MALTA Trends and Developments Contributed by: Josef Cachia Fenech Gonzi and Cherise Abela Grech, GTG Legal
tion relief has been claimed. There are various kinds of double taxation relief that can be obtained, and if any one of them is applied, this refund shall be applicable on such profits. • 6/7 refund: this tax refund is available on taxes on profits arising from profits allocated to the Malta Taxed Account and the Foreign Income Account. This would include the vast majority of profits. In most cases, a foreign-owned entity would be able to claim the maximum tax refund of 6/7ths, effectively reducing the tax payable by the com - pany on its distributable profits to 5%. It is criti - cal to note that the tax refund is granted to the direct shareholder of the company for whom the refund is applied; hence, it is not the company claiming the refund that would receive the refund payment, but its direct shareholder. In addition, Malta applies the full imputation system whereby the law prevents double taxation of the same income in the hands of the company and again in the hands of the shareholders. Hence, after the applicable tax has been levied on the trad - ing company, no further tax is payable on the dividends received by the shareholders. Recently, the legislator also introduced laws that allowed group entities qualifying under the rules to register as a single fiscal unit, which allows for tax consolidation between group entities. The practical effect of this law allows groups that register under the law to simply pay the final effective tax rate applicable, rather than apply for the tax refund. This provides a very significant cash flow boost for groups that qualify under the scheme, as the tax refund specified previ - ously may take several months to be paid to the shareholders. In addition to the tax refund system, Malta allows for the Participation Exemption, which originates
from the Parent Subsidiary Directive. This Direc - tive applies a tax exemption between participat - ing holdings and their participating subsidiaries in EU member states. When the applicable crite - ria are satisfied for the exemption to apply, a full tax exemption applies on all taxes between the participating holding and its subsidiary. The corporate tax system in Malta is critical to the VC sector in Malta. Most VC investors do not invest through a fund but invest directly in the company, either personally or through their own corporate group, to benefit directly from the corporate tax system. Possibilities for the Future In light of the above, Malta’s flexible regula - tory and fiscal regimes combine EU oversight with attractive fiscal incentives. The framework allows investors to benefit from these regimes, with start-ups benefitting from sound govern - ance and investor trust. Trust in solid policies and legal protections (in the context of shareholder rights and contract enforcement) is crucial, especially for VC. Inves - tor rights have so far been protected by Malta’s legal system, which is based on EU law. How - ever, any political unrest or changes in policy could be dangerous. Furthermore, Malta’s tax advantage could be undermined by impending international tax changes (such the OECD global minimum tax), which could make it less appeal - ing to holding firms or funds. Malta must carefully manage these adjustments to maintain its competitive advantage without sacrificing compliance. The lack of later-stage funding is a problem from the standpoint of entrepreneurs. Angel inves - tors and government matching programmes
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