Following the threat of a formal state aid investigation, Malta has notified the European Commission that it is to gradually and unconditionally abolish the fiscal advantages offered to International Trading Companies (ITCs) and Companies with Foreign Income (CFIs) by 2010 at the latest.

The advantageous tax regime effectively meant that such companies were subject to minimal or no taxation, and was “providing sizable aid to companies that are owned by non-Maltese and produce revenue outside Malta, and are therefore highly distortional without promoting growth of the Maltese economy”, the Commission stated in March.

An EC recommendation issued two months ago had given Malta one month to accept a set of new tax measures stipulated by the EC, failing which the Commission had threatened to open a formal state aid investigation. The EU found that Malta’s offshore tax regime was in direct violation of an EU ban on state aid that is liable to distort competition.

The Commission yesterday welcomed Malta’s decision, which has rendered the abolition of the preferential tax schemes by 2010 legally binding.

Competition Commissioner Neelie Kroes commented: “I welcome the abolition of Malta’s preferential regimes as a further important step towards eliminating selective tax incentives that significantly distort the location of business activities in the

single market”.

Malta’s unconditional acceptance means that existing ITC and CFI schemes will be abolished by 1 January 2007, by which date a new refundable tax credit system may replace the old regime as long as it does not effectively favour foreign-owned companies over domestic-owned companies

The ITC tax status, meanwhile, will not be granted to any new company registered in Malta after 31 December 2006, while existing ITCs will be able to benefit from the current system only until 31 December 2010.

Furthermore, the number of new ITCs registered between yesterday and the end of the current year will be limited to the yearly average number of ITC companies created over the last five years.

In 1994, Malta adopted two business tax regimes for multi-national groups setting up special-purpose companies that carry out cross-border activities. These included financing activities and other intra-group services, and the further distribution of their earnings within such groups.

Under the two regimes, Maltese companies active outside Malta had benefited from “extraordinary” refunds of corporate taxes upon distribution of their profits to shareholders residing outside Malta. As such, the profits of ITCs and CFIs profits distributed to non-resident shareholders were subject to very low taxation of 4.2 per cent instead of the normal 35 per cent that is applicable to Maltese onshore companies.