Michael Kyprianou & Co. LLC | View firm profile
Over the past twenty odd years,
Malta has become an international hub for foreign direct investment (FDI). A
solid services sector combined with seasoned professionals across a multitude
of industries have helped the FDI business model flourish, placing Malta on the
map within the European Single Market as a business base of choice for many.
Increased capital inflows,
however, bring about an increased amount of attention from foreign jurisdictions
and regulators alike. Malta, along with Cyprus, Luxembourg, Ireland and the
Netherlands has recently been criticised for adopting what has been viewed by
the larger European Member states as aggressive ‘tax-friendly’ legislation reminiscent
of the offshore centres located in more remote parts of the world. Why is this
the case and is this criticism founded?
From a Maltese perspective it can
be stated that Malta’s corporate tax refund system, the crown jewel of Malta’s
corporate taxation model, focuses on one primary aim, the attraction of FDI.
Malta’s corporate tax rate is 35%, however, non-resident shareholders are
entitled to refunds of up to 30% proportional to their shareholding in Maltese
companies, reducing their effective rate of corporate taxation to as low as 5%.
However this, taken in isolation, should not cause Member States to cry foul
within institutional fora. Malta’s robust remote gaming industry is a prime
example of why this should not be the case. Luxembourg’s avante-garde financial
services sector is another. In these cases, sound regulation, together with
efficient corporate taxation, brought about brick and mortar investments which
now cater for hundreds, if not thousands, of jobs and have increased the
quality of life within jurisdictions which would otherwise have had no exposure
to such international markets.
The European Union’s ‘Code of
Conduct Group for Business Taxation’ assesses a country’s corporate taxation
mechanisms with regards to five factors including the following:
- Targeting Non-Residents;
- Ring Fencing from the National Market;
- Non-Alignment with Substance;
- Transfer Pricing, Profit Shifting, Group Profit;
- Lack of Transparency
Malta is an OECD member which
exchanges information in line with CRS-AEOI legislation. As an EU Member State,
it also takes a rigorous regulatory approach towards Money Laundering and the
Financing of Terrorism. Maltese
Financial Institutions have adopted a risk averse on-boarding policy and
AML-CFT legislation is strictly applied on all fronts. The recently implemented
register of Ultimate Beneficial Owners also plays a part in proving Malta to be
a transparent and co-operative jurisdiction.
What seems to be the major issue
in this regard is the question of local substance and the distance between a
company’s operations and its seat for taxation purposes. Whilst letterbox companies are frowned upon by
all Member States, including Malta, as they add minimal value to a Member
State’s economy, the concept of a single market should run in tandem with one’s
right to establish one’s corporate affairs in a Member State of choice whilst
smoothly operating across borders. In today’s international business world, how
would one determine actual substance in a particular location, especially with
regards to cross-border sectors such as remote gaming, financial services and
e-commerce in general? What about smaller type companies which are run and
managed by their UBOs? Some of these entities (such as advertising entities and
affiliate marketing companies) could generate millions in revenue but are
simply made up of five to ten members who may not even be employed by the
entity in question. Should the physical
location of their operations strictly tie them to their place of corporate
taxation despite the existence of a single-market within the European Union?
Clear cut, hard and fast rules
are yet to be determined (though much guidance can be sought from EU and OECD
guidelines) and the answers to the above will still depend largely on political
pull and push factors, yet the author finds it safe to state that within the single-market,
across the board measures may cause more detriment than good, as small Member
States which derive a large part of their income from FDI should not be placed
in the same basket as larger Member States with more diversified economies.
Will the abovementioned criticism
change Malta’s status as a base for international business? At this point in
time the state of play remains unaltered and drastic European proposals
emerging predominantly from larger member states, such as ‘Tax Harmonisation’,
still remain the subjects of committee debate. It is the author’s opinion that
competition on international corporate tax matters should also be a determining
factor in this regard. Harmonisation and other federalist measures, which
collaterally impinge on a Member State’s sovereignty and policy determining
functions, would make the European Union unattractive as a business base as a
whole. Its implementation is also unrealistic from a political perspective.
Whilst the whistle has been blown on smaller member states and their methods to
attract FDI, especially following the European Parliament’s Tax3 Committee
Report, very little has been done to propose tangible solutions to what is
perceived as a problem by certain Member States. Efficient corporate tax-rates
should be allowed to exist within a more regulated environment thus
facilitating capital flows within a robust single market. Whilst championing the free movement of
goods, persons and services, it is high time that more is done to facilitate
the free movement of capital within the EU.