Malta has been described to me by some of my clients as a very well kept secret . While I am not sure that this is a good thing for us practitioners it is true that our tax system offers a myriad of opportunities for cross border tax planning which are only just beginning to be tapped by foreign investors. Once case in point is the use of Malta for holding of intellectual property.
The Advantages in a nutshell:
1. A step up provision upon migration of foreign IP companies to Malta allow the intellectual property (which can remain situated outside Malta) to be raised from historical cost to fair market value at the date of the migration.
2. IP rights can then be amortized using the new fair market value over a three year period.
3. Research and development taking place outside Malta and which leads to inventions.- Income and royalties arising from such patented inventions are tax exempt in Malta. Moreover the patent can be registered anywhere in the world.
4. There are no withholding taxes on payments of royalties to licensors outside Malta . (provided the IP is used outside Malta by the Maltese registered company)
5. Malta’s extensive network of double tax treaties (which at the moment number almost sixty including with all EU countries as well as Canada, USA and China) together with the EU Interest and Royalty Directive, lead to 0% of withholding taxes on incoming royalties in most cases and hardly ever more than 10% in a worse case scenario.
6. Tax refunds: The Maltese tax refund system has already been tackled in previous articles of mine, and I will not bother the reader by repeating the details, however suffice to say the upon a payment of the corporate tax (35%) a 6/7 refund of the tax suffered on the declared dividend is paid out within a maximum period of 6 weeks to the shareholder (individual or corporate). Thus effectively leading to a 5% net tax.
7. Therefore if a foreign IP company enters into a license agreement with a Maltese company for the foreign company’s EU patent rights, the Maltese company can now utilize these rights within the EU. The Maltese company retains a license fee and passes the rest to the foreign company with which it has the license agreement.
The resultant net income of the Maltese company is considered as taxable trading profits which will be taxed at the Maltese corporate tax rate of 35%. However with the use of refund system , the non resident shareholders can claim a 6/7 refund of this , thus mitigating the net overall tax rate to 5%.
There will be no withholding tax on the royalty income remitted to the foreign entity.
Moreover if the same company also holds IP rights directly and receives royalties from abroad this will be taxed at 35% and will be subject to a tax refund of 5/7 thus resulting in a net effective tax of 10%.
Moreover when no double taxation relief is claimed this rate can be further mitigated by making use of what is known as the Flat Rate Foreign Tax Credit or (FRFTC) for short.
In a nutshell this involves getting the foreign royalty income net of any foreign tax suffered, grossing up the net resultant income by 25%, taxing the resultant notional income at 35% and then deducting from the notional tax charge the 25% grossed up income. The result is the tax payable in Malta, which will be in region of 18% to approximately 7% (depending on whether there are local expenses or not). Then the shareholder will apply for a 2/3 refund on the Malta tax paid. This will lead to net Malta tax charge of 6.25 %. Moreover where local expenses are present these are included in the computation further reducing the net tax charge to a minimum of 2.49% .
In practice it is also possible to utilize this provision where tax treaties are in place, by simply not applying the tax treaty and going for this provision if deemed more beneficial.