Determining a Transfer of Controlling Interest

Transfer of Shares: Determining a transfer of Controlling Interest

The transfer of shares becomes particularly significant when it involves a controlling interest, requiring careful consideration of valuation and tax compliance. Under Maltese tax law, specific tests determine whether such a transfer occurs, and the market value of the shares is computed in these cases. This article provides an overview of the rules for controlling interest transfers, along with examples and their implications.

What Constitutes a Transfer of  Controlling Interest?

For tax purposes, two critical tests—Test 1 and Test 2—determine whether a transfer qualifies as controlling interest.

Test 1: Qualifying Companies

Shares in the following types of companies qualify for controlling interest considerations:

1. Maltese Resident Companies
   • Companies resident in Malta as per Article 2 of the Income Tax Act (ITA); OR
2. Non-Resident Companies with Specific Ownership
   • A non-resident company partly (more than one share) or wholly owned by Maltese residents, where assets consist principally of immovable property in Malta or abroad.; OR
   • A non-resident company wholly owned by non-residents, where assets consist principally of immovable property in Malta.
3. Companies Under Degrouping Provisions
   • Companies referred to in Article 5(9A)(a) of the ITA.

Shares providing a fixed rate of return are excluded from these provisions.

Test 2: Control Conditions

A transfer of controlling interest occurs if, during the 18 months preceding the transfer, the shares held by the transferor meet any of the following criteria:

1. Their aggregate nominal value represents at least 25% of the nominal value of the company’s issued share capital.; OR
2. Their voting rights represent at least 25% of the voting rights in the company.; OR
3. The shares provide the holder the right to:
   • Appoint, nominate, withhold, or veto the appointment of a director of the company.; OR
4. The shares entitle the holder to at least 25% of the profits available for distribution to ordinary shareholders.

Even if a shareholder holding 25% or more of the company transfers just one share, it is deemed a transfer of controlling interest.

Market Value Computation of transfers of Controlling Interest

When a transfer is deemed to be a transfer of  controlling interest, the transfer value of the shares is the higher of:

• The actual consideration paid; or
• The market value of the shares.

Market value computation is only required if both Test 1 and Test 2 are satisfied otherwise the transfer value of the shares shall be the consideration.

Special Scenarios in Controlling Interest Transfers

1. Global Transfers by Related Parties

• Multiple transfers of shares in the same company made by related persons within an 18-month period are aggregated and treated as a single transaction (a “Global Transfer”).
• The controlling interest test is applied to the aggregated transfer. If satisfied, the last transfer in the series is deemed a controlling interest transfer.

Related Parties Definition

• Individuals: Includes spouses, descendants, siblings, and companies controlled by the individual.
• Companies: Includes group companies or companies controlled by the same persons.

Example

John and Dennis are brothers that own 15% and 15% respectively of the 1,000 issued share capital of Malta Limited. On 1 February 2024, John transferred 10% of the entire share capital for a consideration of €25,000. On 1 October 2024 Dennis transferred all his shares for a consideration of €30,000. The cost of acquisition of each share was €20 and the current market value of the shares is €300,000.

In this scenario, both brothers disposed of a portion of their shareholding in the same company within an 18-month period. While neither brother individually held a controlling interest in the company, their combined shareholding totaled 30% before the transfers. As a result, the transfers executed by John and Dennis are aggregated and treated as a single global transfer, making the relevant provisions applicable

Computation of Global Transfer Value

The market value of the shares transferred in the last transfer is calculated as:
Global Market Value less the transfer value (market value or consideration) of the previous relevant transactions.

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_{The sole practitioner at Equitas Advisory is a member of theMalta Institute of Accountants and the Association of Chartered Certified Accountants and is authorised to practice the profession of Accountancy in Malta in line with the Accountancy Profession Act. Cap.281. by the Malta Accountancy Board – Warrant number 121176.}