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On May 1 2004 Malta and Cyprus will become full members of the EU. Both states have ambitions to become international financial services centres. Their taxation systems support this ambition.
Accession day
May 1 2004 will see ten new member states join the EU, bringing the total to 25 at that point. Most of these states are in Eastern Europe. However two of them are Mediterranean states - Cyprus and Malta. These two states in particular have ambitions to expand their international financial services sector. At present Ireland and Luxembourg are the two traditional low tax financial services centres within the EU. In six weeks time, the number will stand at four.

Traditionally Cyprus offered a 4.25% corporation tax rate to its offshore companies. This rate was capable of being reduced by foreign tax credits. It supported its status as a favoured holding company location by an extensive treaty network, which was particularly strong with Eastern European (then Communist Bloc) countries.

Malta is less well known in the internationall financial services centre but has ambitions in that area. It too has a reasonable treaty network (39 treaties). However unlike Cyprus, Malta does not have a treaty with the USA at present.

Corporation tax rates and calculation
The standard rate of corporation tax in Cyprus is 10 percent, and this is calculated on the worldwide income of the Cypriot company.

Malta imposes a standard corporation tax rate of 35 percent. However, this standard rate can normally be reduced to 6.25 percent or less, depending on the circumstances, as a consequence of double taxation relief provisions and Malta’s full imputation system which results in tax refunds due on the payment of dividends to non-resident shareholders.

Following the signing of the Accession Treaty and based on the Commission’s assessment, the EU General Affairs Council has, with the exception of the United Kingdom, considered both the Maltese refund mechanism and the lack of anti-abuse measures in relation to the taxation of foreign source income as harmful measures in terms of the Code of Conduct for Business Taxation. This code is a voluntary political commitment and is not part of EU law. The Maltese government, supported by the UK government, disagrees with this assessment on the grounds that the measures fall outside the scope of the Code, and firmly maintains its position not to implement any changes into its legislation.

Though Malta is not obliged to change its legislation, a political solution leading to a replacement, reduction or phasing out over a transitional period of these benefits may not be excluded. Opinion in Malta is that should there be any changes a transitional period for a considerable number of years will be applicable to all beneficiaries set-up in Malta prior to the change.

Neither country imposes withholding tax tax on interest or dividends paid to foreign recipients. Malta does not impose withholding tax on royalties. The Cypriot exemption from withholding tax on royalties paid to non-residents is dependent on the non-resident not being engaged in any business in Cyprus and on the international property rights being granted for use outside Cyprus.

Holding Company regimes
Cyprus provides an exemption method in respect of both dividends received and capital gains made by a Cypriot holding company in respect of participations held in subsidiaries. The minimum participation requirement in this regard is 1 percent, and in addition, either the profits of the subsidiaries must be taxed at a rate of more than 5 percent or the distributing company must make more than 50 percent of its total income from non-passive sources.

Interest expenses are is deductible in Cyprus only if the loan is used to acquire or lend to a 100 percent subsidiary that is engaged in trading activities. In line with the exemption method used in Cyprus, there is no provision for deductibility of costs in relation to acquisitions or disposals of holdings that meet the tax exemption conditions.

Malta on the other hand provides for taxation on dividends received and capital gains made by a Maltese holding company. However refunds of 100 percent of the tax paid are available where the Maltese company has a participation in the subsidiary. A participation is defined as a 10 percent shareholding, or a holding conferring a level of control or influence, or holding certain options.

Interest expenses are deductible in Malta if ithey arises from a loan toaimed at purchasing acquire a source of income. Acquisition and disposal costs are allowed only with regard to calculating any capital gain derived from assets held by the Maltese company.

Availability of rulings from the tax authorities
There is no formal ruling system in place in Cyprus.

Malta however has a highly developed and formal system. Renewable rulings are available which provide certainty to tax payers in Malta for a period of five years. Even where there is a change in the overall tax legislation these rulings survive such changes for a period of two years.

Opportunities for Financial Service Clients
The two countries provide significant opportunities for financial services clients. Each has a reasonably well developed financial services sector, with a significant double tax agreement network. Each has significant opportunities for the repatriation of profits to parent companies without incurring additional tax locally.

The Cypriot tax system has been revised substantially in recent years to comply with EU rules, and to ensure that various provisions are not considered harmful measures by the EU Commission. The Maltese regime has also been substantially revised, but the practices of allowing flat rate foreign tax credits and a refund mechanism where certain conditions are met have drawn the attention of the EU Commission.

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