It seems like every week there is a development impacting the international corporate tax landscape with changes adopted due to the evolving digital market, developments in EU Directives or implemented by other international bodies and the more recent drive towards a minimum tax rate applicable to multinationals. While this constant state of change may seem daunting at times, it may also offer planning opportunities to cross-border operating companies.

A number of companies that were operating in the traditional zero tax jurisdictions accept that an amount of tax must be paid and are seeking for alternatives that offer an acceptable level of taxation while remaining fully in line with their tax obligations. Malta is one of those alternative jurisdictions.

Following these international developments and Malta’s obligations as an EU member, Malta has implemented the required anti-avoidance rules ranging from interest deduction limitation rules and anti-hybrid mismatch to CFC rules and general anti avoidance provisions. Nevertheless, Malta has done its utmost to ensure that it can still provide a competitive offering to attract international business and investment to the island.

Malta has a full imputation system of taxation for companies in place which is intended to eliminate economic double taxation. In terms of the imputation system, tax that is paid on the profits of the company is available as a credit to the shareholders’ personal tax liability in Malta. This has given rise to the possibility for shareholders of corporate taxpayers to apply for tax refunds on the distribution of dividends. The issuing of the refund is subject to several conditions but effectively reduces the overall tax burden.

Notional interest rate deductions

Malta had commenced a process to understand what changes were necessary to remain competitive when considering other options available to companies operating across borders. One of the first developments to the Maltese corporate tax regime in recent years was the introduction of the notional interest deduction rules. The rules grant the company the possibility to charge a deemed interest at the published risk-free reference rate multiplied by the amount of risk capital employed by the company in the generation of its income. Risk capital includes the amounts allocated to the capital accounts of the company, retained earnings and other reserves. The amount of deemed interest deduction is also a deemed interest income in the hands of the shareholder, however where the shareholder is not resident in Malta, generally no further Malta tax is paid thereon.

The introduction of the possibility to create a fiscal unit between companies that are owned more than 95% by a parent company offered additional flexibility for the groups registered in Malta. The parent company would normally be the principal taxpayer and be responsible for the tax payment of all taxes that may be due by the group companies included in the fiscal unit. The fiscal unit gives the group the possibility to simplify the application of intra group surrendering of losses together with refund applications. This also offers a cashflow benefit to the group as they would no longer be required to go through the tax refund application process which could take several months from when tax is paid, and the refund is issued by the tax authorities.

Personal taxation

Some corporate tax rules should also be seen in conjunction with personal taxation rules, such as the amendments to the allocation of income benefiting from the participation exemption regime. While maintaining a broad participation exemption regime whereby dividends and capital gains from qualifying investments (mainly investments in companies with an interest of more than 5% subject to several anti-abuse conditions) are exempt from tax in Malta in the hands of the company, complex structuring was required for that benefit to be enjoyed by the individual shareholder resident in Malta.

The changes to the allocation of participation exemption dividends and gains now require taxpayers to allocate this income to the company’s untaxed account. On distribution of profits to an individual shareholder resident in Malta, the company will withhold 15% of tax with no further tax due by the individual on the said dividend. Where the shareholder is not resident, no Malta tax is generally applied. Coupled with Malta’s climate, use of the English language and Mediterranean lifestyle, many company owners are seeing this as one of the additional benefits to establish their base of operations for international investments in Malta.

The constantly evolving international landscape has given rise to many difficulties creating the need for companies to be more agile to adapt and remain competitive through proper planning exercises – Malta should be at the top of your list.

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This article first appeared in IR Global Insights: Working smart, surviving and thriving in August 2021.