The Republic of Malta has entered into double tax treaties or agreements with a considerable number of countries. These international fiscal arrangements are aimed at preventing double taxation and fostering a productive spirit of co-operation between the Maltese tax authorities and their international counter-parts. They also act as a formidable deterrent against fiscal evasion. The role which these treaties play within Malta's tax regime is of paramount importance, since they often succeed in providing legal clarity and flexible solutions to a wide array of problematic and controversial issues frequently encountered in the world of cross-border trade and global finance. The questionnaire below provides a general understanding of the key advantages to having a wide network of double tax treaties together, with an illustration as to how these international agreements are capable of helping States navigate their way through the murky and at times turbulent waters of international taxation.
Q1. How important is it for entrepreneurs to choose the right business entity for a new company? And how does double taxation affect them on a day to day basis?
Given the rapid pace of economic globalisation in recent years, foreign economic investment and transnational commercial enterprises have grown considerably. The economic activity is normally carried on through a variety of entities or in a variety of ways, chosen due to factors and characteristics the different entities possess and their suitability for certain situations. A selection of these entities is listed below:
- Companies with Limited Liability (various categories can be set up)
- Partnerships (having only partners with unlimited liability or some of its partners with limited liability)
- Foundations, set up for a specific purpose (with either limited liability of otherwise)
- Trusts;
- Contractual arrangements;
- Civil partnerships
The choice of entities depends on its characteristics as deemed suitable by the person making the economic contribution or investment - however Limited Liability Companies are the most popular type of entity used.
With regards to double taxation, this is an established issue for the carrying on of business generally, and affects business on a day-to-day basis by increasing costs and reducing cash for business. Whilst double taxation is not considered to be a positive thing generally, it is only in a small number of instances that States have actually taken the steps to reduce or eliminate double taxation, through the implementation of domestic measures or in income tax cases by concluding double taxation agreements bilaterally (or multilaterally) with other States.
The ever growing expansion in transnational commerce has led States to negotiate, sign and enact into national law, a complex network of bilateral and multilateral tax treaties or agreements. These international tax treaties prescribe a set of rules and guiding principles aimed at determining which tax is permissible in cross-border situations.
Q2. Can you please explain the bilateral and multilateral treaties in place within your jurisdiction? In brief, what are the overall aims, provisions and goals of each treaty.
The Republic of Malta has entered into 60 plus bilateral double tax treaties with various different States, ranging from key economic powerhouses such as the People's Republic of China and the United States of America to the smaller territories such as Barbados and Luxembourg. Additionally, Malta has signed Treaties which are either awaiting ratification or which are yet to enter into force with other States, such as Turkey and Uruguay. The latest double tax treaty that came into force was that between Malta and Switzerland on 6th July, 2012and which becomes effective as from 1st January, 2013 for certain items of income.
Whilst each double taxation treaty has been drafted in a specific manner so as to accommodate the specific needs and interest of the two contracting States, and hence may be influenced by divergent economical, cultural and legal factors pertaining to the contracting States, virtually all double taxation treaties which Malta has entered into follows the OECD Model Convention. Consequently, all double taxation treaties will prescribe provisions on the tax determination in respect of issues which can most commonly give raise to double taxation such as income, royalties, capital gains, interest, pensions, director's fees etc.
A list of these Treaties can be found on the Malta Financial Services Authority's website.
Q3. What are the key benefits of the Tax Treaties/DTAs?
These international fiscal arrangements provide numerous advantages within the sphere of transnational commerce and finance. The principle objective of a double taxation agreement is to provide a suitable framework designed to avoid the imposition of international double taxation. The key benefits of a double taxation structures are the following:
- Clarity between the contracting states over taxing rights
Double Tax Treaties provides legal clarity and certainty over the taxation rights as allocated in the Treaty between the two contracting States. The treaties would also aim to clarify other situations, such as the issue of 'permanent establishment', which is a minimum threshold requirement that must be met for a State to tax the business profits of a non resident business.
- Avoidance of Double Taxation
As mentioned above, this is one of the goals of a double tax treaty,, as it is one of the main ingredients to encourage international trade. International double taxation arises where the same profits are taxed in more than one State in respect of the same person (or in the hands of different persons), whether a natural person or a corporate entity. The classic case of double taxation arises when a resident of one country generates income in another country and is subject to tax on that income by both the country of residence as well as the country in which the income is earned (the Source country).
By providing legal clarity and certainty over the taxation rights between the two contracting States, the States would as much as possible be avoiding or mitigating situations that might give rise to double taxation, and thus avoiding the risk that that trade between the countries would stifle and their respective economies would likewise be negatively affected.
- Prevention of Fiscal Evasion
Another key goal of a double taxation treaty is to provide a comprehensive framework equipped with sufficient safeguards to combat the threat of fiscal evasion. Malta as a jurisdiction identifies combating fiscal evasion as a key priority, for itself and for its trading partners.
One of the most effective methods at combating and preventing fiscal evasion is through the exchange, between the various international fiscal authorities and regulators, of information, and the treaties generally regulate the manner in which such exchange is going to be conducted. Any contracting State may opt to channel information to the competent authorities of the other State spontaneously, where the contracting State deems it to be in the best interests of the latter that the information is provided.
Q4. How does a double taxation agreement foster cooperation between the home nation and foreign tax authorities?
As with any bilateral arrangement, the successful attainment of the double taxation treaty's objectives listed above largely depends on both contracting States adhering to and complying with the provisions stipulated therein. In order to maximise all potential benefits under the treaty, both contracting states are expected to co-operate with each other in a concerted effort.
If one were to use as an example Article 26 of the 2012 Double Taxation Relief Order signed with Switzerland, the competent authorities in both contracting states are called upon to exchange information in furthering the fiscal interests of both states, and as in other Treaties a mechanism is set up for mutual agreement on disputes that arise. This generally helps foster cooperation between the contracting parties.
Q5. Can you please explain the negotiation and drafting process within your jurisdiction? What are the key differences when dealing with partial double taxation agreement?
The negotiation and drafting process is generally not in the public domain, however in the vast majority of cases the OECD Model Convention is followed as a basis in the negotiation process. Any negotiations begin as a process to update or amend the Model Convention.
Q6. What is the best way to reduce the amount of tax withheld from interest, dividend, and royalties paid by a resident of one country to resident of the other? Please use examples to illustrate your answer.
Articles 11, 10 and 12 of the OECD Model Convention deal with such payments respectively. Contracting States may then agree between them to further lower the withholding tax rates specified in the Model Convention, if this is considered to be desirable.
Q7. How do you limit tax of one country on business income of a resident of the other country?
As specified above, the general OECD Model Convention rule is that business income that does not take the form of a more specific item of income (e.g. interest, royalties, dividends, salaries, Directors' fees etc..) is only taxed in the country where the profit generator is tax resident, unless that same profit generator has a permanent establishment in the other State and the profit can be suitably attributed to that permanent establishment.
This rule is followed in the vast majority of Malta's tax treaties. A permanent establishment is generally almost always defined in the same Treaty (generally in Article 5).
Q8. What are the procedural frameworks for enforcement and dispute resolution regarding double taxation within your jurisdiction?
The vast majority of double taxation treaties which Malta is a contracting party adopt the dispute resolution procedure contemplated in the OECD Model Convention, enshrined under Article 25 thereof. This provision provides the basis on which disputes arise on taxation that runs counter to the provisions of the double tax agreement.
Under the mutual agreement procedure, a person claiming that he was wrongly taxed has the right to present his claim to the competent authority of the contracting State in which he is a resident, within 3 years commencing from the date of notification of the disputed tax charge.
Under the Model Convention, this procedure has been amended to include the institution of arbitral proceedings for the resolution of any unresolved issues. The submission of the contentious issues to arbitral proceedings shall only take place provided that the matter was not previously determined by a Court or tribunal of either contracting party. This added form of dispute resolution is yet to be formally provided for under a double tax treaty to which Malta is a party to, however, the 2012 Double Taxation Relief Order signed with Switzerland does provide for the insertion of this update.
Q9. What are your predictions regarding double taxation agreement over the next twelve months?
We feel that this is very difficult to anticipate since such treaties are largely bilateral arrangements and are not necessarily restricted by multilaterally agreed criteria. At the same time, it is likely that certain aspects of double taxation agreements, such as exchange of information, would be the subject of wider multilateral agreements such that the obligations States will be regulated by factors beyond bilateral double taxation agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
