Participating Exemption
Malta’s participation exemption is a regime that allows a Maltese company to fully exempt from Maltese tax:
- Dividends received from a qualifying shareholding (a participating holding), and
- Capital gains made when that shareholding is sold or transferred.
The Concept of a Participating Holding
The holding needs to be an equity holding – essentially shares that entitle the Company to two of these three rights:
- The right to vote
- The right to profits/dividends
- The right to assets on a winding up
Moreover, to be a participating holding, the Maltese company must satisfy at least one of the following tests:
- Holds at least 5% of the equity shares of the subsidiary, or
- Has invested at least about €1,164,000 (or foreign currency equivalent) in the subsidiary, and holds that investment for an uninterrupted 183 days, or
- Has the right to appoint a director to the board of the subsidiary, or
- Has a right of first refusal over the remaining shares if the other shareholders want to sell, redeem or cancel their shares, or
- Has a call option over the remaining shares, or
- Holds the shares for the furtherance of its own business (and not just as trading stock) in a way that meets the statutory definition.
A participating holding can be in a company, certain partnerships, European Economic Interest Groupings, and some collective investment vehicles, provided they offer limited liability and meet the conditions.
To apply the participation exemption to dividends from a non-Maltese entity, one of the following conditions must be met:
- The subsidiary is resident or incorporated in an EU country, or
- The subsidiary is subject to tax of at least 15%, or
- No more than 50% of its income comes from passive interest or royalties, or
- The holding is not a portfolio investment and the subsidiary (or its passive interest/royalties) is taxed at at least 5% abroad.
Where a participating holding does not fall within one of the safe harbours above, the income derived therefrom may nevertheless be exempt from tax in Malta if both the conditions below are satisfied:
the equity shares held in the non-resident company do not represent a portfolio investment; and
the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.
For capital gains on the sale of a participating holding, once you have a participating holding, gains on disposal are exempt without having to satisfy additional conditions.
