Malta IIP tax residents do not get 5% tax ‘relief’

Financial services practitioners say OECD blacklist has confused physical and tax residency

Financial services practitioners have taken issue with an OECD ‘blacklist’ of passport-selling nations, which claimed Malta was allowing the global rich to benefit from its fabled ‘five per cent tax’.

The think-tank already uses blacklists for uncooperative tax havens which do not adhere to automatic exchange of tax information and its common reporting standard (CRS).

But the latest grouping of 21 passport-selling nations took countries like Malta to task because, according to the OECD, it “gives access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme.”

The statement was short on analysis, but it summed up its misgivings on the premise that so called ‘high net worth individuals’ would buy a second passport “to avoid income tax on offshore financial assets in the CBI [citizenship by investment] jurisdiction” without physically living in Malta, but being merely tax-resident here.

However, Maltese corporate service providers are saying the OECD is confusing tax residency and citizenship status, and they insist that buying a passport through the Individual Investor Programme (IIP) does not confer automatic tax residency in Malta.

One board member of a small bank in Malta summed it up succinctly: “Anybody who is tax-resident in Malta is unable to claim the six-sevenths rebate on the tax paid on their global income. Which means IIP citizens who want to benefit from the rebate do not choose to be tax-resident in Malta. Indeed, their citizenship is not a condition for tax-residency.”

Malta offers a slew of tax relief measures for high net worth individuals. The big draw is the six-sevenths rebate on Malta’s highest tax rate (35%) from global dividends when those profits have been booked in a Maltese holding company. It effectively allows shareholders of a foreign company to pay 5% tax on the profits generated globally once they get kicked up to a ‘Maltese’ parent company.

The operative principle is that those shareholders are not tax-resident in Malta.

For example, foreign chief officers and directors employed for five years on annual salaries higher than €85,000 in particular sectors are eligible for a 15% flat-rate tax. But being tax-resident in Malta, they cannot avail themselves of the six-sevenths rebate on their company dividends, even if those profits were generated globally.

One player in the citizenship-by-investment game, a former due diligence head for the IIP who is now running his own private agency, has noted the OECD’s inaccuracy.

Yakof Agius, head of CivicQuo, says a certificate of residency cannot be confused with a tax residency certificate, which is itself issued by the tax authorities.

“Neither the Malta Residency and Visa Programme (MRVP) nor the IIP grant access to any preferential tax schemes. If you live in Malta for 183 days or more, you must pay tax on all income arising in Malta, on all capital gains taxable in Malta, and on all income arising abroad and remitted to Malta,” Agius says – spelling out the concept of being domiciled in Malta.

“If one resides in Malta for less than 183 days, then one is not considered a tax resident and tax is only incurred on income earned in Malta,” Agius adds, although he qualifies this saying that even if one regularly spends a considerable time in Malta, even less than 183 days a year, they could still be considered a resident for tax purposes.

A case in point are Maltese nationals who move abroad for work: they can still choose to be taxed in Malta on their ‘global’ income.

The Investment Migration Council, a lobby for passport-selling nations, thinks the OECD should make financial institutions verify tax-residency solely on tax certificates issued by government authorities, and not on the presentation of passports, ID cards. Agius says these “may imply tax residency and only in some countries”, specifically offering a lower level of due diligence.

“What would add real value is if the OECD... make use of Blockchain technology to facilitate regulatory practices, through a database similar to the commercially available international risk management databases,” Agius suggests.

That would mean that tax authorities would update the tax residency of an account holder – the citizen in question – who would then grant the financial institutions access to this information, which can only be updated by tax authorities. “Financial institutions would have the peace of mind that the information is from a government source and therefore, more reliable than any self-certification or documentary evidence.”

Like finance minister Edward Scicluna, who said the OECD’s conclusions are mistaken, Agius – whose online business is based on promoting the competitiveness of all citizenship and residency programmes – dubs the blacklist as “an unhappy attack on nation states having RCBI programmes, with a consequent reputational impact across the board.”

Agius was one of the IIP’s leaders on due diligence, and his pitch for the sale of passports to the global rich is clear: “[these] programmes have proved invaluable for countries with small economies to grow and diversify. In fact, the highest level of due diligence may be found in some of these programmes, well beyond the limitations of due diligence as practised in the financial industry.”

Blacklist bombshell

Malta sells citizenship to the global rich for €650,000 through the Individual Investor Programme, which comes with a mandatory property and investment component that raises its total cost to just over €1 million.

But the OECD this week said that “potentially high-risk” schemes are those that “give access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme.”

The Organisation for Economic and Social Development is a think-tank that has developed internationally-recognised standards on taxation, bribery, and consumer protection. Tax justice campaigners like Tax Justice International dispute their tax blacklists: they say the most secretive countries like Switzerland, the USA, Hong Kong, Luxembourg and Germany do not feature anywhere in the OECD’s hitlists.

Having said that, Malta joined a list of passport-selling nations that also offer generous tax schemes for the highly-salaried and itinerant elites, namely Antigua and Barbuda, the Bahamas, Bahrain, Barbados, Colombia, Cyprus, Dominica, Grenada, Malaysia, Mauritius, Monaco, Montserrat, Panama, Qatar, Saint Kitts and Nevis, Saint Lucia, Seychelles, Turks and Caicos Islands, United Arab Emirates and Vanuatu.

The OECD’s criticism centred on the use of residence documents such as identity cards to misrepresent an individual’s tax residence, which would therefore undermine the common reporting standard’s due diligence procedures. But in the case of Malta, such proof of citizenship or residence is not itself proof of tax-residence.

The OECD pointed out that high-risk schemes are those giving access to a low personal income tax rate of less than 10% on offshore financial assets, specifically by passport-buyers who would use a country like Malta to pay less tax on profits booked here, without leaving their original jurisdiction of residence and relocating to Malta.

But that option is already available to non-citizens.

The OECD then said this scenario can arise where the passport-buyer does not physically live in Malta, but claims he is tax-resident here simply by showing a financial institution his Maltese passport.

Then again, Maltese law bars its own tax-resident citizens from claiming the six-sevenths rebate.

Malta’s Individual Investor Programme has generated over €680 million for the government’s posterity fund, as well as an additional €170 million in property investments.

Malta is now awaiting a series of recommendations from the European Commission, after justice commissioner Vera Jourová warned that Europe’s security was being put at risk by golden passport schemes, which she described as “problematic” and “unfair”.

“I understand that citizenship schemes are favourable for the economy. But this is unfair for the people who cannot afford to buy citizenship... if in one country a dangerous person gets citizenship, he gets citizenship for the whole of Europe. Maybe we all have to renegotiate the whole system and the whole competence of Europe. Because there is a contradiction.”

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