A critical comparative assessment of Malta’s direct tax fiscal regime applicable for international holding and financing activities : prospects and challenges

Abstract

A member of the European Union since 2004, from a tax perspective, Malta has distanced itself from its previous offshore regime thanks to a series of legislative changes enacted principally in 1994 and more recently in 2007. The Maltese tax regime has been an important driver in creating an attractive environment for foreign investment. Though often being considered the “new kid on the block”, Malta is increasingly being recognised a jurisdiction for holding and financing activities. The area of direct taxation harmonisation in the European Union is and has been an ongoing debate. Owing to the absence of harmonised rules, various tax rates and regimes have emerged in the European Union. Therefore, a comparison of the tax systems has become an important factor in deciding the location of a holding company. Previously, such a decision might have been led by more practical considerations such as the physical location of key personnel and capital markets. The primary aim of the dissertation is to examine the salient Maltese tax provisions pertinent to the direct taxation of holding companies and financing activities and to serve as a comparative analysis to three other EU jurisdictions. The crux of this study lies in attempting to provide an evaluation of Malta’s current position as well as to give an insight to possible prospects while highlighting any challenges Malta may experience in the near future. An analysis of the Income Tax Act and Income Tax Management Act provisions relevant to such activities shall be undergone. The countries selected for the comparative analysis are Cyprus, the Netherlands and Luxembourg. While resemblances exist in the tax treatment of these jurisdictions, certain distinct differences are also present as shall be considered throughout this dissertation. Financing activities in international tax structures play an important role in the formation of the fiscal policy of holding companies. The dissertation will seek to examine international key concerns of cross-border financing activities. The bias towards debt is the cause of many tax distortions on cross-border flow of interest payments. Against this background, the study shall examine internationally known tax planning methods while it highlights the anti-abuse provisions implemented by various jurisdictions to deny excessive interest payments. Malta does not have specific CFC measures as part of its legislation but its companies might be caught by foreign CFC rules when Maltese companies form part of international structures. The study shall delve into foreign CFC legislation, mainly the anti-CFC rules implemented by the United Kingdom, France and Germany, while it concludes in its assessment as to whether Malta may be advised to introduce CFC rules in its legislation. The research involved in preparation of the dissertation has been carried out via consultation of a host of literature, legislation and case law. It is pertinent to note that the information contained herein is based on laws, regulations and literature current as at June 2015.