MALTA INTERNATIONAL HOLDING COMPANIES
As in the
case of the ITC, the IHC is a normal company and therefore pays corporate
tax at 35% on its world-wide income, but shareholders can then benefit
from considerable tax benefits through a system of tax refunds.
Therefore provided the shareholders of the IHC are non-resident, then the
tax refunds are as follows:
(a)
The corporate tax paid by the IHC on dividends it receives from foreign
companies in which it holds shares and on the gains it makes from the
disposal of the shares held in the foreign companies, is refunded
completely to the non-resident shareholders and the
final tax rate is 0%. There are no withholding taxes or other taxes on the
dividends distributed to the non-resident shareholders and therefore the
0% tax rate is an absolute exemption from tax. Therefore any profits
which the foreign company makes, whatever their nature is (capital
gains, dividends, investment income, interest or similar) and which are
channelled back to the IHC by way of dividend, are taxed at a zero rate on
condition that the IHC holds a "participating holding" in the
foreign company. This means that:
-
the IHC holds 10%
or more of the shares of the foreign company; or
-
the IHC is
entitled at its option to purchase or has the first right of refusal on a
disposal of the balance of the equity shares of the foreign company; or
-
the IHC is
entitled to be represented on the Board of Directors of the foreign company; or
-
the value of the
shareholding exceeds Lm500,000 or equivalent in foreign currency; or
-
the shares are
held in the foreign company for the furtherance of the business of the IHC.
(b) if
the IHC does not hold a participating holding in the foreign
company, the non-resident shareholder still receives a refund of
66% of the
tax paid by the IHC in which case therefore the effective tax rate
is approximately. 11.67%. Once again there are no
withholding taxes or other taxes on the dividends distributed to the
non-resident shareholders and therefore the 11.67% tax rate is the maximum
tax which the shareholder will pay for non-participating holdings in
foreign companies. Moreover the use of the Flat Rate Foreign Tax
Credit allowed by the Maltese Income Tax Act can further reduce the tax to
a maximum liability of 6.25% depending on circumstances.
It is
important to remember that any income that the IHC makes which is
not a dividend distributed to it by a foreign company controlled by the
IHC, but is income made directly by the IHC from other sources (direct
investments by the IHC, bank interests payable directly to the IHC etc)
will be taxed at 11.67% (or 6.25%) because this would be income deriving from a
non-participating holding. In all cases therefore it is much more
convenient for tax purposes if all the investments are made by a
non-taxable foreign corporate structure (example Gibraltar company) controlled by the IHC and the foreign entity's profit is then
distributed by way of dividend to the IHC. This makes the IHC's
holding in the Gibraltar company a "participating holding" and
therefore the final tax rate is nil.
An IHC can also hold both "qualifying" and
"non-qualifying" participation in overseas companies and in this
case the tax rate will be a mixture of the two applicable rates: 0% for
the qualifying shareholding and 11.67% (or 6.26%) for the non-qualifying
shareholding. Naturally in this case, the effective rate of final
tax will depend on the proportion of qualifying and non-qualifying
shareholdings which the IHC holds.
Page last updated on
Copyright 2000: Griscti & Chetcuti, Advocates
Residence