Malta: Offshore Legal and Tax Regime

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

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Malta Forms of Offshore Operation

Offshore operations may take place within the following forms:

• International Trading Company (now closed to new entrants)
• International Holding Company
• SICAV
• Trust

Malta Tax Treatment of Offshore Operations

See Domestic Corporate Taxes 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 is in fact optional, and the shareholder can choose just to take the tax credit of 27.5% if she wishes.

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:

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:

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.

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Malta Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of the various types of offshore entity; see Domestic Personal Taxes for the general principles of individual taxation in Malta, which also apply to the resident employees of non-resident entities. There is in fact no distinction between the employees of resident or non-resident operations. It is a question of individual status; residents and non-residents are treated differently of course. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers, except for the special situations detailed below:

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Malta Exchange Control

The Central Bank of Malta used to apply exchange control under the terms of the Exchange Control Act 1972. Current transactions were freed from exchange controls in 1994; capital controls were removed on Malta's entry to the EU in 2004.

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Malta Offshore Activities

The various forms of offshore entity in Malta are limited as regards the trading they can do in the jurisdiction, but not as regards the running of their businesses from Malta.

International Trading Companies are allowed the following local activities:

Registered Maltese and foreign trusts and International Holding Companies can hold a wide range of assets including the shares of other offshore entities.

The situation of Trading and Non-Trading Offshore Companies was broadly similar to that of International Trading and Holding Companies, respectively.

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Malta Employment and Residence

Although Malta'a accession to the EU has brought with it freedom of movement and employment for EU nationals, in other respects Malta operates quite strict policies as a result of historically high unemployment, although it is now much less of a problem. Normally a work permit will only be issued to a foreigner if there is no suitably qualified local, and the employer will need to operate training and 'understudy' schemes. The regime is less restrictive when foreign investment is involved, and if an expatriate controls 40% of a project, he will always be able to get work permits for himself and for one other expatriate.

As of December 21, 2007, Malta became part of the Schengen area. European Commission President José Manuel Barroso announced ahead of the enlargement of the area that:

"As from this week, people can travel hassle-free between 24 countries of the Schengen area without internal land and sea border controls- from Portugal to Poland and from Greece to Finland. I wish to congratulate the nine new Schengen members, the Portuguese presidency and all EU Member States for their efforts. Together we have overcome border controls as man-made obstacles to peace, freedom and unity in Europe, while creating the conditions for increased security".

Following enlargement, all citizens of the enlarged Schengen space will benefit from quicker and easier travelling. From December 21, 2007 onwards, a citizen can travel from the Iberian Peninsula to the Baltic States and from Greece to Finland without border checks.

Anyone who wishes to reside permanently in Malta other than in conjunction with permitted work must apply for a residency permit under the 1988 Residence Scheme. An applicant must provide evidence of sufficient capital of EUR352,500 or an annual income of EUR23,500. A permit holder must buy or rent property on the island, but benefits from tax and import duty incentives.

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