Group Finance Companies perform the following functions:
- sourcing external debt finance;
- accumulation of interest income and tax optimisation of high tax country group operating companies;
- redistribution of funds within the group.
Such companies may take advantage of the Malta Double Tax Treaties by providing loans in treaty countries or other countries where withholding tax on interest is low or nil.
The use of Malta entities for group finance is extremely attractive in that Malta finance companies can fulfill intra-company and inter-company financial management functions, such as granting of loans for project financing or working capital requirements. Interest payments to the Malta finance company is tax deductible in the country of the borrower reducing the overall corporation tax liability. Choosing the right international jurisdiction for the use of double tax treaties can reduce or eliminate withholding taxes on interest payments.
These structures are particularly attractive for investment into high-tax countries where, domestic tax legislation permitting, high debt structures are widely used.
Apart from the generic features of the tax system, the DTT Network and the adoption of EU Directives, other important features of the tax system beneficial to Malta (Group) Finance are the following:
- absence (under a Double Tax Treaty or the Interest and Royalty Directive) of interest withholding tax;
- possibility of deducting interest expenses from taxable income;
- absence of thin capitalisation rules or their inapplicability in the case of “back to back” financing;
- absence of interest withholding tax in connection with interest paid on loan financing, irrespective of jurisdiction or the absence of a DTT (even for interest payments to offshore jurisdictions);
- reasonable level of “margin” permitted by tax authorities.