S.L. 123.187 Art. 7Controlled foreign company rule.

(1) An entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax shall be treated as a controlled foreign company where the following conditions are met:

(a) in the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than fifty per cent (50%) of the voting rights, or owns directly or indirectly more than fifty per cent (50%) of capital or is entitled to receive more than fifty per cent (50%) of the profits of that entity; and

(b) the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment under the Income Tax Acts and the actual corporate tax paid on its profits by the entity or permanent establishment:

Provided that for the purposes of this paragraph, the permanent establishment of a controlled foreign company that is not subject to tax or is exempt from tax in the jurisdiction of the controlled foreign company shall not be taken into account:

Provided also that the tax that would have been charged in Malta means the tax as computed according to the Income Tax Acts.

(2) Where an entity or permanent establishment is treated as a controlled foreign company under sub-regulation (1), there shall be included in the tax base the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

For the purposes of this sub-regulation, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income:

Provided that the said company is the taxpayer and the said significant people functions are carried out in Malta. IMPLEMENTATION

(3) There shall be excluded from the scope of sub-regulation

(2) an entity or permanent establishment:

(a) with accounting profits of no more than seven hundred and fifty thousand euro (€750,000), and non-trading income of no more than seventy-five thousand euro (€75,000); or

(b) of which the accounting profits amount to no more than ten per cent (10%) of its operating costs for the tax period:

Provided that the operating costs may not include the cost of goods sold outside the country where the entity is resident, or the permanent establishment is situated, for tax purposes and payments to associated enterprises.