Contents
- An Overview of Malta’s Corporate Tax System
- Incorporating a Company in Malta
- Substance Requirements
- Setting Up a Company in Malta: Key Steps
- Consolidated Group (Income Tax) Rules 2019
- Benefits of Registering a Maltese Company as a Fiscal Unit
1. An Overview of Malta’s Corporate Tax System
Companies registered in Malta which are effectively managed and controlled therein are considered to be resident and domiciled in Malta and thus are subject to income tax in Malta on a worldwide basis at the standard corporate tax rate of 35%.
Malta operates a full imputation system of taxation where, upon a dividend distribution, the immediate shareholders receive a full credit of the tax paid on the distributable profits at the level of the distributing company.
The full imputation system mentioned above, is accompanied by the tax refund mechanism, in respect of which following a distribution of profits in favour of the shareholders, the same they are entitled to claim a refund of the Malta tax which was paid at the level of the distributing company. The nature and source of the income should be taken into consideration to determine the amount of refund which the shareholder can claim. The tax refund system can reduce the effective tax rate from 35% to 5%, in some cases even lower.
The different types of refunds are highlighted hereunder:
- 100% tax refund on dividend income derived from an investment which qualifies as a participating holding provided that the anti-abuse provisions are met and/or from the disposal of such holding;
- 5/7ths tax refund if the income received is passive interest or royalties or income and/or capital gains derived from a participating holding which does not qualify for the participation exemption;
- 2/3rds tax refund if double taxation relief has been claimed;
- 6/7ths tax refund in all other cases.
2. Incorporating a Company in Malta
The setting up of a company in Malta provides an effective EU-based solution with an attractive tax system which can be highly beneficial for the ultimate beneficial owners of the company. The process of incorporating a company in Malta is relatively straightforward and can take a couple of days if the necessary documentation is received in a timely manner.
The company’s Memorandum and Articles of Association to be submitted to the Registry of Companies will include the following:
- The objectives of the company (both primary and secondary);
- The name and registered office of the company;
- The authorised and issued share capital;
- The name and residential addresses of the shareholders, directors and company secretary;
- The manner in which the judicial and legal representation of the company is to be exercised.
The minimum authorised and issued share capital of a private company must be EUR 1,164.69 of which 20% should be paid up. Upon incorporation, a registration fee is payable to the Registrar of Companies which fee is based on the value of the authorised share capital of the company. The minimum amount payable is EUR 245 while the maximum is EUR 2,250.
2.1 Shareholders
Private limited companies registered in Malta must have at least two shareholders (in certain instances one). The liability of each shareholder will be limited to the amount invested in the company and the amount of unpaid share capital.
Private limited companies registered in Malta must have at least two shareholders (in certain instances one). The liability of each shareholder will be limited to the amount invested in the company and the amount of unpaid share capital.
2.2 Directorship
Private companies must have a minimum of one director which can be both an individual director or body corporate[1]. Directors shall be responsible:
- to promote the company’s well-being and ensure its proper administration and management;
- for the general supervision of the company’s affairs;
- for the legal compliance with Maltese legislation; and
- for the general corporate governance of the company.
[1] Except for single member companies
2.3 Company Secretary
All companies registered in Malta are obliged to have a company secretary who is appointed by the directors. The roles and responsibilities of a Company Secretary are mainly the following:
- to minute the general board meetings of the Company;
- to minute the meetings of the Board of Directors;
- maintain and update statutory registers; and
- ensure timely submission of applications.
2.4 Accounting and Audit
Companies registered in Malta are required to keep proper books and accounting records and have their financial statements audited at the end of each financial year in accordance with Maltese Legislation.
2.5 Registered Address
Every company registered in Malta must have a registered address situated in Malta.
3. Malta Company Formation: Substance
The approach of tax authorities against tax avoidance has recently hardened and therefore, the existing tax environment is increasingly becoming more and more challenging for multinational businesses operating in different jurisdictions. As a result, businesses operating in more than one jurisdiction require a sufficient degree of substance in the jurisdictions in which they are operating. This is typically achieved by proving that the management and control of such businesses is effectively exercised from the jurisdiction within which they are operating. Normally, for Malta tax purposes this is achieved via the following:
- Having directors’ and shareholders’ meetings held in Malta which are duly documented via minutes/resolutions;
- Ensuring that all decisions in relation to the company are taken on the Maltese territory;
- Having economic substance including ties on the island.
- Determine the most tax efficient structure applicable to the relevant business
- Obtain full due diligence documentation on the parties involved in the corporate structure
- Reserve the company name with the Registry of Companies
- Deposit the initial issued share capital of the company with a preferred local bank
- Prepare the Memorandum and Articles of Association and any other documentation as required by the Maltese Companies Act
- File the Memorandum and Articles of Association along with the relevant documentation with the Registry of Companies
- Register the company for income tax and VAT purposes (if applicable)
- Initiate the process to open a bank account for the company
5. Consolidated Group (Income Tax) Rules 2019
Additionally, on 31 May 2019, the Consolidated Group (Income Tax) Rules 2019, were published, introducing the concept of fiscal units into Maltese tax law. Such rules are applicable as of year of assessment 2020, basis year 2019.
A parent company may make an election for itself and its subsidiaries, both Maltese and oversea companies, to form a fiscal unit. To be able to form part of a fiscal unit the following conditions must be satisfied:
- The parent company which holds shares in another company must meet at least 2 of the following criteria:
- Holding at least 95% of the voting rights in the subsidiary company;
- Beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary company;
- Beneficially entitled to at least 95% of any assets of the subsidiary company available for distribution to its ordinary shareholders on a winding up.
- The principal taxpayer must be a company which is resident in Malta or a company which, although not resident in Malta, carries on any activity in Malta; and
- The accounting year end of the subsidiary must have its accounting period beginning and ending on the same dates as the accounting period of the parent company, with exceptions in the case of newly incorporated companies and companies wound up during the year.
Once a fiscal unit is registered, the principle taxpayer will assume all rights, duties and obligations as defined under the Income Tax Act with respect to the subsidiaries forming part of the fiscal unit.
6. Benefits of Registering a Maltese Company as a Fiscal Unit
When calculating the tax liability of the fiscal unit, if the shareholder of the principal taxpayer is registered for Maltese income tax refund purposes, the rules allow the fiscal unit to apply at its level a rate of income tax which, broadly, results from the offsetting of the refund due to the shareholders against the income tax due by the company, thus achieving a tax-efficient result without the need to distribute a dividend and apply for a tax refund.
This will be beneficial from a cashflow perspective since in normal circumstances the trading company would pay tax in Malta at the standard corporate tax rate of 35% and subsequently claim a tax refund of part of the tax paid in Malta which usually takes circa 6 months to be received. This will facilitate cash flow matters.
