Malta and Cyprus are typically viewed as ?competitors? from the lens of the international financial services industry, and particularly from a tax planner?s perspective. However, although both jurisdictions do have their similarities, a deeper analysis uncovers different strengths and features, including instances where both jurisdictions are complimentary.
The financial services industry is an important pillar of the Maltese economy, and this has been consistently recognised by governments and the respective authorities, who have also committed themselves to this industry, establishing a tradition of co-operation in this sector, the recent overhaul in the Maltese tax system being a case in point. Other ensuing benefits include the short time-frames and reasonable costs for incorporating Maltese companies, the possibility of comfort letters or advance revenue rulings issued by the local tax authorities, and the availability of suitably qualified professionals in virtually all areas of the international financial services industry. Furthermore, all corporate documentation, including the Memorandum and Articles of Association of a Maltese company, may be drawn up in English.
1.1 Changes to Malta?s tax system
A number of important developments to Malta?s tax system have taken place in the recent past (which have entered into force with effect from 1st January 2007), as implemented in agreement with the EU Commission. Hence the current Maltese tax legislation now carries the EU?s seal of approval, which affords additional comfort and stability when Malta is considered for investment purposes and international transactions/re-structuring, particularly long – term. This is not to be underestimated in an industry which is, by nature, dynamic. Indeed, whilst that the full imputation system for dividend taxation has been retained, the amendments have introduced a new tax refund system applicable in favour of persons (whether natural or legal and resident or non – resident) holding shares in companies registered in Malta on or after 1st January 2007, and which applies to all sources of income and gains (except profits or gains which are derived from immovable property situated in Malta and certain other limited items of income or gains which are subject to final tax). The exemption from Malta tax on capital gains available to non – residents pursuant to their disposal of shares in Maltese companies has also been retained, provided such non-residents are not owned and controlled by, directly or indirectly, nor act on behalf of one or more individuals who are ordinarily resident and domiciled in Malta.
1.2 Refund system and Participation Exemption
Profits of a Maltese company are taxed at the standard rate of 35%, and hence Malta is not a zero tax or a low-tax jurisdiction. The tax is actually paid to the Malta authorities and the respective receipt will be issued to the taxpayer in question. However, upon a subsequent distribution of a dividend by the Maltese company (no Malta tax is withheld or otherwise levied on such dividends distributed), shareholders are generally entitled to a refund of six-sevenths (6/7ths) of the Malta tax suffered on the profits out which the dividend was distributed. This would also be the in case in respect of trading profits. The refund is reduced to five-sevenths (5/7ths) when the dividend was distributed out of profits derived from passive interest or royalties or two-thirds (2/3rds) when the dividend is distributed out of prescribed foreign-source income (typically having a passive nature and including foreign source profits resulting from royalties and from dividends, capital gains, interest, rents and other income derived from investments situated outside Malta) in respect of which domestically available double taxation relief (that is, treaty and unilateral relief and the flat rate foreign tax credit) would have been claimed. The refundable tax system has also been extended to Malta registered branches of companies not resident in Malta. As a result, as of 1st January 2007, upon a dividend being distributed by a non-resident company out of profits attributable to the Malta branch of the said company, the shareholder will likewise be entitled to claim a refund of the Malta tax paid on those profits in the same manner as explained herein.