A participating holding arises where a company resident in Malta holds equity shares in another entity and the former:
- Holds directly at least 10% of the equity shares in a company, body of persons or collective investment scheme, which holding confers an entitlement to at least 10% to any two of the following rights:
- Right to vote;
- Right to profits available for distribution;
- Right to assets available for distribution on a winding up; or
- Is an equity shareholder and is entitled to purchase the balance of the equity shares or has the right of first refusal to purchase such shares or is entitled to sit as, or appoint, a director on the Board; or
- Is an equity shareholder which holds an investment of a minimum of €1.164 million (or the equivalent sum in another currency) and such investment is held for an uninterrupted period of at least 183 days; or
- Holds the shares or units for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
While it is most common for a participating holding to be held in a company, Malta’s participation exemption is also extended to holdings in other entities, such as a Maltese limited partnership (the capital of which is not divided into shares), a non-resident body of persons (with similar characteristics to the Maltese limited partnership) or a collective investment vehicle that provides for limited liability of investors, provided the above conditions for the application of the participation exemption are satisfied.
For a company to apply the participation exemption and not declare income or gains received from a participating holding, the following additional conditions must be met:
- The company is a resident or incorporated in a country or territory that forms part of the European Union; or
- The company is subject to any foreign tax of at least 15%; or
- The company does not have more than 50% of its income derived from passive interest or royalties.
In the event that the above three conditions are not satisfied, then the following two conditions must be satisfied:
- The holding in the foreign company is not a portfolio investment; and
- The foreign company or its passive interest or royalties have been subject to foreign tax at a rate which is not less than 5%.