Holding companies in Malta can be set up to hold shares, assets and securities such as yachts, aircrafts, art, real estate, investments, intellectual property, fixed assets as well as personal assets. Malta is increasingly becoming very attractive as a jurisdiction of choice for the setting up of a holding company due to being a tax efficient vehicle. A number of tax treatments may apply in various scenarios:
► Participation exemption
► Dividends received are exempt from tax in Malta
► Capital gains are exempt from tax
Participation Exemption
Malta ITA governs the participation exemption which applies to dividends and capital gains derived from a participating holding or from the transfer of part, or all, of such holding.
Participation Holding
The participation holding exemption exempts from tax income and /or capital gains derived by a Malta holding company registered in Malta from a participating holding or from the disposal of such holding, provided that the company does not hold, directly or indirectly, property situated in Malta or rights over such property.
A participating holding is where a company resident in Malta holds equity shares in another entity and the former:
a. holds directly at least ten percent 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 of any two of the following (“equity holding rights”):
♦ right to vote;
♦ profits available for distribution; and
♦ assets available for distribution on a winding up; or
b. a company 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
c. a company 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
d. a company 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
e. a company 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 one million, one hundred and sixty-four thousand euro (€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 than183 days; or
f. a company 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.
Other conditions for application
The participation exemption for dividends is applicable if the entity in which the participating holding is held:
♦ is resident or incorporated in the European Union; or
♦ is subject to tax of at least 15%; or
♦ does not derive more than 50% of its income from passive interest or royalties.
This is the first set of conditions forming part of Malta’s anti-abuse provisions. Only one out of the three criteria has to be met in order for the exemption to be applied. If none of the above three conditions are met, a further test is applied. This have to be fully adhered to, meaning that both conditions below need to be satisfied completely:
♦ the equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment, and for this purpose, the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment; AND
♦ income has been subject to tax of at least 5%.
The conditions for the application of the participation exemption in relation to dividends do not apply in the case of gains derived from the transfer of a participating holding.
It is also important to note that as from year of assessment 2014, the participation exemption rules were extended to apply also for income and capital gains attributable to a PE (Permanent Establishment) situated outside Malta.