State aid: Commission requests phasing out of distortive tax regimes in Malta

The European Commission has formally requested Malta under EC Treaty state aid rules to abolish the tax regime for Maltese Companies with Foreign Income (CFI) and the International Trading Companies’ (ITC) regime by the end of 2010 at the latest. Under these regimes, revenues from foreign sources paid to shareholders of an ITC or a CFI are subject to minimal or no taxation. The Commission intends to put a definitive end to these offshore tax regimes because they seriously distort competition and trade in the Single Market. Malta has one month to accept the proposed measures, failing which the Commission may open a formal state aid investigation.

Competition Commissioner Neelie Kroes said: “The schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta, and are therefore highly distortive without promoting growth of the Maltese economy”.

In 1994, Malta adopted two business tax regimes for multinational groups setting up special-purpose companies which carry out cross-border activities, including financing activities and other intra-group services, and further distribute their earnings within such groups.

Under the two regimes, Maltese companies active outside Malta benefit from extraordinary refunds of corporate taxes upon distribution of their profits to shareholders residing outside Malta. Thus, ITCs’ and CFIs’ profits distributed to non-resident shareholders are subject to very low taxation in Malta (down to 4.2% instead of the normal 35%).

In response to concerns raised by the Commission, Malta eventually proposed to convert both schemes into a tax refund system by 2012 in the course of the cooperation procedure for existing aid measures. In Malta's view, such a system would cease to be selective and thus would constitute a general tax measure.

To ensure a more effective repeal of the schemes, the Commission requested Malta to introduce rapidly the proposed new system and to anticipate its adoption for all companies to the end of 2010. In particular, the Commission requested the Maltese authorities to:

(i) abolish the existing ITC and CFI schemes by 1st January 2007 at the latest and enact by the same date a new refundable tax credit system that does not in practice favour foreign-owned companies over domestic-owned companies
ii) prohibit the tax status of ITC to any new company registered in Malta after 31st December 2006. The existing ITC shall benefit from the current system only until 31st December 2010
iii) limit the number of newly created ITCs between the date of acceptance of the appropriate measures herewith proposed and 31st December 2006 to the yearly average number of ITC companies created in the last five years.

http://ec.europa.eu/competition/state_aid/register/ii/by_case_nr_203.html

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