Substance is a key theme in international structures and in international tax planning. Various tax authorities and Courts around the world are attacking structures which lack substance.
A considerable number of international tax planning structures such as finance companies, holding and sub-holding companies, intellectual property structures and trading companies are still being established to benefit from tax laws of other foreign jurisdictions in order to benefit from favourable conditions of double taxation agreements.
This can, for example, be the case when country X has not signed a double taxation treaty with country Y and therefore an additional company is set up in country Z with which both country X and country Y have signed a beneficial double taxation treaty. The only goal of the corporate entity established in country Z is to benefit from the favourable conditions of the applicable double taxation treaties. However due to the lack of economic necessity, these kinds of structures lack genuine economic activity.
Since the OECD presented their action plan on BEPS, the importance of substance has significantly increased. The ultimate goal of the BEPS initiative is to prevent the granting of treaty benefits in the case of international corporate structures which are only set up to enjoy the beneficial terms of the applicable double taxation treaties.
In case of lack of substance, one could be confronted with a considerable higher effective tax burden on one’s business activity while encountering severe problems with the tax authorities.
The extent to which substance needs to be organised depends on its actual function – an office and an employee are certainly required. Furthermore, the staff should have some basic level of own decision power, otherwise the tax authorities will easily take a position that decisions are taken in a foreign jurisdiction and not in the jurisdiction in which you have set up your corporate entity, resulting in a lack of economic substance.
Substance in Malta can be achieved in a tax efficient way while at the same time ensuring that costs are kept to a minimum. Mata is used as a hub for various financing, trading and intra-group activities being carried out in Malta. The imputation system of tax on receipt of dividends, the refunds of tax to the shareholders, the various forms of relief from double taxation and the application of the participation exemption ensures that a low effective rate of tax is achieved without resorting to any base erosion and profit shifting techniques or other use of hybrid instruments.
For further information and on advice and assistance how ACT may be of help in setting up your structures in Malta in the most tax efficient way, please contact the firm’s tax partners Stephen Balzan on firstname.lastname@example.org or Elaine Camilleri email@example.com.
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