Malta – Switzerland Income Tax Treaty

Status: In Force
Concluded:  25 February 2011.
Entered into Force: 6 July 2012.
Effective Date: 1 January 2013

One of the latest additions to the long list of Double Taxation Treaties (DTT) entered into between Malta and other countries (currently 60 treaties in force) is the one signed with Switzerland which came into force on 6th of July 2012 whose provisions shall apply from 1st January 2013. Previous tax agreement between the two countries was limited to taxation of income derived from aircraft and ships, established back in 1988.

The most salient features of this DTT can be summarised under the following headings:

• Limitation of Withholding Tax on Dividends and Interest
• Withholding Tax on Royalties
• Exchange of Information

Limitation of Withholding Tax on Dividends and Interest

Dividends: Under the EU Parent Subsidiary Directive Swiss companies were already exempt from withholding tax.  Such exemption required a capital contribution by the Maltese holding company of at least 25%. As per Article 10 of the new DTT, there are no withholding taxes on dividends upon distribution from a Swiss company to a Maltese company where the Maltese company directly holds 10% or more of the Swiss company’s share capital for at least one year, and when both companies are subject to tax in their respective countries.

Interest: Article 11 of this DTT also provides for an exemption from withholding tax on interest payments between companies when one company has a direct holding in the other. This exemption also requires the same conditions that apply for the exemption from withholding tax on distribution of dividend, namely, that the parent company must hold at least 10% of the shares in the subsidiary for at least one year and that both companies must be subject to taxation.

Withholding Tax on Royalties

The new DTT also provides for a similar exemption from withholding taxes on royalties as outlined in Article 12.  The latter, coupled with Malta’s tax refund regime, and the unilateral double tax relief in the form of a flat rate foreign tax credit (FRFTC), results in very low net Maltese tax on royalty income.
Another interesting opportunity exists for companies to migrate to Malta which allows for a revaluation of Intellectual Property costs.  The rebased cost, in accordance with Maltese law, can be amortised over three years.

Exchange of Information

Since the April 2009 G20 London Summit, almost 300 tax agreements have been signed to meet OECD standards on tax transparency and effective exchange of information. All OECD and G20 countries are committed to these standards.

This standard based on OECD regulations has now been introduced in the new Malta-Switzerland DTT with the inclusion of Article 26.

Conclusion

Malta applies a participation exemption on both incoming dividends and capital gains resulting from the disposal of participating holdings. Moreover Maltese law does not impose any withholding tax on distribution of dividends.

Malta applies a full imputation system and although company profits including interest are taxed at 35% shareholders can claim a refund on the ACIT (Advanced Company Income Tax) upon the distribution of dividends. When this is combined with the application of unilateral tax relief and the FRFTC, the Malta tax on interest and royalty income will result in a low effective tax rate.

Historically a Swiss-Maltese holding company setup was considered to be advantageous due to efficient tax features and strengthened by certainty in the application of the law and regulations due to tax rulings provided in both jurisdictions. The features of this new DTT, effective as from the beginning of 2013, reinforce the benefits of using Malta as a holding company for Swiss based subsidiaries.

Example of simple structure using Swiss Trading and Maltese Holding

Should you require any assistance or clarifications kindly contact:

Anthony Vella (Director)
anthony.vella@ecovis.com

Desiree Camilleri (Tax Advisory Assistant)
desiree.camilleri@ecovis.com