04/09/2014 01:44

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Malta rivals Cyprus in some ways, but fortunately its banking system is different.

A treaty for the avoidance of taxation between Malta and Israel became effective in Israel on January 1, pursuant to an order published by the Israeli finance minister on December 26.

Malta is an EU member state with moderate taxation at most. It is a modern country in the Mediterranean and has many attractions for international businesses and investors.

Malta rivals Cyprus in some ways, but fortunately its banking system is different.

The new treaty applies to residents of both countries, expressly including trusts. The residency of a trust is to be determined by reference to various factors, including residency of the trustees, governing law, location of trust assets, residence of the settlor when assets were settled and residency of the beneficiaries in the year in question.

If a company is resident in both countries under domestic tax laws, the treaty provides that the place of effective management shall prevail. But the tax authorities shall merely “endeavor” to agree what that means, so borderline cases of residency and effective management are best avoided.

In the case of natural-resource “exploration,” installations, rigs and ships constitute a taxable permanent establishment after 365 days in any two-year period. What about exploitation? Preferential withholding tax rates apply to payments from one country to a “beneficial owner” in the other country, according to the treaty.

Dividends paid by Israeli companies to a Maltese resident are generally subject to Israeli withholding tax of 15 percent, according to the treaty. This rate drops to zero if the recipient is a Maltese company and is not a real-estate investment company, but it holds directly at least 10% of the capital of the Israeli company.

Distributions made by an Israeli real-estate investment company (as defined in detail in the Israeli Income Tax Ordinance) to a Maltese resident are taxable in Israel but generally at no more than 15% of the Israeli company.

The treaty withholding tax rate for interest payments from one country to the other is generally 5%. Alternatively, a party may elect to pay regular tax on the net interest spread.

The interest withholding tax drops to zero in the case of: payments to or from a governmental body, interest on bonds publicly traded in the payor country, or in the case of international trade debts guaranteed by a state-owned body, merchandise or equipment credit and late-payment penalties.

Royalties are generally exempt from withholding tax under the treaty.

Most capital gains are exempt from tax in the payor or source country under the treaty if the seller was the beneficial owner throughout the period concerned. But Israeli tax will apply to Israeli real-estate gains and to shares in companies deriving more than 50% of value directly or indirectly from Israeli real estate.

If Israeli residents take up residency in Malta, Israel may still impose its exit tax, which is a tax on most unrealized capital gains as of the time of departure.

Pensions paid from Malta to an Israeli resident “in consideration of past employment” shall be taxable only in Israel.

Double tax is avoided by foreign tax credits. There is an information-exchange clause that also covers administration and enforcement of the tax laws of the two countries.

Comments 

Malta has a benign but comprehensive tax regime. Any investments via Malta need checking in each country, including Malta. The above comments relate mainly to Maltese investments into Israel. Israeli residents investing abroad will also need to check Israeli requirements, such as the need to fill out Tax Form 150 each year, detailing foreign corporate shareholdings.

Tax planning requires care. The treaty provides that it cannot be used in a way that constitutes an abuse of the treaty.

This appears to refer to “artificial or fictitious” arrangements as defined in Section 86 of the Israeli Income Tax Ordinance.

Therefore, check that there are people in Malta who know the business or investments concerned, not a mere post-office box or a patent box on paper only.

Nevertheless, the Israel-Malta tax treaty will be useful for trade and investment in appropriate cases and modest tax planning.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.