International Correspondence Lawyers & Financial Experts

DOING BUSINESS FROM MALTA

Date: 12-MAR-2006
Presented by: CEFAI & ASSOCIATES

Introduction

Malta has an open market economy, an excellent economic track record and enjoys a high standard of living at relatively moderate cost. Malta became a member state of the European Union on 1 May 2004. Corporate law in Malta is fully in conformity with European requirements and includes a comprehensive framework for financial services. There are also strong professional secrecy and confidentiality laws. As a general rule, no tax is levied in Malta on income arising outside Malta to persons who are not ordinarily resident and domiciled in Malta. In certain instances, even when income arises in favour of or is received in Malta by non-residents, there is no tax impact under Maltese fiscal laws. Evidently, Malta offers an ideal scenario to non-residents who wish to conduct business activities from the island.

International trading companies

An international trading company is an ideal set up for the purpose of conducting international trading transactions. An international trading company is constituted in terms of the Maltese company law and is regarded like any other company constituted in Malta. However, when an international trading company is owned by non-residents of Malta and has, as its objects, the carrying of trading activities from Malta but not in Malta, the non-resident shareholders become entitled to a special tax treatment. Although the company is chargeable to Maltese income tax at the rate of 35% on its profits, when distributions are made from the company to the non-resident shareholders, the non-resident shareholders become entitled to claim a refund of the tax paid by the company. Taking into account such a refund, the effective rate of tax paid in Malta is at the rate of 4.17%.

International holding companies

A company may be set up in Malta by non-residents for the purpose of holding assets situated outside Malta. Such assets may include immovable property, equity holdings, investments, royalties and other income generating assets. The company is similarly constituted under Maltese law and is subject to income tax at the rate of 35% on its chargeable income. In those instances where the assets situated outside Malta fall to be classified as "participating holdings", the non-resident shareholders are entitled to claim a full refund of the Maltese tax paid by the company when distributions are made to them. In all other cases, when distributions are made to the non-resident shareholders, the shareholders become entitled to claim refund of two-thirds of the Malta tax paid by the company, resulting in an effective rate of tax payable in Malta of 6.5%.

Re-domiciliation of companies

Companies incorporated outside Malta may change their domicile to Malta thus benefiting from the tax advantages available to both international trading and holding companies. The law of the foreign jurisdiction must allow for the company to migrate to Malta. Foreign companies that wish to take this route need not wind-up their foreign business since the former company remains in existence. The company's charter, memorandum or statute must allow the company to migrate and evidence is required from the foreign jurisdiction that it has received notification that the company wishes to migrate to Malta. The formalities for re-domiciliation are somewhat lengthier than those required on a new incorporation but there are also advantages in adopting this route.

The permanent residence scheme

Malta has a very attractive residency scheme addressed to those persons who wish to change their tax residence. This could be considered when an individual resides in a high-tax country and wishes to make savings on his, or her, tax liability. The scheme is open both to EU and non-EU nationals. Eligibility and conditions when applying for a permanent residence permit include the ownership of assets outside Malta worth at least Lm150,000 (approx Euro 345,000) or an annual income of at least Lm10,000 (approx Euro 23,000). The applicant is required to purchase a residence in Malta at a cost of at least Lm50,000 (approx Euro 115,000) for house or Lm30,000 (approx Euro 69,000) for a flat or rent a residence in Malta at not less than Lm1,800 (approx Euro 4,140) annually. The permit holder is subject to a flat income tax rate of 15% subject to a minimum annual tax liability of Lm1,800 after double taxation relief. The tax is calculated on income and capital gains arising in Malta and on foreign income (excluding capital sums) remitted to Malta.

Registration of ships and yachts in Malta

Registration of ships and yachts under the Maltese flag offers many advantages. Any vessel can be registered under the Maltese flag provided it is owned by a registered Maltese company or by a person habitually resident in Malta. There are no restrictions on the nationality of the ship owner. Similarly, there are no restrictions on the nationality of the master, officers and crew. There is a complete tax exemption for private yachts and ships of over 1000 gross tons capacity. The chartering of commercial yachts is normally conducted via an international trading company, thus benefiting from the effective tax rate of 4.17%. The chartering of commercial yachts is also VAT exempt. With effect from January 2006, Malta has reduced its rate of VAT on Maltese registered yachts to between 9% and 5.4% depending on the type of yacht. There are no restrictions, or taxation, on the sale or transfer of shares of a company owning a Maltese registered ship and on the sale or mortgage of such vessels.

Trusts under Maltese law

Malta has recently amended its legislation governing trusts and trustees to allow a wider scope for the creation of trusts in Malta. In terms of Maltese tax law, a tax liability arises where at least one of the trustees is resident in the island. The tax is computed in relation to the income attributable to a trust that has been derived by the trustee in the course of the administration of the trust but only to the extent that such income in not allocated to beneficiaries. However, where the income attributable to a trust consists of income arising outside Malta and the beneficiaries are persons not ordinarily resident in Malta or not domiciled in Malta, it is considered that such income has been directly derived by the non resident beneficiaries. In such instances, there is no tax impact under Maltese tax law.

Trusts in Malta are regulated under the Malta Financial Services Authority which is the competent authority under the Trusts and Trustees Act. The Act incorporates the Hague Convention on the law applicable to trusts and on their recognition which Malta has ratified.

Remote gaming

The remote gaming sector is perhaps the most dynamic and the fastest growing gaming sector in Malta. The sector is regulated under the Remote Gaming Regulations that came into force in April 2004. Under these regulations, there are four classes by which an operator may be licensed. Various gaming taxes are levied depending on the type of licence, however the total maximum tax payable per annum by one licensee in respect of any one license is not to exceed Lm200,000. Only companies established in Malta are eligible to obtain a Maltese remote gaming licence. The company is normally registered within the period of time when the application for a gaming licence is being processed. Although the company is subject to a corporate tax rate of 35%, the corporate vehicle is usually an international trading company through which non-residents become entitled to tax refunds when distributions are made by the company.

Direct investment in Malta

The industrial sector in Malta consists of about 200 foreign and some 400 locally owned companies. A wide range of products manufactured in Malta is exported throughout the globe. The advantages of operating from Malta include a highly trained workforce, excellent transportation and telecommunications network coupled with frequent links to Europe, North Africa and the Middle East. The excellent harbour and Freeport make Malta an ideal manufacturing location.

The Business Promotion Act provides an number of incentives to those foreigners who wish to make Malta as their manufacturing base. The incentives include reduced rates of tax to qualifying companies engaged in certain targeted activities such as pharmaceuticals, plastics, biotechnology and electrical equipment. The reduced rate of tax incentive is only available up to the year 2008. Other incentives include an investment tax credit, value added incentive scheme, investment allowances on capital expenditure, reduced rates of tax on reinvested profits and incentives for job creation.

Relief from double taxation

Malta has entered into a considerable number of double-taxation treaties. Generally speaking, the treaty benefits are available to all Maltese companies. Most treaties are based on the OECD model convention. Malta also grants unilateral relief in respect of tax suffered outside Malta in those jurisdictions in those instances where there is no double taxation treaty. The flat rate foreign tax credit is another type of relief that is available to Maltese companies in respect of income, or capital gains, arising outside Malta. The interaction of reliefs ensure that income arising outside Malta that has suffered tax overseas is not taxed twice when it is declared in Malta for tax purposes.

This article has been contributed by Corporate Services Limited of 5/2 Merchants Street, Valletta, VLT10, Malta in association with Anton Chetcuti-Ganado & Associates, a member firm of Moores Rowland International. Corporate Services Limited is a leading Maltese company providing a comprehensive services to international clients. The auditing firm of Anton Chetcuti-Ganado & Associates handles auditing and accounting services to a varied portfolio of clients.