An entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax shall be treated as a controlled foreign company where the following conditions are met:
- in the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than fifty per cent (50%) of the voting rights, or owns directly or indirectly more than fifty per cent (50%) of capital or is entitled to receive more than fifty per cent (50%) of the profits of that entity; and
- the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment under the Income Tax Acts (as computed according to the Income Tax Acts) and the actual corporate tax paid on its profits by the entity or permanent establishment.
Where an entity or permanent establishment is treated as a controlled foreign company, there shall be included in the tax base the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.
An arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income. Provided that the said company is the taxpayer and the said significant people functions are carried out in Malta.
The CFC rule shall not apply in relation to an entity or permanent establishment:
- With accounting profits of no more than seven hundred and fifty thousand euro (€750,000), and non-trading income of no more than seventy-five thousand euro (€75,000);
- Of which the accounting profits amount to no more that 10% of its operating costs for the tax period;
The income to be included in the tax base of the taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company. The attribution of controlled foreign company income shall be calculated in accordance with the arm's length principle. The income to be included in the tax base shall be calculated in proportion to the taxpayer's participation in the entity.
Where the entity distributes profits to the taxpayer, and those distributed profits are included in the taxable income of the taxpayer, the amounts of income previously included in the tax base shall be deducted from the tax base when calculating the amount of tax due on the distributed profits, in order to ensure there is no double taxation.