Malta, IPR tax planning opportunities

From an IPR tax session held in London between Deloitte, Intertrust and IPEG Consultancy, it became clear that Malta may indeed be an excellent jurisdiction to locate intellectual property (IP) and to perform research and development activities (R&D). The legal protection of IP and IP rights is ensured in Malta through domestic law as well as through Malta’s status as a member of the EU and the World Intellectual Property Organisation and a party to a number of international agreements relating to IP rights.

From a fiscal perspective, one of the main features of Malta’s competitive tax system is its effective tax rate (typically approx. 5%) due to the application of Malta’s full imputation system. In addition, while companies which are resident and domiciled (i.e. incorporated) in Malta are taxable in Malta on a worldwide basis, companies incorporated outside Malta that are only resident in Malta (on the basis that the effective management of the business is situated in Malta) are taxable in Malta on a Malta source and remittance basis. Foreign source (passive) royalty income, which is not remitted to Malta, is therefore not chargeable to tax in Malta in the hands of resident non-domiciled companies. A Malta branch of a foreign entity is only liable to Malta tax on a Malta source basis, and there is no taxation in Malta on foreign source royalty income derived via a Malta IP branch (except for that element that is connected to the activities carried on locally at the level of Malta IP branch).

Moreover, in terms of Malta’s so called ‘patent box’ regime, persons carrying out IP licensing activities from Malta may benefit from a tax exemption in respect of royalties and similar income derived from qualifying patented inventions. The 2012 Budget includes also a proposal to extend the scope of the incentive to cover works protected by copyright, including books, film manuscripts, music and art, however details are not yet known. In addition, should R&D activities be carried out from Malta, incentives, typically in the form of significant tax credits computed by reference to the amount of qualifying expenditure, may be available.

Malta’s effective tax rate in brief
5% As a result of Malta’s full imputation system
0-5% Malta’s full imputation system combined with claiming foreign tax credits, amortisation/depreciation or any other costs such as finance expenses
0% Upon application of the ‘patent box’ regime
0% In case of non-remitted foreign source royalty income derived by a Malta resident, foreign incorporated company as well as in case of foreign source royalty income derived by a Malta branch

Foreign (withholding) tax on royalties paid to Malta may be mitigated (or fully eliminated) under EU law or in terms of Malta’s extensive tax treaty network. In turn, Malta does not impose any tax on outbound dividends, interests and royalties.

Malta offers a high degree of flexibility as regards the vehicles which may be used for IP structuring which include companies, partnerships, trusts and foundations. Each of these may provide certain benefits both from a fiscal and commercial point of view. Moreover, should a securitisation vehicle be utilised to hold IP, due to specific allowable deductions in this respect, essentially no taxable income should be left, and no Malta tax should be payable, at the level of the Malta securitisation vehicle.

Malta also offers a number of benefits with regard to both entry and exit tax strategies. Maltese law offers the option to step-up the value of the IP (from historic cost to fair market value) upon migration (transfer of fiscal residence) or redomiciliation (transfer of fiscal residence and domicile without going into liquidation) to Malta. The stepped up fair market value may be amortised in case of an active trade or business. In turn, various structuring opportunities are available in Malta so as to ensure the tax free disposal of IP such as an intra-group tax exemption, absence of exit taxes and no tax on foreign source capital gains derived by Malta resident non-domiciled companies and Malta branches. Furthermore, Malta has no official transfer pricing, thin-capitalisation and CFC rules. Advanced tax rulings and informal revenue guidance are available, but, although sometimes recommended, this is not required.

The Maltese authorities continually demonstrate their commitment to provide incentives for IP holding and research and development activities carried out from Malta. Besides the fiscal incentives and legal flexibility, a highly qualified workforce, relatively low operational costs of carrying out commercial activities and the fact that English, as an official language, is very widely spoken, make Malta a very attractive and advantageous jurisdiction for doing business.

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The presentation “Malta, Intellectual Property Tax Planning opportunities” can be downloaded here

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