Tax Exemption or 100% Refund for Holding Companies

Since its adoption of the participation exemption, Malta has become an ideal jurisdiction for the setting up of holding companies. Maltese company law does not distinguish between holding companies and trading companies and thus as such, it is possible to incorporate a company for both purposes. Notwithstanding this, it is quite common to separate the two.

A company, registered in Malta, which receives income and/or gains from a participating holding (from a subsidiary that satisfies specific conditions set forth in the Maltese Income Tax Act) or from the transfer of such holding is exempt from tax in Malta.

First and foremost, a participating holding must consist of:

1. a holding of the share capital in a company which is not a property company, or
2. a holding in a Maltese partnership en commandite whose capital is not divided into shares (or a holding in foreign partnership that is similar in nature to such a Maltese partnership) which is not a property partnership; or
3. a holding in a collective investment vehicle (“CIV”) which is constituted outside of Malta and which is not resident in Malta, where the liability of investors in the vehicle is limited to the amount invested.

Moreover, the holding needs to be an equity holding and the holding must in turn entitle the company that holds it to at least any two of the following rights (referred to as ‘equity holding rights’) in the company, partnership or CIV:

1. a right to vote;
2. a right to profits available for distribution;
3. a right to assets available for distribution on a winding up of that company, partnership or CIV.

If the holding has the characteristics set out above (i.e. the characteristics related to being a participating holding and those related to equity holding rights), then the holding is considered to be an equity holding. Once it had been established that a holding is an equity holding, the said holding can qualify as a participating holding (and thus, qualify for the exemption), where the company:

1. Holds at least 5% equity holding in another company which entitles it to at least 5% of any two of the following: (i) right to vote; (ii) profits available for distribution; and (iii) assets available for distribution on a winding up;
2. Has the right to acquire the entire balance of the equity shares in the subsidiary company which it does not already hold; or
3. Has the right of first refusal in the event of a proposed disposal, redemption or cancellation of all the equity shares in the subsidiary company, which it does not already hold; or
4. Is entitled to sit on the Board or to appoint a person to sit on the Board of that subsidiary company as a director; or
5. Holds an investment worth at least €1,164,000 in the subsidiary company and this is held for an uninterrupted period of not less than 183 days; or
6. The holding of such shares in the subsidiary company is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

At least one (1) of the above must be satisfied.

When a dividend is derived from a participating holding, such dividend does not attract tax in Malta where the holding is in an entity which:

• Is resident or incorporated in a country or territory which forms part of the EU;
• Is subject to any foreign tax of at least fifteen per cent (15%);
• Does not have more than 50% of its income derived from passive interest or royalties.

Where none of these three conditions are met, then for the dividend to be exempt from Maltese tax, both of the following conditions must be satisfied:

• The holding in the non-resident entity is not a portfolio investment; and
• The non-resident entity or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

Alternatively, the Maltese company may choose to be taxed on income and gains derived from the participating holding or the transfer thereof and then upon a distribution of dividends derived from such income/gains, its shareholders would be entitled to a 100% refund of the tax paid by said company.