Malta: Case Study - The Redomiciliation of a Company

Group treasury companies have become quite popular over the last number of years. With the creation of such companies questions arise such as where the company should be located, how to make the transition from the existing funding arrangements, as well as issues such as foreign exchange implications.

The redomiciliation or continuation procedure of a foreign company as a Maltese company (which must be permissible under the legislation of the jurisdiction in which the company is incorporated) involves the provisional registration and subsequently the final registration of the company as a Maltese company but without the need to liquidate the foreign company. This is very useful especially if the company has already entered into a number of loan agreements and other contracts. The final registration of the company as a Maltese company takes place upon presentation of the Memorandum and Articles of Association (in terms of the Companies Act) signed by the shareholder/s and the deregistration or cancellation certificate by the foreign authorities together with the required documentation / directors’ declarations.

Registration with the Inland Revenue Department and obtaining a confirmation of the exemption from duty on documents (or stamp duty) is also a straightforward exercise. Such companies do not need to be registered with the VAT Department (since they are not considered to be carrying on an economic activity) and therefore the Maltese company is usually set up and ‘operational’ as a Maltese company once the redomiciliation procedure and formalities are completed. There is no requirement to open a bank account in Malta (although this may be advisable) and the company may continue to operate the existing bank account/s.

Certain important aspects should be considered during the redomiciliation procedure, particularly for finance or group treasury companies:

• Whether the Maltese company be funded through debt or equity or a mixture thereof? In Malta there are no debt to equity ratios or thin capitalisation rules and no withholding taxes apply on either outgoing interest payments or dividends, therefore there is a great degree of flexibility when it comes to the funding of the Maltese company. Also, no capital duties are levied and only a registration fee (based on the company’s authorised share capital) is payable to the Registry of Companies.

• Any step-up in the book values of the company’s assets (including intangibles) may be beneficial since they give a higher tax base without triggering any adverse tax implications in Malta.

• Any ‘drop down’ of additional / new loan arrangements by means of an assignment or contribution agreement. Any resultant amounts may be capitalised into equity (or reserves) without any costs.

• The currency in which the share capital of the Maltese company is to be denominated as this determines the reporting currency. It is possible under our legislation to convert the company’s currency following the redomiciliation procedure. The Companies Act in Malta requires that audited financial statements must be prepared in the same currency in which the share capital is denominated whereas the tax legislation provides that tax payments and tax refunds are also made in the same currency (in which the share capital is denominated) and this may therefore minimise the exposure to exchange fluctuations.

Notwithstanding the aspects highlighted in the last point above, finance or treasury companies with loans in different currencies are not insulated from currency fluctuations and exchange risks. It is important to note that in Malta, unrealised exchange gains are not subject to tax.  Likewise, unrealised losses are not deductible for tax purposes and this may cause certain issues since the tax profits will be higher than the accounting profits and therefore the finance or treasury company may find itself in a situation where it cannot distribute sufficient profits to enable the shareholder or shareholders to claim the tax refund of the tax paid by the company and thus lower the overall effective tax rate. This is either overcome or else mitigated by hedging or putting in place back-to-back arrangements to reduce or eliminate the exposure to currency fluctuations.

Once the company is redomiciled to Malta, it may benefit from Malta’s extensive treaty network and the EU Directives to reduce or eliminate any withholding taxes on interest payments received by the Maltese company. Malta’s tax legislation also provides for unilateral relief provisions for the elimination of any double taxation. It is also possible to claim a Flat Rate Foreign Tax Credit (FRFTC) to reduce the tax payable by the Maltese company and the overall effective tax rate. In view of Malta’s rather unique full imputation system and the tax refund mechanism whereby shareholders may claim part of the tax paid by the company, the overall effective tax rate for group treasury companies is five per cent or less, notwithstanding that the company is subject to Malta’s standard corporate income tax rate of 35 per cent.