New Tax Provisions Updating the Maltese International Tax Regime Karl Cini Brian Tonna & Co. – Malta European Tax Group Meeting - Monaco 8 February 2008

The Company Tax System in Malta – An Overview Malta has come a long way since its first tentative steps into the financial services industry in 1989 The shedding of the offshore tax haven image, legislative changes made in 1994 and full EU membership obtained in 2004 have converted Malta into a modern and attractive jurisdiction for financial services

The Company Tax System in Malta – An Overview Maltese companies are taxed at 35% But tax is ultimately borne by the shareholder depending on his tax status as Malta’s tax system is, and always has been, based on the full imputation system, whereby shareholders receive full credit for any tax paid by the company on profits distributed as dividends

Tax Reform Reforms to Malta’s tax system became effective as from 1 January 2007, subject to certain transition rules for Maltese companies in existence on 31 December 2006 The changes, which follow the proposals outlined by the government in a supplementary paper to the Pre- Budget Document 2007, are in line with Malta’s agreement with the EU

Tax Reform This reform seeks to: –Retain the current full imputation tax system –Extend the refundable tax credit system to dividend payments made by all Maltese companies out of all sources of income (with the exception of profits derived from Maltese immovable property) and to all shareholders irrespective of their tax residence –Extend the refundable tax credit system to Malta tax paid on profits attributable to a Malta branch –Essentially maintain the current definition of a “participating holding,” but with the introduction of certain anti-abuse provisions for holdings acquired after 31 December 2006 –Introduce a participation exemption that will exempt from Malta tax dividends and capital gains from a participating holding.

Phasing out of ITCs With effect from 1 January 2007, companies resident in Malta will no longer be eligible for ITC status. Transition rules have been introduced for companies qualifying as ITCs as at 31 December 2006.

Malta Tax Accounting Profits are allocated to one of the following tax accounts depending on their source and nature – Foreign Income Account (FIA) – Maltese Taxed Account (MTA) – Final Tax Account (FTA) – Immovable Property Account (IPA) – Untaxed Account (UA)

The Refund System Until before the amendments, there were three types of refunds: –100% refund applicable to participating holdings –2/3 refund (of Malta tax paid) on FIA and ITC income –7.5% imputation refund on ITC income Besides retaining the first two, the amendments contemplate other types of refund Refunds are only available with reference to distributions from the FIA and the MTA Applicable also to Maltese residents

The Refund System 4 types of refund: –100% –6/7ths –5/7ths –2/3rds Shareholders have to be registered for refund purposes

The Refund System The rate at which company profits are taxed remains 35% while the available refund will amount to 6/7ths of the Malta tax paid on the profits out of which the dividend distribution was effected, reduced to: –5/7ths where the dividend is distributed out of profits emanating from passive interest or royalties; or –2/3rds where the dividend is distributed out of foreign-source income and in respect of which the Maltese company effecting the dividend distribution has claimed double taxation relief. The tax refund is increased to 100% when the profits out of which the relevant dividend is distributed are derived (dividends and/or capital gains) by the Maltese company from a participating holding

Effective system for relief of double taxation Malta offers various forms of relief from double taxation, which ensures that income will not be taxed twice. These can be grouped as follows: –Unilateral relief, including credit system for relief of underlying tax –OECD based Tax Treaty Network –EU Parent-Subsidiary Directive –EU Interest & Royalties Directive –Participation Exemption –25% flat rate foreign tax credit system (FRFTC)

Effective system for relief of double taxation Participating Holding Under Malta tax law, a participating holding exists where a Maltese company holds at least 10% of the equity share capital of a nonresident company whose capital is divided into shares or: The Maltese company is an equity shareholder in the nonresident company and is entitled to purchase the balance of the shares of the nonresident company or has a right of first refusal over such shares; or The Maltese company is an equity shareholder in the nonresident company and is entitled to sit (or appoint a representative to sit) on the board of the nonresident company; or The investment in the nonresident company is at least €1.165m or the equivalent amount in a foreign currency and the investment is held for at least 183 days; or The investment in the nonresident company is held for the furtherance of the Maltese company’s own business and the holding is not held as trading stock for the purposes of a trade. ‘Equity shares’ are shares which confer upon the holder the entitlement to: Dividends upon distribution Votes at a meeting Surplus assets upon a winding up

Effective system for relief of double taxation Participating Holding – Anti Abuse measures The conditions for participating holding status apply without limitation where the nonresident company is resident in another EU Member State or is subject to tax at a rate of at least 15% in any other jurisdiction. However, where more than 50% of the income of the nonresident company consists of passive interest or royalties (and the company is not resident in another EU Member State or is not subject to tax at a rate of at least 15%), the following conditions also must be satisfied to qualify for participating holding status: –The investment must not qualify as a portfolio investment; and –The nonresident company must be subject to foreign tax at a rate that is not less than 5%. The above limitation is immediately applicable for holdings acquired on or after 1 January 2007.

Effective system for relief of double taxation

Participating Holding – participation exemption With effect from 1 January 2007, Malta has introduced a participation exemption, as a result of which income derived (i.e. dividends and/or capital gains) by a company resident in Malta from a participating holding will be exempt from tax in Malta

The Refund System Examples Passive Income Trading Income having PH having PH claims FRFTC (no PH) claims FRFTC Passive Interest & Royalties Company€€€€€ Profit before tax1, Gross up for the flat rate foreign tax credit , , , Tax thereon at 35% Credit for the flat rate foreign tax credit Tax payable Shareholder Gross dividend received by shareholder1, Tax charged thereon at 35% Credit for tax at source paid by company full 2/3rds5/7ths6/7ths Refund of company tax to shareholders Effective Tax Rate0% 6.25%10%5%

New Regime - Compliance Registry of Companies Prescribed form in terms of article 182(3) of the Companies Act – allowing the tax to be paid 18 months after the year end (unless a dividend on which a refund of tax will be claimed is made before, upon which instance the tax falls due to be paid) Inland Revenue Exemption of duty on the transfer of marketable securities – Form DDT 10 Tax refunds and registration procedures : Registration of shareholder with the Commissioner – stipulated timeframe Advance Corporation Income Tax (ACIT) is triggered by the payment of a dividend from profits allocated to the FIA or the MTA. It is due within 60 days of the end of the month in which the dividend is paid. For interim dividends the payment date of the dividend shall be taken to be the last day of that accounting period.

Malta – General points EU member from 1st May 2004 Local currency as of 1st January 2008 – Euro (€) Stability High quality workforce – fluent in English and Italian Convenient European Time Zone Availability of professional services Accessibility/ flexibility of Regulator

Malta – Key fiscal benefits Malta continues to offer: Tax efficiency but all companies are taxable at 35% No thin-cap rules Flexible transfer pricing rules No withholding taxes on remittances of dividends, interest and royalties to non- residents Advance rulings on international transactions Share capital, accounting and tax payable that can be in a foreign currency Possibility of migrating companies to and from Malta No capital duties and low registration fees Relative ease of incorporation for non-regulated entities Low maintenance costs Audited accounts prepared in accordance with IFRS An extensive Treaty network with over 45 countries

Conclusion From an international business perspective, the extension of the existing tax refund system to dividends distributed from previously non-qualifying sources will leave existing structures unaffected, will broaden the scope for both existing and new business and should finally place the compatibility of the tax system with EC law beyond discussion, given the EU’s endorsement of the changes.