Participation Exemption

    Participation Exemption

    Holding companies registered in Malta that are in receipt of dividend income or capital gains from a ‘participating holding’ or from income arising from the disposal of that same holding may benefit from a participating exemption based on the participating holding rules.

    Malta’s participation exemption on capital gains is also extended to domestic holdings of shares hence capital gains arising from the transfer of a participating holding in a Malta company are also eligible for the exemption.

    The participation exemption provides that a shareholding in a company qualifies as a participating holding if the Maltese resident company holds equity shares in a company or a qualifying body of persons which does not own immovable property and it:

    • has at least 10% of the equity shares in the other company; or
    • is an equity shareholder in a company and the equity shareholder company is entitled to the option to call for and acquire the entire balance of the equity shares of the non-resident company and is entitled to the Right to first refusal to purchase such shares; or
    • is an equity shareholder in a company and is entitled to sit on the Board or appoint a person to sit on the Board of that company as a director; or
    • is an equity shareholder in a company which invests a minimum sum of €1,164,000 and such investment is held for an uninterrupted period of 183 days; or
    • holds the shares in the company for the continuance of its own business and the holding is not held as trading stock for the purpose of a trade.

    Tax on dividends resulting from a participating holding in an EU resident company are exempted in Malta in all cases.

    Tax on dividends received from a participating holding in a non-EU resident company are exempt in Malta provided at least one of the following additional criteria is fulfilled:

    1. the said non-resident company is subject to foreign tax of a minimum of 15%; or
    2. the said non-resident company does not derive more than 50% of its income from passive interest and royalties; or
    3. the shares in the non-resident company are not a portfolio investment and the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

    Additional conditions are to be satisfied in cases where the Parent-Subsidiary Directive for the elimination of withholding taxes have been applied.

    Where the participation exemption does not apply or where the company does not opt for income or gains to be exempt, Malta holding companies would be subject to tax on income less any applicable deductible expenses at the corporate income tax rate of 35%.

    Upon receipt of a dividend, the shareholders would be eligible to claim a refund of the tax paid by the distributing company on income distributed as dividend, depending on the type and source of income received.

    The shareholder of the Malta company would be eligible to receive refunds as follows:

    1. 100% of the Malta tax paid where the income being distributed was eligible for the participation exemption;
    2. 5/7th of the Malta tax paid, where the income received by the company is passive interest or royalties or dividend income from a participating holding which does not fall within the conditions (1) to (3) as detailed above;
    3. 2/3rd of the tax payable in Malta, where income has benefited from double taxation relief; and
    4. 6/7th of the Malta tax in all other cases.

    Malta has a trustee regime and thus shares in Maltese companies may be held by licensed trustees in a fiduciary capacity for and on behalf of subscribers.

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    karl cini

    Karl Cini
    Partner 
    Tax and International Client Services

    karl.cini@nexiabt.com
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