Malta's Participation Exemption: Turning Holdings Into Opportunities: Receive Dividends And Capital Gains From Qualifying Holdings Free Of Tax

If you've ever looked at your international group structures and thought "this could work better," Malta is that sunny little dot in the Mediterranean that makes holding-company life a lot more pleasant. One of the reasons? Malta's Participation Exemption Regime - a set of rules that can reduce tax on certain income to effectively 0%.

The big idea: what is the participation exemption?

Malta's participation exemption is a regime that allows a Maltese company to fully exempt from Maltese tax:

• Dividends received from a qualifying shareholding (a participating holding), an
• Capital gains made when that shareholding is sold or transferred.

In other words, if your Maltese company holds a qualifying stake in another entity – often a subsidiary – then the profits flowing up the chain can be completely shielded from Malta tax, provided the conditions are met.

And if, for whatever reason, you don't or can't apply the exemption, Malta offers an alternative: you can tax the income in Malta and then distribute profits with a 100% refund of the Malta tax to the shareholders, leading to the same result in practice.

The star of the show: what is a "participating holding"?
Everything revolves around the concept of a participating holding.

First, the holding needs to be an equity holding – essentially shares that give you at least two of these three rights:

1. The right to vote
2. The right to profits/dividends
3. The right to assets on a winding up

Then, to be a participating holding, the Maltese company must satisfy at least one of several tests. In friendly terms, you qualify if your Maltese company:

• Holds at least 5% of the equity shares of the subsidiary (the most common route), or
• Has invested at least about €1,164,000 (or foreign currency equivalent) in the subsidiary, and holds that investment for an uninterrupted 183 days, or
• Has the right to appoint a director to the board of the subsidiary, or
• Has a right of first refusal over the remaining shares if the other shareholders want to sell, redeem or cancel their shares, or
• Has a call option over the remaining shares, or
• Holds the shares for the furtherance of its own business (and not just as trading stock) in a way that meets the statutory definition.

Also helpful: Malta has extended this concept beyond just classic companies. A participating holding can be in a company, certain partnerships, European Economic Interest Groupings, and some collective investment vehicles, provided they offer limited liability and meet the conditions.

Extra conditions for dividends (but not for capital gains)

For dividends from a participating holding, there's an extra layer of conditions – essentially Malta's anti-abuse / "safe harbour" rules designed to ensure the regime isn't used in purely low-tax, passive-income structures.
To apply the participation exemption to dividends from a non-Maltese entity, one of these must usually be true:

• The subsidiary is resident or incorporated in an EU country, or
• The subsidiary is subject to tax of at least 15%, or
• No more than 50% of its income comes from passive interest or royalties, or
• The holding is not a portfolio investment and the subsidiary (or its passive interest/royalties) is taxed at at least 5% abroad.

For capital gains on the sale of a participating holding, it's simpler and more generous: once you have a participating holding, gains on disposal are exempt without these extra dividend conditions.

Not just shares: branches and permanent establishments
Malta has taken the same logic and applied it to foreign permanent establishments (PEs) - think foreign branches of a Maltese company.
A Maltese company can elect to exempt profits attributable to a foreign PE, and also exempt gains on the transfer of that PE, mirroring the participation exemption for shareholdings.

This makes Malta attractive not only for pure holding structures, but also for groups with branch operations in various jurisdictions.
Why Malta works so well as a holding jurisdiction

So why are groups increasingly choosing Malta for their holding structures? A few key reasons:

1. 0% on qualifying holding income and capital gains
The participation exemption (or, alternatively, the 100% tax refund) can reduce tax on qualifying dividends and gains to effectively 0% at the Maltese company/shareholder level.
For non-participating income, Malta's full imputation system and refund mechanism often yield very low effective tax rates (commonly around 5% in many trading structures).

2. No withholding tax on outbound dividends
Malta does not levy withholding tax on dividends distributed by a Maltese company to shareholders who are not resident and not domiciled in Malta, and who meet certain conditions.
That means you can typically move post-tax profits out of Malta without additional Maltese tax friction.

3. EU member state, using EU directives
As an EU member state, Malta benefits from the EU Parent–Subsidiary Directive, which can reduce or eliminate withholding taxes on inbound dividends from EU subsidiaries, as well as other EU directives relevant to group structuring. This gives Malta a "white-listed", fully EU-compliant profile that's attractive to international investors and regulators.

4. Extensive double tax treaty network
Malta has a broad and growing network of double tax treaties, helping reduce withholding taxes on outbound dividends, interest and royalties from treaty partners into Malta, and providing mechanisms to avoid double taxation. This is a big plus if you're designing a holding company to sit at the hub of a cross-border group.

5. Flexible corporate laws & easy administration

Malta's company law and regulatory framework are designed to be business-friendly, for example:

• Low minimum share capital requirements
• No need for local shareholders (foreign owners benefit from all bonuses of a local tax system)
• Directors can be non-resident
• Possibility of re-domiciling companies into and out of Malta without a deemed asset disposal for tax purposes
  All of this makes it relatively straightforward to set up, maintain, and, if needed, relocate group vehicles.

6. Substance-friendly, not "brass plate"

Malta encourages real substance - local director/secretary, registered office, employees where appropriate – and is increasingly seen as a mainstream, onshore jurisdiction rather than a secrecy-based tax haven. Its regulator, the Malta Financial Services Authority (MFSA), operates as a "one-stop shop" for various financial services licences and is used to international structures.
For multinationals under OECD BEPS and EU substance rules, that's an important piece of the puzzle.

Where Malta holding companies often fit in practice

In practice, a Maltese holding company is often used to:

• Hold shares in operating subsidiaries across Europe, the Middle East or Africa
• Own intellectual property companies (often combined with other reliefs, while respecting substance rules)
• Serve as a regional headquarters with management, treasury and shared services functions
• Hold fund or investment structures, especially where there's a preference for an EU domicile with a flexible regime.

Profits (dividends) and exit gains can flow up to Malta, be exempt under the paticipation exemption, and then be distributed onwards without Maltese withholding tax – all within an EU, treaty-based framework.

A simple (very simplified!) example

Imagine a Maltese company ("Malta HoldCo") that:
Owns 60% of an EU operating subsidiary (clearly a participating holding), and receives dividends from that subsidiary.
If the conditions are met:
1. The dividends may be exempt from tax in Malta under the participation exemption.
2. Malta HoldCo can then distribute dividends to its non-Maltese parent or investors with no Maltese withholding tax, assuming the usual conditions are satisfied.
On an eventual sale of the EU subsidiary, the capital gain realised at Malta HoldCo level can also be fully exempt under the same regime.

A few words of caution
As sunny and attractive as Malta's regime is, a few sensible reminders:

• Other countries' domestic rules, CFC legislation and anti-hybrid rules still apply.
• The OECD BEPS framework and EU directives mean substance and commercial rationale are crucial.
• The participation exemption has specific legal conditions and anti-abuse rules that must be checked carefully for each structure.

So while the high-level picture is very appealing, detailed professional advice in both Malta and the relevant foreign jurisdictions is essential before implementing or changing any structure.

To sum it up:

• Participating holding = a qualifying, often strategic equity stake with specific rights and thresholds.
• Participation exemption = 0% Malta tax on dividends and capital gains from that holding (plus a foreign PE equivalent), subject to conditions.
• Malta as a holding hub = EU member, strong treaty network, no WHT on outbound dividends, flexible corporate laws, and a reputation as a substance-friendly, compliant jurisdiction.

If you're sketching out an international group chart and wondering where to put the "HOLDCO" box, Malta is very much worth putting in the mix – ideally with a good Maltese tax advisor and your home-country advisors at the table to tailor the structure to your specific situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.