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Malta is not a tax haven

Corporate structures in Malta are totally transparent in that all information is in the public domain.

Corporate structures in Malta are totally transparent in that all information is in the public domain.

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Over a year ago the world woke up to the famous Panama Papers, a great scoop by the
International Consortium of Investigative Journalists.

All the information revealed was information held in secret, signifying that all those clients who
had used Mossack Fonseca to set up their offshore structures had the clear intention of hiding these
structures from their respective tax authorities. Apart from the possible tax evasion, these persons
may also have been using these structures to launder money.

Earlier this year, another group of journalists tried to emulate this great scoop and published the
Malta Files. At that time, I wrote an article in which I described these journalists as irresponsible and
their sensationalist reporting at the expense of a nation as despicable.
Unfortunately, six months later, the same situation seems to have emerged with the ICIJ
publishing the Paradise Papers. One of the jurisdictions targeted is Malta.
The sensationalism surrounding the latest scoop is harming the reputation of countries. This,
again, is irresponsible in regard to Malta, because all the information on persons or corporations who
chose Malta to set up their structures is in the public domain, fully available not only to journalists
but also to any tax authority around the world. It can be obtained by simply opening the Register of
Companies website and doing a search.

But this is not stated by the journalists in question. The public has therefore been deceived.
I am absolutely nauseated by articles about the taxation system in Malta, including by Maltese
journalists themselves, which insist that Malta a tax haven. Also, the use of Malta structures is not
synonymous with money laundering, as is constantly implied. There may be some crooks around
but I have full trust that the controls and anti-money laundering compliance procedures adopted by
serious and professional operators and financial institutions would highlight such abuse.
I will explain why one cannot call Malta a tax haven. The origins of our tax system date back to
1948, when Malta was a British colony. The tax system introduced was cut and pasted from the UK
tax laws and was based on two major concepts, the “imputation system” and “progressive taxation”.
Both these concepts are still the basis of our existing tax system.
The UK partially abolished the imputation system in 1999 but it existed in Germany until 2001,
in Italy until 2004, in France and Finland until 2005, and in Norway until 2006. Probably, these
governments wanted to further tax the shareholder on receipt of dividends, which had up to then
been exempt.

“Imputation” means that taxes paid by the company are imputed as having been paid by the
shareholder. As a result, no further tax is levied on shareholder dividends. Throughout the years, the
Maltese government decided not to tax the shareholder further, irrespective of nationality. Some
OECD member states still apply the full imputation system while others apply it partially.
Therefore, a Malta holding company, as the shareholder of a foreign subsidiary, may have its
dividend income from the subsidiary exempted from tax by virtue of the application of the
“participation exemption” rule (explained below). This is not tantamount to tax evasion and nor is it
money laundering.

After Malta joined the EU, its tax laws were amended to include tax legislation that exists in
major EU countries. Malta’s tax laws are built on the models that exist in the UK, The Netherlands,
Spain, Luxembourg and even Germany. How can someone infer that Malta is a tax haven? I appeal
for this phrase not to be used loosely.
“Tax havens” are jurisdictions where companies are not subject to tax and where the
information about ownership of these companies is usually kept secret, either through bearer shares
or because the information is not disclosed in the jurisdiction’s public registry.
I wrote “not subject to tax”, not that the companies “do not pay tax”. The latter means the
government has no right to tax them, while being subject to tax means the companies are indeed
taxable. This is the official terminology used in tax treaty language. A company may be “subject to
tax” but may be exempt if that company qualifies for the exemptions listed in the law.
These exemptions are not pertinent solely to Malta but are found in most EU countries (such as
the UK, Netherlands, Spain and Luxembourg) and they are in directives issued by the EU. Since
joining the EU Malta has incorporated them into its tax system. I specifically refer to the “participation
exemption” introduced into our tax legislation in 2007 in full consultation with the EU and with full
approval of the Council of Finance Ministers.

Our tax system is a very efficient one as it relates to the income stream of a Malta company. A
Malta company has two income streams: that derived from being a holding company and that derived
from exercising a trading activity.

Holding company income would normally derive from dividend income and capital gains. The
tax treatment of this stream of income is different from that applied to a trading activity.
First of all, every Malta company is subject to income tax at the rate of 35 per cent, with no
exceptions. Should dividends be earned by a Malta company from subsidiaries which qualify as a
“participating holding” (adopting one of the criteria established by law) then the Malta company has
a right to apply for “participation exemption” on the dividend, once the anti-abuse provisions are
adhered to. This means the Malta company is exempt from tax on such dividends received.
The exemption system is identical to that found in Dutch, Spanish and Luxembourg tax laws as
well as those of other countries. So why are certain journalists pointing a finger at Malta when we
have the same tax treatment for dividend income as exists in other OECD member countries? Is
there an ulterior motive here?

With regard to the income stream derived from a trading activity, as mentioned above, all Malta
companies are subject to tax at 35 per cent. Here, the “imputation system” and “progressive taxation”
concepts apply. The income earned from a trading activity is not only subject to the tax but the Malta
company is also “charged” – it actually pays in 35 per cent of its chargeable net profit. The
shareholder is then entitled to a partial refund of tax through the “imputation” concept. All information
is disclosed.

Let me now look at these structures from the point of view of the tax authorities of the jurisdiction
where the ultimate shareholder is resident. Our tax system was scrutinised by the EU during the
application process and, after we made amendments to our legislation, was approved by the EU
when we joined the bloc. Furthermore, the European Parliament’s PANA committee has just
confirmed in its report that Malta is no tax haven.
A foreign tax authority should see to it that the shareholder of a Malta company declares dividend
income in his jurisdiction so as to be taxed accordingly. The partial tax refund should also be
declared. In some EU jurisdictions, this refund is charged tax at a normal rate and in others it is
charged at the rate that applies to dividend income.
This means the tax authorities in the foreign jurisdiction have the right to claim far more tax from
this individual or company in his own country than would otherwise be paid if they were taxed at 35
per cent in Malta, with no refund of tax.
Furthermore, Malta, by virtue of its domestic law, does not charge withholding tax on the
payment of dividends and interest to a non-resident of Malta. This means the foreign tax authority
would have more income to tax in its jurisdiction.

With the Exchange of Information clause found in the treaties, and with all the information about
the company and its shareholders being made public, how dare some journalists call Malta a tax
haven and a source of money laundering? This is terribly irresponsible.
It must also be understood that the countries with which Malta has signed a tax treaty have
thoroughly analysed our tax system and are fully aware of the imputation system as well of the partial
tax refund. This means there is more to tax at their end. If they were not comfortable with our system,
they would not have signed the treaty.
High net-worth individuals or international corporations have a choice of where to set up their
international holding companies in the EU. Some have chosen Malta primarily because they do not
want their structure to be in a tax haven jurisdiction – they want it to be in a serious onshore
jurisdiction.
Corporate structures in Malta are totally transparent in that all information is in the public domain.
The cost of setting up a Malta structure is far below the cost of doing so in other jurisdictions
which are in direct competition with Malta. But had these individuals or companies wanted to hide
such structures, they would never have chosen Malta.
Malta has over 70 double taxation treaties, the majority of them with the most important countries
of the OECD, such as the USA, Germany and all other EU countries. All these treaties contain the
Exchange of Information clause as required by the OECD, which obliges the Maltese authorities to
disclose all information about any company and its shareholders to the other jurisdictions when
asked.
In addition, all companies incorporated in Malta must present all their documentation to the
Register of Companies, including the full identity of the shareholders and directors.

All this information is immediately uploaded to the registry’s website and is available to the public at large
for download.
Malta further adheres to the Common Reporting Standard established by the OECD. This
means all practitioners, including banks, service providers, trust companies, etc, have to submit to
the Maltese tax authorities the ultimate shareholding of the Malta structures that they manage or
deal with.
I repeat, therefore: it is completely irresponsible of journalists to call Malta a tax haven. By
naming important individuals who have set up Malta companies, and whose names were obtained
from the public domain, the sensation is created that these individuals are evading tax or laundering
money. This is absolutely not the case. All the persons or corporations that I know who have set up
such structures have either declared them or live in another jurisdiction and are not subject to tax in
the first place.
All Malta service providers and financial institutions have an obligation at law to report all
information about the shareholders, directors and even related parties in all transactions carried out
by Malta companies. Why would someone who wants to evade tax, who does not want the tax
authority of his jurisdiction to know about his Malta structure, choose Malta when all the information
about his structure is completely available in the public domain? It just does not make sense.
I appeal to journalists not to write sensationalist articles. It is obvious people of ill-repute may
abuse the system, in the same way as they do in Italy, the USA or Switzerland. But this does not
make the jurisdiction itself one of ill-repute. I just wonder what the ulterior motive is.

Francis J. Vassallo is a financial service practitioner and the former governor of the Central Bank
of Malta

Source: Times Of Malta