As international bodies move to restrict aggressive tax planning, companies that operate across different borders need to ensure that their operations and structure do not unintentionally fall foul of measures recently put in place.
Tax Residence as per the Income Tax Act in Malta
Malta’s Income Tax Act holds that a body of persons “resident in Malta” refers to “any body of persons the control and management of whose business are exercised in Malta, provided that a company incorporated in Malta on or after 1st July 1994 shall be resident in Malta and any other company incorporated in Malta shall be resident in Malta from 1st January 1995 where the management and control of the business of the company is exercised outside Malta”.
Tax Residence through Incorporation
One starting point is that a company is deemed resident by virtue of its incorporation in Malta. Quite simply, a company that is incorporated in Malta is deemed to be resident and domiciled in Malta and is therefore subject to tax on a worldwide basis.
Tax Residence by Management & Control in Malta
The next point is that a foreign body of persons (including a company) may be subject to Malta tax to the extent that the control and management of its business is effectively carried out in Malta.
Effectivity of Management & Control in Malta
The place of effective management is the location where crucial management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The claim that a company is effectively managed and controlled in Malta may be substantiated by ensuring that all board meetings and general meetings are held in Malta and that management decisions are taken in Malta (and not anywhere else). Moreover, the company’s records should be maintained in Malta in order to reflect the company’s effective management in Malta.
Further substance may be established by appointing directors resident in Malta. Businesses are expected to carry out key, value-added activities in Malta, so for instance although a software development company may outsource work to external providers, it should have staff on the ground locally who direct the work, or carry out key aspects of the work.
Employing staff will typically require physical office space, even with the current trend for remote working.
An overseas company with branch operations in Malta would need to be registered with the Malta Business Registry in terms of the Malta Companies Act, 1995. This is necessary to ensure the recognition and taxation of any branches in Malta.
Taxation of companies resident but not domiciled in Malta
Particular rules apply to a company that is resident in Malta by virtue of effectively exercising management and control in Malta, but is not domiciled (not incorporated) in Malta. Such a company is charged to tax in Malta only on:
• income arising in Malta, and
• income arising outside Malta, but received in Malta.
Capital gains arising outside Malta that are not remitted to Malta are not subject to tax in Malta. Non-resident shareholders of companies resident in Malta who receive a dividend out of Malta taxed profits, may qualify for refunds of tax, provided that the relevant conditions are satisfied.
Malta resident companies may also benefit from the application of the provisions of Malta’s network of some 70 double tax treaties.
In today’s world, a company will find it difficult to justify having a registered office in one country, while operating entirely in another. Similarly, a corporate group cannot shift profits by abusively recording revenue in a low tax jurisdiction, then moving the “tax-paid” funds to a higher tax country.
It is now more important than ever to seek professional advice to navigate tax rules. There is no simple formula to justify substance: each business is unique and has its own realities, budget, scale and projections. We are able to guide clients on their own circumstances whether carrying out a “health check” on an existing corporate structure, or advice prior to setting up a new venture in Malta.