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Taxation of Captives

The Insurance legislation package introduced in 1996 introduced sweeping changes that mirrored those previously adopted in the field of financial services. It sought to remove the distinction between onshore and offshore insurance activities by combining domestic and international business under one law. It did away with the concept of a 'zero/low tax domicile' for offshore companies and applied a tax rate (35%) across the board with innovative incentives tailored specifically to attract certain classes of business including the Captive Insurance business.

Maltese resident Captive companies are also allowed to benefit from Malta's double tax relief provisions and its diffuse double taxation network now without falling foul of inland revenue legislation in their parent's domicile.

Double Taxation Relief

Double taxation relief is available under the provisions of the Income Tax Act:

• If foreign tax has been suffered in a country with which Malta has a Double Tax Treaty, or
• In respect of Commonwealth income tax, or
• Through unilateral relief, or
• Through a system of a flat-rate foreign tax credit.

Malta's Double Tax Treaty Network ²

Malta has a sizeable network of double tax treaties. The Government is actively pursuing additional treaties with particular emphasis on potential treaty partners with a focus on financial and investment services.

Malta's current network includes over 25 countries. A comprehensive table of 'Malta's Double Taxation Agreements in Force' including a list of partners and the applicable rates may be consulted in Appendix 1 to this memorandum.

Unilateral Relief

Unilateral relief is allowed from double taxation where overseas tax has been suffered on income received from the country with which Malta does not have a treaty and where relief from Commonwealth tax is not applicable.

Flat-Rate Foreign Tax Credit ("FRFTC")

FRFTC is available to a Maltese company (Captive) that receives income or capital gains from overseas and is allocated to its Foreign Income Account ("FIA").

With effect from basis year 1999 all income and gains - in relation to risks situated outside Malta are allocated to a Captive's FIA and may benefit from the FRFTC which is granted at a standard rate of 25%, provided that the amount of FRFTC cannot exceed 85% of the FIA's chargeable tax. FRFTC is available to Captive Companies in Malta even if no tax is suffered in a foreign jurisdiction.

Captives with high expenses chargeable to their FIA (such as reinsurance costs) are keen to benefit from this incentive, as the Captive's final tax burden is reduced considerably as may be evidenced below in TABLE 1.

2/3 Tax Refund to Non-Resident Shareholders

Moreover, a non-resident shareholder (Captive parent company) receiving a dividend payment from a Maltese company (Captive) out of its FIA is entitled to a refund of 2/3 of the tax paid by the company in respect of its income. This results as an effect of the imputation system applicable to distributions from companies.

TABLE 1 below illustrates the manner of computation of the tax relief afforded to Captives and their shareholders by FRFTC and the 2/3 refund to non-resident shareholders:

Table 1
Income allocated to FIA	1,000,000
FRFTC (25%)	250,000
Grossed Up Revenue	12,500,00
Expenses charged to FIA	( 450,000)
Taxable Income	800,000
Company Tax (35%)	280,000
Less FRFTC (limited to 85% Taxable Income)	(238,000)
Company Tax Due	42,000
Less 2/3 refund to non-resident shareholders on distribution of dividends of FIA	(28,000)
Ultimate Tax Burden	14,000

 

Captives as International Trading Companies (ITC)

Alternatively, Captives may choose an ITC corporate structure. An ITC is a company whose operations are restricted to carrying out trading activities from Malta (and not in Malta) only with persons not resident in Malta. ITC's are not entitled (for tax purposes) to maintain a FIA as that described above and their taxability is computed as follows:

• ITC's are subject to income tax at the normal 35% rate on all chargeable income
• Non-resident shareholders (including Maltese companies wholly owned by non-residents) are taxed at the rate of 27.5% on dividends earned from the ITC.
• As the ITC suffers tax at 35%, non-resident shareholders are eligible to a 7.5% refund on the tax paid by the ITC.
• Non-resident shareholders are further allowed the 2/3 refund on the amount of tax paid by the ITC (i.e. 2/3 of the full 35% charged to the ITC)
• Resulting in an Ultimate Tax Burden in respect of non-resident shareholders of 4.17%

TABLE 2 illustrates the tax liability of an ITC and its computation:

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2 See full list in Appendix 1

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