirements, advanced banking, the English language, low company maintenance costs and very advantageous geographical position are the factors that attract a modern entrepreneur to Malta.
How does tax refund work?
The business profits of a Malta company or Permanent Establishment of Overseas Company are taxed at the statutory rate of 35%. However, the non-resident shareholders of Overseas Company have the right of claiming a refund in the amount of 6/7th of the Malta tax suffered on the dividends distributed in the case when a Malta company receives income from trading activities or active business. Tax refund procedure is simple, the refund is claimed by filing the form with the International Tax Unit (ITU). No withholding tax is paid on any dividend distributions of the profits of a Malta company or PE. After the tax refund above, the shareholders of Overseas Company are left with a global effective income tax rate of 5%.
PEs of an overseas company would be taxable in Malta only on income arising in Malta and on income arising outside Malta but remitted to Malta. No withholding taxes: PE profits are not subject to any withholding taxes at the time of transfer or later. Such profits are only subject to the corporate tax charge at the domestic rate.
Diagram of Malta PE of Overseas Company structure and tax refund system
Tax Treaties: Subject to any conditions in a tax treaty, PEs of foreign companies may use the provisions of a relevant Malta tax treaty with another jurisdiction. Malta has extensive tax treaty network of more than 70 treaties in force.
Malta Permanent Establishment (PE) of Overseas Companies
Malta's company law provides the option for foreign companies to set up branches or permanent establishments in Malta, without the necessity of incorporating new, or re-domiciling established companies; providing additional choice and flexibility in respect of corporate structuring. An overseas company is defined as "body corporate constituted or incorporated outside Malta".
By establishing a place of business in Malta and by setting up PE in Malta, the Malta PE:
- Does not have separate legal personality from its foreign counterpart;
- Is not re-incorporated in Malta. The only criteria for its establishment in Malta is that it has a place of business in Malta, and appoints a local resident authorised person in Malta;
- The amount of registration fee to the Company Registry for setting up PE depends on the nominal value of the authorized share capital of the overseas company. Registry fees are payable on submission of the required documents to the Registrar of Companies.
The registration of PE is a simple and straightforward process and can be completed within a few days of receipt of all the documents required.
Every company which has registered PE or a place of business in Malta must file on an annual basis audited financial statements pertaining to the operations conducted by the Maltese PE.
How can we assist?
Our office in Valletta, the capital of Malta, provides a full range of local support services for structuring, registering and administrating PEs of overseas companies in Malta, including:
- local address of PE established in Malta by the overseas company;
- appointment of a local resident in Malta authorised to represent the overseas company in all matters and facilitate communication between the competent authorities and PE;
- company secretarial services;
- day-to-day company management and administration;
- preparation of legal and corporate documents;
- accounting, tax compliance and audit;
- VAT registration (if required) and filings;
- assistance in bank account opening, and management;
- assistance in complying with legal obligations.
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