Archive for the ‘Tax & Legal’ Category

Property Holding Companies – Article by Mr Franco Falzon

September 23, 2010

Property holding companies are legal entities used by net worth individuals or groups of companies to invest in real estate or to hold shares or participations in other companies investing in real estate. A property holding company may be used to invest in a single property or a large number of properties forming part of a large development project. In some cases, a property holding company will be used for each property forming part of large development project. In addition to the holding of immovable property, property holding companies may engage themselves in other activities such as:

  • Leasing real estate to companies forming part of the same group or to un-related third parties; and
  • Financing of immovable property development projects

 

Advantages

In cross-border scenarios, the ideal location of a property holding company becomes a critical issue and normally takes into consideration and addresses a number of tax issues. Proper structuring may achieve the following benefits:

  • Tax efficient repatriation of gains from the sale / transfer of immovable property to the beneficial owners
  • Facilitating the transfer of ownership. Selling shares in the holding company itself may be a viable option to
  • transfer the legal title of the immovable property which in certain cases may not attract capital gains tax.
  • Rental and financing income arises in a tax efficient jurisdiction

Using a Maltese Property Holding Company
Malta has always been a favourite jurisdiction for locating a property holding company. In particular a Maltese property holding company may allow investors to achieve the following tax objectives:

  • Efficient repatriation of earnings to any jurisdiction without suffering any withholding tax in Malta
  • Transferring ownership without any incidence of taxation in Malta
  • Low tax burden on rental and financing income arising in Malta

The attractive features of the Maltese tax system attributable to property holding companies are the following:

Participation Exemption Regime

Income from dividends and capital gains on the disposal of a participation in a non-resident company which qualifies as a ‘participating holding’ are exempt from tax in Malta. For more details on the participation exemption regime please see our Holding companies section.

Tax Refund System
Income other than dividends and capital gains from a ‘participating holding’ such as rental income and interest income from financing activities is subject to corporate income tax. Resident and non-resident shareholders in a Maltese company may however claim back refunds of corporation tax paid in Malta upon a distribution of dividends by a Maltese company.

Shareholders are entitled to claim one of the following refunds of tax:

  • 6/7ths of the Malta tax
  • 5/7ths of the Malta tax
  • 2/3rds of the tax payable in Malta
  • Full refund

The tax refund system significantly reduces the tax suffered in Malta on any income which is not subject to the participation exemption in Malta and subject to tax at the normal corporate rate of tax. More details on the tax refund system in Malta.

No withholding tax on dividends distributed by a Maltese company

Malta does not levy any withholding tax on payments of dividends to non-resident shareholders of Maltese companies. This feature of the Maltese tax system facilitates the repatriation of profits to low-taxed jurisdictions.

No capital gains on the transfer of shares in a Maltese company

Capital gains derived by non-residents on the transfer of shares in a Maltese company are not subject to capital gains tax in Malta provided that the assets of the Maltese company do not consist wholly or principally of immovable property situated in Malta.

No Stamp Duty

Malta does not levy any stamp duty on the transfers of shares in a Maltese company by persons who are not resident in Malta provided that certain conditions are met.

No Thin capitalisation Rules

There are no thin capitalisation rules in Malta. The absence of thin capitalisation rules allows a holding company to finance the acquisition of a participation and push-down debt in a tax-efficient manner. Provided that certain conditions are met, the holding company may fully deduct any interest on loans received from its shareholders. The absence of thin capitalisation rules increases the attractiveness of using a Maltese holding company also as a tax efficient financing vehicle.

Incorporation a Maltese Property Holding Company
A Maltese property holding company may be incorporated as a normal company registered under the
Companies Act.

Minimum share-capital
A Maltese company may be incorporated with a minimum issued share capital of Lm 500 (EUR 1,165).

Incorporation Process
Company incorporation is an easy and straight-forward process in Malta. Provided that the required due diligence documentation is submitted to the Registry of Companies in Malta, a company may be registered within 24 hours from the submission of the Memorandum and Articles of Association and other due diligence documents which may be required.

Bank Account
There is no need for a Maltese company to open a bank account with a Maltese bank, however it is recommended under certain circumstances to open a bank account in Malta

Substance Requirements
No substance requirements, no need to have registered employees or Maltese resident directors. A Maltese company is obliged to have a registered address in Malta. A certain degree of substance may nevertheless be required to gain treaty access.

Applications

Exclusive Holding Activities

 

Holding and Financing

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Incentives for foreigners to invest in immovable property through Malta

October 19, 2009

Although there are not any specific tax incentives relating to   an investment in immovable property in Malta – whereby such  investment would be due to the stability of such property’s value and as a good medium to a long term investment – there might be various tax incentives for Malta companies set up to hold immovable property outside of Malta, usually through a company in such country.  

 Whereas any income or gains from immovable property, and the company holding it, tend to usually be taxed in accordance with the domestic law in that country – lex situs – (although exceptions do apply), where a Malta company holds at least 10% of the equity shares in such foreign company – alternative other conditions can be satisfied where such a 10% equity holding are not achieved, such as €1.1m investment – such holding would be considered a ‘participating holding’ in terms of Malta law.  Where the Malta company receives income from such ‘participating holding’ or gains from the disposal of shares in such participating holding, such profits will stand to be exempt at the level of the Malta company.  Furthermore any subsequent dividend distribution to shareholders wherever they may be situated will not be taxed further in Malta – no withholding tax in terms of Malta law.  This might creates an interesting manner in which to hold immovable property indirectly through a Malta company for investors around the world.

 Other specific tax planning opportunities have in the past worked, for example with immovable property in Portugal.  These can be considered on a case-by-case basis.  One may look into setting up property funds in Malta, again for the purpose of allowing foreign investment in immovable property around the world.

 The above information is merely generic and does not constitute specific financial, tax or legal advice.  We suggest that each case scenario be discussed individually.  

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Use of a Malta Based Holding Company to Own Real Estate in Portugal

October 7, 2009

At the end of 2003 the Portuguese Government amended the tax rates on immoveable assets held in Portugal. This was directed against properties held by entities defined as being offshore. A Portuguese list exists, which details the jurisdictions classified as being offshore.

The Option of Malta

Many property owners have taken the opportunity to restructure the ownership of their properties to jurisdictions not on the Portuguese list of offshore centres. One such jurisdiction is Malta, which, since joining the European Union in 2004, has emerged as a popular jurisdiction for holding property in Portugal.

Taxes Payable by “Offshore” Jurisdictions

A number of additional taxes are payable if a Portuguese property is acquired through a jurisdiction on the list of offshore centres:

  • A property transfer tax at a flat rate of 8% is payable on properties acquired after 2006. This property transfer tax applies to the acquisition value, or the registered value, whichever is greater.
  • Property municipal taxes are payable at the higher rate of 1%. These taxes are liable on an annual basis.
  • Properties held by companies on the offshore list are subject to a 15% withholding tax on deemed gross rental income. This is based on 1/15th of the property’s tax value, as calculated by the Tax Authorities.

Taxes Payable using a Malta Company to hold Portuguese Property

Malta is not on the Portuguese list of offshore jurisdictions and therefore Malta companies pay the standard property transfer tax and the standard municipal property tax:

  • Property transfer taxes in Portugal vary from 0% to 6.5% depending on the property’s value.
  • Property municipal taxes are based on the property’s value as calculated by the Tax Authorities and range from 0.2% to 0.7% for urban properties. The rate for rural properties is 0.8%. This municipal tax is payable annually.
  • Withholding tax is not payable as there is no deemed rental income charge for a Malta company holding Portuguese property.

 Another potential liability to consider is capital gains tax. If a Malta company sells Portuguese property, the capital gain generated will be taxed at a 25% rate. If, however, shares in the Malta company are sold, there will be no capital gain and therefore no taxation will be generated in Portugal.

Company Migration to Malta

Companies registered in offshore listed jurisdictions are able to migrate to Malta. This assumes that the laws of the country where the company is domiciled permit such a migration.

Example of a Typical Company Structure Migrating to Malta

table

Additional Information

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77greatestates or info@77GreatEstates.com.

The Case Study below illustrates the types of tax saving that can be achieved through the use of a Malta company for holding property in Portugal, as opposed to the holding of property by a jurisdiction on the Portuguese list of offshore jurisdictions.

Case Study

The case study below details two scenarios.

  • At the date of purchase the property was valued at €1,000,000, it was held for a 5 year period and then sold for €1,100,000.
  • The first scenario illustrates the property being held by a BVI Company and the second scenario by a Malta Company. In each scenario, the sale of the property is achieved through the sale of shares in the respective company.

table2

TOTAL SAVING

Over a period of five years a tax saving of €95,000 can be achieved through the use of a Malta company as opposed to a BVI company, or a company from another jurisdiction listed as an offshore jurisdiction by the authorities in Portugal.

Malta: The Tax Regime, Double Taxation Treaties and Double Taxation Relief

October 6, 2009

In assessing the tax efficiency of a jurisdiction, the following factors need to be taken into consideration:

  • The tax rate on income in the home jurisdiction
  • Withholding taxes suffered on income paid from one jurisdiction to the home jurisdiction
  • Double taxation relief given in the home jurisdiction for taxes paid elsewhere
  • Withholding taxes on subsequent dividends from the home jurisdiction

The Maltese Tax Refund System and the Effective Tax Rate

Companies operating in Malta are subject to a corporate tax rate of 35%. However, shareholders enjoy low effective rates of Maltese tax as Malta’s full imputation system of taxation allows generous unilateral relief and tax refunds on the distribution of profits:

Trading Income – Shareholders can apply for a tax refund of 6/7ths of the tax paid by the company on those trading profits that have been used to pay a dividend. This results in an effective Maltese tax rate of 5% on trading income.

Passive Income – Where profits are derived from passive income (ie. interest and royalties) the tax refund to the shareholder is 5/7ths of the tax paid by the Maltese company. This results in an effective Maltese tax rate of 10% on passive income.

Where the Maltese company has obtained double taxation relief on the foreign passive income the tax refund to the shareholder is 2/3rds of the tax paid by the Maltese company.

Participating Holding Exemption

The participating holding exemption, exempts the dividends and capital gains derived from a participating holding in a non-resident company, from income tax.

To qualify as a participating holding, the shareholding of the Maltese company in the foreign company must satisfy at least one of the following conditions:

  • The holding is 10% or more of the equity capital of the foreign company or
  • The holding is a substantial equity investment of at least €1,164,000 and the holding is held for an uninterrupted period of at least 183 days or
  • The Maltese company:
    • Holds at least 1 equity share and has an option over the balance or
    • Holds at least 1 equity share and has power to appoint a director

Double Tax Relief for Maltese Companies

Maltese companies enjoy exemption from or reduced withholding taxes on income paid from another jurisdiction.

Income received from foreign sources may have been liable to foreign taxes and may also be subject to withholding taxes. Mitigation of these taxes can be obtained by claiming unilateral relief.

Foreign tax suffered, is allowed as a tax credit against the tax chargeable in Malta. The credit allowed must not exceed the total tax liability in Malta and to claim the unilateral relief the company must demonstrate that:

  • The income arose from a foreign source
  • The income was subject to foreign tax
  • The amount of the foreign tax suffered

Flat Rate Foreign Income Tax Credit

An alternative option to claiming double tax relief, is to claim a flat rate foreign income tax credit.

The flat rate foreign tax credit is calculated at 25% of the foreign income or gain before allowable expenses.

The net foreign income received, plus the tax credit, less allowable expenses, is then subject to Maltese income tax at 35% with relief for the deemed credit (up to a maximum of 85% of the Maltese tax payable). An example is provided below:

  table

The effective tax rate on net income after expenses is therefore 13.38%.

On distribution of the profits, the shareholder can claim a 2/3rds tax refund on the tax suffered by the Maltese company, effectively reducing the overall tax rate even further.

Tax Treaty and EU Directive Relief

Malta has an extensive network of double taxation treaties. A list of Malta’s double tax treaties is detailed in the Appendix below. As a full member of the EU, Malta has access to the benefits of the EU Parent Subsidiary Directive and the EU Interest and Royalty Directive.

taxation table

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Report on Malta as tax haven dismissed as sensational – Article in The Times dated 05th September 2009, by Ivan Camilleri, Brussels

September 11, 2009

germany

Malta has denied “sensational” reports in a German publication suggesting the island was being used as a tax haven by German multinationals.

While admitting there was a recent surge in German investment in Malta, Finance Minister Tonio Fenech said “this is all above board and according to EU laws”.

“German investment in Malta has been present for a long time and the double taxation agreement with Germany is there to facilitate taxation between the two countries and promote investment. We have never had any negative reaction by the German government on this front… This is just sensationalism,” Mr Fenech said.

Describing Malta as “a new tax haven Mecca” for large German multinationals, Germany’s most popular news magazine Der Spiegel gave details of how large German companies were avoiding tax through the island.

The magazine, which sells more than a million copies around Europe every week, accused Germany’s Finance Minister Peer Steinbruck of turning a blind eye to what had become a known “tax loophole” used by Germany’s top companies to “optimise their tax structure” through Malta.

According to an investigation carried out by the magazine, renowned companies like Lufthansa, Puma, BASF, K+S and Fraport were all allegedly using Malta’s taxation system to avoid paying all their dues to the German tax authorities.

They were doing this by forming subsidiary companies in Malta to take advantage of loopholes in the EU taxation system and the double taxation agreement between the two countries to reduce their taxable incomes, the magazine claimed.

The report said this had been going on since Malta joined the EU and despite the German authorities knowing what was happening they did not seem to have the power to do anything to stop it. At the same time the magazine admitted there was nothing illegal in the system being adopted.

“In the global game of financial Monopoly, the small Mediterranean country has become one of German industry’s preferred locations in the time since it joined the EU in 2004,” Der Spiegel wrote.

“German companies have their offices in the town of St Julians, near the Stiletto Gentleman’s Club, and the pubs where foreign language students drink themselves into oblivion. The offices of the BMW Malta Group are near the casino in the upscale Portomaso waterfront development,” the magazine commented sarcastically.

Other German big names, such as Deutsche Bank would also be investing in the island, the magazine reported.

Quoting a partner in an accounting firm in Malta, the report said the number of German companies in Malta was growing rapidly and gave details of how the “tax avoidance system” worked.

Der Spiegel said that, although companies in Malta paid 35 per cent tax on their profits, a rate higher than Germany’s, shareholders could then apply for a refund of the bulk of these taxes. On balance, profit distribution in the form of dividends was taxed at only five per cent. The magazine affirmed that, after taxation, the net dividends were returned to the coffers of the German parent companies, 95 per cent tax-exempt.

Directly criticising the German government for allowing such a system to go on, the magazine charged that “No one (in Germany) seems to be troubled by the fact that this loophole deprives the German Treasury of massive amounts of revenue”.

The magazine also pointed a finger at the German Embassy in Malta saying it was encouraging other German companies to use this system and invest in Malta.

A spokesman for the Foreign Office in Berlin said, when contacted, that the ministry was aware of the article but had no comment to make.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Trusts – Article by Hugh Peralta & Associates – Advocates

August 7, 2009

Malta has a fully-fledged trust legislation, even though Malta’s legal tradition has been predominantly of a civil law nature. Trusts are regulated by the Trusts and Trustees Act which enables both residents and non-residents to set up various types of trusts in Malta. Maltese trust legislation places great responsibility on trustees resident or operating in Malta. An individual or a corporate entity acting as a professional trustee and which is resident or operating in Malta, must be approved and licensed by the Malta Financial Services Authority.

 This licensing requirement means that licensed trustees have a high degree of responsibility especially in ensuring that trusts under their administration are fully compliant with the law, including all disclosure requirements in terms of anti- money laundering laws. Due to this approach, Maltese trusts are not registered in a centralised trust register. The great onus placed on trustees emanates also from the fact that trustees must not only act with diligence and attention but must act with the utmost good faith.

 What is a trust?

 A trust is a legal relationship created by a person, the settlor, who places assets under the control of a trustee, who undertakes an obligation to administer that property for the benefit of a beneficiary/ies or for a particular purpose.

 Trust assets are offered protection by law as the property held in trust constitutes a separate patrimony from the assets of the trustee, ascertaining that the personal creditors of the trustee shall have no recourse against the trust property.  Furthermore, the property of a particular trust is also segregate from property of another trust held by the same trustee. Importantly, the trust property shall not form part of the trustee’s personal estate upon his insolvency or bankruptcy and the trust property shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee’s estate upon his death.

 Formation of trusts

 In terms of Maltese law, a trust can come into existence in any manner.  However, a unit trust must be set up in writing. However it is always recommendable to have a written trust deed or declaration so that this clearly delineates the parameters of the trust and the functions and discretions of the trustee. A trust shall continue until the 100th anniversary of the date of its creation and unless already terminated shall terminate then.  This limit does not apply to trusts set up for charitable purposes or unit trusts.

 Under Maltese law, the beneficiary or beneficiaries must be identifiable by name or ascertainable by reference to a class or to a relationship to some person.  The settlor of a trust may also be a beneficiary under the trust. A trustee is normally precluded from being a beneficiary of a trust apart from specific trusts utilised in a financial services context and known as commercial trusts.  A trustee may benefit under a trust where he is not the sole trustee and in those cases where he is, he may still benefit if he has prior approval of the MFSA or the court.

 Maltese law also provides for the possibility of having a protector in a trust relationship. Such a protector is designated by the settlor so as to supervise the operation of the trustees in terms of the trust deed.

 Applicable law

 The terms of the trust may identity the law applicable to the trust. Furthermore through the adoption of the Hague Convention on the Law Applicable to Trusts and on their Recognition, Malta recognises trusts having a foreign proper law.

 Where the proper law of a trust is foreign law, the validity of the trust, its construction, its effects and the administration of the trust shall be governed  by such foreign law and shall be recognized and given effect to in Malta in accordance with the Hague Convention on the law applicable to trusts and on their recognition.

 Types of trusts

 There are three types of trusts, namely, an express trust, an implied trust and a constructive trust.

 An express trust is one in which the intention of the settlor to create the trust relationship is clearly and openly expressed.  

An implied trust arises from the unexpressed but presumed intention.  A constructive trust arises by operation of law and is not dependent on the intention of the settlor. 

 Trusts can be tailor-made for a number of uses. Trusts may be used for such purposes as asset protection, wealth management, investment purposes, to provide a life annuity for a surviving spouse or a child with special needs. Maltese law allows such a flexible use of the trust concept and details out specific safeguards to ensure the protection of settlers, beneficiaries and the trust property.

 Commercial trust

 The trust legislation also envisages the use of trusts for commercial purposes or commercial transactions. The law identifies a number of scenarios qualifying as commercial transactions such as the use of trusts for:

  • Collective Investment Schemes,
  • Securitisation of assets,
  • Granting of real or personal security,  
  • Securities offerings, whether to the public or for private placement,  
  • Portfolio management,  
  • Custody of investment instruments, 
  • Syndicated loan agreements and other multi-creditor banking facilities; and  
  • Insurance policies and the payment of proceeds thereunder.

 Commercial trusts are afforded a greater flexibility than normal trusts, making these a suitable tool in the financial industry.

 Taxation

 Trusts are considered to be transparent for tax purposes if the income of the trust is distributed to the beneficiaries.  In that case the income of the trust is not charged to tax in the hands of the trustee but is taxed in the hands of the beneficiaries.  Where all the beneficiaries of a trust are not resident in Malta and where all the income attributable to the trust does not arise in Malta, there is no tax impact in terms of Maltese law.  Income attributable to a trust which is not distributed to the beneficiaries is taxed in the hands of the trustees at a rate of 35%.

 How we can help

 Peralta Custodian Limited is the service company within Hugh Peralta & Associates Advocates, which is licensed by the Malta Financial Services Authority to act as a trustee.  Apart from offering Professional Trustee services, we may also help you with any matters related to trusts, including trust advice, drafting of the trust deeds and ancillary documentation such as the letter of wishes, and the setting up of the trust.

 Disclaimer: These notes are intended only as initial general information. They reflect our views and not necessarily those of any court, authority or government. They are not exhaustive, and further advice should be sought for each particular situation before any decisions are taken.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77greatestates or info@77GreatEstates.com.

Taxation of Companies registered in Malta – Article by Hugh Peralta & Associates – Advocates

August 7, 2009

Malta, an independent democracy since 1964 and an EU Member State since May 2004, has developed into a reputable financial centre of choice and offers an attractive and competitive environment for international business and investment. A favourable tax system compounded with excellent infrastructure, state of the art telecommunications, an extensive treaty network, highly qualified professionals, and an English speaking and business friendly atmosphere have raised Malta’s reputation beyond its relative small size.

 Companies, registered or resident in Malta, are subject to income tax on chargeable income at a standard rate of 35% – known as Advanced Company Income Tax (ACIT). However, in view of Malta’s full imputation system of taxation any income tax paid by the company is credited in full to the shareholder upon a distribution of profits, so as to avoid any double taxation of corporate profits. The full imputation system, which has been utilised since 1948 and which is fully compliant with EU directives and ECJ case law, ensures that both resident and non-resident shareholders are entitled for a refund of any tax paid by the company which is in excess of the shareholder’s income tax liability.

 Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements.  The tax refund is also paid in the same currency, thus eliminating any currency exchange risks.  In terms of the provisions of the income tax legislation, a tax refund must be paid by the Inland Revenue Department within 14 days from the end of the month in which it falls due.

 Tax accounting

 The income tax system utilizes different tax accounts for different sources of income namely the Final Tax Account (FTA), the Immovable Property Account (IPA), the Foreign Income Account (FIA), the Maltese Taxed Account (MTA) and the Untaxed Account (UA).

 The attribution of chargeable income to the different tax accounts is an important aspect of the Maltese tax system as this determines the possibility of tax refunds upon a distribution of profits. Distributions from the FTA, the IPA and the UA do not give rise to any tax refunds in the hands of the shareholders, however, a distribution from the FIA and MTA entitles the shareholder to claim a refund which is equivalent to either 2/3rds, 5/7ths, 6/7ths, or 100% of the company income tax.

 Profits attributed to the FTA include income that has been subject to a final withholding tax, profits arising from capital gains on immovable property which has suffered the property transfers tax, certain investment income and certain tax free profits. Profits attributed to the IPA are those profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, profits from the rent, accommodation revenue by hotels and similar establishments, management fees and annual rental value of immovable property in Malta.

 A company’s trading or passive income which is not attributable to the FTA and IPA, is attributed to the FIA or the MTA depending on the source of such income. A distribution from the FIA or MTA enables the shareholder to apply for a tax refund of the company tax.

Tax refunds

  A tax refund is considered to fall due when the company’s audited financial statements (showing the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on a prescribed form, together with the dividend certificate is submitted by the shareholder of his attorney or representative.

 Holding companies and the participating exemption

 Holding companies that derive dividend income or capital gains from a ‘participating holding’ may apply for a participation exemption.  Alternatively, the Maltese holding company may elect to be subject and pay income tax and upon a distribution of profits the shareholder is entitled to claim a full refund of the company income tax. This means that the shareholders may achieve an effective tax rate of up to 0%.

A shareholding in a non-resident company qualifies as a ‘participating holding’ if the Maltese company holds equity shares in a non-resident company or a qualifying body of persons and it:

 i)       has a least 10% of the equity shares in the non-resident company; or

ii)      is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident company, or it has the right of first refusal to purchase such shares; or

iii)    is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or

iv)     is an equity shareholder which invests a minimum in the non-resident company of Lm500,000 (or the equivalent in a foreign currency) and such investment is held for a minimum uninterrupted period of 183 days; or

v)      holds the shares in the non-resident company for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

 Furthermore the non resident company in question must either satisfy any one of the following three conditions:

 –          it is resident or incorporated in the EU,

–          it is subject to foreign tax of a minimum of 15%,

–          it does not derive more than 50% of its income from passive interest and royalties,

 or must satisfy both of the following conditions:

 a)      the shares in the non-resident company must not be held as a portfolio investment; and

b)      the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

 Companies having trading & certain types of passive income

 Shareholders in receipt of dividend income emanating from companies having trading activities and certain types of passive income and whose profits are allocated to the FIA or MTA may apply for a tax refund equivalent of 6/7ths of the company tax paid, except where the income is deemed to be ‘Passive interest or royalties’, or double taxation relief has been claimed on such income.  This means that the effective tax rate can be reduced to 5%.

 “Passive interest or royalties” refers to interest or royalty income which is not derived, directly or indirectly, from a trade or business, where such interest or royalties have not suffered or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%);

 Passive interest & royalties

 When the income is deemed to be passive interest or royalties the rate of refund possible is of 5/7ths of the Malta tax paid – resulting in an effective tax rate of 10%. Alternatively companies receiving passive interest and royalties may reduce such 10% by applying the Flat Rate Foreign Tax Credit (FRFTC).  The FRFTC is a deemed foreign tax of up to 25%.  When the FRFTC is applied a refund of 2/3rds of the Malta tax paid on distributions from the FIA is possible hence resulting in an ultimate tax rate of 6.25%.

 Advance Revenue Rulings

 Certainty can be sought on important aspects through the request of an Advance Revenue Ruling from the International Tax Unit of Inland Revenue Department.  Such ruling is valid for a period of five years and is renewable for a further five-year period.  The ruling is not mandatory however it not only confirms the tax authorities’ interpretation but also serves to preserve the same tax treatment for two years should there be a change in legislation which may affect the company or its tax treatment.

 Other important considerations

 –        Malta does not levy any withholding taxes;

–        Malta has no thin capitalization rules or debt-to-equity ratios;

–        Malta has no specific transfer pricing rules;

–        Malta has no capital duty and wealth taxes;

–        No stamp duties on share transfers in companies owned by non-residents;

–        Non residents are exempt from any capital gains on certain share transfers;

–        Malta has no extensive treaty network with 44 treaties in force and 12 initialed but not yet ratified;

–        As an EU Member State Malta has adopted the EU’s Parent-Subsidiary Directive and the Interest and Royalties Directive;

–        Under the re-domiciliation provisions it is possible to migrate companies into and out of Malta;

–        No exchange control regulations and business may be conducted freely in any currency;

–        Malta’s financial services legislation and tax laws are complaint with EU directives;

–        Malta’s has strong and effective Money Laundering Laws and Regulations

–        Malta’s legislation offers regulated professional trustees which may provide fiduciary and trust services.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77greatestates or info@77GreatEstates.com.

Remote Gaming – Article by Hugh Peralta & Associates – Advocates

August 7, 2009

Malta is fast becoming one of the major hubs for the licensing and setting up of online gaming and betting companies. Apart from the favorable legal conditions, Malta ’s success is also attributable to state of the art infrastructure including good Internet connectivity and capacity, competitive hosting service providers and a sizeable skilled workforce trained in game risk management, odds compilation and call centre support, and a multitude of professional services companies which now specialise in remote gaming.

 Gaming and Betting Legislation

 The Lotteries and Gaming Authority (www.lga.org.mt) established under the Lotteries and other Games Act is responsible for issuing gaming licences, ascertaining that licensees are fit and that proper persons are carrying out the functions relative to gaming. The LGA also ensures that licensees comply with all of their licence conditions and that games and gaming are kept free of criminal activity.

 The Remote Gaming Regulations, issued under the said Act, apply to all types of technologies and games and focus on regulating the means and control the procedures of remote gaming such that the fundamental principles of gaming are preserved.

 Licensing of Remote Gaming Operations

 All operators of remote gaming in or from Malta must possess a valid licence of the relevant class. Applicants must satisfy relevant criteria amongst other things they must be  limited liability companies registered in Malta, must satisfy the fit and proper persons test, demonstrate business and technical ability to carry out the operation and demonstrate that the operation is covered by sufficient reserves or securities and is solvent to ensure player winnings and deposit returns.

 There are four classes of gaming licence, issued for a period of 5 year and renewable thereafter:

 Class 1:  For operators managing their own risk on repetitive games.  This class includes casino type games, and online lotteries;

 Class 2:  For operators managing their own risk on events based on a matchbook.  This class includes fixed odds betting, pool betting and spread betting;

 Class 3:  For operators taking a commission from promoting and /or betting games. This class includes Poker networks, P2P, skill games, betting exchange and game portals;

 Class 4:  To host and manage remote gaming operators, excluding the licensee himself.  This class includes software vendors that want to provide management and hosting facilities on their platform.

 Licensing Fees include a one-time non-refundable application fee of €2,300 and an annual fee of €7,000 in the case of classes one to three.  In the case of class four the license fee is NIL for the first 6 months,  €2,300 per month for the second 6 months and €4,600 per month thereafter.

Main conditions for the granting of a License include the following:

· Licensee must be actively operational

· Adherence to the provisions for the protection of players

· Conformity to anti-money laundering practices

· Appointment of a key official to supervise all the operations and ensure that licensee complies with all applicable laws and conditions of the licence.  The key official must be a director of the company and resident in Malta.

 Licence Application Procedures

 Phase 1: Assessment of the financial ability of the applicant to carry out the business and a due diligence check of the applicant are performed by the Gaming Authority. A probity check on all stakeholders with more than 5% shareholding interest is carried out. A business plan must be submitted for review by the Authority.

 Phase 2:  The Gaming Authority will review the System Architecture and Application Architecture, rules of the games, playing procedures and operator’s procedure. At the end of phase two a letter of intent is issued which is in essence  a provisional license for 6 months.

 Phase 3:  In this phase the licensee is expected  to go live.  The Authority will closely inspect the gaming office’s control system, which must be located in Malta and related administrative and accounting procedures to ensure compliance with the Act and the Regulations.  Control systems must be certified as being compliant. Certification shall be based on ISO/IEC17799 standard and there is no need to test source-code. Certified RNGs having a certificate detailing their level of randomness shall not be retested. Certification must be carried in Malta on the live system and shall be carried under the direct supervision and co-ordination of the Authority’s Remote Gaming Inspectors.  Certification must be carried within six months from date of issue of letter of intent.

 Information for players

 The licensee is obliged to make available to the players all rules relating to the authorised games offered by the licensee and processing fees, if any, incurred by the player.  Furthermore, the licensee’s web site home page should amongst other things specify the licensee’s details, including the fact that the licensee is licensed in Malta and include a link to the Authority’s website.

 Registration of players

 Prior to allowing a player to participate in a game, the licensee must register the player.  Registration details must include the player’s identity, age and place of residence.  A licensee is prohibited from providing loans or giving any credit to players in order to enable them to participate in any games offered by the licensee.

 Protection of players’ money

 In accordance with the regulations, players’ money must be kept in a client account held with a credit institution approved by the Authority and separate from the funds of the licensee. The licensee must ensure that funds in the clients’ accounts, including funds in transit or in the process of clearance are equivalent to the aggregate amount standing to the credit of players’ accounts held by the licensee.

 The licensee should allow a player the option to place a limit on the amount that may be wagered over a specific period of time or the amount of losses that may be incurred.  The licensee must have the necessary security features in place for ascertaining player’s credit card details and payment patterns.  These features will also serve to protect the licensee from fraud.

 Accounting records

 The licensee shall keep proper accounts and records which show a true and fair view of the financial position and state of affairs of the licensee and shall within 60 days from the end of its financial year file with the Authority an audited set of financial statements. Interim financial statements shall also be submitted to the Authority within thirty days from the end of the half yearly period.

 Gaming Tax

 The Regulations propose a gaming tax which varies depending on the type of licence held as follows: 

 Class One: €7,000 per month;

Class Two:  fixed odd bettings: 0.5% on the gross amount of bets accepted; pool betting: 0.5% on the aggregate of stakes paid.  Approved by LGA to certify the licensee according to remote gaming regulations;

Class Three:  tax is 5% of real income. Real Income is defined as net revenue less direct costs (bonuses, affiliate commissions and payment provider fees);

Class Four:  NIL tax.

Class One under class Four: the gaming tax payable by the Class 1 is €1,200 per month. The gaming tax payable by the host platform is NIL. However the host platform (Class 4) pays a licence fee which after the first twelve months of operation is €4,600 per month (see licensing fees).

 There is a tax capping mechanism which limits the gaming tax payable annually by any one licensee to a maximum of €466,000.

 Corporate Vehicle for Remote Gaming Operations

 Apart from the beneficial tax rates for the gaming operation itself, utilising a Maltese registered corporate entity ensures a favourable tax position for the shareholders. Utilising the full imputation system with the refund mechanism available under the Malta’s taxation regime, shareholders of a Malta

Licensed Gaming Company can obtain significant refunds of tax paid at company level. Such refunds can provide an effective corporate tax rate of approximately 5%.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Professional Investor Funds – Article by Hugh Peralta & Associates – Advocates

August 7, 2009

 Malta is rapidly developing into an efficient and attractive non-retail fund jurisdiction after it was one of the first European jurisdictions to introduce a specialised regime for professional investor funds (PIFs). Low set-up costs, efficient regulation, a beneficial tax treatment and Malta’s specialised professionals give the Maltese domicile a competitive edge.

 Furthermore, the Maltese single regulator, the Malta Financial Services Authority (MFSA) is renowned for its efficiency and flexibility, thus ensuring a smooth and unbureaucratic licensing process.

 A number of vehicles may be used to set up a Malta registered fund such as open-ended and closed-ended corporate entities, trusts and limited partnerships. However a form of corporate entity is usually preferred due to the separate legal personality and the flexibility it offers.

 A Prospectus is not needed as long as the fund issues an Offering Document.

 The PIF regime provides for three types of funds: those targeting Extraordinary Investors, those targeting Qualifying Investors and those targeting Experienced Investors.

 Extraordinary Investor Funds are suitable vehicles for hedge funds, with no investment or borrowing restrictions and a minimum entry level of € 750,000 or equivalent (for each fund member or joint fund members). Qualifying Investors Funds similarly have a minimum initial investment of € 75,000 or equivalent. A benefit of both these types of funds is that there is no requirement to appoint a Custodian/Prime Broker as long as the Directors ensure that there are adequate safekeeping arrangements which must be described in the Offering Document.

 On the other hand, Experienced Investor Funds , must appoint a custodian and the minimum investment (per member) is of € 15,000 or equivalent .

 Since professional investor funds are not intended for the general public, they are not burdened with the kind of restrictions usually imposed on retail funds thus offering greater flexibility.

 There are no residence requirements for any of the fund’s service providers other than the need for a local judicial representative. Funds may also be re-domiciled from other jurisdictions under the re-domiciliation of companies’ legislation.

 Tax treatment

 A Malta domiciled fund enjoys an exemption from income tax and capital gains tax at both the fund level and at a non-resident investor level. Any Malta fund or sub-fund can be classified as either prescribed or non-prescribed. A prescribed fund is one in which more than 85% of the value of its assets are situated in Malta, whilst all other funds are classified as non-prescribed.

 No tax is withheld on investment income received by non-prescribed funds. Non-residents receiving dividends out of a locally based, non-prescribed fund suffer no withholding tax on such income. Furthermore no tax is payable by non-resident investors when they dispose of their investment.

 There is also no stamp duty charged on share issues or transfers and no tax on the net asset value of the scheme.

 Uses of a Professional Investor Fund

 A PIF can be used as a fully-fledged Hedge Fund for a variety of assets such as securities, bonds, derivatives, money instruments, debt instruments, other funds, tangible movables and immovable property.

 A Maltese PIF offers great potential for fund managers who want to set up a hedge fund within a reputable, modern and efficient EU jurisdiction which also offers a number of tax advantages. Promoters of a fund have the option to utilise a self-managed corporate fund wherein there would be no need for the Fund Manager to have actual presence in Malta. A self-managed fund also offers the benefit of retaining full control (through the Board), whilst appointing skilled individuals to the advisory committee according to the particular array of underlying assets. Maltese PIFS are also ideal for umbrella or multi-class funds through the utilisation and protection afforded by segregated cell companies which enjoy distinct legal personality.      

 The Players 

 In a corporate PIF the Board of Directors plays an essential role.  This has actual control over the fund and the fund’s strategy and is the point of reference between the fund, the regulator, the fund members and the fund’s players.  It is important that the majority of board meetings are actually held in Malta.

 In a self-managed fund scenario, the Board assumes an even broader function by assuming the role of the Fund Manager. The use of self-managed funds, especially in the non-retail market, has been on the increase in recent years. The Fund Manager is the person entrusted with managing the assets of the Fund. The relationship between the fund and the manager is regulated by a management agreement. In self-managed funds the Board may still opt to seek aid in its management role through the use of delegation agreements with established Fund Managers. The initial, paid up share capital for such a self-managed fund should not be less than EUR 125,000, or the equivalent in any other currency and the NAV of the Scheme is expected to exceed this amount on an on-going basis.

 The advisory committee has an important role. This is answerable to the board and comprises technical people who have expertise in the underlying assets of the fund. In the absence of such an advisory committee expertise related to the investment strategy of the fund must be shown at Board level and hence, although not compulsory, appointing such a committee is recommended. Such advisors offer specialised research on specific markets or instruments.

 The appointment of an administrator is not compulsory, however, an administrator should ideally be appointed so as to assume responsibility for the day to day running of the fund, accounting, calculation of Net Asset Value (NAV) and the retention of the necessary documentation of the member’s unit allocation and investments.

 The Custodian, also at times referred to as the Depositary, is an independent player entrusted with the actual physical holding of the assets of the fund. The appointment of this player is compulsory for retail funds and Experienced Investor Funds, but not for Extraordinary and Qualifying Investor Funds, as long as sufficient arrangements are made for the safe keeping of the fund’s assets. When such a Custodian is appointed, it takes instructions on the disposal of assets from the Manager within the parameters of the prospectus/offering document. The Custodian also assumes the duty of ensuring that the Manager is complying with the law, and the duty of safeguarding assets under its custody, the interests of the scheme and of the holders of units or participants in the scheme.

 Furthermore the custodian is to carry out such functions and duties in accordance with the terms and conditions of the agreement appointing it as custodian, the deed or other instrument establishing or regulating the scheme, the conditions of the collective investment scheme licence and such other requirement as may be laid down by the competent authority.

 The Manager may also appoint a Registrar of the scheme, who is responsible for maintaining a register of the units/shares of the fund and the respective allotment of the members and to update it with any transfers, acquisitions, redemptions or switching of units.

 Requirements for the different classes of Investors

 ‘Extraordinary investors’ include corporate or non-corporate entities, groups, trusts  or individuals having net assets in excess of € 7.5 million (or equivalent); Senior employees or Directors of the fund, are also recognised as Extraordinary

Investors. Other Extraordinary PIFs are deemed to be Extraordinary investors together with any Special deemed Special Purpose Vehicle owned by person qualifying themselves as ‘Extraordinary investors’.

 Qualifying investors’ include corporate or non-corporate entities, groups, trusts  or individuals having net assets in excess of € 750,000 (or equivalent); or persons who have reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile or property similar to the underlying assets of the PIF in question. Relatives and close friends of the promoters (up to ten), and senior employees or Directors of the fund, are also recognised as Qualifying Investors. Furthermore entities having more then € 3.75 million under their discretionary management, other PIFs promoted to Qualifying or Extraordinary investors and any Special Purpose Vehicle owned by person qualifying themselves, all qualify as ‘Qualifying investors’.

 ‘Experienced investors’ are persons who have the expertise, experience and knowledge to be in a position to make their own investment decisions and understand the risks involved. These include persons who have at least one year’s relevant work experience in a professional position in the financial sector; persons who have reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile as the assets to which the PIF in question is related, or persons who have in the past years carried out investment transactions of a significant size and frequency (for example a person who within the past 2 years carried out transactions amounting to at least €50,000 at an average frequency of 3 per quarter).

 How we can help

 Given the specialised nature of a PIF, preparatory work needs to be done before a licence application is submitted. Hugh Peralta & Associates offers assistance in the planning (especially in devising a flexible yet secure structure), the setting up process and obtaining a licence.

 The planning includes assistance in the decisions as to the appointment or otherwise of a custodian, manager, administrator and the appointment of the advisory committee. The role of these functionaries must be identified and included in the offering document submitted with the application.

 Our input may be necessary in relation to the formation of the vehicle itself and the eventual drafting of all necessary applications, offering document, Personal Questionnaires, delegation agreements etc.

 Hugh Peralta & Associates may propose suitable personnel to act as Director/s on the Board of Directors of corporate funds. Such Director/s can also act as the local representative. Furthermore we will provide the necessary registered office and company secretary for the company.

 Hugh Peralta & Associates may help the promoters in their selection of and dealings with local Fund Managers. Alternatively the Board of Directors may assume the Management function of the fund according to the terms of the licence. In such a scenario Hugh Peralta & Associates can offer qualified personnel to aid the Board in assuming such a Management function.

 Hugh Peralta & Associates may offer external administration to the fund according to the delegation arrangement between itself and the Board (or Manager) of the fund. Through our expertise and organisational setup Hugh Peralta & Associates may carry out the fund’s accounting requirements, daily calculation of Net Asset Values, reconciliations, pricing of the investment portfolio, preparation of financial statements, performance and compliance reporting, and preparation of contract notes.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

Tax and legal aspects of real estate investments in Malta, courtesy of PriceWaterhouseCoopers

April 14, 2009

Malta

Introduction

The Maltese Islands, consisting of Malta, Gozo and Comino, cover an area of about 320 square kilometres and have a population of about 400,000. The islands are located in the centre of the Mediterranean just south of Sicily.

Malta has a rich European historic and cultural heritage. This is reflected in its Catholic religion dating from the time of St. Paul, its architecture, and in all major aspects of business, government and social activities. The British and Italian influences are particularly strong, given the country’s proximity to Italy and the fact that Malta formed part of the British Empire from 1801 to 1964. Malta is today an independent Republic within the Commonwealth and became a full member of the EU on 1 May 2004. As from 1 January 2008, the unit of local currency is the Euro ().

English is, with Maltese, an official language and is spoken by practically everyone. Laws are published in English and Maltese, and business correspondence is usually conducted in English.

A number of real estate projects currently exist, aimed at providing qualitative properties to foreigners wishing to invest in Malta.

Malta’s full imputation system of taxation may be utilized efficiently by entrepreneurs who wish to invest in non-Maltese real estate through a Maltese holding company.

Malta as a holding company location for acquiring non-Maltese real estate

Residence of a Maltese incorporated company

Under the Maltese Income Tax Act (“ITA”) chargeability to Malta tax on a worldwide basis is attracted if a person (whether a company or otherwise) is both domiciled and ordinarily resident in Malta. For income tax purposes, a company is considered domiciled in the country of incorporation. The corporate income tax rate is 35%, but due to Malta’s full imputation system of taxation, in certain circumstances the effective tax burden can be significantly reduced on profits distributed to the shareholder.

 

The normal corporate tax rate applicable in Malta in respect of any rental income or capital gains derived from real estate is 35% subject to any applicable double taxation relief. On a distribution of dividends by MaltaCo (being a Maltese company owning non-Maltese real estate as per Figure 1) to its shareholders, the existence of a full imputation system of taxation (where the highest rate of shareholder tax is 35%) and of a number of tax refunds which are available in certain circumstances can result in an effective tax burden of between 0% to 10% on profits distributed.

In terms of Maltese tax law, distributable profits are allocated to different tax accounts i.e. the Final Tax Account (“FTA”), the Immovable Property Account (“IPA”), the Foreign Income Account (“FIA”), the Maltese Taxed Account (“MTA”) and the Untaxed Account. Tax refunds are only available on distributions effected from the MTA and FIA.

On the basis that the real estate is situated outside Malta, any foreign rental income or capital gains derived by MaltaCo should be allocated to the company’s FIA as they represent capital gains and rents derived from investments situated outside Malta. Such profits should be charged to Maltese tax at the standard corporate rate of 35% subject to any relief of foreign tax.

However, apart from the possibility of MaltaCo qualifying for double taxation relief on such income, and subject to certain other conditions, upon distribution of the relevant profits by MaltaCo to its shareholders, the latter should also be entitled to a tax refund of part of the tax suffered by MaltaCo. The extent of tax refund depends primarily on whether or not MaltaCo will be claiming any double taxation relief on the income.

If no double taxation relief is claimed (and subject to the satisfaction of all statutory requirements for the claim of a refund e.g. registration for refund purposes by the shareholder claiming the refund), the refund should amount to 6/7ths of the tax suffered by MaltaCo, hence potentially reducing the effective Maltese tax leakage to around 5% (1/7 of 35%).


The net Malta tax leakage of around 5% after% after a distribution of dividends to shareholders should apply on the basis of certain assumptions e.g. that MaltaCo does not have non-deductible expenses (that would create a mismatch between the accounting and tax profits in the sense that there would not be sufficient distributable profits to cover all the profits that were subject to tax), that the company actually distributes all its taxed profits.

In the case that double taxation relief is claimed by MaltaCo (and the income is allocated to the company’s FIA), the refund should amount to 2/3rds of the Malta tax (before any credit for actual foreign tax suffered) in respect of those distributed profits.

On the basis that income would be allocated to the FIA, an alternative combined with the 2/3 refund may be for MaltaCo to claim the Flat Rate Foreign Tax Credit (FRFTC) – the FRFTC is a system of unilateral double taxation relief which assumes a deemed foreign tax of 20%.

As long as all taxed profits are distributed, the combination of the FRFTC and the 2/3 refund (in this case the refund would be calculated on the tax after the FRFTC) should produce (subject to certain conditions) a net Malta tax burden after a distribution of dividends to shareholders of between 6.25% and 2.5% of the net foreign income, with the actual tax leakage depending on the level of deductible expenses. In this case the Malta tax leakage can never be below 2.5% on net foreign income due to the specific mechanics of the FRFTC.

Therefore on the basis of the assumptions set out above, the post-refund tax leakage in respect of such income could be reduced even to around 2.5% – 6.25% (possibly in the region of around 5%).

Holding shares in a foreign entity

Therefore on the basis of the assumptions set out above, the post-refund tax leakage in respect of such income could be reduced even to around 2.5% – 6.25% (possibly in the region of around 5%).

If a company registered in Malta (MaltaCo) holds shares in foreign entities that qualify as a “participating holding” under Maltese tax law and satisfy an additional condition (see below), dividends derived therefrom and capital gains derived from the disposal of such holding should (at the company’s option) qualify for either (i) the participation exemption which results in a straight exemption at corporate level on such dividends and capital gains or (ii) taxation under Maltese tax law, but on a distribution of dividends, the shareholders should be entitled to a refund of 100% of the tax suffered on the distributed profits.

Unless the participation exemption is opted for (see below), dividends and capital gains received by MaltaCo from its participation in the subsidiaries are subject to tax at the normal Maltese corporate rate of 35% and should be allocated to the company’s FIA.


In terms of Article 48(4) of the Income Tax Management Act, upon distribution by a Maltese company of profits allocated to the foreign income account which are derived from a participating holding (PH) or from its disposal, to non-resident shareholders which are not owned and controlled by, nor act on behalf of a person who is ordinarily resident and domiciled in Malta, such non-resident shareholders are entitled to a 100% refund of the Malta tax paid on the distributed profits.

In terms of Article 2 of the Income Tax Act, a holding constitutes a PH in any of the following situations:

(a)  the company holds directly at least 10% of the equity shares (with such holding also providing at least a 10% entitlement with respect to all of votes, profits available for distribution and assets available for distribution on a winding up) of a non-resident company whose capital is wholly or partly divided into shares;

(b)    the company is an equity shareholder in a non-resident company and it is entitled at its option to call for and acquire the entire balance of the equity shares;

(c)  the company is an equity shareholder in a non-resident company and it has the right of first refusal in the event of any proposed disposal of the equity shares not held by it;

(d)  the company is an equity shareholder in a non-resident company and is entitled to sit on the Board of Directors or appoint a person to sit on the Board;

(e)  the company is an equity shareholder in a non-resident company with an investment in equity shares of at least of Eurol, 164,000 or equivalent in a foreign currency and such investment is held for an uninterrupted period of not less than 183 days;

(f)   the company is an equity shareholder in a non-resident company where such shareholding is for the furtherance of its own business and the holding is not held as trading stock for the purposes of a trade.

For the purposes of the PH situations set out above, qualifying holdings also include non-resident partnerships similar to Maltese partnerships en commandite where the capital is not divided into shares.

In order for the dividends received from a PH to qualify for the participation exemption or 100% refund, the following additional conditions must also be satisfied:

a)      The non-resident company must be resident in the EU, or

b)      The non-resident company must be subject to foreign tax at a rate of at least 15%, or

c)      More than 50% of the income of the non-resident company must not consist of passive interest/royalties.


If none of the above are satisfied, then the holding by the Malta company must not be a “portfolio investment”, and the non­resident company or its passive income must not have been subject to any foreign tax at a rate of less than 5%.

Participation exemption

As an alternative to the 100% tax refund, Article 12(1)(u) of the Income Tax Act exempts “any income or gains derived by a company registered in Malta from a PH or from the disposal of such holding, where the taxpayer has not shown such income or gain as part of his chargeable income..”

This Article operates a direct exemption, which would be claimed directly at the level of the Maltese company and it operates to exempt the above-mentioned dividends and capital gains.

Indeed, operating a straight exemption could facilitate the tax treatment in a number of instances, e.g. it would not create cash flow considerations arising from the payment of the tax and subsequent distribution and claim of the refund, it does not require the level of planning to ensure that the extent of distributable profits is not less than the company’s taxable profits (the refund referred to in (a) above only applies to the tax suffered on the distributed profits), and it does not require the distribution of a dividend in order to obtain the relative refund.

Naturally this exemption operates in lieu of the 100% refund referred to above.

The refund/participation exemption provisions outlined above can be particularly useful in tax planning considerations including those involving foreign real estate transactions when such real estate is owned through a foreign subsidiary of a Maltese company.

Acquiring real estate in Malta

The acquisition of real estate in Malta is carried out by means of a public deed, entered into in front of a notary public. Stamp duty and any legal expenses are paid upon the signing of the contract when the purchaser acquires real estate.

The standard rate of stamp duty is 5% (5 Euro for every 100 Euro or part thereof) of the amount or value of the consideration paid for the real estate, whichever is the higher. However, in the case of persons who acquire real estate as their sole ordinary residence, stamp duty is reduced to 3.5% on the first 117,000 of the consideration paid for the acquisition of the real estate.

Non-EU citizens may only acquire real estate in Malta after a permit is issued by the Ministry of Finance.


Maltese and EU citizens who have resided continuously in Malta for a minimum period of 5 years can acquire more than one real estate without the necessity of obtaining a permit. Furthermore, Maltese and EU citizens who have not resided in Malta for a continuous period of five years, have no restrictions as regards the acquisition of their primary residence, however they would require a permit in order to acquire real estate as a secondary residence.

Non-EU citizens can freely acquire more than one real estate located in Special Designated Areas, without requiring any form of permit.

The permit is granted by the Minister of Finance by making an application. All the above information concerning permits can be summarised in the following table:

 

 

Maltese & EU Citizens with five years continuous residence

Maltese & EU Citizens without five years continuous residence

Non-Maltese &

non-EU

citizens

Primary residence

No restrictions, with no permits required.

No restrictions, with no permits required.

Permit is required.

Secondary residence

No restrictions, with no permits required.

Permit is required.

Permit is required.

Real estate in a Special Designated Area

No restrictions, with no permits required.

No restrictions, with no permits required.

No restrictions, with no permits required.

There are no limitations or permit requirements when heirs, whatever their citizenship, inherit real estate in Malta from a person – whatever citizenship the deceased has – as long as the real estate was acquired legally in the first place.

Taking up residence in Malta

An individual may take up residence permanently or indefinitely in Malta by obtaining a certificate issued under the Residents Scheme Regulations, 2004. The certificate entitles the holder to a flat income tax rate of 15%, subject to a minimum annual tax liability (after taking into account any double taxation relief) of 4,193. The tax is calculated on chargeable income and capital gains arising in Malta and on foreign income (excluding capital gains) remitted to Malta.


Double taxation relief is available to a certificate holder in respect of tax levied outside Malta on any income remitted to Malta and which is also subject to tax in Malta. A distinct advantage to any non-residents who wish to take up residence in Malta, are the numerous Double Taxation Treaties Malta negotiated with numerous jurisdictions.

Eligibility

Any non-Maltese citizen is eligible to apply for a residence scheme certificate and consequently qualify for the particular tax treatment outlined above, if that person either owns assets outside Malta worth at least 349,000 or has an annual income of at least 23,000 arising from outside Malta

A residence scheme certificate can be obtained by filing an application form, duly completed and signed, together with a number of supporting documents and the payment of a small fee.

All documents must be certified original documents and a warranted notary public of the country of nationality of the applicant must attest that the information contained therein is correct. Furthermore, all documents must be legalised by an official at the Malta Diplomatic Mission in the country of nationality (or the Malta Diplomatic Mission accredited to the country of nationality) of the applicant.

Conditions

Once in possession of a residence scheme certificate, the holder must:

      Within 12 months from the issue date of the certificate, take up residence in Malta and make a declaration on a prescribed form at the offices of the Inland Revenue Department within 15 days of arriving in Malta

      Within 12 months from taking up residence in Malta either purchase a residence in Malta at a cost of at least

116,000 for a house or 69,000 for an apartment, or lease/rent a residence in Malta at a rent of at least 4,150 per annum. A copy of the deed of purchase or lease/rent agreement must be furnished to the Inland Revenue Department

      Have an annual income equivalent to at least 23,000 arising outside Malta or at all times capital equivalent to at least 349,000

      Remit to Malta (and not re-transfer out of Malta) at least 13,950 plus 2,300 per dependant annually

      Not engage in any gainful occupation or any form of business activities in Malta unless duly authorised by the relevant authorities. This also applies to any involvement in political activities except for involvement in local council activities


At the end of the first year of residence and subsequently at the end of every calendar year, a certificate holder will be required to complete an annual income tax return showing any remittances of income to Malta for the particular year, and an annual declaration together with specific attachments (including copies of bank statements) confirming that the certificate holder has fulfilled the conditions pertaining to the permit.

The residence scheme certificate does not subject the holder thereof to any statutory minimum periods of presence in Malta.

Selling Real estate in Malta

As a general rule, transfers of real estate are taxed by the imposition of a final withholding tax of 12% on the transfer value. In this respect, the ITA defines the transfer value of the real estate as being the higher of the market value of that real estate and the consideration paid or payable for the transfer. Should the transferor incur any brokerage fees, tax will be calculated at 12% of the transfer value net of qualifying brokerage fees.

In a limited number of instances the transferor is also given the possibility to opt out of the final withholding tax of 12% and instead be taxed at the applicable income tax rates on the difference between the consideration received and the cost of acquisition of the real estate (subject to a number of conditions being satisfied). These instances include:

a.   Where the real estate is sold within 5 years from date of
acquisition, the vendor has the option to choose to be
taxed on the capital gain rather than at 12% of the selling
price.

b.   Transfers by non-Maltese-resident persons who will be
taxed again in their country of residence on any gain made
on the sale of the Maltese real estate and who wish to
claim the tax payable in Malta as a credit against their
home tax. This opt out is subject to a special procedure
and a number of specific conditions.

c.   In the case of transfers of real estate situated in a Special
Designated Area, the election is only applicable to the first
owner and it may be exercised only on the occasion of the
first transfer of real estate within that particular designated
area. Hence, if the option is taken, it will apply to all
subsequent transfers within that designated area.
Subsequent owners will therefore only qualify for the opt
out if they transfer within five years.

In the cases mentioned above, the said choice must be indicated on the deed of transfer. Tax is imposed on the difference between the consideration received by the transferor and the cost of acquisition of the asset plus any expenses, allowances and other deductions available in terms of law. The deductions may include:

a) cost of acquisition declared in the deed;

 

b) stamp duty paid on acquisition;

c)    other expenses related directly to deed of acquisition eg. notarial fees;

d)      proved costs of development and improvements;

e)      inflation;

f)     maintenance at 0.4% per year the real estate was held;

g)      selling expenses relating directly to the transfer (typically brokerage) not exceeding 5% of sale price

Capital gains are brought to charge as follows:

      A 7% provisional tax (calculated on the consideration) is payable upon the deed

      The capital gain is calculated at the self assessment (i.e. tax return) stage and this is taxed at progressive rates varying between 0% to 35% for individuals and at the statutory rate of 35% for companies. Any tax resulting as payable over and above the 7% paid provisionally is due to be paid with the submission of the tax return. Any excessive provisional tax paid is refundable.

A gain from a transfer (where the 12% final tax is not applicable) may be relieved by capital losses, bad debts from previous transfers and trading losses.

Inherited real estate

Capital gains on real estate acquired through inheritance are chargeable to tax at the rate of 12% on the difference between the transfer value and the value of the real estate as declared in the deed of transmission causa mortis. There is no provision for further reduction of the gain through any inflation or maintenance allowances in this respect. If the real estate was inherited before the 25th November 1992, the rate of tax is reduced to 7%.

Exempt Transfers

Various exemptions and reliefs are granted under the ITA and these include:

a.   No tax on capital gain is charged when the real estate
being transferred has been the owner’s own residence for
at least 3 consecutive years immediately preceding the
date of transfer and has been disposed of within 12 months
of vacating the real estate.

b.   Donations are considered as a deemed sale made at the
market value of the real estate at the time of transfer.
However, no tax is payable where the donation is made by
a person to:


      his spouse, descendants and ascendants in the direct line and their relative spouses, or in the absence of descendents to his brothers or sisters and their descendents, or

      philanthropic institutions

In cases where the real estate is subsequently transferred by the donee prior to the lapse of five years from the date of the donation, the cost of acquisition shall be that as acquired by the donor. In this case the normal rates of tax would apply. However, if a real estate acquired by donation is subsequently transferred after the lapse of five years, from the date of donation, the cost to be deducted from the transfer value is that declared in the deed of donation.   In such cases, the rate of tax on donations is reduced to 12% of the gain.

c.   Settlement of real estate on trust or a distribution by a trust
when it is deemed to be a donation referred to above or
when it is not deemed to constitute a transfer (e.g. where
the settlor and beneficiaries of the trust are the same
person or persons).

d.   Assignments of real estate between spouses following the
dissolution of the community of ownership.

e.   Assignments of real estate that had been co-owned by the
spouses made either between the spouses or, following
the death of one of the spouses, between the surviving
spouse and the heirs of the deceased spouse.

4. Letting of Real estate

Owners of real estate may rent their real estate. A permit is required for any rentals to tourists.

Income derived from the letting of real estate is typically categorised under two headings – investment income and income of a trading nature. The difference between the two is distinguished by whether the rental agreement is for short periods (usually for furnished premises and not exceeding three months) or for longer periods.

The tax deductions taken against these two types of rental income are different. Any expense incurred in the production of income derived from trading rental income is an allowable tax deduction.

In the case of rental income derived from long lets where the rental activity is not a trade, the allowable deductions are (1) the MTA licence fees if any, (2) rents and ground rents payable (3) any interest incurred on a loan specifically taken to finance the purchase of the real estate from which rental income is derived, and (4) a further deduction equal to 20% of the rental income received less rents and ground rents payable and less the MTA licence fees


Acquisition of real estate by Companies

Some general points

Subject to conditions, a company operating from an EU member state may freely acquire real estate that is required for the purpose of carrying out the activity for which the company has been set up.

Non-resident companies (principally non-EU companies) require a permit, which the Minister must grant if the real estate is required for an industrial or touristic project or as a contributor to the development of the economy of Malta.

Transfers of real estate by a company

The sale of real estate by a company is subject to the rules outlined in Section 3 above as applicable. Profits subject to tax at 12% are allocated to the FTA and such profits are not subject to any further tax in the company’s hands and neither will they attract tax if distributed by way of dividend.

The transfer of certain real estate between two companies forming part of a group is exempt from tax on capital gains. This applies to a group of companies or companies controlled and owned directly or indirectly by more than 50% by the same shareholders. Whereas such transfers are deemed not to result in a gain or loss for tax purposes, the tax “saved” is actually deferred to the point in time where the relative real estate is transferred outside the group.

Where a trader is transferring real estate which has been used in a business for a period of at least three years and, within one year, replaces the real estate by another used solely for a similar purpose in the business, the capital gain arising from the sale of the old real estate may be offset against the cost of a newly acquired premises, rather than being subject to tax.   This applies for all traders and the objective is to give a cash flow advantage to the transferor, where business premises are being replaced. Such roll over relief in practice results in a deferment of tax rather than an exemption.

Transfers of securities

Transfers of marketable securities are subject to stamp duty at the rate of 2% (or 5% in the case of shares in companies owning real estate in Malta). Stamp duty is payable on the higher of the consideration or the real value of the securities transferred. The law provides for a number of exemptions from the payment of stamp duty on the transfer of shares in companies including certain intra group transfers of shares and transfers of shares by or in entities involved in international operations.


A transfer of shares in a Maltese company is also subject to tax on capital gains. However in cases where the transferor is a non-Maltese resident, such a transfer should be exempt from income tax in Malta. Certain conditions would have to be satisfied for this exemption to apply including that the assets of the company should not consist wholly or principally of real estate situated in Malta and the beneficial owner of the gain or profit, as the case may be, is a person not resident in Malta and such person is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.

VAT

A transfer of real estate is an exempt without credit supply i.e. no VAT is charged by the seller and such seller has no right to claim back/deduct any input tax incurred, including input tax incurred in the construction of that real estate.

Subject to certain exceptions, the letting of real estate is also exempt without credit. These exceptions include:

a.         The letting of real estate for the purposes of providing
accommodation in any premises, and which letting is
required to be licensed by the Malta Tourism Authority,
is subject to VAT at the reduced rate of 5%. In general,
this applies to ‘short let’ holiday accommodation as well
as to letting to persons who have been in Malta for less
than one year.

b.         The rental of real estate for commercial or business
purposes by a limited liability company to a person
registered for Maltese VAT purposes is subject to VAT
at the standard rate of 18%.

c.         The letting of designated premises and sites for parking
and the letting of permanently installed equipment and
machinery is subject to VAT at the standard rate of
18%.

In the case of the above exceptions, the normal VAT rules in connection with the recovery/deduction of input tax apply and therefore the owner/operator/lessor should be in a position to claim/deduct input tax incurred in connection with the real estate letting activity.

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.