Malta Company - Holding Company
The decision of structuring a holding company both for an international group of companies and a family business has always been fundamental in international tax planning, the choice of the jurisdiction of a holding, is crucial to minimise any tax exposure on income and gains. Malta has, pursuant to the enactment of reforms (which have been approved by the EU commission) to the Maltese Income Tax Act, and to the introduction of a Participation Holding and Participation Exemption regime, gained significant importance as a holding company jurisdiction in comparison to its peers. Holding companies may perform the following functions within a group:
- Asset ownership / participation interest in operating &non-operating group companies;
- Accumulation of capital and shareholder value;
- Consolidation of business segments (including consolidated IFRS financial statements);
- Asset protection / mitigation of risks;
- Distribution of profits to shareholders;
- Reinvestment of capital into new projects;
- Receiving dividends from operating companies.
The Malta Holding Company
Apart from the generic features of the tax system, the Double Tax Treaty Network and the adoption by the Maltese government of the EU Directives, other features of the Maltese tax system beneficial to Malta Holding Companies are the following:
- Shares held by a Maltese company in another corporate company may qualify as a “participating holding” and would result in a tax-efficient regime for the Maltese company;
- The shareholders of the Maltese company would thus be able to claim a full refund on any tax paid upon any income or gains derived by the Maltese company from a participating holding or from the disposal of such holding and distributed to such shareholders;
- A Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever any income or gains derived by it from the participating holding or from the disposal of such holding, thereby having cashflow benefits.
For this purpose, a ‘participating holding‘ arises when there is a holding of equity shares in another company (Maltese or foreign) which satisfies any one of the following six (6) conditions:
1. holds directly at least ten percent (10%) 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 (10%) of any two (2) of the following:
(i) right to vote;
(ii) profits available for distribution; and
(iii) assets available for distribution on a winding up.
(ii) profits available for distribution; and
(iii) assets available for distribution on a winding up.
2. 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
3. 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
4. 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
5. 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 (€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 than 183 days; or
6. 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:
Apart from satisfying the conditions of the Participating Holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions:
- it is resident or incorporated in the EU; or
- it is subject to foreign tax of a minimum of fifteen (15) percent; or
- it does not derive more than fifty (50) percent of its income from passive interest and royalties.
Alternatively, if none of the abovementioned three (3) conditions are satisfied, the satisfaction of both two (2) ancillary conditions would need to be satisfied. These two additional criteria are that-
(i) the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment.
In this respect, a ‘portfolio investment‘ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company; and
(ii) the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.
However, where more than 50% of the income of the non resident company consists of passive interest or royalties (and the company is not resident in another EU Member State or is not subject to tax at a rate of at least 15%), the following conditions also must be satisfied to qualify for participating holding status:
- the investment must not qualify as a portfolio investment; and
- the non resident company must be subject to foreign tax at a rate that is not less than 5%.