Belgian Deputy Prime Minister and Finance Minister tasked with the country’s Coordination of the Fight against Fraud, Vincent Van Peteghem, has pledged a crackdown on the practice of Belgians holding letterbox shell companies in Malta to register their luxury yachts and then lease them back to themselves.
This particular tax loophole has seen the registration of at least 50 luxury yachts in Malta by brass plate companies owned by Belgian tax-evading individuals.
Speaking on Thursday, Peteghem promised a crackdown on the practice in Malta and “results on the ground”.
The practice, according to the minister, is being employed by 50 of the estimated 400 letterbox companies owned by Belgian nationals in Malta.
Belgium’s Special Tax Inspectorate (BBI) has, in all, so far opened 54 files linked to Malta.
“Of these, 28 files are still pending and 26 have been closed, seven of which have resulted in total taxes of €4.4 million,” a spokesperson for the Belgian tax authorities, Francis Adyns, said this week.
The issue has long been on the European Commission’s radar, at least since the Panama Papers revealed widespread VAT evasion in the yacht and aviation sectors, which are facilitated by national rules that do not comply with EU law. Malta falls squarely within this category.
The Commission has, in fact, initiated infringement proceedings launched against Malta, Cyprus, and Greece over the reduced VAT being applied on the lease of yachts. And while the Commission says it has received assurance from Malta that the legislation would be amended, it appears the loophole is still very much alive and kicking.
A Commission impact assessment report published at the end of last December explained how such shell entities can be used for both tax avoidance and tax evasion purposes.
“An example of tax avoidance via shell entities would be the use by a large multinational of a holding company to transfer money within its corporate group through payments which are not in line with economic reality.
“As a result, the company ends up paying substantially less tax than other companies. Several examples could be made of tax evasion via shell entities.
“For instance, it could be the case of a wealthy individual evading wealth tax by concealing the ownership of a yacht by interposing a shell entity. A concrete example: an Italian businessman using a Maltese shell company to evade direct taxes on his employees.”
Aside from yet closely related to the yacht tax scam, Malta’s tax imputation system itself has come under practically continual fire, with many of its fellow EU member states crying foul and accusing Malta of effectively stealing from their state coffers by offering their companies better taxation rates, which allows companies to effectively pay close to five per cent corporate taxation on profits through a 6-7ths rebate.
On paper, Malta has the highest corporate tax rate in Europe at 35%. But in practice, almost no shell company pays that. A company that pays out dividends to shareholders anywhere in the world can reclaim so much tax from the Maltese tax authorities that it ultimately pays only 5% or even no tax, among other flexible tax rules.
To qualify for the 6-7ths tax rebate, a company or subsidiary registered in Malta does not carry out its main activities locally, and its shareholders do not reside in Malta.
Being a small economy with limited resources, policymakers have consistently argued they have had to capitalise on the islands’ strengths for service-based industries to flourish. Preferential tax rates and other financial incentives have been provided to cross-border corporations and extremely wealthy individuals for years.
But, against all odds, Malta continues to vigorously defend its taxation system on both European and international levels.