Treaties

Malta's tax treaty network, consisting of 63 tax treaties, has experienced a significant degree of development over the past six months. New tax treaties with Bahrain, Hong Kong, Saudi Arabia, Switzerland, and Uruguay became generally applicable as of 1 January 2013 (1 April 2013 in the case of Hong Kong). Similarly, with effect from 1 January 2014, a new treaty recently concluded with Guernsey will come into force as will a revised treaty with Norway. In addition, during 2012 and the first quarter of 2013, new tax treaties were negotiated with Armenia and Mexico, a protocol to the existing treaty with South Africa was signed and the treaty previously negotiated with Russia has been approved for signature. During the said period Malta has also concluded tax information exchange agreements with the Bahamas, Bermuda and Gibraltar.

The following are the salient features of the new treaties which came into force with effect from 1 January 2013:

Malta-Bahrain treaty

The salient feature of this treaty is allocation of exclusive taxing rights with respect to dividends, interest and royalties to the state of residence of the recipient.

Malta-Hong Kong treaty

Dividends and interest are taxable exclusively in the country of residence of the recipient, whereas royalties may be taxed in the source state subject to a limited withholding tax rate of 3%. The protocol to the treaty permits both Malta and Hong Kong to continue to apply domestic measures concerning tax avoidance.

Malta-Saudi Arabia treaty

The treaty provides that dividends may be taxed in the source state subject to a limited withholding tax rate of 5%. Income from debt-claims are taxable exclusively in the country of residence, whereas royalties may be taxed in the source state subject to a limited withholding tax rate of 5% (with respect to royalties which are paid for the use of, or the right to use, industrial, commercial, or scientific equipment) and 7% (with respect to all other royalties). The treaty also contains a general clause which provides that the treaty shall not affect the application of domestic provision preventing tax evasion and tax avoidance.

Malta-Switzerland treaty

The treaty provides that dividends paid by a company resident in Switzerland shall be exempt from tax in Switzerland when paid to a company resident in Malta, which directly holds at least 10% of the capital of the company paying the dividends for at least one year, and in all other cases the tax charged by Switzerland shall not exceed 15%. Interest may be taxed in the source state subject to a limited withholding tax rate of 10% and an exemption applies if the interest is paid in connection with (i) the sale on credit of industrial, commercial, or scientific equipment; (ii) the sale on credit of any merchandise by one enterprise to another enterprise; or (ii) on any loan granted by a bank. Interest shall also be exempt from tax in the source state where interest is being paid between associated companies which are affiliated by a direct minimum holding of 10% for at least one year, or, both companies are held by a third company which has a direct minimum holding of 10% in the capital of both the first company and the second company for at least one year. Royalties shall be taxed exclusively in the residence state. With respect to the elimination of double taxation, in terms of the treaty Malta shall use the credit method whereas Switzerland shall use the exemption method for certain items of income as well as a modified credit method for other items of income. The treaty also includes a general anti-abuse clause such that the benefits of the treaty may not be granted with respect to wholly artificial arrangements.

Malta-Uruguay treaty

The treaty provides that dividends paid by a company resident in Uruguay to a company (other than a partnership) resident in Malta, which directly holds at least 25% of the capital of the company paying the dividends, shall not exceed 5% and in all other cases the tax charged by Uruguay shall not exceed 15%. The 5% reduced withholding tax rate shall also apply if the beneficial owner of the dividend is a collective investment scheme. Interest may be taxed in the source state subject to a limited withholding tax rate of 10%. Royalties may be taxed in the source state subject to a limited withholding tax rate of 5% (with respect to royalties for the use of, or the right to use, any industrial, commercial or scientific equipment, and copyright of literary, artistic or scientific work) and 10% in all other cases. Both Malta and Uruguay shall, in terms of the treaty, use the credit method to eliminate double taxation.

2013 election results in a change in Government but not in policies

A new Government was elected on the 10 March 2013 and it is now the Labour Party which governs. The change in Government is not likely to bring with it any major changes which are to affect Malta's economic and political stability, so much so that, it is expected that the 2013 budget, as tabled by the outgoing Government and which is subject to approval by the newly formed Maltese Parliament, will be retained in its entirety. The 2013 budget bill includes a proposal to further extend Malta's royalty exemption to include income from trademarks. It also proposes to extend Malta's participation exemption regime to include profits and gains derived by a Maltese company that are attributable to a permanent establishment outside Malta, or to the transfer of such permanent establishment. Furthermore, the 2013 budget includes a proposal that would open the door for the introduction of a system for group consolidation for tax purposes.

According to statistics recently published by Eurostat, the general Government deficit as a percentage of GDP for 2011 was 2.7% and general Government gross debt as a percentage of GDP for 2011 was 70.9%. Real GDP growth for Malta for 2012 was 0.8% whilst the forecast real GDP growth for 2013 is 1.5%. Malta's nominal inflation rate for 2012 was 3.2% and the unemployment rate was 6.5%.

In the conclusion to the report of the European Economic Advisory Group (EEAG) dated February 2013, Malta together with Austria, Germany and Slovakia have been identified as member states of the EU which have 'seen more robust economic momentum in recent years. They have benefitted from the relatively solid condition of their public and private finances as well as their high level of international competitiveness'.

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