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The Participation Exemption
A 0% tax rate is possible after all
Malta has become an ideal hub for business affiliates to setup their holding companies and group finance activities. In addition to its beneficial tax-refund system and double taxation mechanisms, Malta manifests a highly attractive participation exemption which minimizes further the costs of business affiliates.
What is the participation exemption?
Maltese law grants a 100% participation exemption to companies registered in Malta which derive income (dividends) or capital gains from a participating holding or from the disposal of such holding.
What is a participating holding?
The first test for the application of the participation exemption is that the holding in the non-resident company must be a participating holding. Participating holding involves the holding of equity shares by a Maltese registered company in a non-resident company in respect of which at least one of the following conditions is satisfied:
- the Maltese registered company owns at least 10% of the equity shares in the non-resident company
- the Maltese registered company has the option to acquire the remaining balance of the equity shares in the non-resident company
- the investment of the Maltese registered company in a non-resident entity amounts to € 1,164,700 or more and is kept for an uninterrupted period of at least 183 days
- the Maltese registered 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 the non-resident company
- the Maltese registered company is entitled to sit on the Board of the non-resident company
- the holding of shares in the non-resident entity by the Maltese registered company is for the furtherance of its business and the shares are not held for trading purposes
Participations in certain types of partnerships may also be deemed to be a ‘participating holding’.
Further conditions for the application of the participation exemption
The second test for the application of the participation exemption in respect of dividend income (not in respect of capital gains) requires the satisfaction of any of the following conditions:
- the participating holding is resident or incorporated in an EU member state; or
- the participating holding is subject to tax at a rate of at least 15%; or
- the participating holding has 50% or less of its income derived from passive interest or royalties.
If none of the above three conditions are met, then the participation exemption in respect of dividend income applies only as long as the investment in the non-resident company is not held as a portfolio investment and the passive interest or royalties derived by the latter company would have been subject to tax at a rate of at least 5%.
Are there any alternatives to the participation exemption regime?
While the participation exemption offers an extensive cash flow advantage for some investors, evidence of the actual tax paid may be necessary. For this reason, Malta offers a regime which is surrogate to the participation exemption regime but involves an initial full payment of tax in respect of which upon distribution of the income derived from the participating holding, the shareholders would be entitled for a 100% tax refund. The refund itself does not constitute Maltese taxable income in the hands of the shareholder.
Other benefits of the Maltese tax system
In addition to the 100% refund (which requires the satisfaction of the same conditions for the participation exemption), Malta offers a wide-ranging refund system which may be claimed by any shareholder (whether corporate or individual) upon the distribution of dividends (or a bonus issue) by a Maltese company. The amount of refund depends on the type of income derived by the distributing company, but generally a 6/7ths refund of the Malta tax may be claimed. Such refund lowers the effective tax rate in Malta to 5%.
last updated on: 18th February, 2014