Participation Exemption in Malta
A Malta company in receipt of income (dividend income) derived from a ‘participating holding‘ (typically an equity holding of 10% in a non-resident entity although other conditions may be fulfilled), or gains derived from the disposal of shares in a participating holding, may at its option exempt such profits (participation exemption).
The absence a specific ring-fenced regime permits a Maltese holding company to hold any type of assets and carry all sorts of activities in conjunction with its holding activities. The activities of Maltese holding company may include the following:
• Holding of shares and types of participations in resident and non-resident companies.
• Carry out financing activities and treasury operations.
• Holding and leasing of brands, trademarks, trade-names and other intangible assets.
• Holding and leasing of real estate situated in and outside Malta.
• Providing management and related services to related and non-related affiliates.
• Any other trading activities.
Any dividends and capital gains from a holding which constitutes ‘participating holding‘ is subject to a 100% participation exemption and consequently exempted from tax in Malta.
A participation held by a Maltese company would constitute a ‘participating holding‘ if at least one of the following conditions is fulfilled:
• Owns 10% of the equity shares in the non-resident company.
• The investment in a non-resident entity amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days.
• Has the option to acquire the remaining balance of the equity shares in the non-resident company.
• Is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in non-resident company.
• Is entitled to sit on the Board of the non-resident company.
• The holding of shares in the non-resident entity is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes.
Participations in certain types of partnerships may also be deemed to be a ‘participating holding‘.
Income from a ‘participating holding‘ will not be subject to a participation exemption unless the participation is held in a body corporate which satisfies at least one of the following conditions:
(1) It is resident or incorporated in a country or territory which forms part of the European Union;
(2) It is subject to any foreign tax of at least fifteen per cent (15%);
(3) It does not have more than fifty per cent (50%) of its income derived from passive interest or royalties.
Dividends and capital gains from a ‘participating holding‘
Instead of claiming a participation exemption, the holding company may opt to pay tax at the normal corporate income tax rate of 35%. When such profits are distributed, shareholders may claim a full- refund of the Malta tax paid on those profits.
When the participation in the non-resident company does not constitute a ‘participating holding‘, income is subject to tax at the normal corporate income tax rate of 35%. Tax leakage is significantly reduced in Malta since the payment of a dividend by the holding company entitles the shareholder to claim one of the following refunds of tax:
• 6/7ths of the Malta tax; OR
• 2/3rds of the tax paid in Malta
Similarly any other trading income derived by a holding company qualifies for a 6/7th or 2/3rds tax refund. The operation of the tax refund system reduces the effective tax rate suffered in Malta from 0% to 5%.