Malta: Offshore Legal and Tax Regimes
Tax Treatment of Offshore Operations
See Domestic Corporate Taxation for the general principles of Malta corporate taxation, which also apply to offshore entities when they pay tax. Also see Withholding Taxes for a simplified description of the rather complex Maltese withholding tax regime.
Until the end of 2010, an International Trading Company paid tax at the regular rate, 35%, but a non-resident shareholder, or a Maltese company shareholder owned by non-residents, was subject to Maltese tax only at 27.5% on dividends received from an ITC, and could apply for a refund of the difference. In addition, the non-resident shareholder was entitled to a refund of two-thirds of tax paid on dividends (imputed tax) which equaled 23.33%, giving a total return of 30.83%, and an effective rate of tax of 4.17%.
The two-thirds rule was in fact optional, and the shareholder could choose just to take the tax credit of 27.5% if she wished.
The rules for tax payments and refund payments are such that there is a gap of only 14 days between payment of the tax due by the company and receipt of the refunds by the shareholder.
An International Holding Company, which operates a Foreign Income Account (see Domestic Corporate Taxation) to receive income from foreign sources, pays 35% tax on its net income as usual, but can make use of four levels of abatement of the tax:
- Double Tax Treaties: Malta has treaties with 60 countries, including almost all of the leading OECD countries. Most of the treaties allow offsets against local taxation.
- Commonwealth Relief: Not much used now, but equivalent to treaty relief in the case of Commonwealth-source income;
- Unilateral Relief: when there is no tax treaty, Malta gives equivalent relief unilaterally; and
- Flat-Rate Foreign Tax Credit: if no documentation is available to establish treaty or unilateral relief, Malta gives a 25% tax credit anyway.
Only one of these four types of relief applies to a given piece of foreign income; the Maltese Inland Revenue is involved in determining which applies. One way or another, double taxation is avoided.
Once the income passes as dividend to a non-resident shareholder (individual or company) she is entitled to a refund of two-thirds of the 35% imputed tax charge. Therefore the effective tax rate on the originating foreign income will be a maximum of 11.67% (there may be deductible expenses).
If the income arose from a participating holding (a company owned 10% or more by the Maltese company) then the refund is 100% of the imputed tax, so that the effective rate becomes nil.
The SICAV (Societe d'investissement a capital variable) is used by mutual funds. Licensed collective investment funds in Malta are exempt from income tax, but are also not eligible for tax treaty benefits. However, a SICAV can elect to be taxed at 25%, which brings it within the treaty rules and may be advantageous in some situations. Fund management companies (investment services companies) pay tax at 35% but are able to use an extensive list of deductions, including double deduction of salaries paid to Maltese personnel.
Malta's November 2000 budget introduced witholding tax on Collective Investment Schemes. With regard to foreign funds (with a primary or secondary listing on the Malta Stock Exchange), the fund manager or representative must register with the Inland Revenue Department which means that income to the investors in the fund will be subject to a 15% final witholding tax.
Income that goes to local residents from Collective Investment Schemes (either traded on the primary or secondary listings on the exchange) will be subject to tax. This includes distributing funds and accumulator funds.
Banks, insurance companies and mutual funds pay fees as follows:
- Offshore banks: EUR12,500 for application and processing, a one-off licensing fee of EUR18,000 and an annual supervision fee of between EUR21,250 and EUR500,000 which is the equivalent to a percentage of its deposit liabilities.
- Captive insurers: EUR1,800 for authorisation, EUR2,500 for acceptance of application, EUR5,000 for continuance of authorisation and a one off registration fee of between EUR245 and EUR2,250 (depending on the company's authorised share capital).
- Offshore collective investment company: EUR2,000 to EUR2,500 depending on the number of sub-funds.
Apart from collective investment schemes (see above) there are no special tax regimes for financial institutions: they are taxed according to their corporate form, ie as Offshore Companies, International Trading Companies, International Holding Companies or regular Private Limited Companies as appropriate. A special taxation regime for insurers is being prepared as part of a general revision of Maltese insurance legislation.
All trusts, including foreign ones, must register with the Maltese Financial Services Centre (MFSC), which costs EUR250 for application and processing and EUR100 upon approval. Foreign trusts which do not register with the MFSC will not benefit from the tax advantages of registered foreign trusts (they are tax-exempt). Until 2005, Maltese trusts, having by definition non-resident settlors and beneficiaries, were exempt from income tax. Under the The Trusts and Trustees Act 2004, Maltese residents can also form trusts, but the trust is a taxable entity in respect of undistributed income, unless both the beneficiaries and the income are foreign, in which case the trust remains exempt from tax.
Foreign trusts do not have to file tax returns; the Professional Trustee company which is acting as their trustee makes an annual declaration of conformity with the law. No stamp duty or other taxes are payable in respect of trust transactions or documents.
Trust management companies pay EUR2,500 upon the issuance of approval and annually thereafter.