Malta Tax System
General Jurisdictional Rules
A person that is ordinarily resident and domiciled in Malta is subject to tax in Malta on world wide income. When a peson is either ordinarily resident or domiciled in Malta (but not both), than tax is charged on income arising in Malta and on foreign sourced income remitted to Malta – in this case no tax is charged on capital gains arising outside Malta whether remitted to Malta or otherwise. A persom who is not ordinarily resident in Malta but resides in Malta is subject to tax on income arising in Malta and on income remitted to Malta. A temporary resident is normally subject to tax in Malta on income arising in Malta.
The domicile of a person is normally considered as being the country which is considered by law to be his permanent home. Malta has not developed its own notion of domicile but we have borrowed the notion from British common law.
The term ordinarily resident is not defined by the Income Tax Act. Ordinarily resident means residence which is normally part of a person’s every day life. It normally means a regular physical presence in a country, it is a residence with a degree of continuity, nothwithstanding occasional temporary absence. It constitutes residence which is taken up voluntarily.
A person is said to be temporary resident as he takes up residence for a temporary purpose.
A company that is constituted in Malta is considered to be resident and domiciled in Malta for income tax purposes. Such companies are subject to tax in Malta on their world wide income.
A foreign company that transfers its management and control to Malta would be considered to be resdent in Malta. In this respect it would be subject to tax in Malta on income arising in Malta and on foreign sourced income remitted to Malta. No tax would be charged on capital gains derived outside Malta. Only remittances of income will be subject to Malta tax.
Capital Gains Tax
Tax on capital gains is due on gains realised from the disposal of assets such as:
- Immovable property;
- Company securities;
- Goodwill, business permits, copyrights, patents, trademarks and tradenames;
- Transfer of rights over taxable assets;
- Usufractuary interest.
Gains derived are added to the chargeable income and are taxed at the normal tax rates and bands.
Certain exemptions from taxation of capital gains (subject to satisfying certain terms and conditions) include:
- Gains derived from the sale of ones residence;
- Gains derived from sale of securities listed on Malta Stock Exchange;
- Inter group transfer of assets;
- Transfer of securities by a non resident in a Maltese Companies that are not engaged in immovable property;
- Donations to close relatives.
Property Transfer Tax
The sale of immovable property is subject to a 12% final tax on the transfer value. In the first seven years from date of acquisition, taxpayer may opt to be taxed under capital gains rules rather than paying this final tax. After the lapse of 7 years property is taxed at 12% on value of sale. Non resident can always opt to be taxed under normal capital gains rules as under the final tax of 12% they would not be able to claim double taxation relief.
Maltese companies are not subject to a separate system of corporation tax, companies are subject to income tax at 35%. The Maltese tax system adopts a full imputation system. Under a full imputation system, shareholders receive a credit for the full tax paid by the company on profits distributed to them. The credit given may be utilised by the recipient of such a distribution to offset his income tax liability.
Persons in receipt of dividends paid out of taxed profits do not suffer any further tax since the highest rate of tax in Malta for individuals is 35%, equal to the company tax rate. This implies that in Malta we do not have economic double taxation.
Dividends paid out of untaxed profits to Maltese individuals and bodies of persons, excluding companies, suffer a withholding tax of 15%. Dividends paid out of untaxed profits to non-residents are not subject to any withholding tax.
Double Taxation Relief
Malta provides for four types of relief of juridical double taxation as follows:
- Treaty relief;
- Commonwealth relief;
- Unilateral relief; and
- Flat Rate Foreign Tax Credit
In the case where Malta has a double taxation agreement and the treaty provides for the relief of double taxation, then treaty relief will apply. Commonwealth relief applies only if treaty relief is not available. If treaty and Commonwealth relief are not available, it is possible to claim unilateral relief. The Flat Rate Foreign Tax Credit is another form of unilateral relief and is normally applied when no tax is charged in the foreign jurisdiction or tax charged is minimal.
Treaty Relief – under the provisions of treaty relief, a foreigon tax credit is granted for foreign tax paid on income received from a country with which Malta has signed a double taxation agreement and which treaty makes provision for the relief of double taxation. Malta has an extensive double tax treaty network and most of these treaties are based on the OECD model convention for the elimination of double taxation.
Commonwealth Relief – 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.
Unilateral Relief – relief on a unilateral basis is available where treaty relief and Commonweath relief are not available. Under unilateral relief provisions the overseas tax suffered is allowed as a credit against the Maltese tax chargeable on the gross foreign income. This type of credit is limited in the same manner as the tax credit available under treaty relief, that is the amount of the credit is the lower of the Maltese tax charged and the foreign tax paid. Unilateral relief for underlying tax is also available. In oder to be able to claim relief, prove of foreign tax paid is mandatory.
Flat Rate Foreign Tax Credit (FRFTC) – the FRFTC is a form of unilateral relief only available to Maltese companies. This type of relief may be obtained by pooling together different sources of foreign sourced income. FRFTC can be availed of if the other tyes of relief canot be availed of. Treaty and unilateral relief cannot be claimed either if no prove of foreign tax paid is available or if no tax has been paid in the foreign jurisdiction.
The FRFTC is equivalent to 25% deemed tax suffered on the net amount receivable and is to be added to such amount. From this aggregate amount, attributable expenses are deducted to arrive at the chargeable income. The chargeable income is taxed at 35%, but the amount of FRFTC is deducted from such an amount. The FRFTC is limited is limited lower of the 25% credit and 85% of the Maltese tax due before deducting the credit itself.
System of Tax Refunds
A non-resident person or a Maltese company wholly owned by non-residents is entitled to cliam a refund of tax paid by the company on dividends distributed.
- As a general rule the refund amounts to 6/7 of the Malta tax paid. This would mean that the net effective tax paid in Malta would be reduced from 35% to 5%.
- The tax refund is reduced to 5/7 where the dividend is distributed out of passive interest or royalties or if received from a participating holding which does not satisfy the anti-abuse provisions. Passive interest and royalties means interest or royalty income which is not derived directly or indirectly from a trade or business, where such interest or royalties have not suffered or suffered a foreign tax, directly, by way of withholding or otherwise, at a rate of tax which is less than 5%.
- When an enterprise has claimed treaty or unilateral relief than the tax refund will amount to 2/3 of the Malta tax charge gross of relief (limited to the tax actually paid in Malta). If however the flat rate foreign tax credit is claimed,then the 2/3 refund is calculated on the actual tax paid in Malta.
By way of example hereunder is an example of the interaction of unilateral relief a 2/3 tax refund:
|Foreign tax paid (20%)
|Malta tax charge
|Net tax payable
|Effective tax paid in Malta (net of tax refund)
Income or gains derived by a company registered in Malta from a participating holding or from the disposal of such a holding, may at the option of the company be exempt from tax. In oder to exempt such income the following anti-abuse provisions must be satisfied:
- The taxpayer does not show such income or gains as part of his chargeable income in his tax return.
- The income is derived from a participating holding or from the disposal of such holding.
- The body of persons in which the participating holding is held:
- is resident or incorporated in an EU country, or
- is subject to at least 15% foreign tax, or
- does not have > 50% of its income derived from passive interest or royalties, or
- the equity holding is not a portofolio investment, and the non-resident body of persons, or its passive interest or royalties, have been subject to at least 5% foreign tax.
A portofolio investment is an investment in securities such as shares, bonds, and such like instruments and in which is held as one of many such investments for the purpose of risk spreading, where such an investment is not a strategic investment and is made with no interest in and without the intention of influencing the management of the company (in which the investment is held) and in addition is made only to follow the share price and dividend policy of the company, to maximise investment returns and to sell the investment as soon as it appears that the shares may lose value.
The first test is that the income has to be derived from a participating holding. A participating holding is a holding, that arises where a:
- Company holds directly at least ten per cent of the equity shares, or
- Company entitled to acquire the entire balance of equity shares not held at its option, or
- Company entitled to first refusal in the event of a proposed disposal of all equity shares, or
- Company entitled to directorship, or
- Company invests a minimum sum of €1,164,687, held for an uninterrupted period of at least 183 days, or
- Company holds such shares for the furtherance of its own business and not as trading stock.
Once the provisions relevant in determining whether a holding of shares satisfy the participation holding criteria, the company can either apply the participation exemption provisions or else opt to pay tax and claim 100% refund on tax paid on such income on distribution to non-resident shareholders or to a Maltese holding company fully owned by non residents. The terms of a double taxation agreement may provide that a resident of Malta will be entitled to exemption or relief from the foreign tax on certain types of income in the source state only if the company is subject to tax on that income in Malta.
Malta exempts from tax and does not impose any withholding tax on interest or royalties accruing to, or derived by, a non-resident beneficiary provided that such interest or royalties are not effectively connected with a permanent establishment through which the non-resident carries on business in Malta. To benefit from this exemption the non-resident shareholder must not be owned or controlled by, nor act on behalf of a person who is both ordinarily resident and domiciled in Malta.
Value Added Tax
The Maltese VAT system is based on the EU Directives. Every person carrying on an economic activity in Malta (excluding persons carrying exempt without credit supplies) must register for VAT purposes. Registered persons collect VAT on behalf of the Government of Malta. VAT is imposed on the ultimate private consumer and is not an expense suffered by the registered person.
The normal VAT rate is 18%, whilst a reduced rate of VAT applies to the following supplies:
- Holiday accommodation
- Supply of electricity
- Works of arts, collectors items and antiques
- Printed material
- Confectionery items
- Medical accessories
- Repairs of certain products
- Domestic care services
Food stuffs and pharmaceutical products constitute exempt with credit supplies. Medical and educational services constitute exempt without credit supplies.