With holding companies being pivotal in international tax planning, the choice of a holding which is best suited to the structure, is crucial to minimise any tax leakages on income and gains.
Malta has, pursuant to the enactment of reforms to the Income Tax Act, and to the introduction of a Participation Holding and Participation Exemption regime, gained significant clout as a holding company jurisdiction.
In order to appreciate the merits of Malta as a holding company jurisdiction, it suffices to compare the main typical holding company “optimality criteria” (set out below) and the benefits provided by the Malta Holding Company Regime (also set out below):
Optimality Criteria for Malta Holding Companies
Holding companies perform the following functions within a group:
- Asset ownership / participation interest in operating (“opcos”) & non-operating group companies;
- Accumulation of capital and shareholder value;
- Consolidation of business segments (including consolidated IFRS financial statements);
- Asset protection / mitigation of risks;
- Receiving dividends from operating companies (“opcos”);
- Distribution of profits to shareholders;
- Reinvestment of capital into new projects.
For illustration purposes, the company should ideally be resident in a jurisdiction which:
(only some of the main tax related criteria are listed – the following is not meant to be an exhaustive list).
- Enables the extraction of foreign sourced dividends at mitigated or preferably zero rates of foreign withholding tax – In choosing a holding company jurisdiction, one needs to take into account the benefits of a particular country’s Double Tax Conventions (Treaties) in order to reduce the incidence of foreign withholding tax. High tax jurisdictions generally do not enter into Double Tax Conventions with offshore jurisdictions. For this reason, if offshore (non-Malta) Companies are used to own shares in high tax jurisdictions, it is likely to increase the burden of tax, via the imposition of high withholding taxes, rather than reduce it;
- Enables foreign dividends received to be taxed at low or preferably zero rates of domestic corporation or other taxes in the country of residence of the holding company – Not only one should plan to have a holding company in a jurisdiction which can receive foreign dividends with reduced withholding taxes, but one also needs to ensure that those dividends are not highly taxed in the holding company’s country of residence;
- Permits the distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax – Care needs to be taken that the jurisdiction chosen for a holding company is not one that will impose excessive withholding taxes on distributions of income to the shareholders of the company;
- Allows for the realisation of capital gains from the disposal of shares in foreign companies at low or preferably zero rates of both foreign and domestic corporation tax on the gains – All the leading holding company jurisdictions provide, for an exemption from taxation on holding companies realized gains, the disposal of shares in foreign companies;
Enables the tax-free liquidation of the holding company itself.
Malta Holding Companies Regime
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 Malta Holding Companies are the following:
- Shares held by a Maltese company in another corporate company may qualify as a “participating holding” and would result in a tax-efficient regime for the Maltese company;
- The shareholders of the Maltese company would thus be able to claim a full refund on any tax paid upon any income or gains derived by the Maltese company from a participating holding or from the disposal of such holding and distributed to such shareholders;
- A Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever any income or gains derived by it from the participating holding or from the disposal of such holding, thereby having cashflow benefits.
For this purpose, a ‘participating holding’ arises when there is a holding of equity shares in another company (Maltese or foreign) which satisfies any one of the following six (6) conditions;
1. holds directly at least ten percent (10%) of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least ten percent (10%) of any two (2) of the following:
(i) right to vote;
(ii) profits available for distribution; and
(iii) assets available for distribution on a winding up.
2. is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or
3. is an equity shareholder in a company and the equity shareholder company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
4. is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or
5. is an equity shareholder which holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of (€1,164,000) (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days; or
6. is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade:
Apart from satisfying the conditions of the Participating Holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions:
- it is resident or incorporated in the EU; or
- it is subject to foreign tax of a minimum of fifteen (15) percent; or
- it does not derive more than fifty (50) percent of its income from passive interest and royalties.
Alternatively, if none of the abovementioned three (3) conditions are satisfied, the satisfaction of both two (2) ancillary conditions would need to be satisfied. These two additional criteria are that-
- (i) the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment.
In this respect, a ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company; and
- (ii) the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.
However, where more than 50% of the income of the non resident company consists of passive interest or royalties (and the company is not resident in another EU Member State or is not subject to tax at a rate of at least 15%), the following conditions also must be satisfied to qualify for participating holding status:
- the investment must not qualify as a portfolio investment; and
- the non resident company must be subject to foreign tax at a rate that is not less than 5%.
In conclusion, the Malta Tax System Enables:
- The extraction of foreign sourced dividends, at mitigated or zero rates of foreign withholding tax (owing to the use of the Parent Subsidiary Directive or the Use of Double Tax Treaties if the Directive is not applicable);
- The receipt of foreign dividends at zero rates of corporation tax or any other local taxes (subject to conditions – anti avoidance provisions that are easy to satisfy), i.e. “an EU Holding Company with no domestic tax leakage on holding activities”;
- The distribution of available profits to non-resident shareholders at zero rates of dividend withholding tax, irrespective of jurisdiction or the absence of a DTT (even to offshore jurisdictions);
- Allows for the realisation of capital gains from the disposal of shares in foreign companies at zero rates of corporation and capital gains tax on the gains”, irrespective of holding period and shareholder percentage and no capital gains tax on the liquidation of the Holding Company itself.
Contact one of our officers to initiate the incorporation of a Maltese registered Holding company and start reaping the full benefits of an onshore, low-tax, EU jurisdiction. Simply fill in the contact box below or contact us by email on firstname.lastname@example.org or by calling at +356 2338 1500
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