Under Maltese Law, M&A can be achieved in a variety of ways such as asset purchases or share purchases, acquisitions of going concerns and, last but not least, exchange of shares. Besides this, the Companies Act lays down the legal requirements and procedures for mergers and acquisitions of companies in one of two ways: either merger by acquisition or merger by formation of a new company.

As for the tax consequences from a domestic perspective, where a transfer of assets takes place pursuant to the Companies Act, the acquiring company would succeed to all the assets, rights, liabilities and obligations of the companies being acquired, including any domestic unutilized losses or tax depreciation. In all other acquisitions and share exchange transactions which are not legal mergers and or division in terms of the Companies Act, unutilized tax depreciation and tax losses cannot be transferred between the different legal entities.

Tax Free Re-organizations

Intragroup Transfers

Article 5(9) of the Maltese ITA provides for an exemption form tax where assets are transferred between companies that are deemed to be a group of companies for the purposes of the ITA (which definition includes companies that are controlled and beneficially owned directly or indirectly for more than 50% by the same shareholder). In this case no loss or gain is deemed to have arisen from the transfer.

Exemption of Transfers Involving an Exchange of Shares on the Re-structuring of Holdings upon Mergers, Demergers and Reorganisations

Another article providing for an exemption within the domestic ambit is Article 5(14). In such circumstances no loss or gain is deemed to have arisen from such a transfer, and the cost of acquisition upon a subsequent transfer shall be deemed to be the cost of acquisition of the original shares. This exemption, however, only applies where the exchange of the shares does not produce any change in the individual direct or indirect beneficial owners of the companies involved or in the proportion in the value of each of the companies in question represented by the shares owned beneficially directly or indirectly by each individual.

Transfers of Shares

Another tax exemption which is widely used in restructuring through Malta in the context of mergers and divisions is that found in Article 12 (1) (c) (ii) of the ITA. This provision provides that gains or profits generated by any person not resident in Malta on a disposal of such shares in a company is exempt from tax provided again that the beneficial owner of the gain is not a resident of Malta and that such person is not owned and controlled by, nor acts on behalf of a person ordinarily resident and domiciled in Malta.

Step up in Base Cost upon a Cross-Border Merger, re-Domiciliation or Management and Control

Upon a cross border merger or change in residence of a company via a re-domiciliation or management and control, a Maltese acquiring company may elect that the acquisition cost of assets previously situated outside Malta and owned by the acquired Company which was neither resident not domiciled in Malta prior to the said merger, be their fair market value at the time of merger. This stepped up value would be the tax base value for all tax purposes in Malta including tax depreciation/amortization and eventual sale. Such election must be made within a year following that in which the merger occurs.

Merger Directive

Furthermore, Maltese law also implemented the EU Directive on a Common System of Taxation Applicable to Mergers, Divisions, Transfers of Assets and Exchanges of Shares Concerning Companies of Different Member States (90/434/EEC as amended by 2005/19/EC), which aims at eliminating tax obstacles with respect to mergers, divisions and other similar operations between companies of different Member States. The directive is aimed principally at providing tax relief on cross border M&As. The merger directive was implemented into Maltese Law by virtue of Legal Notice 238 of 2003 as amended by Legal Notice 59 of 2006. Thus, in the circumstances to which the directive applies, tax neutrality is achieved for merging companies and its shareholders

Taxation at the Level of the Merging Entities under the Merger Directive

If a Maltese entity transfers all its assets and liabilities to an EU acquiring entity in return for the issue of new shares by the acquiring entity to the shareholders of the Maltese acquired entity, the transfer of assets and liabilities will take place at the tax book value without the realisation of any hidden reserves in the assets and liabilities. This applies provided that the transferred assets and liabilities remain attached to a permanent establishment of the acquiring company in Malta. This rule has the effect of preserving Malta’s taxing rights in respect of the PE profits and denying any step-up in the value of the assets. Capital allowances thus continue to be available in respect of the tax book value.

Taxation at the Shareholder Level

The shareholders of the acquired Maltese Company carry over the original tax base of their old shares into the shares of newly acquiring Company. An aspect peculiar to Maltese tax law is that unless the shareholders are residents of Malta, Malta will lose its right to tax the hidden capital gains arsing to the shareholders upon an eventual disposal of their shares in the acquired entity, as Malta will not have jurisdiction to tax such future capital gains.

Unutilized Tax Depreciation and Tax Losses

Where the shares in a company are acquired solely or mainly for the purpose of acquiring a tax advantage, unutilized tax depreciation and tax losses may be lost. Where a company following acquisition does not carry on the same trade/business it had prior to acquisition, it is highly likely that it will be regarded by the tax authorities as having been acquired solely or mainly for the purpose of acquiring a tax advantage.

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