Malta Group Finance Companies Functions
- Sourcing external debt finance;
- Accumulation of interest income and tax optimisation of high tax country group operating companies;
- Redistribution of funds within the group.
Such companies may take advantage of the Malta Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.
The use of Malta Entities for group finance are extremely attractive. Malta Finance Companies can fulfill intra-company and inter-company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Malta Financing Company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.
These structures are particularly attractive for investment into high-tax countries where, local rules permitting, high debt structures are widely used.
Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to the Malta Group Finance Companies are the following:
- Absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest withholding tax;
- Low overall tax burden;
- Possibility of deducting interest expenses from taxable income;
- Absence of thin capitalisation rules or their inapplicability in the case of “back to back” financing;
- Absence of interest withholding tax in connection with interest paid on loan financing, irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions);
- Reasonable level of “margin” permitted by tax authorities;
- Low expense levels for professional / financial fees.
Malta Group Finance Companies Tax Relief
The Malta Income Tax Act permits tax consolidation and sets forth circumstances in which members of a group of companies may surrender trade (but not capital gains) losses to one another.
In order for companies to be considered to form part of the same group:
(i) Both must be resident in Malta and not resident for tax purposes in any other country;
All Maltese companies are deemed to be resident in Malta, except when they are managed and controlled outside Malta.
(ii) One is the fifty-one percent (51%) subsidiary of the other or both are fifty-one percent (51%) subsidiary of a third party resident in Malta.
Group relief is applicable both with regard to direct and indirect groups as well as horizontal and vertical groups. In order to qualify for relief, thereby permitting allowable losses to be surrendered to a member of the same group, the following two cumulative conditions must be met:
(i) The surrendering company and the claimant company must have been members of the same group thorough the year preceding the year of assessment for which the relief is claimed;
(ii) Both companies must have identical accounting periods.
An exception is made with regard to newly incorporated companies, if such newly formed company, after its incorporation satisfied the aforesaid conditions, like any other company in the year preceding the year of assessment and has the same accounting period end date as that other company in that year preceding the year of assessment.
Allowable expenses which may be surrendered include any losses incurred in any trade, business, profession or vocation during the year preceding the year of assessment, which had it been profitable would have been subject to assessment in Malta, with the exception of allowances relating to the wear and tear of plant and machinery, and initial capital allowances.
Other important rules applicable for tax relief are the following:
- Claimant companies may not, in respect of any one loss, obtain more relief than could be obtained by a single claimant company;
- A surrendering company may surrender allowable losses by way of group relief in excess of the total income of the claimant company in the year preceding the year of assessment. The claimant company may carry forward and set off losses, as if incurred in its own trade.
- The relief does not necessarily be for the full amount available;
- The express consent of the surrendering company must be provided;
- The demand for relief must be made not later than twelve (12) months from the end of the company’s accounting period (default 31st December) which date falls within the year immediately preceding the year of assessment for which the claim is made;
- Where the allowable loss (had it been a profit) would have been allocated to the Immovable Property Account, Foreign Income Account or the Malta Taxed Account of the surrendering company, the claimant company may deduct such loss from its income which stands to be allocated to either its Immovable Property Account, Foreign Income Account or its Maltese Taxed Account and such loss may only be carried forward against the claimant’s total income arising in subsequent years as would stand to be allocated to any of these taxed accounts.
Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors. For bespoke tax advice, please click here to contact our tax advisors or send us an email on email@example.com or by calling at +356 2338 1500