The United Kingdom exited the European Union on January 31 2020, marking a significant historical turning point for itself and also for all EU state members. The decision has led to many uncertainties for UK companies, particularly in relation to their ‘free movement’ and operations in the EU.
Historically, Malta has always been a stepping stone into the European market for non-EU companies. Malta is promoted as a global fintech hub through its experience as a seat of various international asset management companies, collective investment schemes, financial institutions, (re)insurance undertakings, and recently also blockchain projects and innovative methods of financing.
As an EU member state, Malta offers passporting facilities to all other EU/European Economic Area (EEA) jurisdictions and the framework for re-domiciliation and cross border mergers. Furthermore, the Mediterranean island is becoming a cosmopolitan state having a multitude of internationally renowned highly qualified and highly experienced professionals.
Malta’s optimal tax solutions
Malta offers financial services companies a competitive corporate tax regime and other fiscal incentives.
The Malta Enterprise, the country's economic development agency, offers incentives to financial services companies, in the form of tax credits, if the company is considered an innovative enterprise.
In 2019, Malta introduced a Patent Box Regime, providing a basis on which the deductions laid down in the provisions of the Maltese Income Tax Act, may be claimed on qualifying income derived from qualifying intellectual property. Blockchain projects or fintech companies are the ideal candidates for this incentive.
Malta also offers a simplified method for tax calculations and reporting of group companies operating in the financial services industry both from an income tax and VAT perspective through the Consolidated Group Rules and VAT Grouping Rules respectively.
In addition to this, Malta offers a competitive tax regime to Malta tax resident companies. The regime operates a full imputation system of taxation and provides for tax refunds to shareholders out of the tax paid on distributed profits and upon certain conditions being satisfied. The most common refund is that of 6/7th, which effectively may reduce the tax paid to 5% from the standard corporate income tax rate of 35%.
The benefits also extend to employees of financial services companies. Financial services companies relocating to or setting up in Malta should be aware of the Highly Qualified Persons Rules. This is an attractive programme for highly qualified expatriates who hold certain management, technical and executive positions engaged by licensed or recognised operators in Malta in the financial services, remote gaming and aviation sectors.
Another incentive worth mentioning is the Seed Investment Scheme rules. The purpose of this scheme is to grant tax relief to natural persons resident in or operating in Malta investing in start-up businesses.
a) Consolidated Group Rules: A crucial convenient regime
The Consolidated Group (Income Tax) Rules allow financial services companies registered in Malta, which form part of a group to elect to be treated as one single taxpayer. The parent company, as the principal taxpayer opts to form a fiscal unit between itself and its subsidiary, resulting in the latter being treated as transparent.
Tax consolidation allows for a full integration of the tax position of its members.. This leads to most intragroup transactions not being taxable. Tax consolidation can be more beneficial than the group relief provisions. The use of a fiscal unit allows for a better cash flow, when compared to the use of the shareholder tax refunds. By using the fiscal unit the group may attain an identical effective tax rate in a more expeditious manner, as it would not have to pay the corporate income tax rate of 35% and wait for the issuance of the shareholder refund at the level of the shareholder. By virtue of these rules the tax due by the principal taxpayer is immediately decreased to the lower effective tax rate. Tax is payable by the principal taxpayer on behalf of all members of the group and only one tax return is needed to be filed.
b) VAT Grouping Rules: A valuable initiative
The VAT Grouping Rules essentially state that two or more legal persons (including branches) established in Malta may apply to the Commissioner to be registered as a single taxable person for the purposes of the VAT Act, subject to the satisfaction of necessary conditions. This is beneficial because transactions taking place between persons who form part of a VAT group fall outside the scope of Maltese VAT legislation. Another advantage of VAT Grouping is that it simplifies group compliance requirements, which ultimately leads to a reduction in administrative costs.
c) Highly Qualified Persons Rules: A helpful incentive for financial services employees
Malta offers great tax incentives to attract highly qualified persons. The Highly Qualified Persons Rules essentially state that individual income from a “qualifying contract of employment” in an “eligible office” with a company licensed and/or recognised by the Competent Authority is subject to tax at a flat rate of only 15% on an income of at least circa €85,000 Furthermore, the 15% flat rate is imposed up to a maximum income of €5 million. Any excess is not taxable. The 15% tax rate applies for a consecutive period of five years for EEA nationals and four years for third country (non-EU) nationals such as the British for instance. Therefore British financial services companies have another incentive to transfer its employees to Malta to work for a company or branch within their group.
The article was first published in International Tax Review.