The corporate tax rate in Malta is set at 35% and companies incorporated in Malta are subjected to tax in Malta on their worldwide income. This is irrespective of where the source of income is from and where it is received.
However, the country offers a highly efficient fiscal regime that eliminates double taxation on taxed company profits distributed as dividends. The tax system has been deemed compliant with EU non-discrimination principles by the European Commission. It has also gained approval from the Organization for Economic Co-operation and Development.
I. Corporation tax in Malta and Tax Accounting
The allocation of profits to the tax accounts is a crucial aspect of the Malta tax system as it determines the tax treatment applicable to shareholders and the tax refunds which may be claimed upon a distribution of profits.
The following is an overview of the five tax accounts, the type of income or gains allocated to each tax account and the tax refunds which may be claimed by shareholders:
|Tax Account||Allocation||Tax Refunds Malta|
|Final Tax Account (FTA)||Profits subject to a final withholding tax and income exempt from tax (e.g. participation exemption). Such income may include bank interest, tax on transfer of immovable property and certain rents.||None. No tax refunds.|
|Immovable Property Account (IPA)||Profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, as well as profits from rent, accommodation and activities related to immovable property situated in Malta.||None. No tax refunds.|
|Maltese Taxed Account (MTA)||Profits from trading activities and profits which are not allocated to the FIA, IPA or FTA.||6/7ths in the case of trading income.
5/7ths in the case of passive interest and royalties.
|Foreign Income Account (FIA)||Foreign source passive income such as dividends, interest, royalties, rent etc. and all capital gains from foreign sources (unless exempt).||6/7ths in the case of dividends that are being distributed from profits, but excluding: dividends paid out from passive interest or royalties; dividends received from a participating holding that does not satisfy the anti-abuse provisions for the participation exemption to apply; when the company distributing the profits claimed any form of double taxation relief.
5/7ths in the case of passive interest and royalties.
2/3rds where company claims double taxation relief including FRFTC.
100% in the case of income from a Participating Holding.
|Untaxed Account (UA)||The difference between the company’s accounting profits or losses and the total of the amounts allocated to the other four tax accounts. The UA is the only tax account that can have a positive or negative balance.||None or a FWT.|
In all events, the total balance of these tax accounts must equal the profits that a company has available for distribution.
Accounting Distributable Profits = FTA + IPA + MTA + FIA + UA
II. Corporate Tax Rate and Double Taxation Relief in Malta
Double taxation is a situation where the same income becomes taxable in the hands of the same person in more than one country due to different rules for taxation of income in different countries. The two main rules of income tax which may lead to double taxation are:
— Source of income rule, under which the income of a person is subjected to taxation in the country where the source of such income exists i.e., where the business establishment is situated or where the assets/property is located irrespective of whether the income earner is a resident in that country or not; and
— Residential status rule, under which the income earner is taxed on the basis of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned outside that country as well.
Thus, the same person may be taxed in respect of his/her income on the basis of source of income rule in one country and on the basis of residence in another country leading to double taxation.
In other words, the problem of double taxation may arise on account of any of the following reasons:
- A company or a person may be resident of one country but may derive income from other country as well, thus he/ she becomes taxable in both the countries.
- A company or a person may be subjected to tax on his/ her worldwide income in two or more countries. One country may tax on the basis of nationality of taxpayer and another on the basis of his/ her residence within its border. Thus, a person domiciled in one country and residing in another may become liable to tax in both the countries in respect of his/ her worldwide income.
- A company or a person who is non-resident in both the countries may be subjected to tax in each one of them on income derived from one of them. For example, a non-resident person has a permanent establishment in one country and through it he/ she derives income from the other country.
By way of example, if a person is resident and domiciled in Malta, he/she has to pay tax not only on the income which arises in Malta but also on that income which accrues, arises outside Malta or received outside Malta. Thus, if the country where that income arises chooses to tax that person’s income as well, the person becomes liable to pay double taxes.
Many countries (including Malta), have in place rules which seeks to eliminate or at least reduce the burden that double taxation causes.
Malta tax law provides for four mechanisms of double taxation relief of foreign-source income.
this is double taxation relief that is provided for in terms of a double tax treaty that Malta may have concluded with another jurisdiction. In order to determine whether or not a person is entitled to treaty relief, one must consider first and foremost whether the said person qualifies for the benefits of the treaty. Generally speaking, where a person is resident in Malta, such a person should usually be entitled to benefits under the treaty that Malta has concluded.
If the person is entitled to treaty relief, then generally such relief is provided on the basis of what is known as the “ordinary credit method for the elimination of double taxation”. Through this method, the amount of income that has been subject to foreign tax is grossed up and charged to Maltese tax in the normal manner. The Maltese tax that is chargeable on the income that has been subject to foreign tax is then reduced by the amount of foreign tax that has been incurred on the same income. The reduction is given in the form of a credit against the Maltese tax that is chargeable on the income. The credit that is given may not exceed the tax payable in Malta on the income relieved by the credit (i.e., the credit cannot result in the Inland Revenue having to refund tax that is paid abroad to the person making the claim). When applying the credit, it is essential for the person making the claim to have sufficient evidence that shows that the foreign tax that was suffered outside of Malta. Any claim for a credit allowance must be made not later than two years after the end of the year of assessment to which the claim refers.
Including Relief for Underlying Tax:
The unilateral relief provisions are intended to extend the granting of double tax relief even to those situations where Malta does not have a double tax treaty or if a treaty exists, it does not provide sufficient relief for the tax paid suffered in the other country. As a result, in terms of these provisions, Malta would provide double tax relief for foreign tax that has been suffered even if the other country does not return the compliment (hence, Malta provides such relief “unilaterally” rather than on the basis of a “bilateral” arrangement).
The conditions for availing of the unilateral relief mechanism are as follows:
- the person claiming the relief must either be a resident of Malta in the basis year during which the income is received or, unlike treaty relief, the person must be a company registered in Malta (which therefore also includes non-resident companies that carries on an activity in Malta);
- relief can only be claimed for foreign tax that is similar nature to Maltese income tax. Accordingly, a credit would typically not be allowed for foreign stamp duty or other turnover tax given that the nature of these taxes is not similar to income tax;
- the income derived by the person in respect of which relief is being claimed must arise outside of Malta;
- as with treaty relief, the person claiming relief must possess evidence of tax paid abroad.
The unilateral relief provisions also provide relief where a person receives dividends from a company that is not resident in Malta, which dividends are paid out of profits that were subject to foreign tax (this type of credit is referred to as a credit for underlying tax).
The relief is also provided in respect of tax payable in respect of dividends that are distributed by the non- resident company to the person seeking to claim double tax relief, where the non-resident company had itself received the dividend from other companies. Relief is also given in cases where the a classical system is adopted by the non-resident company, and corporate tax had been deducted prior to a possible withholding tax on the payment of a dividend.
However, in this case, it is necessary that the resident company holds at least, directly or indirectly, 10% of the voting power in the non-resident companies.
As with treaty relief, the foreign sourced income must be grossed up before charged to tax and before any relief is granted and the credit for foreign tax may not exceed Malta tax on that income. Also, similarly to treaty relief, claims for a credit allowance must be made not later than two years after the end of the year of assessment to which the claim refers.
Limitation of relief:
Relief provided under the credit method (i.e., both treaty relief and unilateral relief) is capped at the Maltese tax chargeable on the income in respect of which relief is being claimed.
Where the income is received by other persons such as an individual, it becomes necessary to establish at what rate the foreign source income is chargeable to tax in Malta. An individual is subject to tax at progressive rates ranging between 0% and 35% and therefore determining at the tax rate at which such foreign source income is subject to tax in Malta may not be straightforward.
The legislation requires the person to establish the average rate of tax that he is subject to on all of his income. Accordingly, in this case, the individual who calculates the amount of Maltese tax chargeable on his income without taking account of any credit for double tax relief. The tax which is chargeable is then divided by the individual’s worldwide income. This should give the average rate of tax at which such individual’s income is taxable (the average rate should therefore range between 0% and 35%).
This average rate is then applied to the foreign income alone. The credit for foreign tax would therefore be the lower of the actual foreign tax that was levied and the Maltese tax chargeable on the interest income by reference to the average rate.
Furthermore, the total credit for foreign tax paid cannot exceed the total income tax payable by the taxpayer for that same year.
Flat Rate Foreign Tax Credit (FRFTC):
This is a credit for foreign tax that is deemed to have been suffered in foreign-source income rather than for foreign tax that is actually suffered on foreign-source income.
This type of relief is unique to Malta.
The FRFTC can only be claimed in respect of income or gains, which satisfy all of the conditions listed:
- the FRFTC is claimed by a company that is registered in Malta (i.e., individuals and other persons are not entitled to claim the FRFTC);
- the FRFTC can only be claimed in respect of profits that fall to be allocated to the Foreign Income Account (FIA) with the exception of dividends distributed by a company out of profits that were allocated to its own FIA;
- the company must be “specifically empowered” to receive the profits in respect of which it is seeking to claim the FRFTC (objects clause in the Memorandum of Association); and
- the company is required to present a certificate issued by a certified public accountant and auditor confirming that the income in respect of which the FRFTC has been claimed has been derived from foreign sources and falls to be allocated to the company’s FIA.
- income or gains received by a company that that is registered in Malta and has made a Rule 9 election; and
- the company is specifically empowered to receive the profits and which profits would fall to be allocated to the FIA, had it not made the Rule 9 election (with the exception of dividends distributed by a company out of profits that were allocated to its own FIA); and
- in order to claim the FRFTC, the company is required to present a certificate issued by a certified public accountant and auditor confirming that the income in respect of which the FRFTC has been claimed has been derived from foreign sources and, had the company not made a Rule 9 election, falls to be allocated to the company’s FIA.
The FRFTC is calculated at the rate of 25% of the income or gains receivable by the company before any deductions or payments are made from the said income or gains net of any actual foreign tax that has been levied on the income.
Therefore, the amount of FRFTC is added onto the income received in Malta for the purposes of calculating the tax chargeable thereon.
Against such grossed-up income, the company is entitled to claim a deduction for allowable expenses.
The amount of FRFTC is then granted as a credit against the Maltese tax chargeable on the said income. Generally speaking, when no expenses have been claimed as a deduction, the effective Maltese tax chargeable on the income in respect of which the FRFTC has been claimed should be around 18.75% of the net income. When expenses are claimed, the FRFTC could result in a lower effective Maltese tax charge.
It should be stated that the FRFTC is subject to limitation rules. In this regard, the credit that can be claimed cannot exceed 85% of Malta tax chargeable on the income allocated to the FIA less double tax relief credits claimed under the other methods. Such a limitation is likely to be triggered where a significant portion of deductible expenses are claimed against the grossed-up income. If such a limitation kicks in, this could result in an effective tax rate that is higher than the desired amount given that Maltese tax would be chargeable on the entire grossed up income without obtaining a corresponding credit for the FRFTC.
Accordingly, it is accepted practice that the FRFTC does not need to be applied on all the income allocated to the FIA, but merely on that portion that would give rise to the optimal tax position from a Maltese tax perspective. This is called optimization.
When expenses incurred exceed 41% of the income earned, we need to use the optimal FRFTC, which is calculated as:
(Income – Expenses) x 0.4235
Note that the maximum FRFTC credit taken cannot exceed 85% of the Malta tax at 35%. This is the reason why we apply optimal FRFTC when we have expenses which exceed 41% of the income earned. Generally, the best result that can be obtained with the FRFTC is an effective Maltese tax chargeable of around 7.5% of the net income.
This form of relief is a limited type of relief granted on taxes paid to British Commonwealth Countries in respect of foreign sourced income derived by Maltese resident persons from such countries. This relief is only available on a reciprocity basis and nowadays not commonly used in practice.
Malta Double Tax Treaties – We Provide Legal Advice
III. Dividend tax rates in Malta. The Full Imputation System of dividend taxation
In order to understand how dividends are taxed in Malta, a foreign investor should know that the dividends are defined as one of the types of income that are subject to income tax (The ITA (Article 4(1)(c). The corporate tax rate in Malta is 35%, so shareholders will be subject to the same tax on dividends they receive.
However, the tax rate may be reduced due to Malta double taxation agreements as was described above, but also if certain types of legal entities are opted for, described below.
The application of the full imputation system results in the elimination of any economic double taxation on a dividend because tax paid by a company on the profits out of which the dividend is distributed is imputed in full as a credit against tax due by the shareholder on the dividend that he or she receives.
In terms of this system, when a person receives a dividend from a company, the shareholder is deemed for tax purposes to have received a dividend equivalent to the amount of the dividend actually received grossed up by the Maltese tax suffered on the profits that are being distributed. The grossed-up dividend is taxed in the hands of the shareholder in the normal manner.
However, at the same time, the shareholder is also entitled to a credit against the Maltese tax chargeable on the shareholder. The credit is equivalent to the tax suffered by the company on the profits distributed by way of dividend.
The credit results in the elimination of Maltese tax that is chargeable at the level of the shareholder on the dividend received (which therefore has the effect of eliminating economic double taxation). Indeed, if the credit is higher than the Maltese tax chargeable on the shareholder, then the excess of the credit over the chargeable tax results in a tax refund (referred to as an imputation refund) due to the shareholder, subject to certain restrictions.
The full imputation system only applies to dividends that are distributed by a company out of profits allocated to the company’s IPA, MTA and FIA i.e., profits that have been subject to tax at the standard rate of Malta corporate tax.
In view of the fact that the current rate of income tax applicable to companies is 35% and the maximum rate applicable to individuals is also 35%, the receipt of a dividend out of these tax accounts can never result in a shareholder having to pay additional tax on receipt of the dividend. Indeed, the ITA specifically provides in this respect that no person in receipt of dividends from profits distributed out of these tax accounts is to be charged to further tax in respect of such dividends.
Accordingly, in view of the fact that the dividends do not result in further tax payable at the level of the shareholder, in order to simplify the tax compliance obligations of individuals who are resident in Malta and of non-residents persons, such persons have the option of merely not declaring dividends that they receive from these tax accounts in their respective tax returns.
Indeed, in the case of a non-resident person whose sole income arising in Malta consists of such dividend income this also allows such person to avoid having to file an income tax return. If such persons have other income chargeable to tax below the relevant threshold and choose not to declare that dividend then the dividend (together with the full imputation credit attaching to that dividend) is merely ignored for tax purposes.
Naturally, if such a person decides to declare the dividend, then the normal imputation system up to the relevant threshold will apply (typically, persons that will seek to declare the dividend would be persons that stand to obtain an imputation refund as a result of declaring the said dividend). Companies that are resident in Malta must always declare dividends that they receive.
Distributions from the FTA:
Any dividends paid out of profits allocated to the FTA are not charged to further tax and are not considered to form part of the chargeable income of the shareholder. At the same time, the shareholder is not entitled to claim a credit or refund in respect of any tax directly or indirectly paid on such profits. Accordingly, any beneficial tax rate or tax exemption that applied to profits allocated to the FTA is also preserved in the hands of the shareholder.
Dividends distributed from the UA:
The tax treatment of a distribution from the UA depends on whether the person receiving the dividend falls under the definition of the term ‘recipient’. If the shareholder is a ‘recipient’, the company shall have to withhold tax at the rate of 15% upon a distribution of dividend from the UA.
The following persons are considered to be recipients for the purposes of distributions from the UA:
- a person resident in Malta other than a company;
- a non-resident person (i.e., both a company and individual) who is owned and controlled by, directly or indirectly, or who acts on behalf of an individual who is ordinarily resident and domiciled in Malta;
- a trustee of a trust where the beneficiaries of such trust are those listed above; and
- a non-resident EU/EEA individual (and his or her spouse where applicable) who qualifies to be taxed using the resident tax rates.
Dividend distributions made from the UA to a non-recipient (such as companies – resident in Malta or non-resident persons who are not owned and controlled by persons who are ordinarily resident and domiciled in Malta) are not taxed.
A person may declare the dividend received from the UA in his tax return and any tax withheld upon such dividend shall be credited against such person’s income tax liability.
This is suggested in the instances where a taxpayer has low levels of income (which do not exceed the 15% tax bracket) in order to avail of the refund arising from the 15% tax withheld by the company distributing the dividends.
Some further general considerations applicable to dividends:
- Generally, reference to distributions of dividends is taken to mean a distribution of dividends through the payment of cash to the shareholders. However, the ITA also considers other forms of distributions to consists of dividend payments including: bonus share issues representing a capitalisation of distributable profits; and any distribution made by a company, to its shareholders and any amount credited to them as shareholders. Furthermore, distributions which represent income derived by a company or partnerships and which are made to shareholders or partners upon a winding up of the company or partnership (including distributions from the UA) are also considered to be dividends.
- Order in which profits may be distributed by a company – as a general rule, a company is usually able to distribute profits out of the different tax accounts in whatever order that it may determine with the following exception. Where a company wishes to effect a distribution of a dividend out of profits allocated to its MTA, it is first required to ensure that it has distributed any balance of profits that are allocated to its IPA. Furthermore, in respect of dividends which are distributed out of the MTA, a company is first required to distribute all profits allocated to its MTA before 1 January 2011 and it is only after having distributed all such profits that it can distribute profits allocated to its MTA on or after 1 January 2011.
- Dividend warrant – upon a distribution of dividends, the distributing company should provide its shareholders with a dividend warrant. The purpose of the warrant is essentially to provide the shareholder with all the necessary information that he needs in order to dividend tax in the appropriate manner. This warrant shall assist an individual shareholder to consider whether such dividend income should form part of his chargeable income in order to receive an imputation refund accordingly.
If an individual decides to declare the dividend received in his income tax return, the individual must attach a copy of the dividend warrant upon the submission of his income tax return.
Furthermore, in the case of companies, by means of the dividend warrant, the company receiving the dividend would be able to allocate the dividend received in the tax account from which the distributing company distributed the dividend.
Tax refund system
Upon receipt of a dividend, the shareholders would be eligible to claim a refund of the tax paid by the distributing company on income distributed as a dividend, depending on the type and source of income received.
The shareholder of the Malta company would be eligible to receive tax refunds as follows:
100% tax refund Malta:
This refund only applies to profits distributed out of the FIA.
A company is entitled to claim the participation exemption in respect of income that it derives from a participating holding or gains that it derives from the transfer of such a holding as long as certain conditions are met.
However, a company is merely entitled rather than required to claim the participation exemption. Accordingly, if the company (despite being so entitled) chooses not to claim the participation exemption in respect of the income or gains that it derives from the participating holding, the company suffers tax on them.
As long as the profits are derived from a participating holding in an entity that is resident outside of Malta, the taxed profits are allocated by the company to its FIA.
When the company distributes these profits (i.e., profits in respect of which it was entitled to claim the participation but it chose not to claim it), the shareholder becomes entitled to full refund of the tax paid by the company on the said profits.
As a result, once the refund is claimed by the shareholder, such profits would have not suffered any Maltese tax (thus resulting in the same position as though the participation exemption would have been claimed).
2/3 tax refund Malta:
This refund only applies to profits distributed out of the FIA (save for situations involving companies that distribute profits which they derived whilst they had the status of international trading company – such profits would have been allocated by those companies to the MTA).
In respect of profits that are distributed out of the FIA, this refund is the only refund that can be claimed when the dividend is distributed out of profits that were subject to double tax relief at the level of the distributing company.
In this regard, the manner in which the 2/3rds refund is calculated depends on what type of double tax relief was claimed on the profits that are being distributed.
Where the company effecting the distribution had claimed treaty relief or unilateral relief in respect of the profits that it is distributing, the 2/3rds refund at the level of the shareholder is calculated on the Maltese tax chargeable on those profits (i.e., 35% tax) before taking account of the double tax relief credit.
Although the refund is calculated at 2/3rds of the Malta tax chargeable before taking account of the double tax credit, in all events, the refund that can actually be claimed by the shareholder can never exceed the tax actually paid by the company on profits that it distributes (i.e., the Inland Revenue will not issue a refund of tax that it has not received).
Where the company effecting the distribution had claimed the flat rate foreign tax credit (FRFTC) in respect of the profits that it is distributing, the 2/3rds refund at the level of the shareholder is calculated on the Maltese tax actually paid by the company on the profits being distributed.
Accordingly, given that the FRFTC results in an effective Maltese tax rate of between 7.5% and 18.75%, with the effect of the 2/3rds refund at the level of the shareholder, the Maltese tax burden on those profits is usually reduced to between 2.5% and 6.25%.
5/7 tax refund Malta:
A shareholder in receipt of dividends distributed by a company from “passive interest or royalties” should be entitled to a refund of 5/7ths of Maltese tax suffered on such profits.
The refund can be claimed both in respect of profits that are allocated to the MTA and the FIA.
Passive interest or royalties consist of interest or royalties which have not been derived from a trade or business, and such interest or royalties have suffered foreign tax at a rate of less than 5%.
In addition, the 5/7ths refund can be claimed upon dividends received by a company from a participating holding in an entity which does not satisfy any of the anti-abuse conditions that are applicable to the participation exemption.
The 5/7ths refund may not be applied in those cases when the dividend is paid out of profits allocated to the FIA and in respect of such profits the company has claimed relief of double taxation (whether treaty relief, unilateral relief of the FRFTC). In these cases, only 2/3rds refund can be claimed.
Participating Holding in Malta and corporation tax
Malta holding companies may hold shares in other companies, and such participations will qualify as participating holdings if they meet at least one of the following conditions:
- The holding is at least 5% of the equity shares of a company, whose capital is wholly or partially divided into shares and such, holding gives right to at least 5% of 2 of the following:
- the voting rights,
- the dividend rights,
- the rights to assets on a winding-up of the equity shares; or
- The holding is an equity holding and the equity shareholder, has the right to buy the remaining share capital of the company.
- The holding, is an equity shareholding, giving the equity shareholder the right of first refusal in the event of disposal, cancellation, or redemption of the remaining shares of the company.
- The holding is an equity shareholding and the equity shareholder, is entitled to either sit on the board of the company or, appoint a director on the board of the company.
- The holding is an equity shareholder with and investment value of at least €1,164 M for a period of not less than 183 days.
- The holding is an equity shareholding and the holding of such shares is for the furtherance of the business of the holding company but not held for trading purposes.
Malta Participation Exemption Rules, Anti-Abuse Conditions
Any dividends received by a Malta holding company from a participating holding, are exempt from Malta tax if they satisfy one of the following anti-abuse conditions:
- to be resident or incorporated in the EU;
- to be subject to, at least, a 15% foreign tax rate;
- more than 50% of its income does not result from passive interest or royalties.
Should none of the above-listed three conditions be satisfied, two alternative cumulative conditions may be satisfied instead:
- the holding by the Malta company must not be a portfolio investment; and
- the non-resident entity, or its passive interest, or royalties, must have been subject to any foreign tax at a rate of at least 5%.
Dividends and capital gains from a ‘participating holding‘
Instead of claiming a participation exemption, the holding company may option to pay tax at the normal corporate income tax rate of 35%. When such profits are distributed, shareholders may claim a full- refund of the Malta tax paid on those profits.
When the participation in the non-resident company does not constitute a ‘participating holding‘, income is subject to tax at the normal corporate income tax rate of 35%. Tax leakage is significantly reduced in Malta since the payment of a dividend by the holding company entitles the shareholder to claim one of the following refunds of tax:
- 6/7ths of the Malta tax; or
- 2/3rds of the tax paid in Malta
Similarly any other trading income derived by a holding company qualifies for a 6/7th or 2/3rds tax refund. The operation of the tax refund system reduces the effective tax rate suffered in Malta from 0% to 5%.
6/7 tax refund Malta:
A person, in receipt of a dividend paid to him by a company registered in Malta from profits allocated to its FIA or MTA and which are not covered by the sections outlined above (e.g., not consisting in “passive interest or royalties”) may claim a refund of 6/7ths of the Maltese tax chargeable on those profits.
In the case of distributions made out of profits allocated to the MTA, the 6/7ths refund is calculated on the basis of the Maltese tax chargeable before taking account of any tax credits. However, in all cases, the amount of the refund is capped at the level of tax actually paid by the company on the profits being distributed.
As with the 5/7ths refund, the 6/7ths refund may not be applied in those cases when the dividend is paid out of profits allocated to the FIA and in respect of such profits the company has claimed relief of double taxation (whether treaty relief, unilateral relief of the FRFTC). In these cases, only 2/3rds refund can be claimed.
This is how schematically tax refunds Malta can be imagined:
Malta effective corporate tax rate:
Effective corporate tax rate in Malta 2022
The mechanics of the full imputation system, the allocation of profits to the various tax accounts and the tax refunds and the overall effect of their interaction may be illustrated in the following simplest example, and this example illustrates that, even without expenses, Malta corporate tax rate 35% can be reduced to an effective rate of 18.75% on the net income.
Upon distribution of the profits, tax credits and refund provisions will apply, which will effectively reduce the tax rate to 6.25% or even lower.
|Passive Income, €||Trading Income, €|
|At Company Level||Participation Holding||Participation Holding + FRFTC||NO Participation Holding and claims FRFTC||Passive Interests & Royalties|
|Profit before tax||1,000,000||1,000,000||1,000,000||1,000,000||1,000,000|
|Gross up for the FRFTC||–||250,000||250,000||–||–|
|Tax at 35%||350,000||437,500||437,500||350,000||350,000|
|Credit for the FRFTC||–||(250,000)||(250,000)||–||–|
|At Shareholder Level|
|Tax Charged at 35%||350,000||437,500||437,500||350,000||350,000|
|Credit for tax||(350,000)||(437,500)||(437,500)||(350,000)||(350,000)|
|Refund of company tax to shareholders||Full
|Malta effective corporate tax rate||0%||0%||6.25%||10%||5%|
Tax Expert Advice
A classic miscalculation: many clients consider Malta as a tax haven as it has a number of potential benefits for foreign companies and shareholders which are mentioned above, and therefore to incorporate a company in Malta solely for tax reasons.
Please pay attention that it is easy to incorporate company in Malta, but its operation costs time and money – back office supporting, accounting and auditing services, tax returns – this is regular obligatory expenses, doesn’t matter you have activity or otherwise.
In our opinion, a Malta company registration and the development of the associated structure is only worthwhile from a prospective company annual profit of approximately €200,000 upwards.
And also, do not underestimate tax liabilities: yes, it is possible to get a refund of the tax burden if the company is structured accordingly, however the tax liability still exists and it cannot be circumvented.
In order for a shareholder to claim a tax refund from the Inland Revenue Department, the shareholder must first be registered with the IRD.
The obligation to register the shareholder falls upon the company that will earn the taxable profits which it would in turn distribute by way of a dividend.
Such registration is done by means of a specific form (commonly known as ‘shareholder registration form’) which provides the details and shareholding of the shareholders who are entitled to a refund.
The shareholder registration form has to be submitted to the IRD by the date (whichever is the earlier) on which:
- the company’s first provisional tax payment for the relevant year of assessment falls due; or
- the company effects the tax payment for that year of assessment.
If the period between the first day of the company’s accounting period (which ends in the year preceding the year of assessment) and the first provisional tax payment is less than 120 days, the shareholder registration form must be submitted by the date (whichever is the earlier) on which:
- the company’s second provisional tax payment for that year falls due; or
- the company effects the tax payment (other than the first provisional tax payment) for that year.
The shareholder registration form is filed electronically with the IRD.
Following the shareholders’ registration and upon the distribution of dividends, in order for the shareholders to receive the refund, a specific form (commonly known as ‘refund claim form’) must be prepared. This refund claim form includes:
- the details of the distributing company and the shareholder entitled to receive the tax refund;
- the amount of profits from which a dividend was distributed and the respective tax accounts;
- the type and amount of tax refund to which the shareholder is entitled to;
- other details, such as, details pertaining to the bank account in which the tax refund should be deposited, a declaration by an authorized signatory that the form is correct, etc.
The tax refund claim form is submitted with the IRD together with other relevant documentation, including the company’s income tax return and financial statements for the year in which the company derived the profits it has distributed, the dividend warrant, any evidence of foreign tax paid, an auditor’s certificate in the event that FRFTC was claimed, any waiver of the right to receive dividends, etc.
IV. Special tax rules relating to Malta company taxation
The categories of investment income for the purposes of the investment income provisions:
- interest payable by a person carrying on the business of banking under the Banking Act;
- interest, discounts or premiums payable by the Government of Malta;
- interest, discounts, or premiums payable by a corporation or authority established by law (e.g., Enemalta Corporation);
- interest, discounts or premiums payable in respect of: a public issue by a company, entity or other legal person and whether resident in Malta or not; a private issue by a company, entity or other legal person and resident in Malta paid to a collective investment scheme (‘CIS’);
- capital gains arising on the disposal of units in a CIS where the CIS redeems, liquidates or cancels such shares/units and the said CIS is a non-prescribed fund;
- profits distributed by a CIS that is not resident in Malta that are paid through the services of an AFI out of profits that had been allocated in that CIS to a fund that is not a prescribed fund;
- interest payable by a person carrying on the business of banking in accordance with foreign legislation in respect of a sum of money where payment of the income from investment is made through an AFI.
“Payor” is the person who is liable to or makes the payment of investment income.
“Recipient” is a person who is resident in Malta during the year in which investment income is payable to him. The definition also includes, EU/EEA nationals (and their spouse were applicable) who are not resident in Malta for Maltese tax purposes but who apply the tax rates applicable to Maltese residents on the basis that the income that arises in Malta is at least 90% of their world-wide income. The definition of “recipient” specifically excludes banks and insurance companies.
Income tax implications, general rules:
A payor is to withhold tax at the rate of 15% in respect of payments of investment income made to recipients.
When tax is withheld, the payor is obliged to provide the Commissioner with an account of all amounts deducted without specifying the identity of the recipient and must forward the amounts withheld within 14 days from the end of the month in which the payment was made to the recipient.
A payor pays investment income in February and withholding the 15% tax, he must provide the information and the tax withheld to the Revenue by 14 March. If in default, the payor becomes liable to a penalty.
The payor is obliged to provide the recipients of investment income with a certificate setting out the gross amount of investment income paid and the tax deducted.
Where the payor makes a payment of investment income to a non-resident person (i.e., not a recipient for the purposes of the definition), the payor is obliged to obtain a certificate of non-residence from the person receiving the payment. Tax must be deducted on the amount of investment income before deducting any foreign tax.
Generally, once the payment of investment income has been made and withholding tax has been applied, the tax withheld is a final tax and no tax refund or credit is given in respect thereof.
Election not to deduct:
A recipient (save for a prescribed fund) has the option to elect to be paid investment income without the deduction of withholding tax being made. Such election must be made in writing and sent to the payor.
The election becomes effective as from 14 days following receipt of such notice of election by the payor. The election may be revoked in the same manner it is availed of (i.e., the recipient can request the payor in writing to start withholding tax on payments of investment income)
Where the payor pays investment income gross of withholding tax, the payor is obliged to render an account to the Commissioner of all payments of investment income made during the year that were paid gross.
In this case, the payor must pass on all the details of the recipients to whom he has made gross investment income payments. If, in default the payor shall be liable to a penalty. As a result of this disclosure, the Commissioner would expect to see the recipient of the investment income declare the said investment income in his or her tax return.
Indeed, given that no withholding tax would have been applied, the recipient is obliged to declare the investment income that he would have received gross in his tax return for the relevant year of assessment.
“Collective investment scheme"
Definition: this is any scheme or arrangement which is licensed as such under the Investment Services Act.
Article 2 of the Investment Services Act (‘ISA’) defines a “collective investment scheme” as “… any scheme or arrangement which has as its object or as one of its objects the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:
- the scheme or arrangement operates according to the principle of risk spreading; and either
- the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
- at the request of the holders, units are or are to be repurchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or (d) units are, or have been, or will be issued continuously or in blocks at short intervals.
An alternative investment fund that is not promoted to retail investors and that does not have the characteristic listed in the first paragraph above hereof shall only be deemed to be a collective investment scheme if the scheme, in specific circumstances as established by regulations under this Act, is exempt from such requirement and satisfies any conditions that may be prescribed.
Tax treatment of a CIS:
The tax implications in relation to CIS may be analyzed at two levels:
- at the level of the CIS (also commonly referred to as a “fund”); and
- at the level of the investor.
In order to determine whether tax is due at the level of the CIS or at the level of the investor the classification of the CIS as “prescribed” or “non-prescribed” must first be determined.
If the CIS declares that the value of the assets situated in Malta allocated to it is at least 85% of the value of the total assets, the Commissioner is to classify the CIS as being “prescribed”.
A non-Maltese CIS is to be treated as a non-prescribed CIS. A Malta based CIS which does not satisfy the 85% threshold should also be classified as a non-prescribed CIS.
Taxation at the level of the CIS:
- CIS qualifies as a non-prescribed fund: the ITA grants a general exemption from income tax in relation to any gains or profits accruing to a non- prescribed fund with the exception of income that the said fund derives from immovable property situated in Malta. Hence, generally speaking, income which arises in favour of non-prescribed funds is not taxed.
- CIS qualifies as a prescribed fund: a prescribed CIS is also able to benefit from the income tax exemption applicable to non-prescribed funds with the exception that the exemption does not apply in respect of investment income that the fund receives.
Indeed, investment income generally constitutes a significant portion of the fund’s income. Hence, if the prescribed fund is paid other forms of income which do not fall within the definition of investment income and which does not consist of income from immovable property, then such income should still be exempt in terms of the ITA.
Investment income which arises in favour of a prescribed CIS is subject to withholding tax in terms of the investment income provisions outlined.
The Collective Investment Scheme (Investment Income) Regulations set out the rate of tax which is to be withheld by the payor when payment of investment income is made to a CIS: 15% on local bank interest and 10% on all other investment income.
A CIS does not have the right to choose to be paid investment income without a tax deduction being made.
No refund is available to a CIS in respect of tax withheld on investment income paid to the CIS.
For the purposes of the investment income provisions, income paid to a CIS by another CIS cannot be treated as investment income.
In relation to income from immovable property situated in Malta, the normal tax rate applies.
Taxation of gains derived at the level of the investor (for resident investors):
Generally, investors are able to derive a return on their investment in a CIS in one of two ways: either through a sale of the units that the hold in the fund (i.e., deriving a gain on the sale of the units) or through distributions of profits that the funds make to the investors.
The personal connecting factors – residence and domicile – are relevant when determining the tax implications at the investor level.
The income tax treatment of gains derived from the transfer of units in a fund, depends on the classification of the fund in which those units are held.
Gains derived on the transfer of units in a fund are in principle subject to income tax.
However, a tax exemption applies in respect of transfers of securities in prescribed funds listed on the Malta Stock Exchange where those units are held as capital assets.
If the units are held for trading purposes, the gain that is derived is taxable at the normal applicable rates.
Gains derived on the transfer of units in a fund are in principle subject to income tax.
- the gain that is derived qualifies as a capital gain, and
- the units are redeemed, cancelled or liquidated by the non-prescribed fund; the capital gain qualifies as a type of “investment income”.
Accordingly, where the investor qualifies as a “recipient”, the recipient is entitled to have such capital gain fall within the scope of the investment income provisions. This means that the CIS who is redeeming, cancelling or liquidating the units would withhold tax on the capital gain at the rate of 15%.
If the redemption, liquidation or cancelation of shares/units takes place in a non-resident fund the 15% withholding tax should only apply if the services of an AFI are availed of.
For redemptions in a non-resident funds, if the services of an AFI are not made use of, the 15% withholding tax should not apply. In such a scenario the investor would be liable to pay tax at the normal rates.
If the units/shares in a non-prescribed CIS are transferred not by way of redemption, liquidation or cancellation the capital gains arising would have to be declared in one’s income tax return and taxed in the normal manner.
This is how schematically tax treatment of resident investors in funds can be imagined:
Taxation of gains derived at the level of the investor (for non-resident investors):
The ITA provides an exemption from tax in respect of any gains or profits accruing to or derived by a person not resident in Malta on a transfer of any units in a CIS.
Hence, the classification of the fund into prescribed and non-prescribed funds is irrelevant in this case. The exemption applies to trading gains and not exclusively to capital gains.
The exemption is subject to the satisfaction that the person deriving the gain is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.
This is how schematically tax treatment of non-resident investors in funds can be imagined:
Tax implications of the reclassification of a fund and switches:
The reclassification of a fund from a non-prescribed to a prescribed status may attract tax on the eventual disposal of the units/shares held in the fund.
However, subsidiary legislation, provides for the possibility of a reclassification of a fund and also the mechanics that would apply in such a case. A Maltese resident fund may be re-classified both ways i.e., from a prescribed to a non-prescribed fund or from a non-prescribed to a prescribed fund.
In brief, the legislation provides for the following mechanism in order to verify whether a fund status reclassification may be required:
- The Malta resident fund must keep a daily average value of Malta assets and daily average value of total assets of the fund
- The daily average value is calculated on a rolling period of 90 days;
- The result of the % of the daily average value of Malta assets over daily average value of total assets of the
fund should be measured with the 85% test for prescribed/ non-prescribed status;
- A change in ratio from >/= 85% to <85% or vice versa will only become relevant from a fund reclassification perspective if it is not reversed for 30 consecutive days;
- If a change in classification is recorded for 30 consecutive days, then this should be reported to the CIR;
- A fresh fund classification will depend on the discretion of the CIR i.e., ultimately this is at the discretion of the CIR.
There are specific tax rules which would apply on a reclassification i.e.:
- a reclassification from a prescribed to a non-prescribed fund: the full gain on an eventual redemption of fund units would be subject to tax i.e., no relief is provided for the period in which the fund would have been classified as a prescribed fund;
- a reclassification from a non-prescribed to a prescribed fund: the gain is calculated using the values at the point of reclassification but the resulting tax (if any) becomes payable on the eventual redemption of the units.
Switching of units from one sub-fund to another sub-fund within the same CIS (a switch to a fund of a different CIS may be considered as a ‘switch’ but this is subject to various conditions) constitutes a taxable transfer for income tax purposes.
However, the tax would not be payable at the time of the switch but only upon the final disposal of the switched units.
At the point of final disposal, the taxable gains or losses arising on the intermediate switches as well as the final transfer would be taken into account for the purposes of calculating the taxable gain or loss.
Upon a switch, no gain or loss is deemed to arise for income tax purposes and therefore any gains derived on a switch will not be subject to tax at the time of the switch. It is only upon the eventual final disposal of the securities in a CIS that the gains or losses derived by switching may be subject to tax.
Tax Treatment of Distributions:
The distinction between prescribed and non-prescribed funds is not relevant in this regard.
The tax treatment of distributions made by a CIS (i.e., whether prescribed or non-prescribed) is based on the fiscal treatment applicable to distributions from companies.
Hence, in line with normal tax rules on distributions, in the case of distributions from a CIS it is important to determine from which tax account the distribution is made.
The distributable profits of a CIS may be allocated for tax purposes in 4 tax accounts i.e., Maltese Taxed Account (MTA), the Immovable Property Account (IPA), Final Tax Account (FTA) and the Untaxed Account (UA).
In terms of Article 67A (1) of the ITA:
- no profits of a CIS may be allocated to its Foreign Income Account (FIA) – such profits should in general be allocated to its UA;
- dividends received from the FIA of another company are allocated to the MTA of the CIS.
Tax on Dividends:
The taxation of dividends in the hands of the recipient is identical to the taxation of dividends distributed by any other company.
When distributions are made from the UA of a CIS to a recipient as defined the CIS is required to withhold tax at the rate of 15%.
The law provides for a presumption in favour of such deduction and payment having been made. If the latter presumption applies a recipient of a dividend is not obliged to disclose the dividend in any return made.
Nevertheless, a recipient of a dividend from the UA may declare such dividend on his tax return and therefore the presumption would not apply. Any tax withheld is to be credited against the recipient’s income tax liability and, where applicable, a refund is to be made available in respect of tax for the relevant year of assessment.
Dividends paid by a CIS out of profits allocated to any of the taxed accounts, are not subject to further tax in the hands of all unit holders whether these are corporate or non-corporate unit holders or whether resident or non- resident unit holders.
The FTA should be particularly relevant for CISs especially in the case of prescribed funds where investment income is taxable under the withholding tax regime (i.e., the investment income provisions) which is allocated to the FTA of the CIS.
Distributions by such CISs from the FTA will not be subject to any further tax but will not carry a right to a credit or to a refund.
Stamp duty considerations:
Duty on documents is generally imposed on the transfer of marketable securities.
However, an exemption from such stamp duty in relation to acquisitions or disposals of marketable securities applies in certain instances.
In fact, Article 47(3) of the Duty on Documents and Transfers Act (‘DDTA’) includes in the definition of the term “persons”: collective investment schemes holding a collective investment scheme license under the Investment Services Act
Hence, the transfer of securities by a CIS licensed under the ISA and transfers by investors of units in a licensed CIS are exempt from duty.
Moreover, in relation to a foreign CIS an exemption may also be applicable if the CIS “…intends to carry on or has, or intends to have, business interests to the extent of more than ninety percent outside Malta…”.
The exemption should apply once the CIS holds a stamp duty exemption determination.
Transactions that are carried out by a CIS (“Transactions, including negotiation, … in shares, interest in companies or associations, debentures and other securities, …”) should be exempt without credit.
Learn more about VAT in Malta: VAT (Value Added Tax) In Malta | Guide 2022
Taxation of rental income
Rental income derived from the letting of tenements:
Landlords (both companies and individuals) leasing out residential and/or commercial tenements can opt to have their gross rental income (i.e., no deductions are allowed) taxed at a final tax of 15%.
To avail of the said 15% tax rate, the tenement must consist of:
– either a dwelling house, or part thereof, which is to be occupied or is occupied as a home or residence by the occupier or a garage and is not a commercial tenement (applicable as from 1st January 2014); or
– a commercial tenement or a club and is not rented to or from a related body of persons – a body of persons is related to an individual if it is owned or controlled directly or indirectly, as to more than 25% by that individual; and two bodies of persons are related if they are owned or controlled, directly or indirectly, as to more than 25% by the same person (applicable as from 1st January 2016).
Where this option is exercised, it shall for that particular calendar year, apply equally to all other rental income derived from the tenements owned by the landlord.
This option is not irrevocable. Therefore, the landlord may on an annual basis assess whether it is more beneficial to opt for the 15% final tax on gross rental income or to be taxed on rental income after allowing for the deductions.
The 15% tax is final, therefore, no set-off or refund will be allowed. An individual who opts to be taxed at 15% is not required to declare such income in his/her tax return, while a company will allocate its profits to the Final Tax Account and will not be subject to any further tax.
If this option is availed of, the tax on such rental income is payable by 30 June following the calendar year when the rental income is received irrespective whether the landlord is a company or an individual. The payment must be accompanied by the relevant form, namely TA24.
The relevant year for a company opting for the 15% final tax on income is the calendar year, even for companies who do not have a 31 December year-end.
If following an enquiry, the Commission determines that such rental income that should have been declared was not declared, such income will be taxed at 35% on gross rental income without any possibility of set-off or refund. Interest and additional tax will also apply.
Rental income received from or subsidized by the Housing Authority:
Persons renting immovable property to the Housing Authority for a period of at least 10 years are chargeable to tax on such gross rental income at a final withholding tax of 5%.
Furthermore, owners of immovable property who rent such immovable property to persons receiving a rent subsidy under any scheme administered by the Housing Authority, who are registered with the Housing Authority for this purpose and who comply with conditions imposed by the Housing Authority, are chargeable to tax on such gross rental income at a final withholding tax of 10%.
The Housing Authority is responsible to deduct such tax from the payment and to remit it to the Commissioner for Revenue by the fourteenth day following the end of the month during which such rent was paid together with an account of all amounts deducted.
Rental income from restored property
Owners of immovable property which has been restored under any scheme issued by The Planning Authority and who comply with any conditions imposed by the Authority, are chargeable to tax on such gross rental income at a final withholding tax of 10%, if such property is rented for residential purpose and 15% if it is rented for commercial purposes.
The tax due is to be paid to the Commissioner by 30 June following the year when the rent was received, together with the necessary documentation.
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