Financing companies efficiently
Every operation needs financing. Financing may be raised in the same country of operation or in a country other than that in which the operation is located. The latter situation may arise in many cases, particularly where the country of operation has limited investors or limited access to efficient capital markets is restricted or the raising of finance is relatively expensive. Regulatory measures and the local banking system might be weak, thus the investor is forced to raise finance in another country. Investors may also be located in country other than the operating country thus using their own funds implies that their funds have to be transferred.
Financing companies are in fact a strong tool for international tax planning. They ensure funds are transferred in the most efficient manner and that income from financing and treasury operations arise in a jurisdiction characterised with a stable and tax efficient system. Companies forming part of an international group may enter into intra-group financing agreement so as to ensure that the benefits of a favourable tax system are enjoyed by the whole group.
Why considering setting up a financing company?
The reasons for setting up a financing company may vary significantly as with the location of such type of company. In general, setting up a financing company at the right location should achieve one or more of the following objectives:
Pooling of cash and centralisation of financing activities
Centralisation of funding management
Pulling out operating profits by way of interest deductions
Locating financing income in a tax efficient jurisdiction
Tax efficient repatriation of funds to the beneficial owners
Maltese IP Companies
Malta has always been a favourite location for setting up a tax-efficient financing vehicle. Prior to 1 January 2007, a Maltese financing company could be set-up as an International Trading Company. An international trading company was a normal company incorporated under the Laws of Malta which had its objects expressly limited to trading activities with persons outside Malta. International Trading Companies were effectively taxed at the rate of 4.17% and could be used to provide all type of financing activities including intra-group and back to back financing.
Post January 2007
No companies incorporated on or after 1 January 2007 may obtain the status of an International Trading Company. Various legislative changes to the Income Tax Act and Income Tax Management Act were brought into effect on the 1 January 2007 with the objective of phasing out the ITC regime by 31 December 2010.
Despite that the ITC tax refund mechanism has been abolished, which enabled to such types of companies to achieve the effective tax rate of 4.17%, a new tax refund system has been implemented to enable Maltese financing companies to achieve similar levels of tax efficiency.
The new tax refund system characterised by more flexibility and more legal certainty has introduced three types of refunds, the choice of which depends on the type of financing income received and whether the company makes a claim for double tax relief. Under the new tax refund system the following refunds may be claimed:
- 6/7ths of the Malta tax
- 5/7ths of the Malta tax
- 2/3rds of the tax payable in Malta
- Full refund
Conversion of ITCs
Maltese company incorporated prior to 1 January 2007 which have obtained the an ITC status may convert to the new regime and access the benefits granted under the new regime.
Maltese Tax Regime
Since a financing company is incorporated as a normal limited liability company, no restrictions are imposed on the types of activities which may be carried out by such company. This implies that with respect to financing, a Maltese company may carry out any financing activities including but not limited to:
- Intra-group licensing
- Back-to-back sub-licensing
In addition to financing, a Maltese may carry out any related and non-related financing activities such as :
- Holding of participations in resident and non-resident companies (Holding activities)
- Holding and leasing of intangible assets
- Holding and leasing of immovable property
- Holding and leasing of tangible assets
- Other trading activities
In contrast with the International Trading Company regime and a Maltese financing company incorporated on or after 1 January 2007 does not need to obtain any special status. This eliminates the need to obtain an advance revenue ruling.
Capitalisation and funding
Cash may be injected down into the Maltese company either by way of equity or by a mixture of equity and debt. There are no limitations on the amount of debt which can be injected relatively to the amount of capital, thus any gearing level may be achieved to accommodate the needs of the investor.
Relevant Tax aspects of a Maltese financing company
No Thin Capitalisation Rules
Malta does not have any thin capitalisation rules. With proper structuring, a deduction for the interest paid may be achieved in full. making Maltese financing company a tax efficient back-to-back financing vehicle.
Flexible Transfer Pricing Rules
Presently, Malta does not have any restrictive transfer pricing rules. This ensures flexibility with regards to the rate of interest charged on intra-group financing. The absence of restrictive transfer pricing legislation potentially creates an opportunity for a substantially low interest rate margin accruing to a Maltese company on back-to back financing.
No Withholding tax on outbound interest payments
Subject to certain conditions being fulfilled, Malta does not levy any withholding tax on payment of interest to non-residents.
Interest income derived by a Maltese company is subject to tax. Expenses such as the interest paid to the lender of the Maltese company may be deducted in Malta. Profits derived by a Maltese company are subject to corporation tax which is currently set at 35%.
When a Maltese company distributes dividends, its shareholders may claim refunds of tax provided that the dividend represents income paid out of the Maltese Taxed Account and the Foreign Income Account. One of the following refunds may be claimed:
- 6/7ths of the Maltese ACIT
- 5/7ths of the Maltese ACIT
- 2/3rds of the Maltese ACIT
The type of refund which may be claimed by the shareholder depends on:
- The classification of the interest or royalties received by the company; and
- Whether double tax relief has been claimed by the Maltese company. Refunds may be claimed by all shareholders.
Malta does not levy withholding tax on dividends paid to non-resident.
Relief from double taxation
Tax paid outside Malta on the interest and other income received by the Maltese company may be credited against the corporation tax payable in Malta. The three types of relief which may be claimed by the Maltese company ensures that no juridical double taxation arises in Malta on any foreign sourced income received by the Maltese company irrespective of where the income has been sourced.
Treaty Relief A treaty based relief which may be claimed when the Maltese company is entitled to claim
Unilateral Relief A domestic type of relief which may be claimed when a tax treaty is not in force. A company which derives only foreign sourced income may credit all the tax paid abroad provided that the tax suffered abroad is less or equal to the corporate tax payable in Malta. A credit for the underlying (corporation) tax paid on foreign sourced dividends may be claimed under this type of relief.
Flat Rate Foreign Tax Credit Under this type of relief the Maltese company may claim a credit of 25% calculated on the net income received from abroad before any allowable deductions. This type of relief is only available when the other types of relief cannot be claimed.
No capital gains on the disposal of the shares in the Maltese company
The disposal of shares in a Maltese company by a non-resident shareholder/s is not subject to tax in Malta provided that certain conditions are met. This feature of the Maltese tax system may facilitate the transfer of the financing company itself to a new shareholder in cross-border restructuring.
Access to EU Directives
Since Maltas accession to the European Union in 2004, Maltese companies have gained access to the EU Directives. In particular, the Interest and Royalties Directive (Directive 2003/49/EC), restricts other EU Member States to levy withholding tax on interest payments made paid to a Maltese company by an associated EU resident company.
Withholding tax on interest payments made to a Maltese company may be mitigated or restricted by one of Maltas double tax agreements. Currently, Malta has 45 double tax treaties in force based on the OECD Model Convention. Most of the treaties allow for a reduced rate of withholding tax on interest payments made to a Maltese person.
Maltese companies granting finance to companies within the same group of companies are not required to obtain a license from the Malta Financial Services Authority.
Structuring advice and optimisation to an existing structure
Advance Revenue Ruling application
Advice on the participation exemption regime
Tax compliance matters
Preparation of statutory accounts and office back-up duties
Secretarial and administrative support
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