International Trading Companies

Revision No. 8.   - Last Updated : 09-10-2002

 

Purposes for setting up ITC's

One of the most popular and tax effective vehicles designed specifically with the non-resident investor in mind who wishes to invest and set up an operation in Malta is the International Trading Company (ITC).

 Indeed, ITCs have multiple uses and, inter alia, are particularly suitable for:

·                     carrying on any export-oriented trading activity from Malta;

·                     holding patents or copyrights and receiving income therefrom;

·                     re-invoicing operations;

·                     tax purposes, particularly for reducing the incidence of withholding taxes on interest and/or royalty income; or

·                     receiving commission income.

 

 

What is an ITC?

An ITC is a normal private company registered in Malta which, accordingly, is regulated by the Companies Act, but which carries on trading activities from Malta but not in Malta, with persons outside Malta who are not resident in Malta. 

An ITC may only perform in Malta such trading activities as are strictly necessary for the conduct of its operations from Malta.  The exception to this rule is that ITCs may purchase, under certain conditions, locally manufactured goods for export from local companies and may trade with other ITCs.

Besides general trading activities, the activities of an ITC may include banking, insurance and investment services activities provided the necessary licences are obtained.

ITCs may not purchase immovable property in Malta but may freely lease office and living accommodation.  Moreover, ITCs may not hold shares in other companies on a long-term basis and, consequently, cannot act as holding companies.

Since the shareholders are non-residents, the approval of the Malta Financial Services Centre (MFSC) is required prior to setting up an ITC.  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 authorised and issued share capital of an ITC has to be a minimum of 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.  This, effectively, means that foreign funds finding their way to Malta may be transported wherever according to the wishes of the anonymous beneficial owners.

 

 

Withholding Taxes

There are no withholding taxes on dividends distributed.  The amount retained is equivalent to the company tax (35%) and is fully imputed to the shareholder.  Likewise, there are no withholding taxes on interest and royalties accruing to or derived by any person non-resident in Malta provided the debt claim in respect of which the interest accrues and the royalty is not effectively connected to a permanent establishment in Malta through which such person carries on a trade or business. 

 

 

Taxation of ITCs

Although ITCs are subject to the normal corporate tax of 35% levied on all Maltese companies based upon their chargeable income for the year of assessment, certain fiscal incentives are available to non-resident shareholders (who may even be a Maltese company 100% owned by non-residents -- the so-called ‘Dividend-Feeder Company’), upon a distribution of dividends by the ITC, which render the effective tax rate 4.17%.

Example 1

Profits derived from abroad are paid to the ITC.  The ITC is taxed on these profits at 35% corporate tax.  Dividends are then distributed to the nominee shareholder of the ITC (holding shares on behalf of a non-resident) without payment of withholding taxes.  The nominee shareholder in receipt of such dividend is taxed in respect of such dividend at the rate of 27.5%.  However, since the ITC would already have been taxed on its profits out of which the dividend was distributed at the rate of 35% and Malta enjoys a ‘Full Imputation System’, a refund of 7.5% is granted.  To obtain this refund, all the nominee shareholder has to do is to file an income tax return locally and be assessed.  In addition, a refund equivalent to two-thirds (2/3rds) of the Malta tax paid by the ITC is granted.  Thus, the effective tax rate is reduced to 4.17%.  Finally, the dividends, together with the refunds, are distributed to the beneficial non-resident shareholders without payment of withholding taxes. 

 A mathematical example will demonstrate better this tax efficient structure:

 

 

The refunds are:

·                     not taxable;

·                     to be paid by the Tax Department 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.

This is not to say that dividends may only be distributed by an ITC at the end of its financial year.  Interim dividends may be declared but all distributions have to be paid net of 35% corporate tax.  This means that initially the dividend received by the non-resident shareholder will be US$650 (i.e. the income of US$1,000 less corporate tax @ 35%, which must be withheld).  The US$350 tax may be kept in the ITC’s bank accounts and at the end of the financial year are to be paid to the Tax Department.  At that point, the refunds become available as outlined above and the non-resident shareholders shall receive a further US$308.33.  The net effective rate of tax is still 4.17%.

 

Example 2

In case the shareholder wishes to retain the funds in Malta rather than distribute them immediately abroad, a ‘Dividend-Feeder Company’ may be utilised (i.e. a company 100% owned by non-residents which is a shareholder of the ITC).

 The structure operates as follows: the ITC receives income from abroad and is taxed at the normal corporate tax of 35%.  Dividends are distributed without payment of withholding tax to the Dividend-Feeder Company, being a shareholder of the ITC.  The Dividend-Feeder Company enjoys the same refunds as outlined in Example 1 above.  The dividends and refunds may eventually be distributed to the beneficial shareholders at their discretion.  Again, the net effective rate of tax is 4.17%.

 

Example 3

Since an ITC made trade with other ITCs, an even more interesting structure is the following: an ITC purchases goods manufactured in Malta by an export-oriented company (IDA company) belonging to the same owners as the ITC and which operates under a 10-year tax exemption given pursuant to the Industrial Development Act (IDA) which it will then export itself.  The income received by the IDA Company will be treated as income derived from exports and will enter within the tax free dividend scheme if applicable.  The ITC will then sell the goods abroad at profit.  The income derived will be taxed at 35% corporate tax.  On distribution of a dividend to the non-resident shareholders of the ITC, the refund provisions already outlined will apply with the end result that the net effective rate of tax is 4.17% over the whole transaction.

 

 

Double Taxation Treaties (DTTs)

The significance of these fiscal incentives can only be fully appreciated if one views them in conjunction with the double taxation relief that the non-resident shareholders may then receive when the dividends are remitted back to their country of residence.  In this respect, 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. (The agreements with Switzerland and USA are limited to profits derived from operations of ships and aircraft in international traffic.)  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 advantage of this fiscal regime is that, although, in effect, the net tax payable in Malta, after all the refunds are granted, would be of 4.17%, the non-resident shareholder may declare a tax rate of 27.5% because this is his tax rate in Malta, and this emerges very clearly from the law.  Thus, if the non-resident is taxable at the rate of 35% in his home country, he would be given a credit for 27.5% even though, in actual fact, his net tax paid would have been a mere 4.17%.

 

 

Exemption from Exchange Control

Once incorporated, ITCs 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 and to trade in any currency in any part of the world excluding, of course, Malta.

 

Advance Revenue Rulings

So as to provide certainty on the precise tax status of an ITC, the International Tax Unit within the Tax Department, if requested, shall give a ruling guaranteeing for a period of 5 years renewable for a further period of 5 years the tax status of an ITC.  Rulings survive any changes in legislation for a period of 2 years after the entry into force of the new law.  Such rulings are given within a maximum period of 30 days of the application made in writing.

 

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