The United States implements the Affordable Health Care Act, FACTA, and a 3.8% Medicare tax, while other jurisdictions tout their advantages for business, finance and investment. Clearly, the U.S. market is attractive in its own right which accounts for its take-it or leave-it attitude toward taxation incentives. Other jurisdictions, however, are not as fortunate and must develop attractive systems to encourage investment and the growth of its financial sector.
Smaller countries look to the financial sector as a means of increasing their GDP and raising the standard of living. One example is Malta, situated inside the European Union (“EU”) and well-positioned to host holding companies, patent boxes and international finance subsidiaries. Malta has sixty-one (61) income tax treaties and is a member of the EU and may avail itself of the parent-subsidiary directive which permits dividends to pass free of tax in certain cases.
Malta’s Participation Exemption has an anti-abuse test and three safe harbors. One is a foreign company is incorporated or resident in the EU. A second is if less than 50% of its income is from passive sources. Third, the foreign income is subject to tax at 15% rate or more. This test can be easily satisfied with proper planning.
Malta uses a management and control test so foreign entities as well as local companies may become resident. Malta has an imputation system of taxation which allows shareholders to claim tax credits and refunds for tax paid by the company with only 5% leakage. Passive income suffers leakage of about 10%, however, a 25% foreign tax credit and a 2/3 refund brings the rate to 6.25%. A Maltese company may pay to a foreign individual or corporation without further withholding. This is a stark contrast to the US and FACTA.
Malta is a civil law jurisdiction but has enacted trust legislation to go with its statute on foundations. Trust income is subject to tax at 35%; however, the beneficiary may be able to claim a refund. Trust income arising outside of Malta and non-resident beneficiaries permits the income to escape Maltese tax provided there is no local trustee.
Many jurisdictions, including Malta, have special programs to attract high net worth individuals, register yachts and lease aircraft.
Maltese foundations have a unique feature called segregated cells, with each cell being taxed independently. A foundation may also elect to be taxed as a trust. Foundations are treated as corporations for tax purposes.
Protected cell companies are creatures of Maltese law which permits the segregation of assets and liabilities in each cell. It offers a way of converting the character of income or delaying distributions up the chain. You may gain capital appreciation inside the wrapper of the cell.
If a company wants to leave Malta, there are no exit taxes. Consider Section 7874 on U.S. corporate inversions and one realizes Malta is different. There are no controlled foreign corporation (CFC) rules in contrast to Subpart f.
There are many jurisdictions seeking to accommodate business investment and the finance sector. One can find suitable base for most any project given the options available.