International Holding Companies
Revision No
10. -
Last Updated : 11-04-2002
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Quick Reference: (Click on any link in the table to go straight to the relevant paragraph) |
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Tax
Treatment of an IHC if foreign income derives from a ‘Participating Holding’ |
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Indeed, the tax treatment of foreign dividends coupled with the expanding list of Maltese Double Taxation Treaties (DTTs) makes Malta a strong contender in the choice of location for an International Holding Company (IHC) and especially for structuring a foreign investment in an EU country -- or in any country for that matter -- via Malta.
An IHC is a normal private limited liability company under Maltese law, which, however, has its objects limited to the ownership, management and administration of equity holdings in other companies. An ’equity holding’ may be defined as a holding of the nominal share capital in a company which entitles the holder thereof to certain rights such as the right to attend and vote at General Meetings, to dividends and to the assets of the company on liquidation.
In particular, the fact that this type of company is considered as a normal Maltese company means that it is less likely to appear as a tax-saving vehicle in the eyes of the foreign revenue authorities.
If the shareholders are not Maltese residents, authorisation from the Malta Financial Services Centre (MFSC) is required prior to setting up an IHC. This is readily available if the MFSC, after having viewed appropriate bankers’ references and testimonials of the shareholders and directors of the proposed company, is satisfied that they are reputable and financially sound.
The minimum share capital required to set up an IHC is only 500 Malta liri (approximately US$1,200) which must be, at least, 20% paid up. Any foreign currency may be used.
Shareholders may choose to remain anonymous by utilising a licensed nominee shareholder.
Being a normal private company, an IHC is subject to corporate tax at the standard rate of 35% on its worldwide income. However, non-resident shareholders benefit from preferential tax treatment. Accordingly, a non-resident shareholder or a Maltese company 100% owned by non-residents in receipt of dividends from an IHC may claim a two-thirds (2/3rds) refund of the Malta tax paid.
A mathematical example will illustrate the tax effectiveness of this structure better:
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IHC's point of view |
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Net foreign income received in
Malta
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800 |
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Foreign tax suffered on income @ 20% |
200 |
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Chargeable income in Malta grossed up |
1000 |
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Malta corporate tax @ 35% |
350 |
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Less credit for foreign tax |
200 |
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Malta tax due |
150 |
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Distributable profits to non-resident shareholder |
650 |
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Non Resident shareholder's point of view |
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Distributable dividend to non-resident |
650 |
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2/3rds refund of Malta tax (i.e. 2/3rds of 150 |
100 |
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Dividend received by non-resident
shareholder |
750 |
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Total tax suffered in Malta |
50 |
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Net effective rate of tax on net foreign income |
6.25% |
Tax Treatment of an IHC if foreign income derives from a ‘Participating Holding’
A special tax regime exists if an IHC holds 10% or more of the equity of an overseas company, known as a ‘participating holding’. Thus, a non-resident shareholder (who may be a Maltese company 100% owned by non-residents) in receipt of a dividend from profits derived from a ‘participating holding’ or of profits derived from disposal of such ‘participating holding’ is entitled to claim a refund of ALL the Malta tax paid (as opposed to two-thirds).
The exception to this rule is that a holding of shares, whether equity shares or not, in a company not resident in Malta, held as trading stock for the purpose of a trade does not constitute a ‘participating holding’.
The refunds are:
· not taxable;
· to be paid by the Commissioner of Inland Revenue not later than 14 days after the end of the month in which they become due on production of an appropriate dividend warrant; and
· to be paid in the same currency in which the relevant profits were charged to tax.
If an IHC does not satisfy the 10% test, it is still eligible to benefit from the special tax regime if, at least, one of the following conditions is satisfied:
· it is entitled, at its option, to purchase the balance or has a right of first refusal on a disposal of the balance of the equity shares of the overseas company; or
· is entitled to be represented on the Board of the overseas company; or
· the value of the shareholding exceeds 500,000 Malta liri; or
· the shares are held in an overseas company for the furtherance of its own business.
There are no withholding taxes levied upon a distribution of dividends. The amount retained is equivalent to the company tax and is fully imputed to the shareholder upon such distribution of dividends.
Double Taxation Treaties (DTTs)
Malta, currently, has DTTs with over 20 countries, including Australia, Austria, Belgium, Bulgaria, Canada, China, Cyprus, Finland, France, Germany, Hungary, India, Italy, Libya, Netherlands, Norway, Pakistan, Poland, Romania, Sweden, Switzerland, UK and USA. In addition, DTTs have been initialled with Albania, Croatia, the Czech Republic, Kuwait, Malaysia, South Africa, South Korea, Thailand and Tunisia and are awaiting signature, while an agreement with Luxembourg has been signed and is awaiting ratification. Most of these treaties are based on the O.E.C.D. Model. The Agreements with Switzerland and USA are limited to profits derived from operations of ships and aircraft in international traffic.
Very attractive structures can be set up if the dividend derives from a ‘participating holding’ in a company of a country with which Malta has a DTT and which does not tax the dividend very highly.
For example, according to article 10 of the Malta - Netherlands DTT, withholding tax on dividends paid by a Dutch company to a Maltese parent company are reduced as follows from the standard withholding tax of 25%:
· if the Maltese company holds, at least, 25% of the Dutch share capital; or
· where the holding is less than 25%.
Now, suppose that a Maltese company holds 25% of a Dutch company, which pays a dividend of US$1,000 to a Maltese IHC. The withholding tax in Holland would be of 5% amounting to US$50. When the IHC distributes a dividend to its non-resident shareholders (who may be a Maltese company 100% owned by non-residents), the net tax suffered in Malta would be zero:
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IHC's point of view |
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Net foreign income received in
Malta
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950 |
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Foreign tax suffered on income @ 5%
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50 |
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Chargeable income in Malta grossed up |
1000 |
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Malta corporate tax @ 35% |
350 |
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Less credit for foreign tax |
50 |
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Malta tax due |
300 |
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Distributable profits to non-resident shareholder |
650 |
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Non Resident shareholder's point of view |
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Distributable dividend to non-resident |
650 |
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100% refund of Malta
tax |
300 |
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Dividend received by non-resident
shareholder |
950 |
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Total tax suffered in Malta |
0 |
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Net effective rate of tax on net foreign income |
0% |
The situation is even more favourable in the case of the Malta - Bulgaria DTT which stipulates that dividends distributed from a Bulgarian company, irrespective of the shareholding of the Maltese company, are not taxed in Bulgaria.
Exemption from Exchange Control
IHCs are exempt from exchange control and are permitted to hold assets in any foreign currency and keep freely convertible foreign currency accounts whether in Malta or abroad.
So as to provide certainty on the precise tax status of an IHC, particularly since what constitutes a ‘participating holding’ is subjective and discretionary, it is advisable to obtain an Advance Revenue Ruling from the International Tax Unit within the Department of Inland Revenue in order to obtain clarity and certainty on the company’s tax position. These Rulings guarantee the tax position for a period of 5 years renewable for a further period of 5 years. They also survive any changes in legislation for a period of 2 years after the entry into force of the new law. A Ruling is given within a maximum period of 30 days of the application made in writing.