A holding company is used to hold assets and participations in other companies. Typically, the holding company itself does not trade, but it is used to hold the assets or shares in the trading company itself. Nevertheless, it may be more tax efficient for a group to allow the holding company to carry out trading activities which are related to the assets it holds.
Different types of holding companies may be used to attain a variety of fiscal and non-fiscal objectives including the following:
- Spreading the risk of the investor
- Separate certain assets from the trading operations of the group
- Implement repatriation strategies
- Efficient acquisition and disposal of an asset, participation or trading operation
- Sheltering of profits
- Re-characterisation of income
- Create tax grouping
- Minimise the risk of double taxation
- Minimise the tax on exchange differences arising on intra-group financing
- Creating deductions against taxable income
The location of a holding company
The location of a holding company is a crucial factor and depends on the specific aims and priorities of the investor. From a purely fiscal perspective, the ideal holding location should have the following characteristics:
- Levies no tax or minimal tax on the income derived by the holding company
- Levies no tax on the transfer or disposal of an asset by the holding company
- Levies no tax when the shares in the holding company itself are transferred or disposed
- Levies no tax on outbound dividend or interest or royalty distributions
- Has access to a wide double tax treaty network and domestic relief from double taxation
- Has access to the EU primary and secondary legislation
- Allows a the holding company to be capitalised with a very-low amount of equity
- Allows the holding company to carry out other activities in parallel to holding activities
- The holding company is subject to low registration fees
- The holding company is governed by strong corporate legislation which secures the protection of investors and shareholders
As it can be seen below Malta offers many of the characteristic outlined above making it an ideal holding location.
Malta as an ideal holding jurisdiction
Malta has always been a very popular location for a holding company. The fact that Malta does not levy any withholding tax on dividend distributions and does not effectively levy tax on income from certain types of participations has create successful opportunities as an intermediate holding jurisdiction. In fact many large multi-national corporations have taken advantage of Maltese regime and used holding companies to implement an array of international tax planning techniques. Following Maltas accession to the European Union and the recent amendments to the Income Tax Act, Maltas attractiveness as a holding jurisdiction has increased significantly and made Malta one of the most favourable EU jurisdictions to locate a holding company.
A holding company may be incorporated as a normal limited liability company. Companies registered in Malta are governed by the Companies Act and its subsidiary legislation which are fully complaint with EU Law.
Provided that all documents and information are submitted to the Registrar of Companies in Malta, the incorporation may be done within 24 hours.
The shares of a Maltese holding company may be held by a trustee who is duly authorised to act as a trustee in accordance with Maltese Law.
Low registration costs
Incorporation of a Maltese company involves the payment of initial registration fees to the Registrar of Companies in Malta and varies according to the authorised share capital of the company.
Activities of a Maltese Holding Company
The absence a specific holding regime permits a Maltese holding company to hold any type of assets and carry all sorts of activities in conjunction with its holding activities.
The activities of Maltese holding company may include the following:
- Holding of shares and types of participations in resident and non-resident companies
- Carry out financing activities and treasury operations
- Holding and leasing of brands, trademarks, trade-names and other intangible assets
- Holding and leasing of real estate situated in and outside Malta
- Providing management and related services to related and non-related affiliates
- Any other trading activities
Minimum capital requirements
The minimum paid-up share capital to incorporate a Maltese company is EUR 240
A Maltese holding company may be funded entirely by equity or by a mixture of debt and equity. Provided that minimum capital requirements are met, no further restrictions are imposed on the mixture of equity and debt used to finance the holding company.
No substance requirements. No need to have Maltese directors or registered employees. Substance may nevertheless be required to gain access to a tax treaty or an EU Directive.
Income from a participating holding is subject to a 100% participation exemption.
A participation held by a Maltese company would constitute a participating holding if at least one of the following conditions is fulfilled:
- The Maltese company owns 10% of the equity shares in the non-resident company
- The investment in the non-resident company amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days
- The Maltese company has the option to acquire the remaining balance of the equity shares in the non-resident company
- The Maltese company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in the non- company
- The Maltese company is entitled to sit on the Board of the non-resident company
- The holding of shares in the non-resident company is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes
Participations in certain types of partnerships may also be deemed to be a participating holding.
Income from a participating holding will not be subject to a participation exemption unless the participation is held in a body corporate which satisfies at least one of the following conditions:
- It is resident or incorporated in a country or territory which forms part of the European Union;
- It is subject to any foreign tax of at least fifteen per cent (15%);
- It does not have more than fifty per cent (50%) of its income derived from passive interest or royalties;
Where none of the conditions set out above are satisfied then both of the following two conditions must be satisfied:
(1) The equity holding by the company registered in Malta in the body of persons 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 body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment; and
(2) The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than five per cent (5%):
Dividends and capital gains from a participating holding
Instead of claiming a participation exemption, the holding company may opt to pay tax at the normal corporate income tax rate of 35%. When such profits are distributed, shareholders may claim a full-refund of the Malta tax paid on those profits.
Dividends and capital gains from a non participating holding
When the participation in the non-resident company does not constitute a participating holding, income is subject to tax at the normal corporate income tax rate of 35%. Tax leakage is significantly reduced in Malta since the payment of a dividend by the holding company entitles the shareholder to claim one of the following refunds of tax:
- 6/7ths of the Malta tax
- 2/3rds of the tax paid in Malta
No Thin capitalisation rules
Malta does not have thin capitalisation rules. A full deduction of the interest paid by a leverage holding company may be achieved.
No Withholding Tax on dividend, interest and royalty payments
Malta does not levy any withholding tax on outbound payments of dividends to a non-resident shareholder.
Provided that certain conditions are met, Malta does not levy any withholding tax on payments of interest and royalties to persons not resident in Malta.
Access to EU Directives
Since Maltas accession to the European Union, Maltese companies has gained access to the EU Directives:
Parent-Subsidiary Directive (90/435/EEC) - Dividends paid to a Maltese company by an EU subsidiary are not subject to a withholding tax.
Interest and Royalties Directive (2003/49/EC) Interest and royalties paid to Maltese company by an EU associated company are not subject to withholding tax.
Mergers Directive (90/434/EEC) The Directive facilitates mergers between companies established in EU countries.
Access to Maltas Treaty Network
Withholding tax on dividends distributed paid to a Maltese holding company may be reduced or completely restricted by one of Maltas double tax treaties.
Maltas double tax conventions are based on the OCED Model which enjoy favourable or nil withholding tax rates on dividends received from majority holdings. Malta currently has 45 double tax treaties both with EU and Non-EU countries.
Domestic Mechanisms to Relieve Double Taxation
In the absence of a tax treaty, tax levied abroad may be relieved under domestic measures granting relief from double taxation:
In addition to a credit for the withholding tax levied abroad, the unilateral relief grants a credit for any underlying tax suffered abroad.
Flat Rate Foreign Tax Credit (FRFTC)
A company claiming FRFTC may claim a tax credit of 25% assumed to be levied abroad irrespective of whether tax has been levied abroad. FRFTC is calculated on the net income received from abroad before any allowable deductions. Certain conditions must be fulfilled to claim a FRFTC. This type of relief is only available when the other types of relief cannot be claimed.
No Capital Gains on the transfer of shares in a Maltese company
Provided that certain conditions are met, no tax is levied on the capital gains derived on the transfer of shares in a Maltese company.
No stamp duty
Under certain conditions, no stamp duty is levied upon the transfer of shares in a Maltese company.
Advance Revenue Ruling
An advance revenue ruling may be obtained from the Commissioner of Inland Revenue in Malta to confirm whether the participation qualifies as a participating holding. In addition, an advance revenue ruling may be obtained on the following:
- The tax treatment of any transaction which involves international business
- The tax treatment of any transaction which concerns any financial instrument
- Whether a particular transaction falls within the scope of the anti-avoidance provisions of the Income Tax Act
Advanced revenue rulings are issued by not later than 30 days from application and are binding for 5 years. Rulings may be renewed for another period of 5 years at the option of the applicant and remain valid for 2 years from the time of any relevant changes in the Income Tax Act
Maltese companies are obliged to file audited financial statement on an annual basis prepared in accordance with International Financial Reporting Standards.
Maltese Intermediate Holding Company
A Maltese holding company is allowed to denominate its share capital in any currency other than Euro. The statutory accounts will be prepared in the currency in which the share capital is denominated. Unrealised currency exchange differences are not subject to tax in Malta.
Where the functional currency of the parent is different than that of the subsidiary, the interposition of a Malta holding company shelters from tax any difference on exchange which may arise between the currency of the parent and the currency of its subsidiary.
Leveraged Maltese Holding Company
A Maltese holding company can be financed by a mixture of debt and equity. Provided that certain conditions are met no further restrictions are imposed on the level of debt which may be used to finance the company.
Under certain circumstances interest on the debt used to finance the company may be deducted in full. A full deduction may also be permitted if the holding company carries on other activities in addition to the holding of shares and/or participations.
The use of a leveraged holding company allows dividend income to be re-characterised into interest. Such strategy may be used when the investor needs interest and not dividends to arise in a particular jurisdiction.
A tax efficient entry into the EU
Maltas access to the EU directives, the participation exemption regime, the fact that Malta does not levy any withholding tax on outbound income distributions and various other fiscal measures makes Malta an ideal location for non-EU investors to access the EU.
Tax efficient repatriation
There are various non- tax considerations than an investor has to consider when setting up a vehicle in a particular location. In addition to the fiscal benefits, Malta has many other interesting attributes which complements its favourable fiscal environment
- EU member
- Euro Currency
- Political and Legal Stability
- High quality workforce fluent particularly in English and Italian
- Strong banking system
- Convenient European Time Zone
- Professional services & environment
- Accessibility/ flexibility of Regulator
- Favourable weather conditions
- Advanced in telecommunications
- Low maintenance costs
- Fiscal benefits
- Structuring advice and optimisation to an existing structure
- Advance Revenue Ruling application
- Advice on the participation exemption regime
- Feasibility studies
- Due diligence
- Company incorporation
- Registered Office
- Tax compliance matters
- Preparation of statutory accounts and office back-up duties
- Fiduciary Services
- Secretarial and administrative support
For more information, kindly contact: