- Partnership and the scheme “residents without domicile”
- Transparent Partnership for residents in low tax countries
- Transparent Partnership and participating loans
- Transparent Partnership for residents in high tax countries
- Civil Partnerships for foreign active and passive income
- Silent partnerships – Typical and Atypical
- How to register a Partnership in Malta
- How to change legal status or migrate a Partnership
Generally, a partnership is a formal arrangement by at least two parties to manage and operate a business and share its profits. It is not a separate legal person.
In Malta, it is possible to form a General Partnership with unlimited joint and several liability of all partners. In case of a Limited Partnership (en commandite), there are limited partner(s) in addition to at least one General partner. Limited partner(s) are just liable with the contribution made to the partnership.
For tax purposes, the partnership can opt to be taxed like a company (intransparent) and benefit from the specific advantages. Alternatively, it can opt to be taxed only at the level of the partners (transparent). As a result, transparent partnerships are not recognized as separate taxpayers, even though they may have a separate legal entity for corporate law purposes.
In this article we analyze such options and explain them advantages. Nevertheless, tax laws and administration constantly change, there are anti- abuse provisions and it is always required to check back structures with qualified advisors in all related countries.
Partnership and the scheme “residents without domicile”
Maltese law allows foreigners in most cases to become “resident without domicile”. They pay tax only on income arising in Malta and on other income remitted to Malta. Capital gains are not taxed at all and income that arises and remains outside Malta remains tax-free.
Similar concepts are in place in other economically dynamic states that only tax locally sourced income and/or transferable foreign income such as Cyprus, Ireland, the UK, Georgia or overseas countries like Singapore.
The principle of this scheme also applies for partnerships. Consequently, it is possible to create a Maltese partnership with partners residing outside Malta. This partnership can then opt for transparent taxation.
Transparent Partnership for residents in low tax countries
Let us assume partners of a Maltese partnership reside in a tax-free country (e.g. UAE, Monaco) or in a country where they also benefit from the status “residents without domicile”. They can form a partnership in Malta.
If substance is required to avoid source tax for interest, royalties or dividends, the Maltese partnership needs to have sufficient proprietary activities which would qualify as business profits. According to art. 7 double tax treaty only Malta has the right to tax and Malta assumes that active income arises where the business is done, while passive income arises at the place from where it is paid.
Therefore, the Maltese entity can create passive income outside the country tax free and forward it to the shareholders.
Transparent Partnership and participating loans
This is a loan that does not pay fixed interest but allows the lender to share the profits. Some countries allow to deduct the costs of participating loans up to a certain threshold.
The lenders can form a Maltese partnership that grants a participating loan. The borrower has to share the profits, but can deduct the costs. From a Maltese point of view, the revenue qualifies as passive income. For the partnership, the passive income is deemed to arise where it is paid, and if the payment is not received and not remitted to Malta, it remains tax free.
Therefore, a partnership in Malta is a practical instrument for residents of low tax countries to finance their investments.
Transparent Partnership for residents in high tax countries
If the country with higher taxation has a double tax agreement with Malta that defines the exemption method in art. 23, it offers a tool to transfer profits tax free from corporate to private level.
First, a holding in Malta is formed that fulfils all requirements of the parent- subsidiary directive. So a subsidiary can pay dividends tax free to Malta and based on the participation exemption, this remains tax free in Malta.
Second, a partnership is established as shareholder of the Maltese holding. This partnership belongs to residents outside Malta and opts to be taxed transparent. In addition, the partnership needs sufficient substance and create its own revenue. Then, article 7 of the double tax treaty allows only Malta to levy tax, and Malta applies the territorial principle.
Civil Partnerships for foreign active and passive income
Here Malta Civil Code provides for civil partnerships.
A Civil Partnership does not need to be registered with the Malta Malta Business Registry (MBR). In accordance with the rules set out in the Civil Code, civil partners are responsible for all their property, present and future, to the creditors with whom they have entered into an agreement.
Foreign residents can create a civil partnership in Malta and create some substance there. If this entity has active income outside Malta, for example from consulting projects, there are instances where such income can remain completely tax free.
Silent partnerships – Typical and Atypical
In this legal form, the silent partner is just a business investor and therefore his liability is limited to his contribution. Sometimes there is an immediate contribution plus an additional amount he obliges to invest later. The benefits of a silent partner are the ability to generate investment income with limited participation and have limited liability for any financial obligations of the partnership. Benefits can be based on total profits or on profit centre results.
There is a high level of confidentiality because the silent partner is not shown in public registers. In some countries, a silent partner can invest into a project that initially creates losses and offset other income with them.
In most countries, two different types of Silent partnerships are known:
Typical Silent Partnership: the silent partner joins a company in a pure financing role based on a civil law contract that defines his contribution and his share of profits. He is not involved in running the business and does not have the authority to act on behalf of the business.
For tax purposes, his share of profits can qualify (depending on circumstances) as interest expenses in the source country and will be taxed in the residence country of the silent partner.
This structure may be useful if the source country has higher taxation than the country of residence and if the investment object has little movable income or movable costs.
A possible application can be a registered Maltese partnership with an additional typical non-resident silent partner financing real estate in Slovakia and receiving the funds outside Malta.
Atypical silent partnership: the silent partner joins a company in an active role based on a civil law contract that defines his contribution, his participation and his share of profits. He is involved in running the business and usually has some authority to act on behalf of the business.
For tax purposes, his share of profits can qualify (depending on circumstances) as business expenses in the source country. Based on art. 7 double tax treaty, the silent partnership creates a permanent establishment in the source country. This means that the silent partner has transparent business profits which are taxed in the source country. Depending on the double tax agreement (usually art. 23), in the residence country the credit method or the exemption method (with progression clause) will apply.
This structure may be useful if the source country has lower or zero taxation while the silent partner resides in a high tax country. If in addition the exemption method applies, then business profits can be earned in the source country (low taxation) and remain taxfree in the residence country. Obstacles to consider are substance in the source country, transfer prices, as well as social security and tax progression in the residence country.
A typical application could be a resident without domicile in Malta who participates as silent partner in a company in the UAE.
Another option is a Maltese LLC plus a silent partner if they declare a nonregistered partnership which opts to be taxed transparent. Then income outside Malta may remain tax-free for the silent partner at all.
How to register a Partnership in Malta
Partners to the partnership can be both individual and legal persons. For the registration, the Partnership must have a registered address in Malta and authorized capital must be paid in full. For limited partnerships, the partnership agreement must specify the limited partner and the general partner(s), who have unlimited liability. There are standard documents to be submitted to the Malta Business Registry.
A partnership must create a financial report for the tax office, but the annual return do not always have to be submitted to the registry of companies.
How to change legal status or migrate a Partnership
A Maltese company can change its status to a partnership. A partnership agreement is required stating that the company wants to move from a company to a partnership.
Migration of a partnership within the EU is rather simple, because the partners have the right of free movement and there is no need for liquidation.
A partnership in Malta is an especially good alternative in terms of international taxation. Malta is a very flexible country in terms of doing foreign business and Partners may enjoy tax incentives.
More information and contact www.zugimpex.com.