Company Tax Treatment in Malta
Malta has been a member of the EU since 2004 and has one of the highest economic growth in the EU. Its stable and dynamic economy makes it an attractive place for international investors to base their operations. Apart from a strong economy, Malta has other assets to offer to investors; its high skilled proactive professionals in various fields, English being an official language, its geographical location, its extensive double tax treaty network, and various tax incentives, are factors which makes Malta one of the most attractive investment locations.
As provided by the Income Tax Act in Malta, any company that is incorporated in Malta is considered as being tax resident and domiciled in Malta and subject to tax in Malta on its worldwide income. A foreign company having its management and control in Malta is considered to be tax resident but not domiciled in Malta and is subject to tax on any income and capital gains arising in Malta and any foreign income remitted to Malta.
Companies incorporated in Malta are taxed at a flat rate of 35% on their profits. Profits are computed by taking into consideration the company turnover less expenses which are incurred in the production of the income. Any expenses not related to the trading activity of the company are disallowed for tax purposes.
Malta’s tax system offers a range of fiscal incentives, namely the imputation system of tax, the refund system of taxation, participation exemption and the various forms of relief from double taxation.
Full Imputation System
Malta operates a full imputation system for the taxation of dividends paid by Maltese resident companies to their shareholders. Tax incurred at the level of the company on profits distributed to the shareholders is available as a credit against the tax chargeable on the recipient of the dividends. Therefore a full credit is given in the hands of the shareholder of the tax paid at the corporate level. Consequently, no tax is paid at the level of the shareholder due to the fact that the highest tax rate for individuals is 35%, equivalent to the fixed tax rate for companies.
The full imputation system eliminates economic double taxation, where the same income is taxed twice at the level of different taxpayers.
The Refundable Tax Credit System
The tax refund system is applicable to shareholders of companies registered in Malta, whereby the shareholders are entitled to a tax refund of part of the tax paid at the level of the company in the profits distributed. The tax refunds are not allowed on:
- Profits derived directly or indirectly from immovable property situated in Malta;
- Profits which are exempt both at the level of the company and in the hands of the shareholder.
The amount of tax refunds vary depending on the type of profits of the company being distributed.
- Passive interest and royalties – 5/7ths of the tax charge resulting in a net effective tax rate in Malta of 10%
Income from interest and royalties is considered as passive when it is not derived from a trade or business and where it has not suffered foreign tax of less than 5%.
- Foreign income which double taxation relief has been claimed – 2/3rds of the Advance Company Income Tax (i.e. both foreign tax and Malta tax paid)
The resulting refund will be limited to the tax paid in Malta. This could result in all the Malta tax paid to be refunded however no foreign tax can be refunded. If the Flat Rate Foreign Tax Credit (FRFTC) is claimed, the 2/3rds refund is calculated on the resulting Malta tax payable and not on the Advance Company Income Tax.
- Any other trading profits – 6/7ths of the tax charge, resulting in a net effective rate of tax in Malta of 5%.
In order for a person to benefit from the tax refunds as described above, he/she must register with the Commissioner of Inland Revenue.
Tax refund claim forms can be submitted to the tax authorities once the company tax return is submitted. Once the tax refund claim form is processed and approved by the local tax authorities and the company tax has been paid, the tax refund is effected within 14 days to minimise cash flow implications as much as possible. Tax refunds are paid in the same currency in which the corporate tax is paid to avoid exchange rate differences.
NB: Malta does not impose any withholding tax on payment of dividends, interest or royalties.
Double Taxation Relief
Double taxation is imposed when different jurisdictions impose taxes on the same taxpayer due to dual residence conflict, dual source conflict or residence – state conflict. In order to avoid double taxation being incurred by taxpayers, Malta provides different forms of double taxation reliefs.
Treaty Relief
In order for the treaty relief to apply, all the following conditions must be met:
- Malta has a double tax treaty is in force with the State in which the income was derived;
- The foreign tax must have been validly imposed in terms of the treaty;
- No claim can be made for the tax suffered at company level before the withholding tax is suffered (underlying tax) unless permitted by the double tax treaty in place;
- The foreign tax credit cannot exceed the total income tax payable for the relevant basis year;
- A person claiming the treaty relief must be resident in Malta during the respective basis year for which the claim is being made;
- Evidence of the foreign tax paid outside Malta must be provided to the local tax authorities;
- Claim for treaty relief to be made not later than 2 years after the end of the respective basis year for which the claim is being made.
Unilateral Relief
In order for the unilateral relief to apply, all the following conditions must be met:
- Malta has a double tax treaty is in force with the State in which the income was derived;
- The foreign tax must have been validly imposed in terms of the treaty;
- No claim can be made for the tax suffered at company level before the withholding tax is suffered (underlying tax) unless permitted by the double tax treaty in place;
- The foreign tax credit cannot exceed the total income tax payable for the relevant basis year;
- A person claiming the treaty relief must be resident in Malta during the respective basis year for which the claim is being made;
- Evidence of the foreign tax paid outside Malta must be provided to the local tax authorities;
- Claim for treaty relief to be made not later than 2 years after the end of the respective basis year for which the claim is being made.
Under the unilateral relief, a claim can be made for the tax suffered at the company level before the withholding tax is suffered (underlying tax).
Commonwealth Tax Relief
Commonwealth tax relief is allowable for persons resident in Malta who are liable to pay tax in Malta on income which has been subject to any Commonwealth income tax. Commonwealth Relief is applicable on a reciprocal basis to relieve taxes paid in Commonwealth countries.
Flat Rate Foreign Tax Credit (FRFTC)
In order for the Flat Rate Foreign Tax Credit to apply, all the following conditions must be met:
- Available only to companies resident in Malta (not available to individuals);
- Not benefitting from any of the other forms of double tax relief;
- Applicable only to income which is allocated to the company’s Foreign Income Account (FIA);
- The company must be expressly empowered to receive income which falls to be allocated to the FIA;
- A confirmation from a certified public accountant or an auditor by means of a certificate that the income has been derived from foreign sources and falls to be allocated to the FIA.
The net foreign source income is grossed up by 25% and the resultant income less any allowable expenses is taxed at 35%, providing for a tax credit equivalent to the amount by which the foreign source income has been grossed up which is available for set-off against the tax due on the chargeable income.
No evidence of the actual foreign tax paid is required since the FRFTC is a tax credit for notional foreign tax paid.
Participation Exemption
Malta tax legislation provides for a Participation Exemption, whereby dividends and capital gains derived by a company registered in Malta from investments in subsidiaries which qualify as participating holding are not subject to tax in Malta, provided that the required conditions and anti-abuse provisions are satisfied.
The Income Tax provisions provide the following 6 instances when an investment is considered a participation holding:
- The Malta company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares; or
- The Malta company is an equity shareholder which holds an investment representing a total value of a minimum sum of €1,164,000 in a company and that investment in the company is held for an uninterrupted period of not less than 183 days; or
- The Malta company is an equity shareholder in a company and is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or
- The Malta company is an equity shareholder in a company and is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
- The Malta company is an equity shareholder in a company and is entitled to either sit on the board or appoint a person to sit on the board of that company as a director; or
- The Malta company is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
For the application of any of the above instances, it is important that the subsidiary does not own any immovable property in Malta and that the participating holding qualifies as an equity holding, which requires that at least two of the following rights are satisfied:
- Right to votes;
- Right to profits available for distribution;
- Right to assets available for distribution on a winding up of the company.
Dividends received from participating holdings are subject to the exemption, provided that the body of persons in which the participating holding is held satisfies any one of the following anti-abuse provisions:
- It is resident or incorporated in a country or territory which forms part of the European Union; or
- It is subject to any foreign tax of at least 15%; or
- It does not have more than 50% of its income derived from passive interest or royalties
Where none of the above three conditions is satisfied then both of the following two conditions must be satisfied for the participation exemption to apply:
- The investment by the company registered in Malta is not a portfolio investment and the non-resident subsidiary has not more than 50% of its income derived from portfolio investments; and
- The non-resident subsidiary or its passive interest or royalties have been subject to foreign tax at a rate which is not less than 5%.
NB: The definition of participating holding has been extended under certain conditions; to holdings in a partnership, EEIG and Collective Investment Schemes, that does not own immovable property situated in Malta.
Holdings in Malta companies, partnerships, EEIG or Collective Investment Schemes which qualifies as participating holding, may only benefit from the exemption of capital gains of such transfer of holding, the exemption does not apply to dividends income.
Branches
A foreign company may set up a branch in Malta to carry out activities. The income of the branch will be taxed in the hands of the foreign company since it is not considered as a separate entity but an extension of the foreign company. For tax purposes, the foreign company is considered as a person who is not resident and not domiciled in Malta but who carries out activities in Malta and hence is taxed in Malta only on any income or capital gains arising in Malta attributed to the branch.
The refund tax credit system outlined above has been extended to shareholders of foreign companies that have a branch in Malta. The refund tax credit is applicable on tax paid in Malta through the branch on profits attributable to activities performed in Malta when such profits are distributed to the shareholders of the foreign company.