Document 1 ROOM DOCUMENT#3 Code of Conduct Group (Business Taxation) 28 March 2006 ORIGIN: Commission Services DRAFT Rollback proposal Advance Company Income Tax System Malta ML4 and ML5 Introduction Following further discussions with the Commission on previous proposals that were put forward by Malta before the Code of Conduct Group, Malta has changed its roll-back proposal to the system of advance company income tax and subsequent refunds as is described herein. Conditions attached and tax consequences Malta proposes to abolish the International Trading Company regime and the Foreign Income account, which included specific refund provisions for non-resident shareholders. General income tax All companies resident in Malta are subject to income tax at a rate of 35%. There is no separate system of corporation tax, and a company is subject to tax in much the same way as an individual. A full imputation system is applicable which means that dividends paid by a company resident in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. This system applies to both resident and non-resident shareholders. Resident shareholders are taxed on the gross dividend at the applicable tax rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability. Individual shareholders of companies will be entitled to tax refunds when their marginal tax on the dividend is less than the tax paid by the distributing company. Within this general system an Advance Company Income Tax (ACIT) combined with a system of refunds will be introduced as described below. 1
Advance Company Income Tax general conditions and tax consequences Under the ACIT system, ACIT will be payable upon distributions, by all companies, of profits which are not derived from immovable property situated in Malta. The ACIT paid may be set-off by the distributing company against its company income tax. Once ACIT has been paid by the distributing company, shareholders, whether resident in Malta or not, may claim tax refunds as described below. The ACIT will be levied at the level of the distributing company at the rate of 35% and upon distribution the shareholder will be entitled to a refund of a part or whole of that ACIT. This refund will be reduced where the distributing company would have claimed double taxation relief. The actual level of the refund of the ACIT paid has not yet been decided upon by Malta. This means that at present it is not known to which extent the ACIT paid will be refunded to the shareholders 12. The refund in the case of profits emanating from a participating holding will in any case be a full refund, in effect imputing the taxation of the company. The resident shareholder will be taxable for the total amount of net dividend received and refund received. The non-resident shareholder is not taxed in Malta (see enclosed table). The ACIT system has different consequences for income from ' participating holdings' or from other sources. The different tax consequences appear at shareholder level since the shareholder is entitled to a refund of the ACIT paid by the distributing company. Since for participating holdings the ACIT paid by the distributing company is wholly refunded to the shareholder, the system, in principle, results in an effective 0% tax rate and thus in practice leads to a similar result as a participation exemption (holding regime). For ACIT paid by the distributing company on other types on income, the system, in principle, results in an effective?? % tax rate in Malta after the profits are expatriated. A shareholding in a non-resident company will qualify as a 'participating holding' of a Maltese company if the latter holds equity shares in a non-resident company and it: has at least 10% of the equity shares in the non-resident company or is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident company, or it has the right of first refusal to purchase such shares; or 1 The Commission services consider that, in order to achieve a complete rollback description, on the basis of which a proper rollback assessment can be made by the Member States, the level of the refunds given to the shareholders should be specified for all cases. Malta is requested to further specify this element. 2 Statement by Malta: 'Malta considers that the proposed system is a general system and within such a system the quantum of the tax to be applied (as a result of the tax rate and/or tax refunds) is a matter which falls within the competence of the Member State concerned. The system can be assessed in terms of the Code of Conduct for Business Taxation on the basis of the structure of the system and this assessment should not be influenced by the level of tax refund. Furthermore, Malta submits that since the proposed tax system is a general system applicable to all companies and all shareholders, the system will constitute the tax measures that will be generally applicable in Malta and not measures that provide for a significantly lower effective level of taxation, including zero taxation, than those which generally apply. Consequently in accordance with the provisions of paragraph B of the Code, the proposed tax system cannot be considered to be potentially harmful and therefore covered by the Code '. 2
is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or is an equity shareholder which invests a minimum in the non-resident company of Lm 500,000 (or the equivalent sum in a foreign currency);or holds the shares in the non-resident company for the furtherance of its own business. Malta will introduce provisions to restrict the application of the ACIT system in case of holding activities. A participating holding in a non-resident company will only be recognized in case: the non-resident company is resident or incorporated in a tax treaty, an EU or EEA jurisdiction, or, in case the majority of the income of that non-resident company is not derived from passive sources (i.e. interest, royalties and rents), or in the case of passive income, if the Maltese company controls more than 50% of the voting rights of the foreign subsidiary, and that particular income was subject to tax [according to MT:]" at a rate that is at least as burdensome as that required by another EU Member State in order to apply the participation exemption. Provided that where in these circumstances other anti-abuse provisions would be applicable in a member state the equivalent of which are not present in Maltese legislation then if the subject to tax rate of that Member State is the lowest then that rate shall be ignored for the purpose of this exercise. With regard to this subject to tax condition, if a dividend is received from a foreign subsidiary which had mainly passive income, Malta would treat such dividend as being received from a participating holding if, and only if, that same dividend received from that foreign subsidiary would qualify for a participation exemption in a Member State taking into consideration all the related and connected anti-abuse provisions applicable in that member state. While there may be various ways in which this provision may be implemented, Malta considers that this may be achieved by incorporating in its legislation the relevant conditions obtaining in the laws of the relevant Member States and providing that a participation holding must satisfy at least one of those set of conditions." 34 Conditions and tax consequences at the level of the shareholder All beneficial shareholders (resident and non-resident) in a Maltese company will be entitled to an ACIT-refund. 3 The Commission services consider that, in order to achieve a complete rollback description, on the basis of which a proper rollback assessment can be made by the Member States, the anti-abuse measure for passive income should be specified. The Maltese statement that the subject to tax requirement should be 'at a rate that is at least as burdensome as that required by another EU Member State in order to apply the participation exemption' is not useful in this context. The participation exemptions in the EU are widely diverging from scope of tax exemption to scope of antiabuse provisions attached to them. Malta is requested to further specify this element. 4 Statement by Malta: 'The subject to tax requirement at a rate that is at least as burdensome as that required by another EU Member State in order to apply the participation exemption is a clear statement. Added to this is the further commitment to address the situation where in a Member State the subject to tax rate is low but that Member State has other anti abuse provisions the equivalent of which are not present in Maltese legislation. In these circumstances the subject to tax rate of such a Member State will be ignored.' 3
There are no further requirements (or anti abuse provisions) relating to the non-resident shareholders. The result of the proposal is reflected in the following table. Since the extent of the refund of ACIT paid has not yet been decided upon by Malta certain fields in the table include a question mark. Tax treatment at company level Maltese company Total company profits 1000 Income tax payable (rate (350) 35%) normal tax or ACIT Profits available for 650 distribution Tax treatment at shareholder level Source dividends Dividends other other res. non-res. res. non-res. Net dividend received 650 650 650 650 ACIT Refund (100% or?? of the ACIT paid by the company on the profits Taxable income in Malta for shareholder (at rate of maximum 35%) Imputation credit to shareholder 350 (100%) 350?? 1000 0? 0 Tax payable by shareholder (350) 0? 0 Total tax on profits payable in Malta (on company and shareholder level) Effective combined level of taxation of corporate profits in Malta (*) 350 0?? res. non-res. res. non-res. 35% 0%?? 4
(*) The following statements were made by Malta: 'Malta highlights the fact that in their view this compares the taxation of a resident who is subject to tax in Malta on worldwide income with that of a non-resident who is not taxable in Malta on worldwide income. According to Malta the taxation of the non-resident in his country of residence should also be taken into consideration. Malta reiterates the internationally accepted principle that residents and non-residents are not in an objectively comparable position. Residents have stronger connecting factors with the jurisdiction in which they reside than non-residents have and therefore the tax borne by a person in a jurisdiction must be commensurate with the use of the infrastructure and benefits provided by that jurisdiction. As Malta has explained during the Code Group meetings the comparison of the level of taxation of distributed corporate profits is not a sound comparison. A comparison of such combined level of taxation for the distributed corporate profits in other Member States will also produce disparities some of which are significant. These disparities are increased when dividend withholding rates are reduced by virtue of double taxation agreements which more often than not would be applicable. If the comparison under discussion were to be regarded as a correct one in terms of the Code of Conduct for Business Taxation, most, if not all, double taxation agreements would be regarded as being harmful in terms of the Code. In Malta s opinion, the foregoing clearly demonstrates that the comparison is not correct.' Transitional arrangements Malta proposes the following transitional arrangement: The new system described above will come into effect on 31 December 2007 (possibly 1 January 2007) and will be applicable to all new companies registered on or after that date; New entrants under the existing regimes 'International Trading Companies (ML4) and 'Dividends from (other) Maltese companies with foreign income' (ML5) will be allowed until 31 December 2007 (possibly 1 January 2007); Existing beneficiaries benefiting from these regimes ML4 and ML5, existing on 31 December 2007 (possibly 1 January 2007), will be allowed to benefit from the respective regimes until 31 December 2010. 5