January 15, 2011 | By Keith Martin in Washington, DC

Germany took steps in late November to shut down the use of Maltese holding companies to make outbound investments.

A large majority of German blue chip companies have such holding companies.

The new rules took effect on January 1.

Basically, Germany modified how it determines whether passive income received by an offshore holding company is subject to tax in the country where the holding company is located at less than a 25% rate. Tax at less than that rate would cause Germany to look through the holding company and tax the German owners of the holding company on dividends, interest or other passive income received in Malta without waiting for the income to be repatriated to Germany.

German companies had been using a two-tier structure in Malta. The lower-tier holding company was subject to tax in Malta on its income at a 35% rate. However, the upper-tier company was then allowed a tax refund of 5/7ths or 6/7th of the tax paid by its subsidiary, reducing the effective tax rate in Malta to 5% or 10%.

Germany will now look at the combined effective rate of the two companies.

Keith Martin