Malta Information
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Home Country: malta
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 Posted: Tue Oct 17, 2006 4:31 am Post subject: DOING BUSINESS IN MALTA |
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DOING BUSINESS IN MALTA
GENERAL
Malta has created the right economic environment to meet the demands of the global market. It has strong and long-standing links with Europe, North Africa and beyond and has a liberal foreign investment policy.
Malta has a thriving industrial sector with over 200 foreign and some 400 locally-owned manufacturing companies. Products made in Malta are exported worldwide and comprise semiconductors, electronic components and sub-assemblies, pharmaceuticals and medicinals, rubber and plastics, fabricated metal products and machinery, software, garments, food products and others.
The flexible and highly-trained multi-lingual workforce is Malta’s main asset and helps to ensure the country’s competitive edge through high-quality production at costs that are highly competitive relative to mainland Europe.
Malta offers a modern transportation infrastructure, state of the art telecommunications networks, and frequent air links to Europe, North Africa and Middle Eastern destinations. Malta’s strategic location in the centre of the Mediterranean as well as its excellent harbours and Freeport make it an excellent manufacturing location.
The Business Promotion Act (BPA) which succeeded the Industrial Development Act and which has been in force since 2001, introduces greater scope and flexibility to the incentives available for the promotion of business, and covers a much wider range of qualifying sectors and activities than before.
The BPA provides incentives for those industries demonstrating growth and employment potential that are engaged in manufacture (including software development), repair, improvement and maintenance activities.
The Business Promotion Regulations, issued in terms of the Business Promotion Act, provide attractive fiscal incentives for companies engaged in particular manufacturing and qualifying activities.
The incentives available under the Business Promotion Act may be subdivided under two headings namely, tax related incentives and non-fiscal related incentives.
FORMS OF COMPANIES
Private Limited Company
The private limited company, (or 'partnership anonyme' in civil code terms), has the suffix 'Limited' or 'Ltd'. The company is formed by submission of the Memorandum and Articles to the Registrar (in English), together with the appropriate fee. Incorporation takes about 7 to 10 days and shelf companies are not available.
The following are the chief characteristics of a private limited company:
* only one member is necessary;
* only one director is necessary, and must be a natural person, but can be of any nationality and resident anywhere;
* there must be a company secretary, which must be a licensed Maltese Nominee Company;
* there must be a registered office in Malta;
* the minimum authorised and paid-up capital is Lm500, but it is usual to have capital between Lm2,000 and Lm5,000 (the highest amount within the lowest duty band); a minimum 20% of the authorised value must be paid up; if there are non-resident members then the minimum capital is Lm10,000 of which 50% must be paid up, and they must obtain exchange control permission (a formality);
* shares can be registered but not bearer; preference or redeemable shares are permitted; and shares do not have to carry voting rights;
* accounts must be kept but do not have to be filed.
International Trading Company
An International Trading Company (ITC) is a company registered in Malta which does business exclusively with non-residents, both in fact and according to its Articles. Certain complementary activities in Malta are permitted:
* purchases for export of Maltese goods provided that they are not made from a 15% shareholder in the buying company;
* trading with companies registered in Malta under the Financial Services Centre Act 1988 (ie offshore companies);
* trading with other International Trading Companies.
The Maltese Inland Revenue will give a Ruling on request that a company is an ITC, which is valid for 5 years, extensible for a further 5 years.
An International Trading Company pays an effective rate of tax of only 4.17%. In addition it is able to make use of Malta's many double taxation treaties (unlike offshore companies).
The beneficial owners of an ITC can remain confidential if they incorporate the company through a licensed nominee company. As regards its legal basis, the ITC is formed as a private limited company.
Note 1 : The existing ITC and CFI (Companies with Foreign Income) schemes will be effectively abolished by 1st January 2007 at the latest.
Note 2 : The tax status of ITC is prohibited to any new company registered in Malta after 31st December 2006.
Note 3 : The existing ITCs will benefit from the current system only until 31st December 2010.
International Holding Company
The International Holding Company (IHC) is similar to the International Trading Company except that as its name implies it holds participations in foreign companies. Its effective tax rate is 11.67% or less; if dividends emanate from a 'participating holding', ie one of more than 10% in the paying company, then the effective rate of tax is nil.
Like the ITC, the IHC can make use of Malta's Double Taxation Treaties.
Offshore Company
Offshore Companies were brought into being by the Malta Financial Services Centre Act 1988. The details of their formation are no longer interesting, because in 1994 the Government legislated them away. The final date for forming an Offshore Company was 1996, and existing Offshore Companies had to convert into other forms (mostly International Trading or Holding Companies or Trusts) by the end of 2003.
Offshore Companies, which must be owned by non-residents and which must deal or trade only with non-residents, came in two flavours: the Trading Offshore Company, and the Non-Trading Offshore Company.
Trading Offshore Companies could be General Trading Offshore Companies (for any purpose other than banking or insurance), Banking Offshore Companies or Insurance Offshore Companies. The two latter are dealt with in Offshore Business Sectors; the General type was used for many purposes including barter and counter-trade operations, reinvoicing centres, employment centres, leasing, construction management, administration etc. Trading Offshore Companies paid 5% tax (or more if they wish).
Non-Trading Offshore Companies were property-holding vehicles, property being defined very widely to include shares, other holding companies, investments, ships, etc. Non-Trading Offshore Companies were exempt from tax, including withholding tax.
Offshore Companies did not benefit from Malta's network of Double Taxation treaties.
General Partnership
General Partnerships are formed under the Companies Act 1995 as a partnership 'en nom collectif' which has a partnership name. There is a Deed of Partnership giving the names of the partners, the address of the registered office, the objects of the partnership, its duration, and the amount of capital contributed by each partner. The Deed is registered by the Registrar of Companies.
The partners are liable jointly and severally for the full debts of the partnership.
Limited Partnership
Limited partnerships in Malta have general partners, who are responsible for management, and have unlimited liability, and limited partners, who are liable only to the extent of their capital contributions to the partnership. A limited partnership is formed under the Companies Act 1995 as a Societe en Commandite Simple and is subject to the same rules as a general partnership. The SICAV (Societe 'd'Investissement a Capital Variable) is also formed under the Act, but as a partnership limited by shares (Societe en Commandite Limitee par Actions), and is used by mutual funds.
Branch of Overseas Company
An overseas company can carry on business in Malta through a branch office, and is not subject to the local income tax regime (ie its profits can be freely remitted back to head office); the disadvantage is that it is not eligible for any of the incentives offered by the Maltese government for inward investment.
Trusts
The Offshore Trusts Act 1988 was amended by The Trusts and Trustees Act 2004, which became effective in January 2005, and allows Maltese residents and firms to use local trusts, while also furthering Malta’s international obligations on non-discrimination, transparency and the prevention of money laundering.
The government believes that the legislation, which creates a more streamlined and simplified trust regime, will make Malta much more attractive to both international and domestic clients, by offering greater flexibility and certainty. The new Act eliminates the nominee company regime, and introduces a licensing regime for professional trustees.
Until 2005, trusts in Malta were based on the Offshore Trusts Act 1988, which was largely based on Jermal trust law, itself a common law implant stemming from English trust law. Trusts under this Act must have non-resident settlor and beneficiaries, and trust assets must not include Maltese real estate (permitted under the new Act).
The Recognition of Trusts Act 1994 gave effect to the Hague Convention, and results in a division of trusts into:
* Maltese trusts, where the proper law of the trust is Maltese, and the governing legislation is the 1988 Act (now called the Trusts Act 1988); and
* Foreign trusts, governed by whatever law the settlor has nominated..
All trusts, including foreign ones, must register with the Maltese Financial Services Centre (MFSC), which costs Lm200 on registration and annually thereafter. Foreign trusts which do not register with the MFSC will not benefit from the tax advantages of registered foreign trusts (they are tax-exempt). Under the 2004 Act, transfers of assets into a trust or a change of beneficiaries may give rise to a charge to tax.
Under the 2004 Act, a registered trust must have a Maltese Professional Trustee as one of its trustees, which files an annual declaration of conformity with the law.
It is likely that a Malta-registered trust will often be a more effective holding vehicle than the International Holding Company. Trusts are able to use the extensive network of Maltese Double Taxation Treaties.
Unit Trusts
There are no special provision in Maltese law covering Unit Trusts, which are therefore treated in the same way as ordinary Maltese trusts, and have the same tax regime.
BUSINESS INCENTIVES
1. Provision of Immovable Property
Industrial buildings can be allocated at competitive rates of rent.
2. Soft Loans
Qualifying companies may benefit from low interest rate loans covering up to 75% of the qualifying expenditure undertaken by the company.
3. Loan Interest Rate Subsidies
Alternatively, companies may qualify for a subsidy on the interest rate payable on loans taken up from licensed financial institutions to acquire additional assets.
4. Loan Guarantees
Guarantee may be availup to 75% of loans taken up by qualifying companies to finance the acquisition of assets.
5. Training assistance
Qualifying companies may benefit from substantial training assistance. Depending upon whether a company is classified as “large”, “small or medium” enterprise, such assistance may vary from 35% to 80% of costs incurred on training.
6. Work Permits
Indefinite work permits are granted to shareholders (or their nominees) holding more than 40% of the equity. Definite work permits for specialists are granted according to company requirements.
TAX INCENTIVES
1. Reduced Rates of Income Tax
This incentive applies only to qualifying companies engaged in those particular activities listed under the Business Promotion Regulations. These activities include pharmaceuticals, plastics, biotechnology, electronic and electrical equipment.
Such qualifying companies benefit from the following highly favourable tax rates, as applicable and up to 31/12/2008:
(a) 5% for the first 7 years of operation;
(b) 10% for the next 6 years;
(c) 15% for the following 5 years.
This incentive will no longer be available after the 31st December 2008.
2. Investment Tax Credits
This incentive, in terms of which the tax payable is reduced and even eliminated, may be availed of only by those qualifying companies that are entitled to benefit from reduced rates of income tax.
Investment tax credits are calculated as follows:
Either
(a) 50% of investment on capital equipment;
Or
(b) 50% of the first 2 year wage costs of new jobs created.
Note: For SMEs the applicable percentage is increased to 65%.
Tax credits unutilised during a particular year are carried forward to the following year and increased by 7%.
The combination of the above incentives would normally result in minimal or no taxes being paid for a number of years.
This incentive will continue to be available after the 31st December 2008.
3. Value Added Incentive Scheme
This incentive is applicable to those qualifying companies that are not eligible for reduced rates of income tax, and consists of a scheme whereby such companies benefit from reduced rates of income tax according to the increase in value added derived from their activities.
The reduced rates of tax applicable are as follows:
(a) 5% for the first 7 years of operation;
(b) 10% for the next 6 years;
(c) 15% for the following 5 years.
The reduced rates of tax apply to part or indeed a multiple of the increased profit when compared to a base period. For new companies, since the base period would be Nil, all the profits in the initial three years would be taxed at the reduced rate of 5%.
This incentive will no longer be available after the 31st December 2008.
4. Investment Allowances
Tax deductions in addition to normal tax depreciation are provided as follows:
Plant and machinery – 50% of the investment;
Industrial buildings or structures – 20% of the investment.
5. Reduced Rates of Tax on Reinvested Profits
The tax on profits that are reinvested in projects approved by Malta Enterprise is reduced by 19.25% from 35%.
6. Incentives for Job Creation
The creation of new jobs for particular persons, e.g. persons unemployed for more than two years, disabled persons, would entitle a company to an additional tax deduction based on the wage cost of such persons.
7. Tax Treaties
Malta has concluded tax treaties with a number of countries (mainly European but including Canada and Australia) which enhance the incentives provided by Maltese domestic legislation.
Most of these treaties ensure that profits generated in Malta are either exempt from tax in the country of residence of the investor, or that such a country will provide a tax credit for the Malta tax spared as a consequence of the incentives Malta provides.
RESIDENCE & LIABILITY FOR TAXATION
It is necessary to consider both domicile and residence to establish the exact tax situation of individuals in Malta.
Maltese domicile is established on the basis of UK case law principles. Broadly speaking, an individual's domicile of origin (where he was born) can be changed if he establishes a permanent home elsewhere. He can only have one domicile.
Residence is defined as habitual presence in the country; ordinary residence means that an individual is present in Malta in the ordinary or regular course of his life.
Individuals who are domiciled and ordinarily resident in Malta pay income tax on their world-wide income.
Individuals who are domiciled elsewhere, and who are resident but not ordinarily resident in Malta pay tax on their income arising in Malta, or remitted there (but not capital gains, whether remitted or not). The six-month test is likely to be definitive in establishing residence.
Non-resident individuals pay tax on their Malta-source income only; but local interest and royalty income are exempt from tax, as are capital gains on holdings in collective investment schemes or on securities as long as the underlying asset is not Maltese immovable property.
'Returned migrants' are offered a special tax regime: a person born in Malta who returns can elect to pay 15% income tax on local income only; there are various conditions.
Holders of Permanent Residence Permits issued under the Immigration Act 1970 can pay tax at a reduced rate on income arising in Malta plus remittances of foreign income. Such individuals are considered to be non-resident as regards investments in offshore and non-resident companies.
Income Tax
Income is comprehensively defined, under the same headings as for business income, and permitted deductions also follow the corporate model. Capital gains are also treated in the same way, and included in taxable income.
Certain types of income, and certain individuals (apart from returned migrants and holders of Permanent Resident Permits, both dealt with above), may benefit from reduced rates of tax:
* the special 27.5% rate of tax applicable to non-resident shareholders in International Trading Companies;
* the special regimes applicable to officers and/or employees of offshore companies, Freeport companies, insurance and mutual fund companies;
* the 'final withholding tax' of 15% on income from certain types of investment and income from part-time employment or self-employment, also at 15% (subject to various rules).
Social Security Taxes
Employers and employees make social security contributions in Malta on a graduated scale: at the maximum weekly pay of Lm 129.78 the employee and employer each pay 10% (Lm 12.97). The employer deducts the social security contribution along with income tax. The self-employed also make contributions.
Stamp Duty
Stamp Duty is levied on various transactions in Malta; the most important are:
* share transfers at 2% of the consideration;
* share issues at 0.4% of the nominal value;
* transfers of immovable property: 5%.
Companies licensed under the Investment Services Act 1994 (ie investment funds) are exempt from stamp duty on share transfers and issues. Maltese companies with predominantly foreign income can also obtain exemption.
Value Added Tax
VAT was reintroduced into Malta as from 1st January 1999, as required by the EU accession process, at a rate of 15%, with a reduced rate of 5% applicable to tourist accommodation. The budget for 2004 included an increase in the VAT rate to 18%.
Property Tax
In 2005, the Government attempted to introduce a new withholding tax of 12% to be levied on all sales of real property, replacing an existing 35% capital gains tax.
The new tax would not affect those selling their primary residence, who were exempt from capital gains tax.
Critics said that the tax would lead to an increase in property prices, disadvantage foreign buyers and generally fail to achieve its objective of stabilising the local housing market.
The government's rationale for switching to a withholding tax was to cut down on under-declarations of selling price and to boost the housing supply by encouraging those who have held on to property for long periods to sell.
In February, 2006, Malta's Parliamentary Secretary, Tonio Fenech, unveiled a number of amendments to the property tax in an attempt to head off criticism.
DIRECT CORPORATE TAXATION
The Maltese Income Tax Act as amended governs company taxation. Malta imposes income tax on the world-wide income of companies resident in the country; this includes all companies incorporated or registered under any Maltese law if they are ordinarily resident, and any foreign company which is managed and controlled from Malta. The definition of income includes capital gains; there is no separate capital gains tax as such. However, capital losses can only be relieved against capital gains, so the distinction is preserved within the tax computation. Local-source income and foreign-source income are also treated separately within the computation; Maltese companies with foreign income maintain a Foreign Income Account for this purpose (see below).
Non-resident Maltese companies pay income tax on locally-sourced income including capital gains, and on income remitted to Malta (excluding capital gains).
Non-resident foreign companies pay income tax on locally-sourced income only (not including capital gains). Local interest and royalty income would normally be exempt.
The Income Tax Act lists a number of sources of taxable income:
* Trade or business;
* Profession or vocation;
* Employment or office;
* Dividends;
* Interest and discounts;
* Pensions, charges, annuities and other annual payments;
* Rents and other profits arising from immovables or real rights thereon;
* Royalties;
* Other gains or profits.
Rates of Income Tax
The rate of income tax in Malta is 35% on chargeable income. Note that certain types of company benefit from lower rates, International trading Companies and International Holding Companies, see Offshore Legal and Tax Regimes; also, companies licensed under the Malta Freeports Act and 'qualifying' companies under the Business Promotion Act may receive tax holidays of 10 years or more.
Branch or Subsidiary ?
Branches of foreign companies are not subject to income tax in Malta; Maltese income and expenses are taken into the tax computation in the home country of the mother company. On the other hand, branches are not able to take advantage of double tax treaties, nor of Maltese investment incentives, all of which are available only to companies incorporated in Malta.
Calculation of Taxable Base
Allowable expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Expenses can only be offset against the income in whose production they were incurred; they can be apportioned between types of income (losses, however, are transferable between income types). Among others, the following expenses are allowable:
* Repairs and the cost of maintaining the equipment used;
* Interest on capital employed in acquiring income;
* Bad debts and provisions for them;
* Capital allowances: first year 20%, but only 10% for hotels and industrial buildings; wear and tear allowances in future years.
Some types of expense are non-deductible, including:
* expenses incurred prior to production of the income, eg company formation, equity issuance or installation costs;
* charitable contributions (and other spending away of net income);
* capital items.
Unrelieved losses can normally be carried forward to offset future profits from whatever source (but only within the overall category of 'foreign-source' or 'local-source' - losses cannot cross that boundary line). Unabsorbed capital allowances however can only be applied to income from the same source.
Foreign-source income is protected against double taxation through 'Commonwealth Relief' which is now hardly ever used, Double Taxation Treaty relief, Unilateral Relief (often applies when Double Taxation relief is not available), and finally a 25% Foreign Tax Credit if all else fails. Only one of these four reliefs is available, and they apply in the order stated.
Group relief is available both for income and capital, but with limitations.
NB: This brief summary of some of the more important aspects of Maltese income tax law is given for general information only; it should not be relied upon in actual situations, for which professional tax advice is necessary.
Filing Requirements and Payment of Tax
The tax year is the calendar year, ending 31st December. Tax is assessed on the basis of the preceding calendar year, on on the financial year of the company that ended in the previous calendar year.
Companies make three equal payments of tax in the year of assessment, in April, August and December.
A tax return must be submitted within six months of the end of a calendar year, or if the company's financial year ended before 31st December, within one month of receipt of the official return form, if this is later. If there is a balance due according to the company's return, it must be paid by 30th June in the year of assessment.
Tax due on foreign-source profits is payable 18 months after the balance sheet date, or 18 months after the payment of a dividend, it that is earlier.
Withholding Tax
As regards dividends, Malta operates a full imputation system, but the situation is made quite complicated by the interaction of varying regimes for different types of income. Companies need to maintain three distinct income streams:
* Foreign Income;
* Taxed Local Income; and
* Untaxed Local Income.
Untaxed local income is that received from fiscally-privileged companies of various types, who are allowed to pay untaxed dividends etc, and it can be passed on subject to a withholding tax of 15% or in some cases without any deduction; taxed local income will have borne corporate income tax at 35% and dividends are not subject to withholding tax; foreign income will have been relieved of all or almost all of any tax it has suffered and will then have borne 35% local income tax - no withholding tax, therefore.
Resident (tax-paying) shareholders have a full 35% tax credit in respect of taxed local or foreign income dividends. Non-resident shareholders can take the tax credit, or they can opt for refunds of either two-thirds or all of the domestic tax paid depending on whether the foreign income came through a 10% participation or not.
NB: This is a highly simplified description of the Maltese withholding tax regime; specialist professional advice is necessary before any action is taken.
Malta's November 2000 budget introduced witholding tax on Collective Investment Schemes. With regard to foreign funds (with a primary or secondary listing on the Malta Stock Exchange), the fund manager or representative must register with the Inland Revenue Department which means that income to the investors in the fund will be subject to a 15% final witholding tax.
Income that goes to local residents from Investment Collective Schemes (either traded on the primary or secondary listings on the exchange) will be subject to tax. This includes distributing funds and accumulator funds.
Further changes made by the budget include tax levied on all government stock bought directly by an investor. However, tax is not levied if the investor invests in an accumulator fund which then reinvests in government stock. |
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