Malta Participation Exemption

What is a participation exemption system?

Article 12(1)(u)(1) of the Income Tax Act (ITA) outlines the participation exemption, which allows income or gains derived by a company registered in Malta from a participating holding or from the transfer of such holding to be fully exempt from tax, provided specific conditions are met.

Criteria to qualify for a participation exemption.

To qualify for a participation exemption, the shares held by the Malta-registered company must meet the criteria for a participating holding. Specifically:

1.Equity Shares Requirement:– The shares must be equity shares, which means:

• • Holding a portion of the share capital in a non-property company; and

• • • Entitling the shareholder to at least two of the following rights:
      • Right to vote.
      • Right to dividends.
      • Right to assets available for distribution upon winding up of the company.

2. Additional Conditions for Equity Shares: The equity shares held must also satisfy one of the following:

These provisions extend to holdings in partnerships, European Economic Interest Groupings (EEIGs), foreign bodies similar to partnerships, and non-resident collective investment vehicles (CIVs), provided they meet the conditions.

Once a holding qualifies as a participating holding, the Malta company can claim the participation exemption on:

• Gains from the transfer of that participating holding.
• Dividends received from that participating holding.

For dividends, additional anti-abuse provisions apply:

1. The holding company is non-resident for Maltese tax purposes; and
2. It meets one of the following:
   • Resident in an EU country.
   • Subject to at least 15% foreign tax.
   • Derives no more than 50% of its income from passive interest or royalties.

If the above anti-abuse provisions conditions are not met, then both of the following criteria must be satisfied:

• The participating holding is not a portfolio investment.
• Passive interest or royalties are taxed at a minimum of 5%.

These anti-abuse provisions are not applicable to capital gains from the transfer of a participating holding.

Optional Nature of Participation Exemption

The participation exemption is optional. A company may choose to declare the income or gains and be taxed at 35%, and subsequently apply for a full refund or claim the exemption, which means the income or gains will not be declared and will be allocated to the Untaxed Account.

Benefits of Participation Exemption

1. No tax payment, thus eliminating the need for shareholders to wait for tax refunds, ensuring no cash flow impact.
2. Avoidance of issues related to non-deductible expenses for tax refund purposes.

Drawback

The profits may be subject to investment income provisions concerning Maltese resident shareholders.

Anti-abuse Provisions

Changes in beneficial owners or their entitlement to exempt profits after claiming the exemption will result in the taxation of relevant profits at 35%.

Income/Gains from Transfer of Participating Holding

• For Malta entities:
  • Non-resident UBO: Participation exemption applies if the ultimate beneficial owners are non-resident.
  • Maltese resident UBO: Exemption does not apply; income allocated to Maltese Taxed Account.
• For foreign entities:
  • Non-resident UBO: Participation exemption applies; income allocated to Final Taxed Account.
  • Maltese resident UBO: Participation exemption applies post-2019; income allocated to Untaxed Account.

Dividend Income from Participating Holding

• For Malta entities:
  • Subject to normal Maltese tax based on the tax accounts from which income is distributed.
• For foreign entities:
  • Exempt, but dividends allocated to Maltese residents will be taxed at 15% upon distribution.

Exemption for Permanent Establishments Outside Malta

The participation exemption also applies to income or gains from permanent establishments (including branches) situated outside Malta. This holds true regardless of whether the establishment belongs exclusively or partly to the Malta-registered company.

Anti-abuse Provisions

Transactions primarily aimed at reducing tax through participation exemption will result in taxation as if the provision did not apply. The exemption only applies if dividends are not deductible in the jurisdiction of origin, relevant for parent-subsidiary directives.