MALTA Law and Practice Contributed by: Donald Vella and Kirsten Debono Huskinson, Camilleri Preziosi Advocates
ther set out in 2.7 Capital Gains and 3.4 Taxation of Individuals on Shares in Closely Held Corporations . In addition to the participation exemption (see 2.7 Capital Gains ), the ITA entitles companies registered in Malta to claim an exemption in respect of income that is attributable to a permanent establishment situ - ated outside Malta or gains derived from the trans - fer of such a permanent establishment. The income attributable to the permanent establishment is calcu - lated as though the permanent establishment were an independent enterprise operating in similar conditions and at arm’s length. This exemption applies regardless of whether such a permanent establishment belongs exclusively or in part to the Maltese company. 6.2 Non-Deductible Local Expenses Foreign income is, in principle, taxable at the level of local corporations. Therefore, no limitations on the deductibility of expenses are currently being contem - plated. 6.3 Dividends From Foreign Subsidiaries The specific tax treatment of dividends sourced from foreign subsidiaries depends on whether the dividends fall within the scope of the participation exemption. If the participation exemption is applicable, such divi - dends would be exempt from corporate income tax. Additional conditions for the participation exemption are applicable in the case of dividends. The partici - pating holding must satisfy any one of the following • it is subject to foreign tax of a minimum of 15%; or • it does not derive more than 50% of its income from passive interest and royalties. Alternatively, it must satisfy both of the following two conditions: • the shares in a body of persons not resident in Malta must not be held as a portfolio investment; and • the body of persons not resident in Malta, or its passive interest or royalties, has been subject to tax at a rate not less than 5%. additional three anti-abuse conditions: • it is resident or incorporated in the EU;
Dividends that derive from an equity holding that does not qualify as a participating holding in relation to the participation exemption will be taxable in Malta, in the hands of the Maltese corporate shareholder, under the corporate income tax rate of 35%. Tax refunds may be claimed by the shareholder of the Maltese company in certain instances, as well as relief in respect of any double taxation, when these dividends have already been subject to a foreign tax or withholding tax in their country of origin. 6.4 Taxation of Intangibles Developed by Local Corporations In principle, any gains on the transfer of IP or profits from royalties derived from the licensing of IP would be subject to tax at the level of the local company. However, certain deductions may be applicable. It may be useful to note in this context that Maltese tax law allows as a deduction against royalty income any capital expenditure on the acquisition of IP or IP rights incurred by a company (not exceeding the fair market value of such IP or IP rights) when it is proved to the satisfaction of the Commissioner for Tax and Customs that such assets are used or employed in the production of the income of such company. 6.5 Controlled Foreign Corporation-Type Rules A number of tax-related anti-abuse measures based on ATAD have been introduced into Maltese legisla - tion, including a controlled foreign corporation (CFC) rule that includes in the tax base of a Malta-based company diverse types of income not distributed by a foreign-based subsidiary or permanent establish - ment of the company, bringing these profits to tax in Malta, to the extent that said income derives from non-genuine arrangements put in place for the essen - tial purpose of obtaining a tax advantage. 6.6 The Substance of Non-Local Affiliates No specific regulations or guidance in Maltese legisla - tion apply to the substance of non-local affiliates at this time. 6.7 The Sale of Shares in Non-Local Affiliates Depending on the circumstances, Maltese companies can apply the participation exemption in respect of
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