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:

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.