Following an agreement reached with the European Union, Malta’s revised corporate tax system became effective as from 1st January 2007. The tax refund previously available to non-resident shareholders is now available to all, completely removing any distinction between resident and non-resident shareholders, with the exception of profits derived from immovable property situated in Malta. Malta’s full imputation system whereby the tax paid at the corporate level is given as a credit against the tax paid at the shareholder has been retained.

Under the new Maltese corporate tax system, companies resident in Malta will remain subject to the 35 percent corporate tax. Upon a distribution of its profits, the shareholders of the Maltese company will be entitled to a refund of the tax paid by the company as explained hereunder.

Malta has introduced a refundable tax credit system of six-sevenths (6/7ths) of the Malta tax paid by a Maltese company on the profits out of which the dividends are paid. The refund system, payable to the shareholders resident and non-resident, will apply to dividends emanating from all Maltese companies, irrespective of their activity exercised and the source (Maltese or non-Maltese) of the income derived by such distributing companies.

As from the 1st January 2007, Malta operates a participation exemption which exempts from tax, dividends and capital gains derived from participating holdings. Several criteria determine what constitutes a participating holding. The more important are the following:

(i)    The Maltese company holds at least ten percent equity shares in the foreign company or,

(ii)    If less than 10 percent referred to above, the Maltese company has a certain level of control and or other rights in the subsidiary company or,

(iii)    The Maltese company is an equity shareholder in the foreign company and invests therein not less than €1,164,673 or the equivalent in any other currency. In such a case, a minimum holding period of 183 days is required in order to qualify as a participating holding.

So long as these criteria are met, dividends distributed from other EU subsidiaries will be exempt from tax. In the case, where the participation exemption is denied due to the above criteria not being met, the shareholders of the Maltese Company will be entitled to claim a refund of six-sevenths (6/7ths) of the tax paid by the Maltese company.

At the community’s request, Malta introduced some anti-avoidance provisions excluding the participation exemption when dividends are derived from a holding in a non-EU entity that would have suffered tax at a rate of less than fifteen percent or the income of such non-EU entity consists mainly of passive interest of royalties, or where the participation is a portfolio investment and the entity is taxed at less than five percent.

In other words, these anti-avoidance provisions are of a subject-to-tax nature, and target passive interest and royalties derived by a non-EU entity, which would not have suffered tax of at least five percent. For clarity and certainty, the law defines both the terms ‘passive interest or royalties’ as those not derived from a trade or business, and delineates the term ‘portfolio investment’ by contrasting it with a strategic or direct investment. Upon a distribution of dividends caught by these anti-abuse provisions, where the dividends are paid out of profits consisting of passive interest or royalties, the shareholder can claim a tax refund of five-sevenths (5/7ths) of the tax of the distributing company.

In cases where a Maltese company has claimed any form of double tax relief, the refund applicable shall be of two-thirds (2/3rds) of the corporate tax paid by the company. The refund due may not exceed the tax actually paid by the company after having claimed the relief.

Malta does not impose any withholding tax upon distributions on outbound dividends to shareholders resident in any other jurisdiction.

This universal tax refund system described above and the reconfirmation by the Organisation for Economic Cooperation and Development (OECD) that Malta is on its white list of States implementing the internationally agreed tax standard at the G20 summit convened in April is expected to consolidate Malta’s position as an attractive jurisdiction for foreign investors.