Malta has become a prime destination for multinational enterprises in the past few years. This is due to a number of reasons, one of which is the participation exemption that provides an outright exemption from income tax applicable to dividends derived from companies established outside of Malta and from the disposal of marketable securities, better known as shares. Over the last few years, some favourable changes have been made to the participation exemption regulations to include all partnerships and a broader definition of a participating holding.
What is participation exemption?
Dividend income or capital gains derived from a participating holding or the disposal of such holding will be fully exempt from paying tax in Malta, provided several conditions are satisfied.
Such conditions include the following;
- Equity Holding
- Participating holding
- Anti-abuse measures
Equity holding: Explained
Equity holding means a holding of the share capital in a company which is not a property company, where the shareholding is entitled to at least any two of the following three equity rights:
- a right to vote,
- a right to profits available for distribution to shareholders and
- a right to assets available for distribution on a winding up of that company.
Malta participating holding: Explained
A participating holding is present where a Maltese registered company holds equity shares in another entity and the former:
- Holds directly at least 5% of the equity shares of another entity such as a company, body of persons or CIS, or
- Is an equity shareholder in another entity and is entitled to either sit on the Board or appoint a person to sit on the Board of the other entity; or
- Is an equity shareholder investing at least €1,164,000 (or the equivalent sum in a foreign currency) for an uninterrupted period of not less than 183 days in another entity; or
- Is an equity shareholder and is entitled to, at its option, call for and acquire the entire balance of the equity shares not held by it; or
- Is an equity shareholder and is entitled to the first refusal in the event of proposed disposal, redemption or cancellation of all the equity shares; or
- Is holding shares for the furtherance of its own business, and the holding is not held as trading stock for trade.
Anti-abuse measures
Concerning dividends, the Participation Exemption is relevant if the entity in which the Participation Holding is held is accountable to one of the below conditions:
- Is a resident or incorporated in an EU country; or
- Is subject to foreign tax of at least 15%; or
- Has 50% or less of its income from passive interest or royalties; or
- Is not a portfolio investment and has been subject to tax at a rate of at least 5%.
Do the conditions required when claiming participation exemption on capital gains differ from those when claiming it on dividend income?
Yes, they do. When claiming a participation exemption for capital gains, only the equity holding conditions and the participating holding conditions are to be satisfied. However, the addition of the anti-abuse provision conditions must also be satisfied for dividend income.
Participation exemption as a non-resident company
The participation exemption does not apply to non-resident companies. If, however, a non-resident company disposes of shares in a Maltese registered company, the transferor will still be exempt from paying taxes due to the non-resident status and subject to that the company in which the shares are being transferred do not own, directly or indirectly, immovable property in Malta.
Participation Exemption FAQs
Yes, a taxpayer may choose not to avail of the participation exemption and pay taxes accordingly; however, the taxpayer would then be eligible to claim a 100% tax refund. Nonetheless, from a cash flow perspective, it is recommendable that, when possible, the participation exemption is availed of.
Further information on tax refunds can be provided through the following link.
Does the participation exemption apply to individuals?
No, the participation exemption is only applicable to Maltese-registered companies.
Can a Maltese registered company owned directly or indirectly by a Maltese resident individual/s benefit from the participation exemption?
Yes, however, it depends on the domicile of the individual/s. Suppose the individual is ordinarily resident and domiciled in Malta; in that case, the participation exemption will not be possible. Nonetheless, the participation exemption could still be availed if the individual is a non-domicile Maltese resident subject to possible corporate restructuring.
If the shareholding of the Maltese registered company is owned by a mixture of resident and non-resident persons, would the participation exemption still be applicable?
If the conditions to avail of the participation exemption are satisfied, the participation exemption will be applied on a pro-rata basis according to the holding of the non-resident.
Can a Maltese-registered company that disposes of shares in its Maltese-registered subsidiary benefit from the participation exemption?
Yes, subject to that, the beneficial owner is a person not resident in Malta and such a person is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.
How can ADVITAC assist in benefiting from Participation Exemption?
Here at ADVITAC we assist you in carefully understanding whether your business can qualify for participation exemption and what can be done if that’s the case. We also propose possible corporate restructuring that would help you benefit from participation exemption.
