1. Binding tax ruling issued by the Spanish Tax Office

The Spanish General Directorate of taxes has recently issued a binding tax ruling regarding the tax treatment of tax refunds received by corporate shareholders of Maltese subsidiaries under the tax refund scheme applicable in Malta.

  1. Tax treatment of dividends and shared profits in Maltese entities

Under Malta’s tax system, corporate shareholders of Maltese subsidiaries have the right to obtain a refund of Maltese corporate income tax paid (35 percent) in certain circumstances:

  • The refund arises from a dividend payment.
  • The dividend must come from profits that have been subject to tax (that have not benefited from exemption or deduction).
  • The refund is proportionate to the amount of taxed profits from which the dividend is paid, within the limit of 6/7 of the corporate income tax paid.
  • The refund must not exceed the corporate income tax paid.
  • The refund is due only to partners registered in the Maltese Commercial Registry for this purpose and in proportion to their stake.

Therefore, the Maltese tax accounting system requires resident companies to keep, and allocate distributable profits to, alternative tax accounts according to their origin and tax treatment. This system allows easy identification of dividend payouts and taxable income in Malta.

  1. The Spanish participation exemption regime

In a nutshell, to qualify under the Spanish participation exemption regime, certain requirements have to be met: (i) The participation test: a direct or indirect stake of at least 5 percent in the corporate capital or shareholders equity of the entity, held continuously for one year (this requirement will also be met if the acquisition price of the direct or indirect stake exceeds EUR20 million) and (ii) The tax test: a minimum nominal tax of 10 percent on the entity is required. This minimum level of taxation is deemed to be met if the foreign subsidiary is resident in a tax treaty jurisdiction.

As a result of its binding ruling, the Spanish tax authority will treat refunds of this type as dividends to which the Spanish participation exemption should apply (provided that the above-mentioned requirements are met and that the refund was directly linked to the dividend distribution).

Therefore this tax ruling opens the door to avoid using Maltese double-tiered structures (and thus reducing the associated costs) and to an extent clarifies the tax treatment applicable to Spanish investors having business interests in Malta.