Attard, Stephen: Malta’s Proposals to Extend its Tax Refund Benefits have been accepted by the European Union

Malta’s Proposals to Extend its Tax Refund Benefits have been accepted by the European Union by Stephen Attard
The Maltese Government announced on the 23 March, 2006 that it has reached an agreement with the European Commission regarding Malta?s tax system, and the fundamental feature of this agreement is that Malta?s competitive tax imputation system will remain in place. It is expected that Malta will thereby become even more attractive as a jurisdiction for the incorporation of companies for international transactions in view of the degree of certainty achieved through this agreement with the EU.During the course of recent discussions between the EU Commission and Malta, both parties discussed various proposals intended to allay certain previous concerns on the part of the EU Commission. The final proposal by the Maltese authorities (as accepted by the EU Commission) was to the effect that Malta?s current refundable tax credit system be extended to all shareholders of Maltese companies. Hence, with effect from 1 January, 2007, tax refunds will become available to all shareholders (whether non-residents or otherwise) receiving dividends distributed by all Maltese companies. These refunds will apply regardless of the companies? legal form or status, the business activity exercised, their size, sector, and the source and type of the income derived by the companies.This proposal by Malta has been accepted by the EU Commission since ?although still advantageous for foreign investors, the system would not be selective within the meaning of state aid rules?.The EU Commission has also recognised that the current 100% tax refund granted by Malta in relation to participating holdings by Maltese companies can remain in place as it is in conformity with the EU?s Parent Subsidiary Directive.Currently, refunds to shareholders of Maltese international trading companies (ITCs) and holding companies with certain foreign income (IHCs) are only selectively available to non-Maltese residents and provided the Maltese company does not operate within the Maltese economy. Maltese ITCs and IHCs existing as at 31 December, 2006 will continue to utilise the current system until the end of 2010. Thereafter, the above-mentioned extended tax refund rules will apply to these ITCs and IHCs automatically. Accordingly, current users of the Maltese system will be adequately protected and will be able to continue benefiting from Malta?s tax imputation rules.Another benefit of the Extended Tax Refund System will be that existing restrictive rules on the type of activities which can be performed by ITCs and IHCs will no longer be necessary for companies incorporated after 1 January, 2007. From that date onwards, the tax refunds will apply irrespective of the type of activities carried out by the company.The extension of tax refunds and the elimination of the current selective criteria are therefore not expected to have any significant impact on existing or future international structures making use of Maltese companies since the tax benefits will now apply across the board to everyone. The tax refund amounts are not expected to be materially different from the prevailing ones and, indeed, the Maltese Government has stated that the agreement with the EU Commission ?ensures Malta?s future ability to continue to be an attractive and competitive environment for international business and investment?.