Malta is seeking to strengthen its status as a jurisdiction of choice for both the financial services and high-tech manufacturing sectors, which, together with tourism, form the bedrock of the Maltese economy.
Malta is seeking to strengthen its status as a jurisdiction of choice for both the financial services and high-tech manufacturing sectors, which, together with tourism, form the bedrock of the Maltese economy. The Maltese legislature has undertaken a number of initiatives to simplify the legal and tax framework for cross-border mergers and acquisitions (M&A) involving Maltese entities. To this end, Malta has fully implemented the European Union (EU) Merger Directive, which provides possibilities for tax-neutral company reorganizations in addition to those that were already available under Maltese domestic law.
In recent years, Malta has emerged as a jurisdiction of choice for multinationals seeking a cost-effective, tax-efficient jurisdiction within the EU. This is due to a number of factors, including Malta’s:
Under Maltese law, M&A can be achieved in various ways, such as purchase of assets, purchase of shares, purchase of going concern or exchange of shares. Further, the Maltese Companies Act provides that two or more companies may be amalgamated through a merger by acquisition or a merger by formation of a new company.
This report provides a general overview of tax and other issues relating to cross-border M&A in Malta and clarifies the frameworks within which the different operations may take place. In particular, the following aspects are addressed:
Domestic M&A activity has remained stable, driven mainly by the consolidation of smaller firms into larger economic entities to reduce fragmentation and by strategic acquisitions by the larger corporates to generate synergies. This activity has also seen foreign corporations either acquiring the majority stakes in previously wholly domestically owned businesses or taking stakes in joint ventures with domestic investors.
Internationally, there has been significant interest from foreign companies seeking to set up a European business base in Malta by either establishing a Maltese company that would then acquire another European company or group or by a cross-border merger. Indeed, Malta has experienced an increasing level of international M&A activity through either:
Asset and share purchases have different tax consequences for the seller and buyer.
In a share deal involving a company that does not own non- business Maltese real estate, a seller who is not resident in Malta has no exposure to tax on capital gains. By contrast, an asset deal involving a Maltese business owned by a company resident and domiciled in Malta normally exposes the company to tax on capital gains from the transfer of the business and the recapture of previously claimed tax depreciation.
For the buyer, an asset deal generally presents advantages. The tax depreciation is calculated on the amounts at which assets are acquired, avoiding the need to undertake extensive due diligence regarding the assets, liabilities and obligations inherent in acquiring a company.
Purchase of assets
Implications for the seller
A transfer of a business or business assets normally is subject to capital gains tax at the rate of 35 percent. However, the effective tax suffered in Malta may be reduced to 5 percent under Malta’s full imputation and tax refund system on profit distributions. Where the seller is a company resident in Malta (by virtue of central management and control) but not domiciled (incorporated) in Malta and the transfer comprises capital assets (business/shares and other assets) not situated in Malta, no exposure to Maltese tax arises. Such a resident non-domiciled company is only taxable on its Maltese source income/capital gains and on foreign-source income that is actually received in Malta.
The Income Tax Act (ITA) provides for an exemption from such tax where assets are transferred between companies that are deemed to be a ‘group of companies’ for ITA purposes.
A ‘group of companies’ is defined to include companies that are controlled and beneficially owned directly or indirectly as to more than 50 percent by the same shareholders.This is further qualified for intragroup transfers of immovable property situated in Malta or securities in a ‘property company’ (essentially defined as a company that owns immovable property in Malta, directly or indirectly, through its shareholdings in other bodies of persons). In this case, the ultimate beneficial shareholders of the transferor and transferee companies must be substantially the same, with only a 20 percent variance in each individual’s shareholding in the two companies (‘immovable property group exemption’). Where the applicable conditions are met, no loss or gain is deemed to have arisen from the transfer.The cost base of the assets does not increase for tax purposes, but the tax on the capital gain is deferred until a subsequent transfer outside the group.
As Malta has fully implemented the EU Merger Directive (90/434/EEC), qualifying cross-border mergers that do not meet the conditions for these exemptions could be achieved tax-neutrally under the directive.
Value added tax
Goods and services that fall within the scope of Maltese valued added tax (VAT) are chargeable at the rate of 18 percent.
However, the transfer by a person of assets of its economic activity is neither a supply of goods nor a supply of services and thus falls outside the scope of Maltese VAT, provided all of the following conditions are met:
Where the transferee is not registered under article 10, the above provision may still apply, provided it is proved to the Commissioner for VAT that the transferor did not qualify for a credit of the input tax attributable to the acquisition and the accumulation of the assets being transferred.
Implications for the buyer
In principle, the purchase of assets may increase the cost base for the buyer while a gain from the sale is taxable for the seller. However, Maltese tax law only imposes a tax on transfers of certain prescribed capital assets.
For tax purposes, it is necessary to apportion the total consideration among the assets acquired. Where the purchase agreement specifically stipulates the purchase price for each asset acquired, the allocation generally is accepted for tax purposes. Although Malta does not have any transfer pricing legislation, the amounts stipulated in the purchase agreement should approximate fair value. An acquisition of assets must be accounted for in accordance with International Financial Reporting Standards (IFRS) 3, which requires the purchase price to be allocated to the identifiable assets acquired on the basis of their fair value. Where the purchase agreement does not specifically allocate the purchase price to the various assets acquired, the IFRS accounting values are generally recognized for tax purposes.
Goodwill is the amount by which the total purchase price exceeds the value of identifiable tangible and intangible assets. Goodwill is not deductible for tax purposes.
Tangible assets, plant and machinery (including computers and software), and industrial buildings and structures can be depreciated for tax purposes. Tax depreciation for plant and machinery is calculated on the straight-line method over the minimum number of years. Tax depreciation for industrial buildings or structures (excluding land) comprise an initial allowance of 10 percent plus a straight rate not exceeding 2 percent per year. Where the acquiring and selling company are related (50 percent shareholding or both owned and controlled 50 percent by same shareholder), the wear and tear deductions for the acquiring company are computed on the lesser of:
On disposal of a depreciable asset, further tax depreciation or recapture of tax depreciation previously claimed may result, depending on whether the disposal proceeds are less or more than the tax base cost.
Step-up in base cost on cross-border merger
On a cross-border merger, a Maltese surviving company may elect an acquisition cost of fair market value at the time of acquisition in cases where the assets were previously situated outside Malta and owned by a merging company that was not domiciled and/or resident in Malta before the merger. This stepped-up value is the tax base value for all tax purposes in Malta, including tax depreciation/amortization and eventual sale. The election must be made in the year following the year in which the merger occurs.
Where a transfer of assets takes place pursuant to a merger/ division under the terms of the Companies Act, the acquiring company succeeds to all the assets, rights, liabilities and obligations of the companies being acquired, including any domestic unutilized tax depreciation and tax losses. In all other acquisitions and share exchange transactions, unutilized tax depreciation and tax losses cannot be transferred between different legal entities.
Value added tax
If the seller has charged VAT, the buyer may or may not be able to recover the VAT, depending on the nature of the buyer’s business.
Duty on documents and transfers
Where the merger involves the transfer of immovable property or shares in companies having 75 percent or more of the value of fixed assets being Maltese immovable property, a duty of 5 percent is normally payable unless the immovable property group exemption applies. Further, where the merger involves the transfer of shares, a duty of 2 percent may be payable unless one of the numerous exemptions apply.
The duty is payable on the higher of the consideration or market value. In practice and in accordance with the Civil Code, the buyer normally pays the duty. However, the law provides that the seller and the buyer are jointly and severally liable for the payment of the duty.
Main advantages for buyer
An advantage of an asset purchase over a share purchase is that the tax cost base of depreciable assets may increase and new intangible assets (e.g. intellectual property rights internally generated by the target) may be created on which the acquiring company may claim tax deductions. Where a purchase of assets is financed by debt, the interest expense is incurred by and deductible for the operating company, thus ensuring that it is immediately utilized against operating profits.
Purchase of shares
Implications for the seller
Generally, a seller is subject to tax on the chargeable gain on the transfer of shares at the rate of 35 percent except in the following circumstances:
Implications for the buyer
On a share deal, the tax base cost of the assets of the target company remain unchanged. The buyer can apply a step-up the base cost to market value if the tax residence of the target company is transferred to Malta or if the target company is re-domiciled to Malta.
Payment for indemnities and warranties
Subject to the terms of the sale-purchase agreement, an amount received or payment pursuant to warranty provisions is normally regarded as capital in nature and constitutes an adjustment to the agreed purchase price.
Unutilized tax depreciation and tax losses
The acquiring company generally inherits unutilized tax depreciation and tax losses. However, where the shares in a company are acquired solely or mainly for the purpose of acquiring a tax advantage, unutilized tax depreciation and tax losses may be lost.
Crystallization of tax charges — de-grouping provisions
Where the target company acquires an asset from a group company that is exempt under the immovable property group exemption within 6 years of the acquisition of the target and the acquisition causes the target to cease being part of the original group, the previously exempt gain crystallizes in the hands of the target company. Provision for this liability should be taken into account in establishing the transfer price. Alternatively, the liability may be transferred to a company of the seller by joint election, subject to certain conditions.
Given Malta’s imputation and tax refund system, in the vast majority of cases, it is normally beneficial for the seller to realize part of its value in the target by paying dividends or simply declaring them, which creates a liability for the target. The payment normally results in no further tax.
The seller may also be entitled to claim tax refunds (normally, 6/7 of the 35 percent Malta tax charge) from the Maltese tax authorities and the sales proceeds may be correspondingly reduced.
Duty on documents and transfers
Unless the immovable property group exemption applies, duty at the rate of 5 percent is due where Maltese immovable property accounts for 75 percent or more of the fixed asset value of the target company or group. In other cases, a duty of 2 percent is due on the transfer of shares; however, the law provides for a number of exemptions that typically exempt most international M&A activity from this 2 percent duty.
Several potential acquisition vehicles are available for achieving a merger or acquisition. The tax implications ultimately influence the choice of vehicle. There is no capital duty on introducing capital into a Maltese company or branch or a Maltese-registered societas Europaea.
Local holding company
A Maltese holding company is taxed as an ordinary company at the standard corporate tax rate of 35 percent. However, under Malta’s imputation tax system, no tax is payable on dividends received from resident companies. Moreover, on the receipt of dividends from other resident companies, the holding company may claim tax refunds, which generally reduce the Maltese tax to between 0 and 6.25 percent.
These tax refunds may also arise as a consequence of debt financing since the interest expense is deductible against dividends received, thus releasing all or part of the underlying tax on the dividends as a tax refund. Where certain conditions are met (i.e. 10 percent holding), a participation exemption should apply to any income derived from non-resident companies and to gains arising from the disposal of shares in resident and non resident companies.
Where Malta is chosen as the domicile of an acquisition vehicle that will acquire non-resident companies, it is beneficial to use a company not domiciled/incorporated in Malta but resident in Malta by virtue of the exercise of central management and control (effective management) in Malta. Such a company is only subject to Maltese tax on Maltese source income and gains and on foreign income actually received in Malta; the company is not taxed on foreign source capital gains even if received in Malta. Such a company may thus benefit from Malta’s network of tax treaties.
Malta does not levy any withholding taxes (WHT) on dividends, interest and royalties.
Foreign parent company
The use of a foreign parent company as the acquisition vehicle does not create any advantages or disadvantages from a Maltese tax perspective. The foreign parent is entitled to any dividends, interest or royalties without any Maltese WHT.
The parent is also entitled to tax refunds paid by operating distributing companies in the same way as a Maltese holding company, thus reducing the Maltese tax liability to between 0 and 6.25 percent. However, the receipt of dividends and tax refunds by the foreign parent may expose it to tax on the dividend and/or tax refund in its country of residence.
Non-resident intermediate holding company
See ‘Foreign parent company’ above.
Where a branch of a foreign company undertakes the acquisition of the target’s business, as the foreign company is a person not resident or domiciled in Malta, it is subject to tax only on Malta source income and capital gains. Malta source income includes profits derived from any trade/ business that is carried out from Malta. Any foreign-source income and gains derived would not be taxed in Malta even if the proceeds were received in Malta. Non-trading income, such as dividends received from companies not resident in Malta, is regarded as foreign income accruing to a person not domiciled and not resident in Malta, so it is outside the scope of Maltese taxation. Such non-trading income is not normally attributable to the trading activity of the Maltese branch.
The profits (determined in the normal way) of the Maltese branch are taxed at 35 percent in the same way as a company resident in Malta is taxed. On a distribution of such profits by the foreign company of which the Maltese branch forms part, the shareholders of the foreign company are entitled to claim the applicable tax refunds from the Maltese tax authorities, which reduces the tax burden to between 0 and 6.25 percent. Further, Malta does not impose any WHT on branch profits.
Joint ventures do not have a specific legal form under Maltese law and can be conducted through partnerships, limited liability companies or contractually. Where a legal form is not established or a partnership is established, the partners are generally assessed on their share of the profit of the joint venture. The use of partnerships in Malta as the medium to carry out an activity may not always be beneficial since the tax refunds that reduce the Maltese tax burden to between 0 and 6.25 percent may not always be available. However, as of the 2016 assessment year, the partnership may elect to be treated as a company, thereby allowing the application of the tax refund system.
In Malta, both equity funding and debt funding are beneficial from a tax perspective. Equity funding (including non- statutory equity such as shareholders’ contributions) maximizes the notional interest deduction, while debt funding (including profit-participating loans, which are regarded as pure debt for Maltese tax purposes) allow the deduction of actual interest expenses.
As mentioned, the advantage of funding the acquisition with debt is that the ITA provides a tax deduction where interest is payable on capital employed in acquiring income. In addition, Malta does not levy any WHT on interest and does not have any thin capitalization rules. By contrast, dividends are not deductible for tax purposes in Malta.
Deductibility of interest
Maltese tax law provides for the deductibility of interest incurred on money borrowed, provided that the interest is payable on capital employed in acquiring income.
This deduction rule has the following implications for the buyer:
Malta does not have any thin capitalization rules, so there is no limit on the amount of debt financing. Further, Malta does not have transfer pricing rules, although a general anti-avoidance provision may apply in limited circumstances.
Withholding tax on debt and methods to reduce or eliminate it
Under Maltese tax legislation, interest paid to a non-resident is not subject to tax (by withholding or otherwise), provided that the debt claim for which the interest is paid is not effectively connected with a permanent establishment of the non-resident in Malta.
Checklist for debt funding
A buyer may use equity to fund its acquisition with no limitation. This includes the ability for the acquiring entity to issue shares to the seller in full or partial satisfaction of the consideration. Further shares may be issued after the acquisition.
Malta does not levy any stamp duty or other type of capital tax on the issue of shares. Malta does not levy any WHT on the payment of dividends to non-residents. Dividends are not deductible for tax purposes.
Shares may be issued at their nominal value or at a premium, which company law treats as statutory share capital. Subject to certain conditions, the acquisition of a target in consideration for the issue of shares may be exempt from the requirement to account for the inherent share premium in a share premium account.
Notional interest deduction
A notional interest deduction (NID) in force 2018 and later assessment years was introduced to achieve equal treatment of debt and equity financing, by granting an additional deduction for the return on equity financing. The NID may also simplify Malta’s full imputation system since imputation credits are reduced as a result of claiming the NID.
The NID is optional and can be claimed by companies and partnerships resident in Malta (including Maltese permanent establishments of foreign entities) against their chargeable income for the year.
The NID is calculated by multiplying the deemed notional interest rate by the undertaking’s balance of risk capital at year-end. The notional interest rate is the risk-free rate for Malta government stocks with a remaining term of about 20 years (currently about 2 per cent) plus a premium of 5 per cent. Thus, the NID rate at the time of writing would be expected about 7 percent.
For NID purposes, risk capital includes share capital, share premium, reserves, interest free loans and any other item shown as equity in the financial statements as at year end. The maximum deduction in a year cannot exceed 90 percent of chargeable income before deducting the NID. Any excess can then be carried forward to the following year. Remaining chargeable income is subject to tax at the standard rates.
Where a company or partnership claims a NID, the shareholder or partner is deemed (for tax purposes) to have received the corresponding notional interest income from the company or partnership. Distributions of profits relieved from tax by the NID, however, are not charged to tax.The legislation includes an anti-avoidance provision to prevent abuses of the NID.
As mentioned earlier, exemptions in Maltese law enable various reorganizations to be achieved in a tax-neutral manner.
A profit participating loan or a loan with any other mixture of the characteristics of both debt and equity could be used to finance the acquisition of a Maltese entity. From a Maltese viewpoint, such arrangements are treated as loans, so the interest is deductible in Malta.
The discount or premium payable on the issue of securities is normally treated as a tax-deductible interest cost of finance akin to interest. The amount of the interest is computed using the amortized cost method in compliance with International Accounting Standards (IAS) 39, using the effective interest rate method.
Where acquisitions involve elements of deferred consideration (i.e. the amount of consideration depends on the business’ post-acquisition performance), the unknown future consideration is regarded as part of the sale price and, if taxable, it is normally only taxable on receipt. Where the sale price relates to shares disposed of, the deferred settlement may be eligible for the participation exemption in the same way as the remainder of the consideration.
Concerns of the seller
In structuring any transaction, the buyer and seller have competing demands, especially where a Maltese situs business is the subject of the sale. The buyer normally prefers an asset purchase deal. The seller normally prefers a share purchase deal in light of the various exemptions and mitigations available, which include:
Usually, other tax-efficient structuring is also possible, depending on the circumstances.
Company law and accounting
The Companies Act 1995 regulates the formation, liquidation, amalgamation, division and conversion of companies. In summary, the main provisions are as follows:
Among other things, the procedure to effect a merger or a division involves preparing the draft terms of merger and division, which must be filed with the Registrar of Companies for registration and approved by a shareholders’ extraordinary resolution (of each of the companies involved in the merger or division) within 1 month of the registration. The companies may be required to redeem the shares of any dissenting shareholders.
Company law in Malta requires the application of the General Accounting Principles for Small and Medium Sized Entities (GAPSME) for qualifying entities that do not exceed the qualitative and quantitative criteria. Companies that are not eligible to adopt GAPSME are required to apply IFRS as adopted by the EU in the preparation of financial statements. Companies that are eligible to apply GAPSME may also have an option to apply IFRS as adopted by the EU (EU-endorsed IFRS).
EU-endorsed IFRS may differ from IFRS as published by the International Accounting Standards Board (IASB) if, at any point in time, the EU has not endorsed new or amended IFRS. The accounting guidance provided by IFRS on M&A has undergone significant amendment since 2004.
The definition of a ‘business combination’ refers to a transaction or other event in which an buyer obtains control of one or more businesses. The GAPSME definition of ‘business combination’ is largely the same as under IFRS.
Mergers are transactions in which the shareholders come together in a partnership for the mutual sharing of the risks and rewards of the combined entity and in which no party to the transaction in substance obtains control over any other, hence obviating the IFRS requirements for business combinations.
IFRS does not allow merger accounting or the pooling of interests method as an alternative to acquisition accounting (or the ‘purchase method’ as previously referred to in the 2004 version of IFRS 3). After the pooling of interests method was abolished, IFRS provided additional guidance on the identification of the buyer in a business combination (or acquisition), restricting such guidance to accounting for acquisitions.
The acquisition method always views a combination from the buyer’s perspective, where the identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. The buyer is required to recognize goodwill acquired in the business combination as an asset and initially measure that goodwill at its cost. The cost is the excess of the cost of the business combination over the buyer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. After initial recognition, the buyer is required to measure the goodwill at cost less any accumulated impairment losses. The buyer does not amortize this goodwill but tests it annually for impairment.
IFRS is silent on the accounting for the combination of entities or businesses under common control of corporate entities or individuals. Such arrangements include mergers as defined earlier. For similar transactions, IFRS requires management to use its judgment in developing an accounting policy that is relevant and reliable. In exercising its judgment, management may consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework. In practice, entities apply either the book value (carry-over) basis accounting method or the purchase method in accounting for business combinations involving entities under common control.
IFRS is also silent on the accounting for the formation of a jointly controlled entity. In practice, jointly controlled entities apply the principles of accounting for business combinations by analogy in measuring the fair values of the contributed assets, including the requirements for recognition and fair value measurement of contributed contingent liabilities.
When two or more entities that are ultimately controlled by the same party both before and after the business combination are merged, GAPSME allows the book values of shares held in the capital of an entity included in the consolidation to be set off against the corresponding percentage of capital, with the difference added to or deducted from consolidated reserves.
The Companies Act also requires the preparation of consolidated financial statements, although a number of exemptions are available where certain conditions are met. These exemptions apply where:
Maltese tax legislation does not provide for full tax consolidation. Nevertheless, group relief may be claimed provided that certain conditions are met:
Malta does not impose specific transfer pricing rules.
A company incorporated in another country and deemed to be tax resident therein as a result may also be tax-resident in Malta by reason of its effective management being exercised in Malta. Under Malta’s tax treaties, such a company is treated as resident in Malta if its place of effective management is in Malta. As noted, such a company is tax-resident in Malta but not domiciled in Malta and is subject to Malta tax on Malta source income and gains and on foreign income received in Malta. Any foreign source capital gains are not subject to Malta tax even if received in Malta.
Foreign investments of a local target company Malta does not have any controlled foreign company legislation.
Advantages of asset purchases
Disadvantages of asset purchases
Advantages of share purchases
Disadvantages of share purchases
Pieta PTA 9044 Malta
T: +356 2563 1004