Maltese companies have been used as holding companies for a number of years providing a nil effective tax rate for dividends received from qualifying holdings and gains derived from the disposal of such holdings. The law provides this exception to the rule due to companies that have a close relationship within the same group of companies and as recognition to one’s right to establish freely. Furthermore, the Parent Subsidiary Directive requires Member States to either exempt dividend income received by parent companies from qualifying subsidiary companies or alternatively to provide a credit for the underlying tax paid.

• The law labels qualifying holdings as participating holding and the Malta Company must meet the following conditions:

• Holds more than 10% of the equity shares of a foreign company; or

• Holds at least 1 equity share in said foreign company and has an option over the balance; or

• Holds at least 1 equity share in said foreign company and has a right of first refusal over the balance; or

• Holds at least 1 equity share in said foreign company and has the power to appoint a director; or

• Has an equity shareholding in said foreign company of at least €1.164m which has been held for an uninterrupted period of at least 183 days; or

• Holds equity shares in said foreign company in furtherance of its business provided that it is not held as trading stock.

In the event that a Maltese company is in receipt of income or gains from a participating holding, such income would be subject to tax at 35% and the shareholders of the company have the possibility of applying for a refund of the full amount of the tax paid thereon by the Company.

Following amendments to the Maltese corporate tax regime in 2007, Maltese companies may also now benefit from a participation exemption regime. The participation exemption regime renders qualifying income free from tax in the hands of the company. Furthermore non-resident shareholders will not be subject to any further tax or withholding taxes thereon. The participation exemption may be utilized at the option of the company however the holding is subject to further tests. To qualify for this participation exemption the foreign company must:

• be resident or incorporated in an EU country or territory; OR

• be subject to any foreign tax of at least 15%; OR

• not have more than 50% of its income derived from passive interest or royalties.

Where none of the above three conditions is not satisfied then both of the following two conditions must be satisfied for the income to be eligible for the participation exemption:

• the foreign holding is not a portfolio investment (for this purpose the holding of shares in a foreign entity which derives more than 50% of its income from portfolio investments shall be deemed to be a portfolio investment); AND

• the foreign entity or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.