From Offshore to Onshore

Maltese International Companies

The Republic of Malta consists of three islands, Malta, Gozo and Comino. They are situated in the center of the Mediterranean Sea, just 80 kilometers off the southern coast of Italy. The climate is typically Mediterranean with mild winters, pleasant spring and autumn seasons and hot summers.

The population is just under 400,000 and the official languages are English and Maltese. In practice everybody in Malta can speak English. The mainstay of the economy is tourism whereas other important sectors of the economy are financial services, manufacturing, the semi-conductor industry and the freeport.

Malta became independent from Britain in 1964 after being a colony for more than two hundred years. It is a Republic since 1973. It is a fully-fledged democratic country with respect for the rule of law. Malta is a member of the major international organizations including the United Nations and the Council of Europe, the International Monetary Fund and will join the European Union in May, 2004.

Following independence in 1964, Malta placed much emphasis on the manufacturing and tourism industries and since 1990 it started developing its own financial services industry. The first foray into this field was the introduction of Maltese Offshore Companies which were typical offshore companies, having no reporting requirements and paying no tax at all. The gradual development of Malta into a leading financial services centre in the Mediterranean region brought about changes to the approach taken by the Government and in effect the Malta Financial Services Authority was created, much on the lines of similar European authorities. The creation of the MFSA brought in more regulation of Maltese companies and in 1994, the offshore companies were phased out; it was no longer possible to incorporate offshore companies and those companies which were incorporated were given until the end of 2004 to change their structures into onshore companies.

The end of the offshore regime brought about the introduction of two new types of Maltese companies, the International Trading Company and the International Holding Company.

These companies are in effect normal onshore companies registered in Malta. They are companies having non-resident shareholders and carry out their trading activities from Malta but they are not allowed to trade in Malta.

The International Companies, unlike offshore companies, are normal onshore companies which audit their accounts at the end of their financial year and pay corporate tax on world-wide profits to the Maltese Inland Revenue; this makes it very unlikely that foreign tax authorities will consider these companies to be tax avoidance structures. Moreover these companies and their non-resident shareholders are able to take advantage of the extensive double taxation agreements that Malta has with a large number of countries. To date, Malta has negotiated more than thirty-four such treaties, including those with most member states of the EU, Canada, Australia, South Africa, China, India and South Korea.

The tax concept behind the International Companies is that these companies pay corporate tax at 35% on their world-wide profits but a system of refunds and imputations turns these corporate structures into very tax efficient instruments for shareholders not resident in Malta. A distinction is made between International Trading Companies and International Holding Companies , the first having an effective tax rate of 4.17% whereas the second pays no effective tax at all.

International Trading Companies

International Trading Companies, as the name implies are used for carrying on trade. The companies pay corporate tax at 35% at the end of their accounting year on their world-wide trading profits; following the payment of the corporate tax to the Maltese Inland Revenue, an automatic system kicks in whereby the non-resident shareholders receive a refund of 30.83%, making the effective tax rate just 4.17%. Refunds are paid out by the Malta Inland Revenue Department within two weeks of payment of the corporate tax.

There are no further withholding taxes or other payments to be made by the ITC or by the shareholders and therefore the final total tax rate is always 4.17%. No stamp duties or exchange control restrictions apply on the distribution of the profits or dividends to the shareholders and there are no taxes or restrictions on the exportation of the dividends from Malta

International Holding Companies

International Holding Companies are not allowed to trade and their aim is to "hold" shares in one or more overseas companies and to own and manage its own assets held outside Malta.

The company will receive royalties, dividends, interest, capital gains, rents and other income arising abroad or derived from foreign investments, as well as its own dividends and at the end of its financial year, the company audits its accounts and pays corporate tax at 35% on its world-wide income, but shareholders then benefit from considerable tax benefits through a system of tax refunds. Non-resident shareholders of holding companies, upon payment of the corporate tax, become entitled to tax refunds as follows:

• 100% refund of the corporate tax paid where the overseas investment from which the income derives is considered to be a "qualifying participation", making an effective zero rate of tax; or
• 2/3% refund of the corporate tax paid where the overseas investment from which the income derives is not a qualifying participation making an effective tax rate of 11.67%.

A qualifying participation means any one of the following:

• the IHC holds 10% or more of the shares of an overseas company; or
• the IHC is entitled at its option to purchase or has the first right of refusal on a disposal of the balance of the equity shares of the overseas company;
• or the IHC is entitled to be represented on the Board of Directors of the overseas company;
• or the value of the shareholding exceeds Lm500,000 or equivalent in foreign currency; or
• the shares are held in the overseas company for the furtherance of the business of the IHC.

A Holding Company can also hold both "qualifying" and "non-qualifying" participations and in this case the tax rate will be a mixture of the two applicable rates and the effective rate of final tax will depend on the proportion of qualifying and non-qualifying shareholdings which the IHC holds.

Once again there are no withholding taxes or other taxes on the dividends distributed to the non-resident shareholders.

Other considerations

Apart from the obvious tax advantages, the International Trading or Holding Company can have nominee shareholders; nominee shareholders are provided by Maltese service providers licensed for this purpose by the Malta Financial Services Authority. The use of nominee shareholders makes the ultimate beneficial owners anonymous and the identity of the beneficial owners may only be revealed by the nominee to a Maltese Court in the course of a money-laundering investigation.

The use of nominee shareholders and local directors (which however are not a requirement) will ensure full anonymity of the beneficial owners of the company and will help to keep the management and control of the company centred in Malta. The company is allowed to have both corporate or individual directors, both resident or non-resident in Malta.

On May 1, 2004 Malta will be joining the European Union. The accession treaty with the Union has already been singed since April 2003. This brings with it an added advantage to the use of Maltese corporate structures. All Maltese companies, on accession, will be automatically passported as European Union companies and will be able to trade within and with the EU without hinderance or restriction, while still enjoying the limited taxation rates outlined above.

The Malta Financial Services Authority also issues licences to companies involved in the provision of investment services (brokers, stock brokers, financial advisers etc), insurance services, banking services and gambling services. Whereas the requirements for the issue of such licences are in line with the European Union directives, the Malta Financial Services Authority is more user-friendly than the authorities of many other European jurisdictions. Maltese companies which are licensed by the MFSA to carry out these licensable activities will be able to trade within the EU on the strength of the Maltese licence and these companies, although trading within the EU, will still be regulated by the Malta Financial Services Authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.