Participation Exemption and Recognised Stock Exchanges

Overview of Malta’s Participation Exemption

Malta’s participation exemption applies to both dividends and capital gains derived from an equity investment referred to as a participating holding. Such a holding arises where a Maltese registered company satisfies one of the following:

Conditions for a Participating Holding

• it holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 5% of any two of the following:

  • right to vote,

  • profits available for distribution, and

  • assets available for distribution on a winding up.

• it is entitled at its option to call for and acquire the entire balance of the equity shares, or

• it is entitled to first refusal in the event of a proposed disposal, redemption or cancellation of all the equity shares, or

• it is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director, or

• it holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of €1,164,000 or its equivalent in foreign currency in a company and that holding in the company is held for an uninterrupted period of at least 183 days, or

• the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

The company in which the equity investment is held cannot be a property company with immovable property situated in Malta.

Eligible Entities Beyond Companies

Malta’s participation exemption may also apply to holdings in other entities, such as a partnership or European Economic Interest Grouping irrespective of whether such entity elects to be treated as a company for tax purposes in Malta, or a collective investment vehicle that provides for limited liability of investors.

Additional Conditions for Dividend Participation Exemption

With respect to dividends, the participation exemption is only applicable if the entity in which the participating holding is held satisfies one of the following:

• it is resident or incorporated in a country or territory which forms part of the European Union, or

• it is subject to tax at a rate of at least 15%, or

• it has 50% or less of its income derived from passive interest or royalties, or

• it is not a portfolio investment, and it has been subject to tax at a rate of at least 5%.

Election to Tax Exempt Income

Notwithstanding the applicability of the participation exemption, a Maltese company may still elect to have the dividend income and/or capital gains which would otherwise be exempt under the participation exemption, to be taxed in Malta. This would then entitle the shareholder/s (following a dividend distribution) to claim a full tax refund of the Malta tax paid by the distributing company.

Exemption on Transfers Listed on Recognised Stock Exchanges

Apart from the participation exemption, Malta also has provisions for an exemption from capital gains arising from transfers of shares listed on a foreign stock exchange which is recognised by the Maltese tax authorities (even if the holding does not satisfy the conditions under the participation exemption).

Recognised Foreign Stock Exchanges

The stock exchanges that are recognised by the Maltese tax authorities include:

• Stock exchanges that are members of the World Federation of Stock Exchanges,

• The New York Stock Exchange,

• Stock exchanges that are included in the register of regulated markets within the European Economic Area maintained by the European Securities and Markets Authority (ESMA),

• EDX, PLUS Stock Exchange, LIFFE, NYSE Euronext London, The London Metal Exchange, ICE Futures Europe, London Stock Exchange.

How we can help

EMCS may advise and assist with respect to these exemptions as well as other exemptions which may be applicable to your particular situation in order to maximise your income and gains.