Taxation & International Structures
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Under the notion of domicile and residence in Malta, companies that are registered in Malta are treated as both domiciled as well as resident and therefore their worldwide profits are taxed in Malta.
The amendments to the Maltese fiscal laws in 2007, in line with an agreement reached with the European Union, offer a revamped system of corporate tax refunds.
A Maltese company is subject to tax on its profits at the rate of 35%. When the company pays a dividend to its shareholder, no withholding of tax or further tax is due on the dividend. Under the new tax refund system introduced in January 2007, a tax refund is applicable upon the distribution of profits from the Malta Tax Account and Foreign Income Account. Therefore the shareholders of a Maltese company may claim a refund of part of the tax and in some cases all of the tax, which was paid at a corporate level, out of profits which are not derived from immovable property situated in Malta.
The extent of the refund depends on the nature and source of profits. The law provides for 4 types of refunds depending on the nature of the profits:
- 6/7thsrefund – refund of 30% of 35% tax producing a tax liability of 5% typically due to trading profits
- 5/7ths refund – refund of 25% due in respect of passive interest & royalties
- 2/3rds refund – refund due where the company has claimed double taxation relief
- 100% refund – refund due where the profits derived from a Participating Holding (profits received from equity shares held by a Maltese company in a foreign company)
The tax refund system is applicable to a distribution of profits, and with respect to the 6/7ths refund it is recommended that a two-tier structure is set up, incorporating a Malta Holding Company, 100% owner of the Trading (to benefit from tax refund) and a Malta Trading Company (distributing dividends to the Holding).
The dividends paid by the Malta Trading Company to the Malta Holding Company out of taxed profits are not subject to further taxation in the hands of the Malta Holding Company since Malta operates in a full imputation system of company taxation whereby the tax paid on profits out of which the dividend is paid is credited in full to the receiver of the dividends. Furthermore, the Malta Holding Company is entitled to claim a refund of 6/7ths of the tax credit on the dividends received thus reducing the effective tax rate to 5%.
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