Chris Naudi and Dr Robert Attard explain the Maltese taxation system as it applies to insurance companies.
Malta’s major taxes are income tax and value added tax. The Maltese tax system neither contemplates wealth taxes nor poll taxes, but it does envisage a stamp duty.
The laws governing income tax have been heavily drawn from the legal instruments of the British Commonwealth, namely the Model Income Tax Ordinance. The Maltese VAT Act is based on Directive 2006/112 of the European Union. The Duty on Documents and Transfers Act, which contemplates a stamp duty in respect of certain transactions, traces its origins back to the Middle Ages.
Income tax is the major source of public revenue, accounting for 34 percent of the government’s total tax revenue. Value added tax accounts for 21 percent of the government’s revenue and social security for another 24 percent.
The Income Tax Act contemplates three distinct taxes:
a) Income tax
b) Capital gains tax, and
c) Property transfers tax.
The taxation of captive (‘affiliated’) insurance companies in Malta
The principal rules relating to the taxation of affiliated insurance companies are contained in Article 2 of the Income Tax Act; Article 27 of the Income Tax Act (Chapter 123 of the Laws of Malta); Article 48A of the Income Tax Management Act (Chapter 372 of the Laws of Malta); Article 22 and Part II of the Fifth Schedule to the VAT Act; and Title 1 of Part III of the Duty on Documents and Transfers Act (Chapter 364 of the Laws of Malta).
Maltese tax law does not have a formal captive company tax regime that applies exclusively to affiliated insurance companies; instead, the taxation of affiliated insurance companies is regulated by the rules of the Income Tax Act, which expressly envisages the concept of a protected cell company.
Normal Maltese companies
Companies that are incorporated in Malta and established for the purposes of providing insurance in respect of risks originating with shareholders or undertakings connected to such companies are subject to Maltese taxation, like any other Maltese company. The affiliated insurance company framework is not ring-fenced.
Affiliated insurance companies are subject to the standard rate of tax for companies, which is 35 percent. Affiliated insurance companies incorporated in Malta are considered to be companies that are ordinarily resident and domiciled in Malta and consequently are subject to the worldwide basis of taxation (subject to income tax in Malta on worldwide income and chargeable capital gains). Affiliated insurance companies can elect to benefit from participation exemption, which is an exemption from tax on income and gains received from foreign equity that satisfies the conditions necessary to be considered as a participating holding.
Affiliated insurance companies established in Malta must allocate their tax profits to five tax accounts: the Final Tax Account, the Immovable Property Account, the Foreign Income Account, the Maltese Taxed Account and the Untaxed Account.
The two tax accounts that are of most relevance to affiliated insurance companies are the Foreign Income Account and the Maltese Taxed Account. Profits derived by an affiliated insurance company from the business of insurance that are attributable to a foreign permanent establishment are allocated to the company’s Foreign Income Account. On the other hand, profits derived from the business of insurance that are not attributable to a foreign permanent establishment are allocated to the company’s Maltese Taxed Account. Profits that are allocated to the company’s Maltese Taxed Account and Foreign Income Account are subject to the refundable tax credit system as discussed below.
Special computational rules
All companies that undertake the business of insurance (affiliated insurance companies included) are subject to a specific tax framework, which is set out in the special provisions contained in Article 27 of the Income Tax Act. The said provisions provide for special tax deductions and favourable computational rules. Thus, the law provides that in the case of a person carrying on the general business of insurance, chargeable income is ascertained by taking into account, inter alia, technical provisions at the commencement of the year; the equalisation reserve at the commencement of the year; gross premiums written; reinsurance recoveries received; income from investments received and receivable, and interest income earned; profits or gains from the sale or disposal of investments; realised differences on exchange; other technical income, including commissions, allowances and fees received and receivable; technical provisions at the end of the year; claims paid; reinsurance premiums paid; and losses from the sale or disposal of investments.
Refundable tax credit system
Affiliated insurance companies are, like all companies registered in Malta after January 1, 2007, subject to the refundable tax credit system contemplated in Article 48A of the Income Tax Management Act. Thus, part of the tax paid by an affiliated insurance company may be refunded to its shareholders upon a distribution of such profits to the shareholders by way of dividend. The amount of the refund depends on the nature and source of the profits derived by the company that distributes the dividend. The quantum of the refund is generally a six-sevenths refund, but in certain cases, the amount of the refund is of two-thirds as explained below.
The shareholder receives net dividend of €650 and a tax refund of €300 (six-sevenths of €350).
Furthermore, distributions from the Foreign Income Account and the Maltese Taxed Account are subject to the full imputation system. Thus, outbound dividend flows are not subject to tax at all. Exemptions are contemplated in respect of certain transfers of securities in Maltese companies and liquidation proceeds as well.
Access to double taxation relief
Affiliated insurance companies are considered to be nontransparent tax treaty subjects for Maltese tax law purposes and can benefit from all available forms of double taxation relief.
Malta has an extensive tax treaty network of 51 treaties to date and is in the process of ratifying treaties with important tax treaty partners (most recently, Switzerland and the US). In the absence of a treaty, affiliated insurance companies can always avail themselves of unilateral relief (which computationally applies in a manner analogous to treaty relief) and the flat-rate foreign tax credit (a relief that is granted at a flat rate of 25 percent).
An affiliated insurance company’s election to apply any form of double taxation relief can directly impinge on the quantum of the refund.Thus, Article 48A of the Income Tax Management Act prescribes that when a company applies double taxation relief in respect of its Foreign Income Account profits, the only refund that may be availed of is the two-thirds refund, and not the six-sevenths refund.
The shareholder receives a net dividend of €650 and a tax refund €87 (two-thirds of €131).
Duty on documents and transfers
The execution of insurance policies generally attracts duty at the rate of 10 percent of the agreed yearly premium. However, insurance policies that are executed outside of Malta and are not used in Malta are outside the scope of the Duty on Documents and Transfers Act.
Value added tax
The VAT Act contemplates the chargeability of Malta VAT on:
a) Every supply of goods and services that takes place in Malta
b) Every intra-community acquisition in Malta, and
c) Every importation that takes place in Malta.
However, Article 22 and Part II of the Fifth Schedule to the VAT Act prescribe that the supply of insurance and reinsurance services by persons licensed under the Insurance Business Act or the Insurance Brokers and other Intermediaries Act, including related transactions in respect of which they are so licensed, are exempt from VAT .
Maltese tax law further strengthens the solid regulatory framework that applies to affiliated insurance companies. The Maltese refundable tax credit system is the fruit of an agreement reached with the EU; therefore, affiliated insurance companies incorporated in Malta have the right to access systems of double taxation relief and are granted full treaty recognition.
Chris Naudi is a partner and head of tax at Ernst & Young. He can be contacted at: email@example.com
Dr Robert Attard is director of tax services at Ernst & Young. He can be contacted at: firstname.lastname@example.org