Malta income tax law provides for a 100% participation exemption in respect of dividend income and capital gains derived from a Malta resident company from a ‘participating holding’. As a result, such dividend income and capital gains shall be exempt from Malta tax subject to certain anti-avoidance principles.
Malta’s Participation Exemption Regime
A participating holding arises where the Malta resident company holds at least 10% of the equity shares in a company whose capital is wholly or partly divided into shares. Should the Malta company own less than 5% of the equity shares, it is still eligible as a participating holding provided it satisfies any one of the following criteria:
- It holds one or more equity shares in the foreign company with an option to acquire the balance; or
- It holds one or more equity shares in the foreign company together with a right of ‘first refusal’ in the event of a disposal, redemption or cancellation of the balance; or
- it holds one or more equity shares in the foreign company and an entitlement to sit on the Board of Directors of the company or to appoint a person to sit on that Board; or
- it holds a minimum equity share investment in the foreign company exceeding €1,164,000 and the said investment is held for an uninterrupted period of 183 days; or
- it holds one or more equity shares in a foreign company where the holding of such shares is in furtherance of its business but not as trading stock for the purposes of a trade.
Equity shares’ are defined as shares in a company (or similar body of persons) which is not a property company[1] and entitle the shareholder to any two of the following:
- voting rights; and/or
- a right to profits available for distribution to shareholders; and/or
- a right to assets available for distribution on a winding up of that company.
It should be noted that in order for the participation exemption (full refund) to apply to dividends received from a participating holding, such participating holding must be in one of the following companies (or similar body of persons), that is where:
- it is resident or incorporated in a country or territory which forms part of the EU; or
- it is resident in a jurisdiction which has at least a 15% rate of tax; or
- not more than 50% of the income of the company is derived from passive interest or royalties.
Where none of the above conditions are satisfied, it is still possible for dividends derived from such participating holding to benefit from the participation exemption provided the following 2 conditions are both satisfied:
- the holding by the Malta company in the foreign company must not be a portfolio investment; and
- the body of persons not resident in Malta must have been subject to any foreign tax rate of at least 5%.
Please note that the conditions for participating holding do not include a minimum holding period. The only exception is where the holding in the foreign company is less than 10% and the Malta company holds the minimum substantial investment of € 1,164,000.
It is also worth mentioning that the exemption from Malta income tax extends to income or gains derived from a permanent establishment, including a branch which is situated outside Malta of a Malta company.
[1] ‘Property company’ shall mean a company which owns immovable property in Malta or any rights over such property, or a company which holds directly or indirectly shares or other interests in any entity or person which owns immovable property in Malta or any rights over such property.
Other Tax Advantages
Maltese holding companies benefit from the application of all EU directives and Malta’s growing network of double taxation treaties. To date, there are over 70 double taxation agreements which are mostly based on the OECD Model Tax Convention.
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