EU asks Malta to amend tax rules for foreign firms

The European Commission yesterday formally asked 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 said it intends to put a definitive end to these offshore tax regimes because they seriously distort competition and trade in the EU's single market. The Commission said that Malta has one month to accept the proposed measures, failing which it may open a formal state aid investigation.

Contacted by The Times, the Parliamentary Secretary at the Ministry of Finance, Tonio Fenech, said the government is already taking steps to comply with the Commission's request and that there should be no problem for Malta to conform.

"We welcome the Commission statement as we have already communicated to the Commission our intentions to put our taxation rules vis-à-vis foreign companies registering in Malta on the same footing with EU legislation. Discussions with the Commission over the issue have already taken place and we will comply with the timeframe suggested by the Commission," he said.

Mr Fenech said that a whole revision exercise of Malta's taxation system is currently being undertaken by the tax reform commission nominated by the government a few weeks ago, and the changes to tax regimes in this sector form an integral part of the changes that will be announced by the government.

The issue goes back to 1994 when 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 enjoyed tax advantages that were not in conformity with EU law. These included low taxation levels.

The Commission said that in response to its concerns, Malta proposed to convert both schemes into a tax refund system by 2012. However, the Commission is insisting that these changes should be made earlier.

The Commission is expecting Malta to abolish the current ITC and CFI schemes by January 1, 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.

Brussels is also demanding that Malta prohibits the tax status of ITCs for any new company registered in Malta after December 31, 2006 and that the existing ITCs benefit from the current system only until December 31, 2010.

The Commission also wants Malta to limit the number of newly-created ITCs between the date of acceptance of the appropriate measures and December 31, 2006 to the yearly average number of ITC companies created in the last five years.

European Competition Commissioner Neelie Kroes said the schemes provide sizable aid to companies that are owned by non-Maltese and produce revenues outside of Malta. She said that these are highly distortive and do not promote any growth in the Maltese economy.