Malta: Malta – A Financial Services Haven Right In The Center Of The Mediterranean Sea

Malta’s economic policy is quite simply to create wealth and to have wealth permeate all levels of society – real wealth, generated from profitable commercial activities. Making the country richer means ensuring that it has an attractive business environment that encourages and rewards local and international investors. Fiscal and monetary regimes need to make good sense for business. Malta does business with the world. Goods and services have become global commodities and so too has money. Money moves in and through Malta in very large amounts.

Malta has put in place tax policies that are competitive and attractive to business.

The four main branches of business of major interest to the foreign investor are the offshore company sector, the registration of trusts, the registration of ships and yachts under the Maltese flag and permanent residency in Malta.

The registration of Offshore Companies as such is no longer carried out in Malta.  Malta has opted a new Companies Act and has amended the Income Tax Act to create what are today known as the International Holding Company (IHC) or International Trading Company (ITC). These are normal Maltese onshore companies with all the advantages of being onshore companies and none of the disadvantages of being offshore companies. They are therefore less prone to look like tax avoidance structures. Both however offer very substantial fiscal and tax incentives and savings to the non-resident shareholder. These companies are supervised and regulated by the Malta Financial Services Centre (MFSC), which was set up by Government, but is an autonomous body with a distinct legal personality. 

An International Trading Company (ITC) is a normal onshore Maltese company registered in Malta, which is allowed to carry on trading activities from Malta but is not allowed to trade in Malta. Moreover its trading activities must be confined to persons who are not resident in Malta. An ITC, unlike an offshore company, is a normal onshore company, which makes it likely that foreign tax authorities will consider the ITC to be a tax avoidance structure.  This in turn allows the ITC to take advantage of the extensive Double Taxation Treaties that Malta has with a large number of countries. To date, Malta has negotiated thirty such treaties, including those with all member states of the E.U., the USA, Australia, South Africa, China, India and South Korea.

The ITC is itself a very tax efficient instrument for shareholders not resident in Malta.   At the end of the accounting year, the ITC being a normal onshore company, pays company tax at the normal rate of 35% on trading profits; however a system of tax refunds and imputations made to the non-resident shareholders ensures that once the profits are distributed to the non-resident shareholders, they directly receive a refund of 30.83% and therefore the real tax paid is only 4.17%. 

It works like this.  Assuming the ITC receives Lm1000 income, at the end of the accounting year it pays 35% tax, (therefore Lm350) and distributes the remaining Lm650 as dividend.  At that stage the shareholders will claim a refund of 7.5% of the gross income, that is Lm75, and a refund of two thirds (2/3) of the corporate tax paid, that is 2/3 of Lm 350 equal in all to Lm233.33. These refunds are paid by the Inland Revenue Department to the ITC within 14 days from the date of the request made to the Inland Revenue Department. 

Still using the above figures, if the ITC during the year receives Lm1000 and say its accounting period ends on 31st December, then on the 31st December it pays Lm350 corporate tax, and on the 1st January the shareholders apply for the refunds. By the 15th January they will receive Lm308.33 by way of tax refunds, which means that only Lm 41.67 is paid by way of final tax - that is an effective tax rate of 4.17%. No withholding taxes, stamp duties or exchange control restrictions apply on distribution of the profits or dividends to the shareholders and their are no taxes or restrictions on the exportation of the dividends from Malta.  This means that funds finding their way to Malta may be remitted anywhere around the world.

Moreover it is possible to distribute interim dividends at any time during the year and the shareholders need not wait for the end of the accounting year to take dividends.   However if an interim dividend is paid to the shareholders, this is made net of 35% tax and the refunds of tax can only be claimed once, at the end of the financial year.  Therefore in effect the beneficial shareholders can receive an interim dividend whenever it suits them, but this is distributed by the ITC net of the 35% corporate tax, which tax is kept in the ITC’s bank account until the end of the financial year; at that stage the 35% retained tax is paid to the Inland Revenue and within 14 days the shareholders receive their refunds.

Apart from the obvious tax advantages, the ITC can have nominee shareholders and directors, thereby ensuring full anonymity of the beneficial owners of the company. It is also allowed to have corporate directors.

Unlike International Trading Companies, International Holding Companies are not allowed to trade. They are set up as onshore companies and their aim is to "hold" shares in one or more overseas companies.    A Holding Company may also be set up to own and manage its own assets held outside Malta.

An International Holding Company (IHC) is considered to be a normal private limited liability company under Maltese law. The company utilizes a Foreign Income Account and deposits into this account all profits coming to it from royalties, dividends, interest, capital gains, rents, permanent establishments, branches, holdings and other income arising abroad or derived from foreign investments, as well as the IHC's own dividends.

As in the case of the ITC, the IHC is a normal company and therefore pays corporate tax at 35% on its worldwide income, but shareholders can then benefit from considerable tax benefits. A non-resident shareholder receiving dividends from an IHC has a right to a refund equal to two-thirds of the tax paid by the company on its profits and such dividends distributed to non-resident shareholders are exempt from any withholding tax.  

In purely mathematical terms the final result is that in the case of an IHC the total tax payable on profits distributed to non-resident shareholders is equivalent to 11.67%.  However, more interestingly, where the income of the IHC emanates from a ‘participating holding’ (that is where the IHC holds at least a 10% equity in a foreign company), the tax refund to the shareholder will amount to 100% and in effect therefore no tax is paid.

An IHC can also have nominee shareholders and directors, thereby ensuring full anonymity of the beneficial owners of the company.  Finally the IHC is exempt from any transfer duty and exchange control restrictions applicable under Maltese Law and can therefore freely export its assets; shareholders also have no restrictions on the exportation of dividends.

For both companies, the minimum issued share capital is Lm500 (approx. US $1250) to be expressed in any foreign currency. On incorporation 20% of the issued share capital must be paid into a bank account, which is set up with a local bank.

Registration can usually be completed within 24 hours of receiving all the necessary documents. Shareholders are normally two, though it is possible to have a single shareholder for an ITC. There must be at least one director. Since all companies must have a registered office in Malta, the ITC or IHC usually makes use of the local address of the consultancy firm setting it up. There is no restriction on the nationality of the shareholders (provided they are not Maltese residents) and there is no restriction on the nationality of directors. There is no necessity to have General Meetings in Malta.

Finally, the director of an ITC may also apply to be given a Permanent Residence Permit to reside in Malta indefinitely and to be able to work as a director of the ITC.

Another attractive tax saving vehicle is the registration of trusts. Until very recently, trusts formed no part of Maltese law but with the development of the country as a financial services center, a law was enacted to allow for the setting up of trusts.

The advantage of trusts in Malta is multiple: favorable taxation, confidentiality, control of assets, no probate (both in the country of citizenship and residence and also in the country where the assets are); the investment income from funds can be accumulated tax-free.  Trusts established in Malta are exempt from succession duty and stamp duty; the property forming the trust can be freely imported to Malta without customs duty and there are no exchange control restrictions. Moreover, income tax and capital gains tax are fixed at Lm200 each year. The law also provides for a Governmental guarantee against future or retroactive revocation of rights and exemptions.

Trusts must be created in writing, either by will, by unilateral declaration of trust or other written instrument. A unilateral declaration of trust is made by a nominee company acting as trustee and contains all the terms of the trust as well as information enabling the identification of the beneficiaries.

Neither the settlor nor the beneficiaries of a trust may be resident in Malta. Moreover, the trust property shall not include immovable property situated in Malta or shares of a company registered in Malta unless it is an offshore company.

Maltese law also allows for the recognition of foreign trusts which may be registered with the Financial Services Centre and thus obtain the tax advantages applicable to Maltese trusts.

Every trust is free to adopt the proper law of its choice; however trusts, which adopt Maltese law, must be registered with the Malta Financial Services Centre. Foreign law trusts need not be registered with the Centre but registration will entitle them to the benefits and other exemptions allowed under the Trusts Act.

A Nominee Company acting as a trustee affects registration.  The trust instrument is a highly confidential document and no person may be ordered to divulge to any authority (including any court) any matter relating to a trust.

The registration of ships and yachts is another efficient tax saving instrument offered by the Maltese financial services sector.

Registration of ships and yachts under the Maltese flag offers many advantages, amongst which low company formation and ship registrations costs, no restrictions on the nationality of the ship owner, complete tax exemption, no restrictions on the nationality of the master, officers and crew, no restrictions or taxation on the sale or transfer of shares of a company owning Maltese registered ships, no restrictions or taxation on the sale and mortgaging of Maltese registered ships, no trading restrictions and preferential treatment to Maltese ships in certain ports.

Any vessel can be registered under the Maltese flag provided a Maltese registered company owns it. The formation of a Maltese company is a straightforward operation and can be taken care of within a few hours. There are no nationality requirements as to both the shareholders and directors and usually the real ship or yacht owner will be the shareholder and director of the company.  The company will have its registered office at the address of the consultancy firm in Malta registering the ship. The company can also have nominee shareholders to preserve the anonymity of the real owners

A vessel is first registered provisionally under the Malta flag for six months during which period all documentation must be provided and the vessel will then be registered permanently.

As regards EU residents and VAT, it is worth pointing out that since the ship or yacht will be owned by a Maltese registered company, the vessel is tax exempt in the EU and VAT is not payable (or can be reclaimed) provided that the vessel is not in EU waters for more than six months in any twelve month period.

Finally Malta offers a Permanent Residence Scheme, which is one of the most tax advantageous schemes around the world.

A Permanent Residence Permit entitles the holder to reside permanently and indefinitely in Malta without the necessity of obtaining and renewing an entry visa.

A Permanent Residence Permit holder pays a flat tax rate of 15% on all income brought into Malta.  This is subject to a minimum payment of Lm1,000 per annum. Global income, which is not brought to Malta, is not taxed in any way.

Permanent Residents also get an exemption from customs duty on household and personal effects, furniture and other domestic and one car.

Once a Permanent Resident decides to leave Malta he may freely take any part of his capital and income out of Malta with no restrictions.  No death duty (succession tax) is payable in Malta except for a 5% charge on a person's death on immovable property situated in Malta.

Any foreigner of whatever nationality may obtain a permanent residence permit, which is issued on an indefinite basis, though an annual renewal form must be submitted.

Once the Permanent Residence Permit is issued you must come to Malta at least once within the first twelve months; beyond that, your presence in Malta is not required and there is no minimum period of stay in Malta.   Moreover within the first year you will also have to either purchase a house for not less than Lm50,000 (or Lm30,000 in the case of an apartment), or lease/rent property for not less than Lm1,800 per annum.

A Permanent Resident cannot work in Malta.  This general statement however is subject to the following clarification: the Permanent Resident cannot be employed by a Maltese person or Maltese registered company and cannot offer freelance services to Maltese persons or Maltese registered companies.  However a Permanent Resident may use Malta as a base to work from, provided that he does not offer his services on the local market.  A Permanent resident may also be employed by or offer his freelance services to non-Maltese persons or non-Maltese companies.   A Permanent Resident may also be a director of an International Trading or Holding Company (offshore company) registered in Malta.

An applicant must prove that he has an annual income in excess of US $25,000.