In this third article in a series about the world’s premier offshore financial centers we look at the Mediterranean island of Malta.
In large part due to its favourable tax climate and low tax rates, since the 1970s Malta has developed into a premier offshore financial centre, offering international investors and entrepreneurs a wide range of services including company management, trust and offshore banking services.
The official languages are Maltese and English. Being a former British colony and a common law country, English is widely used in business and government, signs are typically bilingual, many Maltese attended higher education in the UK, and nearly everybody speaks fluent English.
Malta’s tax system is especially advantageous for foreign entrepreneurs, investors and wealthy individuals. Malta has no wealth, estate or gift taxes. Even though Maltese citizens who are residents of Malta are subject to personal income taxes on their worldwide income (progressive rates from 0% to 35%), Malta offers a number of beneficial residence schemes to foreigners wishing to relocate. As Malta is a member of the EU and a party to the Schengen treaty, non-EU nationals who become residents of Malta can enjoy visa-free access to the Schengen area. Various tax incentives are available to both corporations and their shareholders upon the distribution of dividends.
Domicile and residence
Malta’s income tax legislation refers to a person’s residence and domicile. The Income Tax Act defines the term ‘residence’ with respect to an individual, as a person who resides in Malta except for temporary absences. Generally, individuals are considered to be resident in Malta if they are physically present for at least 183 days in a calendar year. A corporation is considered to be resident in Malta if its management and control is exercised in Malta.
However, if a company is incorporated in Malta, it is considered to be resident in Malta irrespective of the location of its management and control.
Domicile, however, is not defined by law for the purposes of taxation. In practice, with respect to an individual, a domicile of origin is acquired upon birth and this may be changed with a domicile of choice if it is proven that the person intends to establish his permanent home in that other country. No person may have more than one domicile at the same time.
Persons who are resident and domiciled in Malta are subject to tax on their worldwide income. However, a person who is either resident or domiciled in Malta but not both, is only subject to income tax in Malta if the income arises in Malta or if income arising abroad is remitted to Malta. Lastly, a person who is neither resident nor domiciled in Malta is taxed in Malta only upon income arising in Malta.
Personal income tax
Malta has a progressive income tax with the maximum being 35%. However, due to the domicile and residence rules as mentioned above, in practice this means that foreigners resident in Malta are not subject to income tax in Malta on income arising outside Malta which isn’t remitted to Malta. This includes any foreign sourced capital gains, even when they remit these gains to a Maltese bank account, for example, capital gains made by selling shares.
Under certain conditions, a minimum tax of € 5,000 applies for income not remitted to Malta.
However, if you already pay € 5,000 (or more) in income tax on your salary as the director of your Maltese company, this will not affect you. In addition to this favourable tax climate, special programs also exist.
The (Global) Residence Programme
The (global) residence programme offers a fixed rate of 15% on foreign source income remitted to Malta. Maltese income is subject to the regular rate of 35%. A minimum tax liability of € 15,000 applies. The primary conditions for these schemes are that the individual has regular and sufficient income to support themselves and their family and owns or rents a qualifying property in Malta. A property is considered as “qualifying” when the purchase value is over € 275,000 or the annual lease value is over € 9,600.
The Highly Qualified Persons Programme
A special tax regime to attract highly qualified persons exists for financial services and e-gaming. The programme offers a fixed income tax rate of 15% to individuals. The primary conditions for this scheme are that the individual is not domiciled in Malta and obtains qualifying employment income in Malta of at least €85,016 per year.
The Retirement Programme
Any non-Maltese national who is a national of an EU Member State, EEA Member State or Switzerland can apply for the retirement programme, and consequently qualify for the 15% flat tax rate for Maltese income. Foreign income not received in Malta is not taxed in Malta. The primary conditions for this scheme are that the individual must have a pension income and owns or leases a qualifying property in Malta as mentioned above.
Social insurance and payroll taxes
Social insurance and other contributions are payable on employment income and certain self-employed income. Employers must withhold social security contributions from wages automatically, along with income taxes. Employers and employees must pay social security contributions in Malta on a graduated scale. The rates are up to € 46.53 per week for both employer and employee. Self-employed persons pay a rate up to € 69.79 per week depending on their income.
Corporate income tax
Companies incorporated in Malta under Maltese law are considered domiciled and resident in Malta. These companies are taxable on a worldwide basis. A non-Maltese incorporated company managed and controlled is also resident in Malta and subject to Maltese tax, but only on income arising in Malta and on income received in/remitted to Malta. Companies which are either not resident in Malta or not domiciled in Malta are only subject to tax on any income and certain capital gains arising in Malta and on income arising outside Malta which is remitted to Malta, if any. The nominal corporate income tax rate is a flat 35%, but exemptions and incentives will in many cases reduce the effective rate to 5%, the lowest rate in the EU. This can be combined with the EU’s treaty freedoms and the favorable decisions in tax matters by the European Court of Justice and the Maltese tax treaty network. Malta’s tax system has been deemed to be compliant by the European Commission with EU non-discrimination principles and has gained approval from the OECD.
Corporate income tax incentives and exemptions
Tax refund on distribution of profits
Malta does not levy withholding tax on dividends paid to shareholders. Furthermore Malta offers foreign shareholders tax refunds of 6/7 (30 percentage points) of the corporate income tax paid on distributed profits which have been subject to tax in Malta. This refund scheme thereby reduces the effective corporate income tax rate from 35% to 5% (with the exception for profits derived from real estate or profits subject to a final withholding tax). The refund is 2/3 of Maltese tax paid when the distributed dividend is derived from foreign sourced income that was relieved from double taxation.
Withholding tax on dividends, interest and royalties
No withholding tax is imposed on dividends distributed by Maltese companies (except for distributions of untaxed income to resident persons other than companies). Interest and royalty income related to qualifying intellectual property derived by non-residents is exempt from tax in Malta as long as certain conditions are complied with (e.g., they are not effectively connected to a permanent establishment of the recipient situated in Malta).
Industry and commerce
For industrial development, tax credits are available in respect of qualifying expenditure by companies which conduct business consisting solely of one or more qualifying activities.
These are activities related to manufacturing, information and communication technology, research and development (R&D) and innovation, logistics operations as well as activities carried out by companies licensed under the Malta Freeports Act. Also investment credits are available for wage costs of jobs created.
Aviation and shipping
Income of qualifying shipping organizations is not subject to income tax, however they are subject to an annual tax based on tonnage. Non-resident shipping companies only pay taxes on profits from the transport of passengers, mail, livestock or goods shipped in Malta.
Income from aircrafts used in the international transport of passengers or goods, is considered to be arising outside Malta. Therefore, a resident non-domiciled company will only be taxable in Malta if it remits its income to Malta.
Malta also has various other incentives for access to finance, investment aid, small and medium size business development, enterprise support, employment training and R&D which will only be mentioned here, but not discussed in further detail.
The Maltese income tax system exempts from tax income and capital gains derived by a company registered in Malta from a participating holding or from the disposal of such holding. Under conditions the participation exemption also applies to branch profits.
In general a holding in another company is considered to be a participating holding if a company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, and such holding confers an entitlement to at least 5% of any two of the following, a) the right to vote, b) profits available for distribution and/or c) assets available for distribution on a winding up.
Additionally, the participation exemption may apply if the shareholding has a minimal purchase value of at least € 1,164,000 and has been held for a continuous period of at least 183 days, or if the holding company has an option to buy the entirety of the outstanding shares of the subsidiary. Furthermore, if the holding company may appoint one or more members of the board, or has the right of first refusal in the case of sale, redemption or cancellation of the outstanding foreign company’s shares or holds a shareholding for the development of its own business and not only as stock for resale purposes, the exemption may also apply.
The exemption is not available in situations where immovable property situated in Malta is directly or indirectly owned by the subsidiary of the Maltese company. Also some anti-abuse rules may apply. If the income where the subsidiary is neither a resident nor incorporated in an EU country, or is subject to foreign tax of less than 15%, or has 50% or more of its income from passive interest and royalties. If the income from the entity has been subject to foreign tax of at least 5% and the investment is not a portfolio investment, the participation exemption should still be available to the Maltese company. Capital gains derived from a participating holding are not subject to the above anti-abuse rules and the Maltese company may claim a participation exemption without having regard to the above.
Value added tax
The standard VAT rate in Malta is 18%, 7% for the hotel and restaurant industry and 5% for certain goods (medicines, services and cultural goods, electricity, etc.).
Malta has no wealth tax.
Inheritance and gift taxes
Malta has no inheritance or gift taxes.
Immovable property tax
There is no immovable property tax. There is a property transfer tax on the sale of immovable property. It is generally levied at a flat rate of 12% on the transfer value or the selling price, unless the following exception applies.
Capital Gains Tax
Capital gains tax (CGT) is a tax based on profits and other gains made throughout a calendar year. The final taxable amount is added up to the person’s total taxable amount, which would then be subject to a progressive rate of tax of up to 35%. It is available instead of property transfer tax in specific instances. If this specific tax regime is applicable, the taxable amount is the selling price with the deduction of the cost of acquisition an inflation element and several expenses related to the property and its transfer. Some exemptions exist for transfers to spouses and selling and replacing business assets, intercompany transfers and the sale of participations under the participation exemption.
General Anti-Abuse Rule (GAAR)
There is a general anti-abuse tax rule in Malta. Arrangements which have been put into place for the main purpose (or one of the main purposes) of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, and are not genuine having regard to all relevant facts and circumstances are ignored for the tax law. An arrangement (or series of arrangements) is regarded as non-genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality. Additionally some anti-abuse rules exist for the participation exemption as mentioned above.
Tax treaty network
Malta has conducted agreements for the avoidance of double taxation with 71 countries across the world. These tax treaties serve to protect taxpayers from double taxation by restricting the right to tax of the contracting states.
Wealth and asset management
Malta’s wealth and asset management industry has been quick to catch the sights of esteemed individuals and affluent families. In fact, the industry is among the fastest growing on the island, fostered through well enacted legislation and business-friendly operating environments. This prime industry in Malta has established its stronghold by offering diverse services, ranging from succession planning to philanthropy, estate planning, and corporate structuring, amongst others. Complimenting this, a number of investment vehicles have been established, most notably trusts and foundations, that vary in complexity and cater to different levels of wealth. Malta has become one of the most stable jurisdictions in which to establish trusts, whether inter vivos or testamentary, and foundations, not least because of the level of professional expertise available in the country.
The setting up of trusts in Malta is regulated by the Trusts and Trustees Act. By adopting trusts into its legislation, Malta allows for the creation of domestic trusts and the beneficial, yet secure, protection of a person’s wealth and property. The law incorporates the provisions of the Hague Convention on the Law Applicable to Trusts and on their Recognition as ratified.
The Malta Financial Services Authority (MFSA) is the designated authority in charge of the authorization and supervision of trustees. Individuals can plan for future generations and efficiently distribute assets with certainty and security that is guaranteed through a number of annual requirements to which Malta Trusts are subject to, including the drawing up of accounting records and due diligence updates. The law allows for the setting up of a variety of trusts, including fixed interest trusts, discretionary trusts, charitable trusts, protective trusts, and unit trusts. There is no shortage of benefits that come with establishing a trust in Malta – to name a few, the process takes a mere three days and is completely authorised under the EU, it is fully confidential and flexible, and trusts can be set up for 125 years and can easily be re-domiciled to other jurisdictions.
Malta foundations are efficient vehicles for structuring wealth and for estate planning purposes. Maltese law on Foundations was introduced in April 2008. Under the law, one can set up a private foundation or a purpose foundation – the latter being highly effective vehicles for wealth management and estate planning. As opposed to trusts, foundations have a separate legal personality with its own liabilities and obligations. Malta foundations are an excellent vehicle for asset protection and the creation of different patrimony, in addition to avoiding the splitting of estates. A Malta foundation can be set up either by means of a public deed or else through a last will published in Malta. Founders need to make an endowment of money or property worth at least €1,164.69 to the same foundation. This does not apply to foundations established exclusively for a social purpose or as non-profit making entities in which case the endowment amounts to at least €232.94.
Setting up in Malta
Malta company law
Having a pro-business approach, Malta is home to more than 70,000 foreign companies, with 30% having been registered in the past few years. The procedure for setting up a business in Malta or incorporating a company is fast and straight forward, with the process taking as little as one week. For an additional fee, a company may be registered within just 24 hours. No licences or permits are required, except for businesses operating in the sectors of pharmaceutical, iGaming, financial industry, insurance and medical which have specific regulatory requirements. Malta offers various forms of partnerships and limited liability companies including:
- Public Limited Liability Company (plc)
- Private Limited Liability Company (Ltd)
- En commandite partnership
- En nom collectif partnership
Businesses may take other forms including that of a sole trader, trusts, and branches of foreign companies. Whilst companies are generally set up with more than one shareholder, there is the possibility to set up a company as a single member company. Various persons or entities may hold shares, including individuals, corporate entities, trusts and foundations.
Alternatively, a trust company authorised by the Malta Financial Services Authority may act as trustee or fiduciary, and may hold shares for the benefit of the beneficiaries. While there are no legal requisites regarding the residence of directors or the company secretary, it is advisable to appoint Malta resident directors as this ensures that the company is managed effectively in Malta.
Fintech and blockchain
Whilst the traditional areas of financial services and capital markets present a realistic and substantial source of FDI for any financial industry, new areas of investment have emerged in recent years.
The merging of the financial services sector and technology has created the Fintech industry, which encompasses a variety of market players. This industry is releasing revolutionary technologies in order to compete with established market players such as retail banks and insurance companies. It includes peer-to-peer lending via crowdfunding platforms, money transfer solutions, virtual currency operators, online securities intermediaries and online wealth management services.
Fintech has gained significant popularity in recent years when cryptocurrencies and blockchain technology (also referred to as distributed ledger technology (DLT)) took centre stage. Malta is at the forefront of innovation, regulation, and facilitation of DLT, being one of the few countries which have sought to regulate this space which remains widely unregulated.
Ground-breaking legislation, dealing with blockchain-based businesses and their service providers, as well as cryptocurrencies and initial coin offerings, was brought into force in November 2018. Malta’s efforts to become a true Blockchain island are bearing tangible fruit, and several industry players, including Binance which is one of the largest cryptocurrency exchanges in the world, have recognised Malta’s prowess in the field and chose to set up shop here.
Malta is known for being a world-class jurisdiction for regulated online betting and gaming operations. The island offers many exciting opportunities for both new market entrants and established operators seeking a well-regulated and tax-friendly environment. The gaming regulatory framework provides wide-ranging incentives aimed at businesses related to remote gaming and licensed by the Malta Gaming Authority.
Infrastructure and maritime policy
Malta is the largest maritime registry in Europe and the 6th largest in the world, offering high service and safety standards and luring clients within Europe and beyond. It is one of the largest registries in Europe for pleasure yachts and superyachts.
The Malta Freeport is the third largest maritime and logistics centre in the Mediterranean region- and a highly prestigious and reputable one at that. Over recent years, the maritime industry in Malta has been largely privatised, with the private sector assuming more of an initiative role and the government focusing more on the regulatory aspect.
Malta’s far-reaching success in the maritime industry is heavily attributed to two main pillars: the excellent reputation of its flag and register, and the possibility of fiscal planning and VAT payment minimisation particularly in the context of private yachts and super-yachts based on their use in the EU – including with regards to leasing. In fact, there is a possibility to reduce VAT down to 5.4% through Maltese financial yacht leasing. Qualifying shipping activities such as ship ownership, operation, and administration, also qualify for certain fiscal tax benefits.