ATAD / CFC 2019 Malta Full Imputation Refunds

[jackfrost]

Anybody got some more indepth knowledge how the 2019 CFC rules that also Malta etc have to implement in domestic law to be effective 2019 will change the full imputation refund?

classic scenario:

- non-dom resident on Malta
- Maltese LTD doing business
- Gibraltar LTD holding the Maltese LTD, 100% beneficiary being the non-dom

Guess some questions are:

Do CFC rules actually apply for the domestic full imputation refund laws or do they only apply for the corporate taxation in general which should be fine as the profits are fully taxed at the full Maltese tax rate at the source / subsidiary in Malta?

 

[anticfc]

The CFC rules of which jurisdiction?

 

[Martin Everson]

Do CFC rules actually apply for the domestic full imputation refund laws or do they only apply for the corporate taxation in general which should be fine as the profits are fully taxed at the full Maltese tax rate at the source / subsidiary in Malta?

You may want to contact the authors of this article and pay for their advice in your specific case. Your case is in fact a very common setup among the expats living in Malta:

Malta reviewing domestic tax law in preparation for ATAD | International Tax Review

i.e contact ARQ in Tax - A|R|Q Group - Malta

 

[anticfc]

As Martin says, it's best to contact a competent tax lawyer in Malta, but here's my armchair analysis:

So this is what the regulation says: Article 7

1. The Member State of a taxpayer shall treat an entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax in that Member State, as a controlled foreign company where the following conditions are met:

(a) in the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of capital or is entitled to receive more than 50 percent of the profits of that entity; and
​

Assuming this is true for the Gibraltar LTD.

(b) the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer and the actual corporate tax paid on its profits by the entity or permanent establishment.
​

Malta has a holding regime where qualifying participating holdings are exempted from tax on dividends, so the tax on Malta Holding LTD's dividends from Malta LTD would be 0%.

An argument that the Gibraltar LTD is paying negative corporate tax because it's getting refunds from Malta LTD seems like it won't fly as "actual corporate tax paid" as it's not "corporate tax" paid in Gibraltar, and it's not "paid", it's received.

For the purposes of point (b) of the first subparagraph, the permanent establishment of a controlled foreign company that is not subject to tax or is exempt from tax in the jurisdiction of the controlled foreign company shall not be taken into account. Furthermore the corporate tax that would have been charged in the Member State of the taxpayer means as computed according to the rules of the Member State of the taxpayer.
​

Again, computed according to the Maltese holding regime system of 0% tax.

2. Where an entity or permanent establishment is treated as a controlled foreign company under paragraph 1, the Member State of the taxpayer shall include in the tax base:

<rules regarding passive income and substance requirements>
​

Note that the Gibraltar LTD isn't necessarily treated as a CFC company under EU rules, so the passive income and substance requirements don't need to apply.

3. <Various exceptions to CFC status that member states might put into law>

4. <More lenient variations on paragraph 2>
​

Of course Malta might get CFC rules that cover the Gibraltar LTD case, but it doesn't seem like it's required.

 

[Martin Everson]

Good info anticfc.

@jackfrost I would seriously speak to a tax specialist but I am sure they will tell you to wait and see . If potentially paying 35% tax in the near future is a problem then I would consider unwinding your structure. You have risk from both the ATAD side and from Brexit (Gibraltar company side).

 

[jackfrost]

Yes thanks that is good info. I am planning on doing that as soon as the concrete domestic law wording is out. Before that they will just tell you "wait n see" in a long analysis which pretty much says... nothing.

I like it in Malta so will see what the final result is.

Anything similar in the EU from 2019 on? How is Cyprus doing for non-doms?

Limited which pays 12.5% corp and pays purely dividends to non-dom owner which are exempt make it a total of 12.5%?

 

[jackfrost]

Some public details starting to trickle in:

Scicluna says Malta on board with EU’s anti-tax avoidance rules

An entity will be considered a controlled foreign company where it is subject to more than 50% control by a parent company that is tax-resident in Malta and its associated enterprises, and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in Malta. This will not apply to CFCs with profits not larger than €750,000 and non-trading incomes not greater than €75,000, and to CFCs whose accounting profits amount to no more than 10% of their operating costs for the tax period.

 

[Martin Everson]

This does not shed any more light on your particular non-dom situation however. What is interesting from your link is the below.

"As part of the ATAD rules, as from 1 January, a change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event."

 

[jackfrost]

Can anybody get anything out of this? Does it mean CFC rules continue to NOT apply in general when your annual turnover is less than 750k meaning Malta LTD + foreign holding + UBO in Malta is still 6/7th refunds and nothing changes?

Would the UBO on Malta be the "parent company with more than 50% control" of the foreign holding in this case?

 

[jackfrost]

This does not shed any more light on your particular non-dom situation however. What is interesting from your link is the below.

"As part of the ATAD rules, as from 1 January, a change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event."

Thought so. Although if you are only consulting and shutting down the company, opening up another within the EU (i read that shifting assets within the EU does not necessarily trigger those new atad exit taxations?) it is probably questionable what should be taxed?

 

[Martin Everson]

Although if you are only consulting and shutting down the company, opening up another within the EU (i read that shifting assets within the EU does not necessarily trigger those new atad exit taxations?) it is probably questionable what should be taxed?

Your link says in regards to doing that it just defers the tax.

"Where the country of the new residence of the taxpayer or of the new location of the assets is another EU Member State, the payment of the tax can be deferred."

 

[jackfrost]

@Martin Everson Do you have an opinion on the 750k clause in relation to the whole scenario and that the Maltese LTD in this case is not the parent of anything but the foreign company the parent of the Malta LTD and the UBO the "parent" of the foreign LTD?

 

[Martin Everson]

@Martin Everson Do you have an opinion on the 750k clause in relation to the whole scenario and that the Maltese LTD in this case is not the parent of anything but the foreign company the parent of the Malta LTD and the UBO the "parent" of the foreign LTD?

On face value it seems if you are below the 750k profits threshold you have nothing to worry about in CFC terms in Malta. The CFC rules will always be applied from Malta side where you are resident and not Gibraltar. You may want to however consider getting an Estonia company (no tax on non-distributed profits) to keep everything within EU and switch it for the Gibraltar company via share sale. You may want to do this prevent any future changes in Malta or EU tax law or EU parent-subsidiary directive that may force withholding tax to apply to dividends paid to third countries such as Gibraltar (after brexit).

 

[jackfrost]

@Martin Everson Lets suppose i sell the Malta LTD over the an Estonian holding where i am the UBO again. The profits distributed by the Estonian company to me should still be tax free in Estonia since it originates from dividends from another company (Malta LTD) correct? And in Malta it would be case of non remitted dividends from foreign sources.

 

[Martin Everson]

@Martin Everson Lets suppose i sell the Malta LTD over the an Estonian holding where i am the UBO again. The profits distributed by the Estonian company to me should still be tax free in Estonia since it originates from dividends from another company (Malta LTD) correct? And in Malta it would be case of non remitted dividends from foreign sources.

The Estonia company setup is not ideal for profit distribution but for those looking to retain profits tax free and simply use company relevant expenses paid outside Malta to live off. In such a scenario the setup is tax free EU setup. However an Estonia company paying a Malta resident a dividend will have WHT applied regardless of if the payment is made outside Malta.

So lets assume you made 250k EUR in 2018. You do your 6/7 full imputation in Malta to get 5% tax paid in Malta minus your Malta salary to live on. Then the remainder paid to your Estonia company sits tax free in Estonia company. You can draw a little more income to spend offshore via Estonia company relevant expenses paid to a personal non-Maltese account. It will just mimic your Gibraltar setup but you cannot like a Gibraltar company take money out from the company outside Malta with no tax consequences. This will all work for profits under Malta's CFC 750k profit threshold it seems.

 

[jackfrost]

Thanks, not so ideal. Cyprus non-resident holding probably better idea than as that should be same as the Gib holding last time i checked - might be wrong though.

Will be interesting to see if Malta really sticks the finger to the EU with a generic 750k treshold which would be pointless anyways i guess since you could simply setup multiple companies? Larger companies can probably easily get around the 50%, 10% etc pp.

 

[Martin Everson]

I was thinking the exact same thing about setting up multiple companies. However I expect Malta to find themselves in front of EU if they don't observe the spirit of the law. I have not looked at Cyprus. A Malta company with Cyprus shareholder used to be the standard setup that tax law firms sold. I forget why they stopped doing this or at least stopped advertising this setup.

 

[jackfrost]

https://mfin.gov.mt/en/The-Budget/Documents/The_Budget_2019/Budget_speech_2019.pdf

1.4
Controlled Foreign Company
(CFC)
Rules
An entity will be considered a CFC where it is subject to more than 50% control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in
Malta.
The measure will not apply:
-
To a CFC with accounting profits of no more than EUR 750,000, and non
trading income of no more than EUR 75,000; or

To a CFC whose accounting profits amount to no more than 10 percent of its operating costs for the tax period.

The parent company will be entitled to double taxation relief for the tax paid by the CFC on the included income. The regulations also provide for the avoidance of double taxation that could arise if the CFC subsequently distributes its profits or the parent company disposes of its interest in the CFC.

 

[jackfrost]

Do the 75k non trading aka passive income apply to the e.g Gibraltar holding or shareholder as that is all passive income? (dividends from Malta LTD and dividends to shareholder)

 

[jackfrost]

Or does the eu parent-subsidiary directive come into play there