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      Tuesday 24 September 2019

      The Malta Ukraine double taxation agreement

      Managing director as representative

      Malta is one of the countries having a favourable double taxation agreement with Ukraine which was ratified by the Government of Malta in December 2017. The treaty became effective on the 28 August 2017, and provides for the following reduced rates of withholding taxes for dividends, interest and royalties paid by a Ukrainian company to a Malta company:

      • Dividends – 15% or 5%: the reduced tax rate applies if the dividend recipient owns at least 20% of the capital of the dividend paying company.
      • Interest and Royalties – 10%.

      By virtue of its domestic legislation, Malta does not impose any withholding taxes upon the payment of dividends, interest and royalties, making Malta one of the best holding company jurisdiction in Europe.

      What are the benefits of setting up a holding company in Malta?

      • A flexible participation exemption regime resulting in the exemption of dividend income and capital gains on certain qualifying investments.
      • Modern legal and tax framework.
      • Benefitting from Malta’s double taxation treaty network with over 72 countries as well as from EU directives since Malta is a full Member of the European Union.
      • Malta does not levy withholding taxes on the outward payments of dividend, interest and royalties by virtue of its domestic legislation irrespective of the country of residence of the recipient.
      • Comparatively low establishment and operating costs.
      • Strategic location in the center of the Mediterranean and convenient European time zone.

      A new Malta company or continuation of an existing foreign holding company?

      Apart from the incorporation of new companies, Malta also enables the inbound redomiciliation of companies incorporated outside of Malta provided the foreign jurisdiction allows for such. Upon the redomiciliation of companies to Malta, Maltese tax legislation also allows for the step-up of the cost of assets of the company being redomiciliated, provided certain conditions and timelines are satisfied. The benefit of a redomiciliation is to have continuity of the existing foreign company and potentially its subsidiaries.

      What are the Malta tax considerations applicable to holding companies?

      1.  No stamp duty or other taxation is levied in Malta upon the acquisition of subsidiaries

      The acquisition of shares in a foreign company would not attract any Malta stamp duty or other Malta taxes irrespective of the manner in which the shares are acquired.

      1.  Malta’s participation exemption regime

      Dividends and capital gains derived by a Maltese company from a holding which qualifies as a participating holding would be exempt from tax in Malta under the participation exemption only where the investment in the subsidiary satisfies the following conditions:

      One of the following conditions should be met for a holding to qualify as a participating holding:

      a) A company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 5% of any two of the following:

      1. Right to vote.
      2. Profits available for distribution.
      3. Assets available for distribution on a winding up.

      b) A company is an equity shareholder in a company and the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held.

      c) A company is an equity shareholder in a company and the equity shareholder company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company.

      d) A company is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director.

      e) A company is an equity shareholder which holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of one million, one hundred and sixty-four thousand euro (EUR1,164,000) (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days.

      f) A company is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

      For the purpose of the above, "equity holding" shall mean a holding of the share capital in a company which is not a property company, when the shareholding entitles the shareholder to at least any two of the following rights:

      1. Right to vote.
      2. Profits available for distribution.
      3. Assets available for distribution on a winding up.

      Should any of the above conditions be satisfied capital gains realised by a Malta company upon the disposal of an investment in a participating holding, should be exempt from Malta tax. In the case of dividend income however, for the participation exemption to be applied, the following extra conditions must also be satisfied apart from the above:

      • Where the body of persons in which the participating holding is held satisfies any one of the following conditions, that is to say:

      (1) The equity holding by the company registered in Malta in the body of persons not -resident  in  Malta  is  not  a  portfolio investment  and  for  this  purpose  the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than 50% of its income from portfolio investments shall be deemed to be a portfolio investment; and

      (2) The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

      Is VAT in Malta applicable to holding companies?

      A Malta holding company would fall outside the scope of Malta VAT should it be set up as a pure holding company. However, the company may be liable to pay VAT on the acquisition of services from other EU countries which are subject to the reverse charge system.

      If the Malta company has other income which is not tax exempt in Malta, how is it taxed?

      If the Malta holding company has other income which is not exempt, the effective tax rate would vary between 0 and 6.25% by the application of Malta’s full imputation system and Malta’s favorable tax refund system as well as with the application of Malta’s double taxation relief mechanisms.

      Will there be taxation in Malta upon the disposal of the investment in the Malta holding company?

      As long as the shareholder disposing the shares in the Malta holding company is not resident in Malta, gains should generally be tax exempt from Maltese taxation.

      Author:

      Yashica K. Pathak

      Editorial Content Manager

      Antoinette Scerri
      Director, Tax Advisory Services
      E: antoinette.scerri@nexiabt.com

      Date: August 2019

      Malta is one of the countries having a favourable double taxation agreement with Ukraine which was ratified by the Government of Malta in December 2017. The treaty became effective on the 28 August 2017, and provides for the following reduced rates of withholding taxes for dividends, interest and royalties paid by a Ukrainian company to a Malta company.

      Date: August 2019
      Date: August 2019
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