Setting Up A Company In Malta
Procedure
The procedure to incorporate a structure in Malta is relatively straightforward and quick process. The Registrar would typically process the registration within 2 to 3 working days.
Whereas the most preferred form of company is the Private Limited Liability Company (Ltd), the Companies Act caters for a wide range of entities including:
- Public Limited Liability Company (plc)
- Partnership en nom collectif (general partnership)
- Partnership en commandite (limited partnership)
- Association en participation
- Societas Europaea (European company)
- European Economic Interest Group (EEIG)
A company may be set up by the submission of its Memorandum of Association with the Malta Business Registry, which must include certain key information such as company name, objects, capital, subscribers, directors, and company secretary. In practice, tailored Articles of association, which regulates the internal management of the company, is also submitted together with the Memorandum of Association to the Registrar.
Capital requirements
The minimum authorised share capital of a public company is €46,587.47. In the case of a private company, the minimum authorised share capital is €1,164.69.
Shareholders
Private Limited companies must have at least 2 shareholders. However, it is worth noting that single-member companies may be set up. In such case, the Memorandum and Articles of Association of the Company must:
- determine the principal activity of the company
- limit the number of persons holding debentures of the company to not more than 50
- prohibit any body corporate from being a director, and
- prohibit the company and each of the directors, from being a party to an arrangement whereby the policy of the company is capable of being determined by persons other than the directors, members or debentures holders thereof.
Registration fees
The registration fee will depend on the authorised share capital of the company and on whether the registration is made in paper or electronic format. The fees start at €100 with the maximum set at €2,250 if the authorised share capital exceeds €2,500,000.
Companies are also subject to an annual fee payable to the Malta Business Registry, based on the share capital of the company, ranging from €100 to €1,400.
Re-domiciliation
Re-domiciliation of non-resident companies to Malta are permitted under Maltese law. Shareholders of a non-resident company may re-domicile their company to Malta rather than undertaking a winding up/liquidation procedure before setting up a new structure in Malta. The company would keep its assets, rights, obligations and liabilities of its country of origin.
Once the company is re-domiciled to Malta it will be considered as resident and domiciled in Malta and hence subject to tax on its worldwide oncome at the standard 35% rate. Furthermore, its shareholders may benefit from the tax refund system
Upon re-domiciliation the company may opt for the step-up clause whereby the company may revalue the assets from historic costs to fair market value at the time of re-domiciliation. Such revaluation will apply for determining gains on a subsequent disposal of assets with the result that any previously accrued profits would be exempt from tax in Malta.
Directorship and Company Secretary
Every public company must have at least two directors whereas every private company must have at least 1 director. It is also a legal requirement for all companies to have a company secretary.
A Maltese company is managed by the directors who have the authority to execute all powers of the company, having broad discretionary powers.
No company may have:
- As company secretary its sole director unless the company is a private exempt company.
- As sole director of the company a body corporate, the sole director of which is company secretary to the company.
All companies are required to hold an annual general meeting. Every company must hold an Annual General Meeting. Every general meeting other than the annual general meeting is called an extraordinary general meeting
Annual returns, Accounts and audits
Companies are also required to file a copy of the annual accounts.
Companies returns, and annual accounts can also be filed online.
The format of the accounts to be submitted depends on the size of the company. Small companies may draw up abridged balance sheets and abridged layouts of profit and loss accounts.
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Malta Tax System
Malta has a voluminous tax treaty network and has signed and ratified over 75 double taxation treaties which override any provisions to the contrary under Maltese domestic legislation.
Malta does not apply any withholding tax on dividends, interest or royalties by Maltese companies to non-Maltese recipients.
A company incorporated in Malta is deemed to be both tax resident and domiciled in Malta and thus is taxed in Malta at a 35% rate on a basis. Foreign companies which are incorporated outside Malta but are managed and controlled from Malta and/or which carry out business activities in Malta are subject to tax in Malta on income and capital gains that arise in Malta and foreign income which is remitted to Malta.
As a general rule, expenses are deductible where they are incurred wholly and exclusively in the production of the company’s income, provided that these expenses are not expressly excluded as deductible by the income tax act.
In addition, Malta companies and permanent establishments of non-Maltese companies may deduct a ‘notional interest on risk capital’ as part of their expenses, subject to the approval of their shareholders.
Full imputation system
Malta applies a full imputation system whereby a shareholder in a Maltese company may claim for a full or partial refund of the tax paid by the Maltese company, depending on the type and source of income received.
The shareholder of the Malta company would be eligible to receive a tax refund as follows:
- 100% of the Malta tax paid where income or gains are derived from an investment which qualifies as a Participating Holding (PH) and in the case of dividend income, where such PH falls within the safe harbours or satisfies the anti-abuse provisions as detailed below.
- 5/7ths of the Malta tax paid, where the income received by the company is passive interest or royalties or income from a PH which does not fall within the safe harbours or satisfy the anti-abuse provisions.
- 2/3rds of the tax payable in Malta, where income has benefited from double taxation relief.
- 6/7ths of the Malta tax in all other cases.
Participation exemption
Income or gains deriving from participating holdings may be exempt from tax under the participation exemption regime.
A participating holding occurs when a company resident in Malta holds shares in another entity and holds directly at least 5% of the equity shares in a company, body of persons or collective investment scheme, which holding confers an entitlement to at least 5% to any two of the following rights:
- Right to vote;
- Right to profits available for distribution;
- Right to assets available for distribution on a winding up; or
Is an equity shareholder and is entitled to purchase the balance of the equity shares or has the right of first refusal to purchase such shares or is entitled to sit as, or appoint, a director on the Board; or
Is an equity shareholder which holds an investment of a minimum of €1.164 million (or the equivalent sum in another currency) and such investment is held for an uninterrupted period of at least 183 days; or
Holds the shares or units for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
With respect to dividends, the participation exemption is applicable if the entity in which the participating holding is held:
- is resident or incorporated in a country or territory which forms part of the European Union; or
- is subject to tax at a rate of at least 15%; or
- has 50% or less of its income derived from passive interest or royalties; or
- is not a portfolio investment and it has been subject to tax at a rate of at least 5%.
However, this additional anti-abuse4 requirements do not apply in the case of gains derived from the transfer of a participating holding. Such gains are therefore exempt with no further prerequisites.
The profits or gains to which the exemption applies are calculated on an arm’s length basis, i.e. as if the permanent establishment is an independent enterprise operating in similar conditions.
Any gains or profits derived by non-residents on a disposal of shares or securities in a company resident in Malta are exempt from tax in Malta, provided that the company does not have, directly or indirectly, any rights over immovable property situated in Malta, and the beneficial owner of the gain or profit is not resident in Malta and not owned and controlled by, directly or indirectly, nor acts on behalf of an individual/s ordinarily resident and domiciled in Malta
Furthermore, the exemption also extends to income attributable to a permanent establishment (“PE”) (including a branch) of a Maltese company where the PE is situated outside Malta, and gains derived from the transfer of such permanent establishment. The exemption applies irrespective of whether such PE belongs exclusively or partly to the Maltese company and also applies where the PE is operated through an entity or relationship, other than a company, in which the Maltese company has an interest.
Tax consolidation
Malta recently introduced Income Tax Consolidation Rules for companies. These rules aim at simplifying the income tax calculation and allowing for consolidated tax reporting within a ‘fiscal unit’.
Starting from year of assessment 2020 onwards, eligible companies may opt to form a fiscal unit. Such fiscal unit will comprise a ‘principal taxpayer (i.e. a parent company) and its selected subsidiaries (including non-Maltese subsidiaries) if any two of the following criteria are met:
- the parent company holds at least 95% of the voting rights in the subsidiary;
- the parent company is beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary;
- the parent company would be beneficially entitled to at least 95% of any assets of the subsidiary available for distribution to its ordinary shareholders on winding up.
The option to be treated as principal taxpayers may be made by Malta resident companies, Malta branches of non-resident companies, Malta branches of non-resident companies that carry out activities in Malta and Malta trusts and foundations when they are treated as companies in terms of the Income Tax Act.
Any income or gains derived by members of the fiscal unit will be attributable to the principal taxpayer and will be taxable in the hands of the principal taxpayer at the rate applicable thereto.
Transactions occurring between members of the fiscal unit will not be taken into account in the calculation of the taxable income, expect for the transfers of immovable property situated in Malta and shares in property companies.
All expenses incurred by members of the fiscal unit (which are not ignored transactions) will be deemed to be incurred by the principal taxpayer and will only be deductible against the income attributable thereto.
Furthermore, any tax refund due to a shareholder of a member of a fiscal unit will be considered when determining the tax rate applicable to the fiscal unit.
In practice this means that when the fiscal unit is created, the principal taxpayer takes responsibility for duties and obligations of its subsidiaries. On the other hand, duties and obligations of these subsidiaries are suspended. Therefore, the principal taxpayer will be required to file a self-assessment and tax return for all entities within the fiscal unit.
The principal taxpayer is also responsible for the payment of tax, any additional tax and interest due by the fiscal unit, jointly and severally with its 100% owned members of the fiscal unit.
Moreover, the principal taxpayer is required to prepare each year audited consolidated balance sheet and audited consolidated profit and loss account covering members of all fiscal unit.
Anti-avoidance
Where the final tax payable by the principal taxpayer is lower than 95% of the aggregate of the tax that would have been payable by all members of the fiscal unit (should they not form the fiscal unit), then the difference between the tax otherwise payable and the actual tax paid will be considered as an advance made to the shareholders of the principal taxpayer.
That advance will be deemed to be an untaxed distribution of a dividend to the shareholders of the principal taxpayer and subject to tax accordingly.
Benefits of the regime
These rules create a cash flow advantage in comparison with the application of the tax refund system. When opting for the fiscal unit, the shareholders of a Malta company will be allowed to avail of the same effective tax rate without the requirement that the Malta subsidiaries pay tax at 35% rate and without waiting for the tax refund to be received. As a result, the cash that would otherwise be needed whilst waiting for the refund will be readily available for reinjection in the business or even distribution to the shareholders.
Another benefit of these rules is that the fiscal unit will be able to account for potential tax refunds and benefit from the attractive consolidated tax rate even if the members of the fiscal unit do not distribute any dividend.
Intellectual Property
Patent box
Malta introduced patent box deduction rules, which allow taxpayers actively involved in the development and exploitation of IP to opt for the application of special rules on calculating deductions (“Patent Box Deduction”).
Income and expenses which fall under the definition of ‘Qualifying IP’ will be eligible for the Patent Box Deduction. Such Qualifying IP include the following intangibles (provided that these are granted legal protection in at least one jurisdiction):
- patents
- non-patent IP protected by legislation
- orphan drugs legislation, utility model and software protected by copyright
- IP assets that are non-obvious, useful, novel and that have features similar to those of patents (available to small entities only, i.e. entities with group turnover of up to €50 million and gross IP revenue of up to €7.5 million).
It is important to note that marketing-related IP assets such as brands, trademarks, and tradenames do not fall under the Qualifying IP definition and hence may not benefit from the patent box deduction. Furthermore, companies which activity consists solely of holding and marketing IP without development will not benefit from the patent box deduction either.
Who is eligible?
The patent deduction rules are available to taxpayers that are involved in activities of exploitation of IP, provided that they meet the following criteria:
- they should be able to demonstrate that they carry out all important functions in relation to creation, development, improvement or protection of the qualifying IP themselves solely or in cooperation under the terms of a cost sharing agreement, either directly or via;
- a permanent establishment situated in a jurisdiction other than that of the taxpayer (only if the income of permanent establishment is subject to tax in the country of residence of the taxpayer); or
- other enterprises (and employees of other enterprises) provided that such functions are performed under the specific directions of the entity claiming the benefit.
- they are the legal owners of the qualifying IP or hold an exclusive licence in respect of such IP. If the IP is developed under a cost sharing agreement, the entity must own a share in the ownership of the qualifying IP or be the holder of an exclusive licence;
- they are specifically empowered to receive income from qualifying IP; and
- they have sufficient level of substance in the jurisdictions where activities relating to the qualifying IP are being carried out.
How do the patent box rules work?
Taxpayers are allowed to deduct their expenses related to qualifying IP in terms of more favourable conditions than the terms provided under the general rules.
The patent box deduction is calculate using the following formula:
95% x (Qualifying IP expenditure/Total IP expenditure) x Income/Gains from qualifying IP
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