Malta

Key Corporate Features
General Information
Company Information
Compliance

Key Corporate Features

General Information

Malta is an independent nation, having split from the UK in 1964. The Maltese Islands are 100 km south of Sicily, with a population of 366,000; the climate is warm. Malta has a Westminster-style democracy, but has been politically fractious since independence. 15 years of post-colonial adolescent flirtation with Communism and the third world has been succeeded by a more mature attitude.

Malta will join the EU by May 1, 2004, with EU accession negotiations almost completed, the opposition labour party was still hankering after a life as the 'Switzerland of the Mediterranean'. Eventually, Malta was invited to join the EU in December, 2002, along with Cyprus and 8 Eastern European ex-Soviet states. A referendum in March, 2003, approved EU entry, and after the government was returned to power in April, it signed the EU accession treaty in Athens. Finally, the Maltese Parliament ratified the accession treaty in July, 2003. No turning back!

The official languages are English and Maltese. The British military and naval base once dominated Malta but since 1979, when the British left, the excellent port facilities have not yet been fully re-utilised. Tourism has become a major contributor to the economy, particularly visits by cruise ships. The airport has good connections with a wide range of European countries. GDP per head of $14,000 is low on the European scale and increases at around 4-5%; inflation is low at 2%; and unemployment at 5.5% is not too bad.

Almost entirely lacking energy or other natural resources, and with a severe shortage of arable land, Malta is inevitably an import-hungry country. In the last 15 years, the Government has tried hard, and with some success, to create a high-technology manufacturing sector and to establish processing and distribution facilities around its rapidly growing Freeport. There are extensive investment incentives.

Manufacturing, tourism and shipping go some way towards paying for imports, but the gap cannot be closed without the development of a financial services sector. Maltese legislation for banking, mutual funds, insurance and trust services was relatively late in arriving, and while these sectors are growing, they are not on the scale of some other OIFCs. Malta has moderately high internal taxes, but offers low-tax regimes to companies and individuals. Malta is phasing out its 'designer tax' Offshore Companies, which the EU would never have accepted, and hopes that the EU will allow their replacements, the International Trading and Holding Companies, to survive. However, in August, 2003, after Malta had already signed its accession treaty to the EU, the European Commission attacked a number of features of Malta's tax regime, including International Trading and Holding Companies. The Maltese government has indicated that it does not agree with the Commission's position. It is strange that such matters were not resolved prior to completion of the accession negotiations.

There is a reasonably sophisticated business and professional infrastructure. Business sectors with offshore activity include banking, investment fund management (there is a stock exchange with a growing array of mutual fund listings), trust management, shipping (a particularly strong sector) and investment holding.

Malta will be home to a World Trade Centre as its aplication for membership to the World Trade Centres Association (WTCA) was accepted in March 2001. World Trade Centres provide crucial support services to international businesses such as temporary office accommodation, secretarial and translation services, corporate training, meeting and exhibition facilities. The government has stated that it sees the establishment of a World Trade Centre as 'an additional and very important step in the promotion and development of Malta as a principal hub for trade in the Mediterranean region.'

The 'commitment' letter Malta issued to the OECD in May 2000 in order to avoid inclusion on the list of countries indulging in 'unfair' tax competition will have consequences for its offshore sector but these are as yet unclear.

Company Information

Private Limited Company

The following are the chief characteristics of a private limited company:

• only one member is necessary;
• only one director is necessary, and must be a natural person, but can be of any nationality and resident anywhere;
• there must be a company secretary, which must be a licensed Maltese Nominee Company;
• there must be a registered office in Malta;
• the minimum authorised and paid-up capital is Lm500, but it is usual to have capital between Lm2,000 and Lm5,000 (the highest amount within the lowest duty band); a minimum 20% of the authorised value must be paid up; if there are non-resident members then the minimum capital is Lm10,000 of which 50% must be paid up, and they must obtain exchange control permission (a formality);
• shares can be registered but not bearer; preference or redeemable shares are permitted; and shares do not have to carry voting rights;
• accounts must be kept but do not have to be filed.

International Trading Company

An International Trading Company (ITC) is a company registered in Malta which does business exclusively with non-residents, both in fact and according to its Articles. Certain complementary activities in Malta are permitted:

• purchases for export of Maltese goods provided that they are not made from a 15% shareholder in the buying company;
• trading with companies registered in Malta under the Financial Services Centre Act 1988 (ie offshore companies; see below);
• trading with other International Trading Companies.

The Maltese Inland Revenue will give a Ruling on request that a company is an ITC, which is valid for 5 years, extensible for a further 5 years.

An International Trading Company pays an effective rate of tax of only 4.17%. In addition it is able to make use of Malta's many double taxation treaties (unlike offshore companies).

The beneficial owners of an ITC can remain confidential if they incorporate the company through a licensed nominee company. As regards its legal basis, the ITC is formed as a private limited company (see above).

International Holding Company

The International Holding Company (IHC) is similar to the International Trading Company except that as its name implies it holds participations in foreign companies. Its effective tax rate is 11.67% or less; if dividends emanate from a 'participating holding', ie one of more than 10% in the paying company, then the effective rate of tax is nil.

Like the ITC, the IHC can make use of Malta's Double Taxation Treaties.

Compliance

An International Trading Company pays tax at the regular rate, 35%, but a non-resident shareholder, or a Maltese company shareholder owned by non-residents, is subject to Maltese tax only at 27.5% on dividends received from an ITC, and can apply for a refund of the difference. In addition, the non-resident shareholder is entitled to a refund of two-thirds of tax paid on dividends (imputed tax) which equals 23.33%, giving a total return of 30.83%, and an effective rate of tax of 4.17%.

The two-thirds rule is in fact optional, and the shareholder can choose just to take the tax credit of 27.5% if he wishes.

The rules for tax payments and refund payments are such that there is a gap of only 14 days between payment of the tax due by the company and receipt of the refunds by the shareholder.

An International Holding Company, which operates a Foreign Income Account to receive income from foreign sources, pays 35% tax on its net income as usual, but can make use of four levels of abatement of the tax:

• Double Tax Treaties: Malta has treaties with 25 countries, including almost all of the leading OECD countries, with another 10 treaties in the pipeline. Most of the treaties allow offsets against local taxation.
• Commonwealth Relief: Not much used now, but equivalent to treaty relief in the case of Commonwealth-source income;
• Unilateral Relief: when there is no tax treaty, Malta gives equivalent relief unilaterally; and
• Flat-Rate Foreign Tax Credit: if no documentation is available to establish treaty or unilateral relief, Malta gives a 25% tax credit anyway.

Only one of these four types of relief applies to a given piece of foreign income; the Maltese Inland Revenue is involved in determining which applies. One way or another, double taxation is avoided.

Once the income passes as dividend to a non-resident shareholder (individual or company) he is entitled to a refund of two-thirds of the 35% imputed tax charge. Therefore the effective tax rate on the originating foreign income will be a maximum of 11.67% (there may be deductible expenses).

If the income arose from a participating holding (a company owned 10% or more by the Maltese company) then the refund is 100% of the imputed tax, so that the effective rate becomes nil.

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