Participation Exemption Report

Participation Exemption Report

Companies incorporated in Malta are treated as domiciled and residents in Malta and are subject to tax on their worldwide income and capital gains.

Therefore any dividends received by a Maltese company from, a foreign subsidiary, or capital gains derived from the sale of shares held in such a foreign subsidiary, would be taxable in Malta.

ACT II of 2007, being the legislative instrument implementing various measures that were agreed upon by Malta and the European Union, added paragraph (u) to Article 12 (1) of the Income Tax Act (ITA), whereby an exemption known as the Participation Exemption was introduced.

The Participation Exemption does not apply to all persons in general but only to companies registered in Malta.

The exemption as enacted in Article 12(1)(u) of the ITA applies only to income received from a participating holding, and to any capital gain derived from the disposal of such a holding.

A participating holding shall exist where:

(a) A company resident in Malta holds directly at least 5% of the equity shares in another company, body of persons or collective investment scheme, which holding confers an entitlement to at least 5% to any two of the following rights:

(i) A right to vote 

(ii) A right to profits available for distribution;

(iii) A right to assets available for distribution on a winding up of the; or

(b) A company 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

 (c) A company is an equity shareholder in a company and is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company; or

(d) A company is an equity shareholder in a company and is entitled to sit as, or appoint, a director on the Board; or

(e) A company 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

(f) A company 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.

A property company is one that owns immovable property in Malta

A property company shall mean a company which owns immovable property situated in Malta, or any real rights thereon, or a company which holds directly or indirectly, shares or other interest in an entity or person which owns immovable property situated in Malta, or any real rights thereon, where five per cent or more of the total value of the said shares or other interests so held is attributable to such immovable property or rights.

However, where a company, entity or person is carrying on a trade or business in Malta, and in the course of such trade or business, owns immovable property in Malta consisting of a factory, showroom, warehouse or office used solely for the carrying on of such trade or business, then such company, entity or person shall not be treated as a property company, if the immovable property so owned does not account for more than fifty percent of the total value of its assets consist of immovable property situated in Malta or any rights over such property and it does not carry any activity the income from which is derived directly or indirectly from immovable property situated in Malta.

Nowhere in the ITA is the Participation Exemption referred to as such – this term is often applied when referring to Article 12(1)(u) which exempts any income or gains derived by a company registered in Malta, from a participating holding, or from the transfer of such participating holding. But this Article provides that this exemption shall apply on the condition that the participating holding:

  1. is resident or incorporated in an EU member state; or
  2. is subject to tax at a rate of at least 15%
  3. has 50% or less of its income being derived from passive interest or royalties

If none of the above three conditions are satisfied, then both conditions set out below have to be satisfied:

  1. the investment held in the participating holding must not be a portfolio investment. In this regard, the ITA provides that if the participating holding is deriving more than 50% of its income from portfolio investments, then it shall be deemed to be a portfolio investment,
  2. the passive interest or royalties derived by the participating holding must have been taxed at a rate of at least 5%

Act I of 2010 extended the remit of the participation exemption to include also shares in companies resident in Malta. This came about because references to the term “company not resident in Malta” were removed from the definition of participating holding contained in Article 2 of the ITA. 

However, holdings of shares in companies resident in Malta, whether trading or holding companies, which are, or are deemed to be, property companies, do not qualify for the participation exemption. 

Moreover, the participation exemption shall apply to a participating holding in companies resident in Malta, only in respect of gains or profits that are made upon the transfer of such a holding.

In taking advantage of the participation exemption, a Maltese registered company receiving income from dividends received from, or making a gain on the disposal of, a participating holding, shall be granted a cash-flow advantage in that its tax bill shall be reduced.

However, if the Maltese registered company is required to provide evidence of tax paid in Malta in respect of the income or gain arising from the participating holding, it can still obtain a 100% refund of the tax paid on such income through the use of Malta’s tax refund system.

Borg Galea & Associates are trusted accountants in Malta offering tax advice for companies in the country. Get in touch with us to speak with our expert advisors and learn more about our services. Call us at + 356 27037012.

Scroll to Top

We use cookies to improve your browsing experience. By clicking "Accept Cookies", you agree to the storing of cookies on your device to enhance site navigation, analyse site usage, and assist in our marketing efforts. Click to view our Privacy Policy