Participation exemption

Malta has an attractive participation exemption regime which exempts from tax income derived from a qualifying equity holding should the requirements for the participation exemption be met.

Under the Income Tax Act, an exemption applies to dividends and capital gains derived from a participating holding or from the transfer of part or all of such participating holding. A participating holding exists where:

a) A company resident in Malta holds directly at least 10% of the equity shares in another not resident company, body of persons or collective investment scheme, which holding confers an entitlement to at least 10% to any two of the following rights:

i. Right to vote

ii. Right to profits available for distribution;

iii. Right to assets available for distribution on a winding up; or

b) Is an equity shareholder and is entitled to purchase the balance of the equity shares or has the right of first refusal to purchase such shares or is entitled to sit as, or appoint, a director on the Board; or

c) Is an equity shareholder which holds an investment of a minimum of €1.164 million (or the equivalent sum in another currency) and such investment is held for an uninterrupted period of at least 183 days; or

d) Holds the shares or units for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

For a holding in a company to be a participating holding, such holding must be an equity holding, i.e. a holding in a company, not being a property company (a company having, directly or indirectly, any rights over immovable property situated in Malta – subject to some exclusions), that confers any two of the three rights in (a) above.

The application of the participation exemption to dividends from a participating holding is linked to an anti-abuse provision. The participation exemption applies provided that the entity in which the participating holding is held satisfies any one of the following conditions:

  • is resident or incorporated in an EU country or territory; or
  • is subject to foreign tax at a rate of at least 15%; or
  • has no more than 50% of its income derived from passive interest or royalties; or
  • the Malta company’s holding is not a portfolio investment and it has been subject to any foreign tax at a rate which is not less than 5%.

However as from 1st January, 2016, in the case of distributed profits received from a participating holding by a parent company that is resident in Malta, dividends shall be exempted from tax in Malta to the extent that such profits are not deductible by the relevant subsidiary in that other EU Member State.

The anti-abuse provisions for the application of the participation exemption do not apply in the case of capital gains which are exempt with no further conditions.