Global Tax Alert | 15 July 2013

Malta enhances participation exemption to apply to branch profits

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On 17 May 2013, the Maltese Government published Act III of 2013. The Act enhances the participation exemption so it now applies to branch profits. In addition, conditions for the application of the participation exemption have been improved.

Participation exemption requirements

Malta’s participation exemption was introduced in 2007. The participation exemption exempts from tax, income and/or capital gains derived by a company registered in Malta from a participating holding or from disposal of such holding.

A participating holding is defined as a holding when it meets one of the following criteria:

  • A company holds directly at least ten percent of the equity shares of a company and the holding confers an entitlement to at least ten percent 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.
  • A company is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by it to the extent permitted by the law of the country in which the equity shares are held; or
  • A company is an equity shareholder in a company and the equity shareholder is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
  • A company is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or
  • A company is an equity shareholder holding an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of €1,164,000 (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days; or
  • A company is an equity shareholder in a company and its holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Equity holding shall mean a holding of the share capital in a company which is not a property company, when the shareholding entitles the shareholder to at least any two of the following rights (equity holding rights): (i) right to vote; (ii) a right to profits available for distribution to shareholders; and (iii) a right to assets available for distribution on a winding up of that company.

With respect to dividends, the application of the participation exemption is linked to an anti-abuse provision. The participation exemption applies provided that the entity in which the participating holding is held satisfies any one of three conditions, including:

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

If none of the three conditions are satisfied then both of the following two conditions must be met:

  • The equity holding by the company registered in Malta in the entity not resident in Malta is not a portfolio investment and for this purpose the holding of shares by a company registered in Malta in a company in an entity not resident in Malta which derived more than fifty percent (50%) of its income from portfolio investments shall be deemed to be a portfolio investment; and
  • The entity not resident in Malta, or its passive interest or royalties have been subject to any foreign tax at a rate not less than five percent (5%).

Application of the participation exemption to branch profits

The participation exemption will apply to any income or gains derived by a company registered in Malta which are attributable to a permanent establishment (PE, including a branch) situated outside Malta or to the transfer of such PE, whether the PE belongs exclusively or in part to the particular company, including a PE operated through any entity or relationship other than a company, in which the particular company has an interest, where the taxpayer has not shown such income or gains as part of its chargeable income in the return made pursuant to article 10 of the Income Tax Management Act. For these purposes “profits or gains” shall be calculated as if the PE is an independent enterprise operating in similar conditions and at arm’s length.

Where, in the opinion of the Commissioner, a series of transactions is effected with the sole or main purpose of reducing the amount of tax payable by any person by reason of the operation of this provision, such a person shall be assessable as if this provision did not apply and, for the purpose of this provision, a series of transactions shall mean any two or more corresponding or circular transactions carried out by the same person, either directly or indirectly, as the case may be.

In addressing substance over form, the 2013 amendments clarify that a holding of a Company in the various forms:

  • A partnership en commandite, the capital of which is not divided into shares constituted under the Companies Act, not being a property partnership; or
  • An entity which is constituted, incorporated or registered outside Malta, not being a property partnership and is of a nature similar to a partnership en commandite as defined above; or
  • A collective investment vehicle constituted, incorporated or registered outside Malta and which is not resident in Malta, where the liability of investors in such scheme is limited to the amount invested by them, constitutes a participating holding if one of the criteria noted above under the participation exemption requirements is met. For the purposes of this proviso, the terms “equity shares” or “shares” shall be construed as referring to the capital in the said body of persons or collective investment scheme which entitles the holder to at least two of the following rights: (i) a right to vote; (ii) a right to profits available for distribution; and (iii) a right to assets available for distribution on a winding up of the said body of persons.

Tax Exemption on Income from Trademarks

Act III of 2013 also extended the royalty exemption to royalties, advances and similar income derived from trademarks.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited, Msida, Malta
  • Christopher J. Naudi
    +356 2134 2134
    chris.naudi@mt.ey.com
  • Dr. Robert Attard
    +356 2134 2134
    robert.attard@mt.ey.com

EYG no. CM3645