Malta has one of the EU’s most comprehensive participation exemption regimes (a term generically used to refer to exemption from tax on dividends received from a subsidiary and on any capital gains earned on the sale of shareholdings), offering tax exemptions in Malta for dividends and capital gains related to a Participating Holding (PH).
A Maltese holding company (MaltaHoldCo) has a Participating Holding when it has a shareholding in the share capital of a company whose capital is represented by registered shares or equity holdings, does not own real estate in Malta, and meets at least one of the following conditions:
- The shareholding has a 5% holding and confers an entitlement to, at least, 5% of any two of the following:
- Right to vote;
- Profits available for distribution;
- Assets available for distribution on liquidation;
- The shareholding has a value of, at least, € 1,164 M on purchase date and has been held for a continuous period of, at least, 183 days;
- Malta HoldCo detains an option to buy the entirety of the outstanding shares of the subsidiary;
- Malta HoldCo has powers to appoint one member of the board of directors of the subsidiary;
- Malta HoldCo has a right of first refusal in the case of sale, redemption or cancellation of the outstanding foreign company's shares;
- Malta HoldCo holds a shareholding for the development of its own business and not only as stock for resale purposes.
Holdings in European Economic Interest Groupings (EEIG), in some partnerships and in some collective investment schemes may also qualify as Participating Holdings provided the entity in question has elected to be taxed as a company and meets either of the above mentioned conditions.
Condition for Dividend Tax Exemption in Malta
Only in the case of dividends does the non-resident company have to also meet at least one of the following anti-avoidance conditions:
- To be resident or incorporated in the EU;
- To be subject to, at least, a 15% foreign tax rate;
- More than 50% of its income does not result from passive interest or royalties.
If none of these 3 conditions has been met, the following 2 conditions must be met cumulatively:
- The holding by Malta HoldCo is not a portfolio investment and the non-resident participated company has not more than 50% of its income derived from portfolio investments;
- The non-resident participated company or the respective passive interest and royalties have been subject to, at least, 5% foreign tax.
Nevertheless, these exemptions will not apply to income derived from a participation qualified as a Participating Holding in an entity that is resident for tax purposes in a jurisdiction included in the European Union (EU) list of non-cooperative jurisdictions, for a minimum period of three months during the year immediately preceding the assessment year.
However, if satisfactory proof is presented to the Maltese tax authorities that such entity maintains enough workers, with significant functions in that jurisdiction, commensurate with the type and extent of the activity carried on in that jurisdiction and the income derived therefrom, the exemptions could still apply.
Where such 3 months are consecutive and fall in 2 subsequent consecutive base years, the exemption will not apply in respect of any such income derived in either of the two years.
The list of non-cooperative jurisdictions for tax purposes adopted by the European Council can be seen here.