Malta applies a 100% participation exemption for gains and profits derived from a Participating Holding or from the transfer thereof. Where the participating holding is in a non-resident company, the holding company may opt for full refund instead of applying the outright exemption. In this case the income and gains derived from the participating holding would be fully taxable in Malta (subject to any double taxation relief available) and upon distribution to the holding company the shareholder would be entitled to claim back a full refund (100%) of the tax paid by the distributing company in Malta.
When applying the participation exemption to a company (or other entity) distributing dividends then the following anti-avoidance provisions need to be adhered to:
- The distributing company is resident or incorporated in a country or territory which forms part of the European Union; or
- is subject to tax at a rate of at least 15%; or
- has 50% or less of its income derived from passive interest or royalties; or
- is not held as a portfolio investment and it has been subject to tax at a rate of at least 5%.
It should be noted that the application of the anti-abuse provisions when applying the participation exemption are applicable only in respect of dividends and do not apply in the case of gains derived from the transfer of a participating holding.
A company resident in Malta (holding company) owns a Participating Holding when it has a shareholding in the share capital of a company that does not own real estate in Malta, and meets at least one of the following conditions:
- The holding company owns at least 10% of the share capital whose capital is wholly or partly divided into shares, which holding gives an entitlement to at least 10% to any two of the following rights:
- Voting rights
- Right to profits available for distribution
- Right to the assets available for distribution on liquidation; or
- The shareholding has a value of, at least € 1,164,000 on the purchase date and has been held for a continuous period of, at least 183 days; or
- The holding company has the option to buy the entirety of the outstanding shares of the subsidiary; or
- The holding company has powers to appoint one member of the board of directors of the subsidiary; or
- The holding company has a right of first refusal in the case of sale, redemption or cancellation of the outstanding subsidiary company’s shares; or
- The holding company holds a shareholding for the development of its own business and not only as stock for resale purposes.
A participating holding may also be held in a partnership, whether Maltese or foreign, which elects to be treated as a company for the purposes of Maltese tax law or a non-resident body of persons (with similar characteristics) or a collective investment vehicle that provides for limited liability of investors, provided the above conditions for the application of the participation exemption are satisfied. The participation exemption is also extended to include any income or gains derived by a company registered in Malta which are attributable to a permanent establishment situated outside Malta or to the transfer of such permanent establishment, provided the taxpayer has not shown the income or gains as part of its chargeable income in the income tax return.