The Maltese Holding Company and the Participation Exemption
What is a Holding Company?
A holding company is a company that is characterized by its lack of operational activities but is set up to hold, own and protect assets such as (i) real estate holdings, (ii) fixed assets, (iii) aircraft, (iv) maritime vessels, (v) bank accounts, (vi) intellectual property, and (vii) shares in other companies.
Benefits of Opening a Maltese Holding Company
Segregation of Business Activities and Assets
One of the greatest benefits attributable to a holding company stems from the concept of separate legal personality. A number of subsidiary trading companies can be set up under the ownership of a parent holding company, each operating in a separate line of business and having its own separate legal personality. As a result, the assets and liabilities of each subsidiary company will be segregated from the rest. Therefore, creditors of one trading companies will not be able to attack the assets of the parent company or other companies within the structure, offering greater protection of assets and limiting the potential impact of liabilities or financial setbacks in one sector on the overall corporate structure.
Structuring the business in this manner not only entails the strategic consolidation of assets but also affords the flexibility for each subsidiary to operate from the most advantageous jurisdiction based on its specific business line. This approach recognizes the varying regulatory, tax, and legal landscapes in different regions and enables the holding company to optimize its subsidiaries’ locations for maximum benefit.
The Participation Exemption
A holding company may benefit from the participation exemption which exempts any dividend income and capital gains derived from a participating holding from tax.
What is a Participating Holding?
The Income Tax Act provides that a participating holding arises where either:
(a) A company directly holds at least 5% of the equity shares of a company, which holding entitles the company to at least two of the following:
(i) 5% of the right to vote.
(ii) 5% of profits available for distribution.
(iii) 5% of assets available for distribution on a winding up.
(b) A company is an equity shareholder in a company and is entitled at its option to call for and acquire the entire balance of the rest of the shares in the company to the extent permitted by the law of the country in which the shares are held.
(c) A company is an equity shareholder in a company and is entitled to first refusal in the event of a proposed disposal, redemption or cancellation of all of the shares of that company not held by it.
(d) A company is an equity shareholder in a company and is entitled to (i) sit on the Board or (ii) appoint a person to sit on the Board of that company as a director.
(e) A company is an equity shareholder in a company and holds an investment exceeding €1,164,000 in value as on the date it was acquired in that company and that holding is held for an uninterrupted period of not less than 183 days.
(f) A company is an equity shareholder in a company and the holding of such shares is for the furtherance of its own business and not as trading stock for the purpose of a trade.
What is an Equity Shareholder?
It then defines an equity shareholder as a company which holds an equity holding, defined as 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:
(i) A right to votes.
(ii) A right to profits available for distribution to shareholders.
(iii) A right to assets available for distribution on a winding up of that company.
Tax Exemption for Participation Holdings
Any income or capital gains derived by a Maltese company from a participating holding or from the transfer of such holding shall be exempt from tax.
However, with respect to dividends derived from participating holdings acquired on or after 1st January 2007, the exemption only applies if:
(a) The entity in which the participating holding is held is (i) resident or incorporated in an EU Member State, or (ii) is subject to any foreign tax of at least 15%, or (iii) it does not derive more than 50% of its income from passive interest or royalties; or
(b) The equity holding is (i) in an entity not resident in Malta, (ii) is not a portfolio investment and (iii) the entity or its passive interest or royalties have been subject to any foreign tax which is not less than 5%.
Other Tax Benefits
Malta also boasts a robust double tax treaty network, effectively reducing withholding taxes on received dividends. Being a member of the EU, Malta has implemented several EU directives, including the Parent-Subsidiary Directive and the Interest and Royalties Directive. Remarkably, no withholding tax is applied to distributions from the holding company to its parent company or shareholders, regardless of the shareholder’s residence. Additionally, the issuance of share capital incurs no capital duty, and subsequent transfers of shares do not attract stamp duty. This tax-friendly environment enhances the attractiveness of Malta as a jurisdiction for holding companies, providing favourable conditions for efficient dividend distribution and share transactions.
Good Reputation
Malta offers a great alternative to offshore company formulation. With the ever-increasing need for due-diligence and transparency, offshore companies have been put under pressure. Financial institutions and governments may have a negative outlook on offshore companies or view offshore companies as high-risk entities. Therefore, Malta offers fantastic tax incentives whilst also maintaining a good reputation through compliance with EU principals and directives.
Simple Process
Maltese Company Formation is a very simple and straightforward process, involving relatively low setup and ongoing administration costs. In fact, the Maltese Companies Act adopts a uniform approach to the minimum initial share capital, setting it at €1,165 without distinction between holding and trading companies, with only 20% of the minimum share capital required to be paid-up at the time of incorporation.
For further information on the Maltese Holding Company and the Participation Exemption, contact us today to discuss your options.