Are harbors good in Malta?

In recent years, a significant number of agreements on avoidance of double taxation between Malta and a number of popular low-tax jurisdictions came into force that have made it extremely interesting territory from the point of view of building holding schemes. Comparing on this basis Malta with the most widely used by Russian business jurisdiction of Cyprus you can say that building a corporate structure with the use of Maltese companies beneficiary has not less opportunity than now Cyprus provides.

Comparative table of agreements on avoidance of double taxation of Malta and Cyprus, concluded by them with various foreign states and territories below:



Agreement on avoidance of double taxation between Malta and Cyprus was signed and entered into force, allowing to use resident-companies of both states simultaneously.

Today, however, optimization of taxation of profits of Russian companies by building holding schemes with the use of Maltese companies directly is impossible. The reason for this is that the procedure and conditions for avoidance of double taxation with respect to incomes of individuals and legal entities that are residents of Malta and receiving income from sources in the Russian Federation (as well as incomes of the Russian companies and individuals derived from sources in Malta) is still not determined. The result of absence of appropriate international agreements is obvious: income received from sources in one of the States is taxed in that state and then and in the state of residence of recipient.

History of diplomatic relations between Russia and Malta has more than three centuries, and although for such a long period of time in certain moments there was a slight cooling, most of the time foreign relations of the two states were and are close enough. All the more surprising that between Russia and Malta still there is no a valid bilateral agreement in the part of taxation of income.

Encouraging trends have emerged at the beginning of 2013, when Chairman of the government of Russia Dmitry Medvedev approved the agreed with the Government of Malta draft of Convention on avoidance of double taxation and prevention of tax evasion for income and it’s Protocol. The Ministry of Finance of Russia was instructed to ensure finalization of the draft along with making minor changes and sign the Convention on behalf of the Government of the Russian Federation. Finally, on April 24, 2013 Convention was signed in Moscow. Almost a year the fate of Convention remained unclear, and finally on April 2, 2014 it was ratified by the Russian side. However, in order Convention to enter into legal force procedure of ratification by each of the states-parties to the Convention in accordance with their domestic law is not enough. Russia and Malta have committed themselves to notify each other through diplomatic channels about execution of their internal ratification procedures, and on the 30th day after receipt of the latest of these notifications provisions of the Convention begin to act. Diplomatic channels are closed channels and we will learn regarding exchange of diplomatic notes from the Letter of the Ministry of Finance of Russia, but the question is when. If this happens in the current 2014, then provisions of the Convention will be applied in respect of income received from January 1, 2015. Let's hope for the best variant of development of events.

What are the advantages for residents of the Russian Federation who receive income from sources in Malta and Maltese companies receiving income in Russia, when the long-awaited Convention enters into force? Whether in case of the entry into force of the Convention it will be more rational to use Maltese companies in comparison with Cyprus in order to receive income from sources in the Russian Federation? Let’s stop at the main provisions of the Convention in comparison with similar provisions of the current Agreement between the Russian Federation and the Republic of Cyprus.

Methods for determining residence for taxation purposes are provided for by the Convention and the Agreement in general order, but it is important to note that in both cases for legal entities priority compared with other signs is the place of effective management.

The Convention concerns avoidance of double taxation under Maltese income tax and the Russian tax on profit of companies and tax on income of individuals. Cyprus Agreement covers a larger scope of relations and applies also in respect of corporate tax, property tax and tax on property of individuals.

The following table vividly shows features of taxation essential for business income provided for each of the analyzed documents:



Obviously, the Convention between the Government of the Russian Federation and the Government of Malta, in case of its entry into force, will not turn it into a new “tax haven”, but only to a maximum approximate its capabilities to existing opportunities of Cyprus. Perhaps the most significant positive effect, which you can expect in the event it enters into force, is open to Russian business new states and territories with favorable terms of income taxation, access to which are not available at present because of the lack of Cyprus relevant agreements on avoidance of double taxation.

In addition, in some cases, few benefits in the text of the Convention on avoidance of double taxation may be useful.

And yet the Maltese jurisdiction has a number of advantages compared to the jurisdiction of Cyprus, and the first of them seems to be a novelty. Cyprus, which for two decades has become the textbook offshore in understanding of the society in the beginning of the second quarter of 2013 significantly lost its attractiveness due to the banking crisis. As a consequence, Russian companies where shareholders, suppliers or licensors are Cyprus company often are not credible. Malta, failing significantly to show itself in Russia as a jurisdiction that provides preferential tax treatment or not disclosing information when conducting financial operations, saves positive assessment from contractors.

In addition, Malta cannot be called a low-tax jurisdiction in the full sense of the word - in fact the rate of profit tax here is 35%. Its actual decrease is not the result of direct legislative permission but consequence of application of mechanism of tax return. Subject to fulfillment of certain requirements of the law a shareholder of a Maltese company may claim deduction of amount paid by the company as profit tax in full. Deduction from the total amount can be claimed in any one of the following three conditions:

• Shareholder with qualified participation (more than 10% direct participation) - a resident of the European Union;
  
• Dividends from qualified participation are taxed in the state of the recipient at a rate not lower than 15%;
  
• Income in the form of interest and royalties are not more than 50% of the income of the shareholder.
  

In Malta there is a system of so-called tax accounts, on which the company accumulates distributable profit. Deduction in full amount of the tax can be claimed if the dividends were paid from the account of foreign income:




If none of these three conditions is not fulfilled, the shareholder still has the right to a deduction in the amount of 6 / 7 of the amount of income tax paid. If the dividends are paid out of income in the form of interest and royalties the deduction is granted in the amount 5/7 of the amount of income tax paid. The same deduction can be obtained in respect of dividends received from unskilled participation (less than 10%) in a Maltese company. Recipient of dividends is entitled to claim deduction in the amount of 2/3 of the amount of tax paid by the company distributed from the account of foreign income and which is:

• non-resident of Malta, which does not own or over which there is no control, directly or indirectly, by a person domiciled in Malta and which is a resident, or
  
• the company resident of Malta, the capital of which is fully owned by the person or several persons non-residents, if such persons are not owned or over which there is no control, directly or indirectly, by a person or several persons domiciled in Malta and which is it’s resident.

Another important aspect which stems from the same spring banking crisis in Cyprus the effects of which are still being felt. Ambiguous behavior of representatives of the supreme bodies of state power, attempt of actual nationalization of foreign capital, finally, the “freezing” of savings of depositors ‘ accounts in Cyprus banks and their transformation in illiquid assets in the form of shares undermined authority of the Cypriot economy. Right now the Russian businesses need an alternative, which may become Malta, not ideal, but reliable enough to compete with Cyprus.