Taxation of cross border intra-group financing : the case for Malta

Abstract

This dissertation seeks to place Malta at the forefront of cross border intra-group financing, through the use of a Maltese group treasury entity. Accordingly, the study sets out to identify the characteristics which define a suitable jurisdiction for the establishment of this financing vehicle and whether Malta meets such criteria. Moreover, the research delves into the debt-equity conundrum to identify the financing alternatives which impact the overall tax burden of a multinational business. Consequently, this thesis also identifies the context of associated tax savings together with the potential threats and opportunities of international taxation implications. The objectives of the study have been satisfied through the use of semi-structured interviews with tax professionals and other relevant personnel, as well as through further probing into Maltese income tax legislation to determine applicability of certain provisions to the activities of the financing vehicle. Moreover, the data gathered was then applied to a computational analysis to provide a more thorough understanding of the tax calculations involved and the related outcomes. The findings reveal that the locational decision of a group treasury company is to a considerable extent tax driven, albeit other non-tax factors are also apt to be highly valued. Furthermore, the Maltese income tax treatment depends on whether the income derived by such company is classified as trading or non-trading in nature. The latter has important implications on the required allocations to the Maltese tax accounting system and the applicable income tax refund which may be claimed by the shareholders. In addition, the analysis undertaken highlights two optimal financing alternatives, both involving the use of intra-group debt in order to generate tax savings. The context is largely influenced by the effective tax payable in Malta and the amount of debt capability, the interest rate charged as well as the tax rate of the subsidiary being financed. As a result, the study concludes that Malta is highly attractive for the provision of intra-group financing, since all the tax criteria identified are satisfied. However, the findings also indicate that certain hindrances may emanate from other considerations such as the local capital market. Another consequential outcome is that since the nature of the financing activities is highly mobile and does not require substantial resources to operate, relatively large margins may nevertheless be allocated to the Maltese set-up and consequently substantial tax savings may be generated by the multinational group. Finally, the value of the study lies in the fact that it explores an area which has and should continue to contribute to the growth of Malta as a hub for financial services. Beyond this, the outcome provides an opportunity for multinational enterprises to legitimately mitigate their tax burden by increasing their investment in Malta.