Tax havens explained - Malta an attractive location for investors.

1. Malta
Malta is an island in the central Mediterranean Sea just south of the Italian island of Sicily and north of the
African coast. The strategic location and close proximity to continental Europe, combined with advanced
infrastructure and numerous economic incentives makes Malta very attractive location for investors.
The island of Malta has developed into a high-value added international business centre within a
Mediterranean setting, combining a highly educated, English speaking workforce with world class financial
and legal professionals. Malta now provides an attractive base for international financial and business
operations, e-commerce and e-gaming operators trading via Malta-registered International Trading
Companies. Malta has created the right economic environment to meet the demands of the global
market. It has strong, long-standing links with Europe, North Africa and beyond and has a liberal foreign
investment policy.
General Incentives
Malta offers numerous advantages to foreign investors, including:
• Membership in the EU
• It has adopted Euro (as of January 2008)
• Highest percentage share of hi-tech imports and exports within the EU
• “AAA” rating by Moody’s
• Established trade links with Europe, North Africa and Middle East
• Dedicated and well educated workforce
• High quality educational facilities, easy to set up courses tailor made for specific industries, able to
quickly adapt to the needs of industry
• Multilingual workforce
• Modern developed telecommunications system, wireless internet connections, VOIP and 3.5G
• Malta Freeport, servicing 115 ports worldwide
• International Airport with direct flights to 37 major cities
Economic incentives
The government of Malta is promoting foreign investments and the development of enterprises in the
country. Amongst other things, the existing legislation provides a number of fiscal and non-fiscal
incentives to foreign investors. The Business Promotion Act (BPA) enacted with the aim of encouraging the
establishment of new and the expansion of existing businesses, provides the main legislative back-bone
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2. for tax incentives to enterprises in targeted sectors carrying out their business operations in Malta. The
BPA granted generous tax credits and in certain circumstances, even tax holidays to qualifying enterprises
working in a specific economy sectors. Additionally, companies carrying out certain activities, such as R&D,
re-investment of profits and the sponsorship of employees undertaking post graduate education in
science, technology and IT, may also avail themselves from tax credits.
Malta is an ideal location for an International Holding Company (IHC). The minimum share capital required
to open an IHC is $1250 or the equivalent in any other currency. An IHC is subject to corporate tax at the
standard rate of 35% on its worldwide income. However, non-resident shareholders benefit from
preferential tax treatment. Accordingly, a nonresident shareholder or a Maltese company 100% owned by
non-residents in receipt of dividends from an IHC may claim a two-thirds (2/3) refund of the Malta tax
paid.
A numerical example below illustrates the tax effectiveness
IHC’s point of view
Net foreign income received in Malta 800
Foreign tax suffered on income @ 20% 200
Chargeable income in Malta grossed up 1000
Malta corporate tax @ 35% 350
Less credit for foreign tax 200
Malta tax due 150
Distributable profits to non-resident shareholder 650
Non-Resident Shareholder’s point of view
Distributable dividend to non-resident 650
2/3rds refund of Malta tax (i.e. 2/3rds of 150) 100
Dividend received by non-resident shareholder 750
Total tax suffered in Malta 50
Net effective rate of tax on net foreign income 6.25%
The above tax feature which refunds the corporate tax on dividends distributed to non-residents can be
used to open a branch in Malta with the objective of distributing Debt to daughter companies. The
interest paid by the daughter company can be reduced from their taxable income and the tax paid in
Malta can then be recuperated by parent company.
Legislation in Malta for IP Company
Malta attracts a number of high-tech companies, due to special attention to Intellectual Property (IP)
rights. An IP company may be incorporated as a normal limited liability company and get registered under
the General Companies Act, and accordingly be liable for corporate income tax.
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3. In Malta, royalty companies may hold, license and market any type of intellectual asset including
trademarks, trade names, software copyrights, brand-names, patents, designs and technical know-how. In
addition no stamp duty is levied on the acquisition of intellectual property by a Maltese company.
This royalty company is a very efficient vehicle for intra-group licensing and sub-licensing, which is
implemented by a number of companies in Malta. A royalty company is permitted to carry out any other
activity even though it may not be related to the holding, licensing and marketing of an intellectual asset,
such as:
• Investment holding activities
• Holding and leasing of immovable property or tangible assets
• Financing activities
• Other trading activities
Tax incentives
• In terms of the relevant provisions of the Income Tax Act, expenditure on patents or patent rights may
be amortized over the life of the patent or patent right.
• Similarly any expenditure on intellectual property rights may be amortized over a period of three
years, commencing on the period during which the expenditure was incurred.
• Certain qualifying research and development expenditure approved by the Malta Development
Corporation may benefit from further deductions and tax credits.
• Royalties paid by a Maltese company to a related or non-related licensee may be deducted in full.
• Malta Royalty companies are not subject to structure transfer pricing legislation
Corporate Taxes
All types of income (including royalty income) derived by a company in Malta is subject to a corporate tax
of 35%. However the shareholders may claim the refund of the tax paid by a Malta royalty company.
Four types of refunds are available:
• - 6/7ths tax refund of the corporate tax
• - 5/6ths tax refund of the corporate tax.
• - 2/3rds tax refund of the tax paid in Malta
• - 100% tax refund in case of participating holding company
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4. The type of refund which shareholders are eligible to claim depends on whether double tax relief has been
claimed by the Malta royalty company and whether the royalty income is qualified as an active or passive
income.
A company which has not been incorporated under the laws of Malta but managed and controlled in
Malta is subject to tax on its foreign sourced income on a remittance basis. Under the remittance rules,
foreign sourced income is not subject to tax in Malta unless this is received in Malta.
An IP company which has not been incorporated under the laws of Malta but has shifted its management
and control to Malta is exempt from tax on any royalties arising outside Malta provided that these have
not been received in Malta.
Withholding Tax
Provided that certain conditions are met, Malta does not levy any withholding tax on outbound royalty
payments. This feature of the Maltese tax system enables the implementation of tax efficient back to back
royalty structures. Furthermore, Malta does not levy any withholding tax on outbound dividends.
Additionally Malta does not have any CFC legislation or any similar anti-avoidance rules.
Tax treaties
Malta currently has 45 double taxation treaties into force (http://www.malta-tax.com/dtr/treaty-tax-
rates.htm). Most of Malta’s double tax treaties provide for a reduced rate of withholding tax on royalties
paid to a Maltese company. In some cases Malta’s double tax treaties provide a 0% withholding tax for
royalties paid to a Maltese company. Limitation of benefits provisions may apply for Maltese companies
subject to tax on a remittance basis.
EU Interest and Royalties Directive
Following Malta’s accession to the EU, the Interest and Royalties Directive applies to royalty payments
made to Maltese companies. Royalty payments from associated companies resident in EU Member States
are not subject to withholding tax in the country of source, provided that the relevant conditions imposed
by the particular Member State are fulfilled.
Case Study
Let us assume that we have a software company that owns a specific IP rights. We will demonstrate in this
example how can we set a new structure for a company to save on taxes.
The software company should register the patent not under its own name but under the name of a 100%
owned offshore company (e.g. any BVI company). The offshore company then enters into a license
agreement with a Maltese company for the offshore company’s European patent rights.
The Maltese company now will have the exclusive ability to exploit the offshore company’s IP in Europe.
Furthermore the Maltese company can enter into contracts with European customers, through which it
will exploit the rights that it owns.
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5. In our example the first contract is with a Dutch software company for the right to subscribe to the
software for which the Maltese company holds the rights. The second contract is with an Italian company.
The income is passed fully to the Maltese company with no withholding taxes in any of the EU-member
states. The Maltese company retains a 5% license fee and pays tax on this income but it is able to pass 95%
of the income to the offshore company where no further taxes will be paid.
If the software company had negotiated these contracts directly it should have suffered up to 35% income
taxes (Netherlands and Italy). If the EU-based company sells the rights, then any gains will be subject to a
35% income tax. However, if an offshore company sells the rights, then the effective capital gains tax is
0%.
Flow Diagram
Tax refund
Parent Company
and
No With-holding tax
Dividends
Tax @ 35%
Royalties Malta IP Company Royalties
License License Low or Nil
Withholding tax
Operational Operational Operational
Company EU Company in EU company in EU
Another possible structure
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6. Parent IP
Company
No With-holding tax
License Royalties
Tax @ 35%
Malta Sub IP
Royalties Royalties
Company
Sub -License Sub-License Low or Nil
Withholding tax
Operational Operational Operational
Company EU Company in EU company in EU
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7. Bibliography
http://www.iflr.com/Article/1977432/International-tax.html
http://www.malta-tax.com/dtr/treaty-tax-rates.htm
http://www.ird.gov.mt/intertax.asp
http://www.csnltd.com/pages/onshore.html
http://www.3a.com.mt/Articles/Incentives-for-business-in-Malta.html
http://www.lowtax.net/lowtax/html/jmaobs.html#investment
http://www.cc-advocates.com/invest-in-malta/
http://www.euromalta.com/companies/royalties-routing.htm
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