Malta Company Tax System – Malta Trading Companies
The Lowest Tax Rate in EU
- 5% Effective Corporate Tax Rate
- 0% Patent & Other IP Tax Exemptions
- 100% Holding Company Participation Tax Exemption
- Over 70 Double Tax Treaties
- and more..
In addition to Malta’s corporate laws being based upon the UK Companies Act, providing settled, tried and tested corporate rules, as a member of the EU, Malta has adopted all EU tax directives which include the:
- Parent – Subsidiary directive – Participation Exemption (100% tax relief for income derived from subsidiaries)
- Mergers Directive
- Interest and Royalties Directive
Full Imputation System
Malta is one of the few remaining countries that operates a full imputation system thereby avoiding economic double taxation; avoiding the system whereby profits are taxed both at company and the shareholder level.
Under the full imputation system dividends paid by a Malta company carry a tax credit equal to the tax paid by the company on the profit from which the dividends are paid. Shareholders are then taxed on the gross dividend at the regular rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability.
As a result:
- No Maltese tax is paid by the shareholder on a distribution of dividends made by a Malta company
- Shareholders receive full credit for any tax paid by the company on profits distributed as dividends – avoiding double taxation.
- Excess imputation tax credits are refundable where the shareholder is liable to Maltese tax (i.e. due to holding of Malta real estate) on the dividend at a rate which is lower than the company rate of tax (ie. 35%)
Full Imputation System – Example
Taxation of Malta company
|Tax at 35%||€35|
|Profit after taxation available for distribution||€65|
Taxation of the shareholder of Malta company receiving dividend
|Tax deducted by XYZ Ltd.||€35|
Basis of Taxation
Malta Incorporated Companies – are automatically deemed to be both resident and domiciled in Malta for tax purposes and are taxed on their worldwide income.
Remittance Basis – companies incorporated under foreign laws are regarded as resident in Malta if their management & control are exercised in Malta and are taxed on a source and remittance basis ie. subject to tax on Malta source income (including capital gains) and on income arising outside Malta (excluding capital gains) and remitted to Malta.
Non Resident Companies – are taxable on chargeable income and capital gains arising in Malta, however a number of exemptions may apply in respect of certain income.
Re-domiciled / Continued Companies – to Malta from another jurisdiction, from the date of re-domiciliation, are deemed to be resident and domiciled in Malta.
The chargeable income of a company includes its taxable income and capital gains, is taxed at 35%, which is reduced by the application of tax refunds.
Taxable income of a company is the profit reported in the company’s audited financial statements subject to certain adjustments necessary to arrive at taxable profits.
Adjustments would typically include:
Depreciation and a deduction for statutory capital allowances
Expenses – incurred wholly and exclusively in the production of the income are deductable; excluding deductions relating to: amortisation including amortisation of goodwill, provision for bad debts, donations, pre-trading expenses and unrealised differences on exchange.
Trading tax losses incurred by the company may be carried forward indefinitely until offset against taxable profits.
Capital losses may not offset trading profits, but capital losses can be carried forward and offset against future capital gains. In addition trading losses may be offset against capital gains.
Group Companies – Group Relief – trading losses incurred by one company may be surrendered to another company/ies within the same group. A group for income tax purposes being, when:
- each company is resident in Malta and not resident in any other country; and
- one is a subsidiary of the other or both are subsidiaries of the same parent company resident in Malta.
The company surrendering the losses and the company receiving the losses (claimant) must have accounting periods that begin and end on the same dates. Group relief for a particular year may only be claimed with respect to losses incurred in that same year; however once losses are surrendered, the claimant company can continue to carry such losses forward indefinitely or until fully absorbed. Capital losses do not qualify for group relief.
Tax Accounting & Tax Refunds
Maltese Corporate tax Accounts – chargeable income is allotted to 5 different tax accounts, depending on the type of income and is an important aspect of the Maltese tax system as it determines the possibility of tax refunds upon a distribution of profits:
|Maltese Corporate Tax Accounts||Profits attributed include:||Tax Refund|
|Foreign Income Account (FIA)||Trading or passive income which is not attributable to the FTA or IPA, is allocated to the FIA or the MTA depending on the source of such income|
1. Profits resulting from royalties and similar income arising outside Malta and from dividends, capital gains, interest, rents, income or gains derived from a Participating Holding (PH) or from the disposal of such holding, and any other income derived from investments situated outside Malta, which are liable to tax in Malta and are receivable by a company registered in Malta.
2. Profits resulting from investments, assets or liabilities situated outside Malta to a company either licensed as a bank in Malta or in possession of a licence granted under the provisions of the Financial Institutions Act
3. All profits or gains of a company registered in Malta, which are liable to tax in Malta and attributable to a PE (including a branch) situated outside Malta
4. Profits resulting from dividends paid out of the foreign income account of another company registered in Malta
|Shareholders able to claim a refunds as follows: 2/3rds – 4.66% Tax Rate|
Applies to activities conducted by banks, financial institutions doing business outside of Malta or most foreign passive institutions on which double taxation relief is claimed.
The law does not allow the possibility of claiming 6/7 or 5/7 refunds on most foreign income (mostly passive) on which double taxation is claimed – in such situation the 2/3 refund applies.
Foreign tax paid can be taken into account for purposes of the refund, subject to maximum refund not exceeding Malta tax paid – this in effect means that even with this kind of refund there may be in effect situations where there will be no Maltese tax leakage.
5/7ths Refund = 10% tax rate
Refund applies to:
1. Profits derived from passive interest or royalties the refund due will be 5/7ths of the tax paid in Malta and where any foreign tax levied is less than 5% (gross of any double taxation relief claimed in Malta in respect of tax paid outside Malta on the taxed profits).
The term passive interest or royalties includes interest or royalties which are not derived, directly or indirectly, from a trade or business.
2. Where Maltese companies holding shares in a non-resident company do not qualify for a‘participating holding’.
The 6/7 refund is the normal refund applicable to companies in respect of trading activities.
Applicable to, amongst others:
Group Finance Structures;
Captive Insurers Companies; Gaming Companies;
and International buying and selling Companies.
Foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid – this in effect means that there may be situations where there will be no Maltese tax leakage.
|Maltese Taxed Account (MTA)||Trading or passive income which is not attributable to the FTA or IPA, is allocated to the FIA or the MTA depending on the source of such income.Profits of a company that are not included in the FIA and:1. which have suffered tax; or2. (ex. trading profits which have been subject to tax in Malta) which have been exempt from tax under the provisions of any Maltese law and where the distribution of such profits by the company is also exempt from tax in the hands of the shareholders. (This requirement has ceased to apply with effect from year of assessment 2008)|
|Final Tax Account (FTA)||1. Income subjected to a final withholding tax2. Profits arising from capital gains on Malta located real estate which has suffered the property transfers tax – are subject to 12% tax of sales value3. Certain investment income and certain tax free profits;4. Certain Business Promotion Act profits.||No tax refund.Any distributions from this account:1. do not carry imputation tax credits,2. are not subject to tax in the hands of the recipient, and3. do not need to be disclosed in the relevant tax return|
|Immovable Property Account (IPA)||Malta located real estate not subjected to the final withholding tax, rents, accommodation revenue by hotels and similar establishments management fees and annual rental value of immovable property in Malta construction and project management other prescribed activities||No tax refund.|
|Untaxed Account (UA)||1. Total distributable profits (or losses) – profits (or losses) allocated to other tax accounts = untaxed account2. Includes income or gains which were exempt from tax||No tax refund.|
Relief of Double Taxation
Malta grants relief for double taxation on the basis of the ordinary credit method on a source-by-source and country-by-country basis using 4 types of tax relief:
- treaty relief
- unilateral relief (if no Malta tax treaty exists)
- commonwealth relief
- flat-rate foreign tax credit (FRFTC)
The FRFTC is a notional tax credit equivalent to 25% of the income, for foreign taxes paid on income allocated to the Foreign Income Account (FIA). The income upon which the FRFTC is claimed is grossed up by the amount of the available credit. The grossed up income less any allowable expenses is subjected to 35% tax – the taxpayer is then entitled to a credit against the tax so determined, amounting to the amount by which the income was grossed up, but the credit cannot exceed 85% of the tax payable.
The examples below illustrate the mechanics of the full imputation system applicable in Malta and the related tax refunds:
|Having PH||Having PH claims FRFTC||No PH claims FRFTC||Passive interest and Royalties|
|Profit before tax||1,000||1,000||1,000.0||1,000||1,000|
|Gross up for the FRFTC||–||250||250.0||–||–|
|Tax thereon at 35%||350||437.5||437.5||350||350|
|Credit for FRFTC||–||250.0||250.0||–||–|
|Gross dividend received||1.000||1000||1000||1000||1000|
|Tax charged at 35%||350.0||350.0||350.0||350.0||350|
|Credit for tax at source||350.0||350.0||350.0||350.0||350|
|Refund to shareholders||350.0||87.5||125||250||300|
|Effective tax rate||0%||0%||6.25%||10%||5%|
Elimination of Exchange Risk
As income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements and is the currency that the tax refund is paid out, this serves to eliminate any currency exchange risks.
When is the tax refund paid out?
In terms of the provisions of the income tax legislation, a tax refund must be paid by the Inland Revenue Department within 14 days from the end of the month in which it falls due.
A tax refund is considered to fall due when the company’s audited financial statements (showing the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on a prescribed form, together with the dividend certificate, is submitted by the shareholder or his attorney or representative.
Advance revenue rulings
An Advance Revenue Ruling from the International Tax Unit of the Inland Revenue Department provides certainty. Although not mandatory, it does provide certainty as to the tax authorities’ interpretation, as well as serves to preserve the same tax treatment for two years should there be a change in legislation which may affect the company or its tax treatment.
- Provide certainty on the legal application to a specific transaction
- Binding on Inland Revenue for 5 years – renewable for a further 5 year period
- Survives a change in law for 2 years
- Issued within 30 days of application
Informal Revenue Guidance
- In the form of a letter of guidance from Revenue
- Not expressly regulated in terms of law
- Creates a legitimate expectation for taxpayer to rely upon
- Considered by the Inland Revenue Department as binding
A provisional tax rate of 7% on capital gains is levied at the time of transfer on gains arising from the transfer of securities, business, goodwill, a beneficial interest in a trust and intellectual property rights. Capital gains are added to the taxpayer’s income for the year and tax is charged on the total amount.
Transfers of Malta located real estate are subject to a final withholding tax of 12% of the transfer value (or of the gain thereof).
Alternatively, a transferor of Malta real estate may, in certain circumstances, opt to be taxed at the standard rates on the gain arising on the transfer rather than be subject to the final withholding tax. The provisional tax paid will be allowed as a credit against the tax due; excess credit is repaid by way of refund.
An exemption from capital gains tax exists for transfers made between companies in the (i) same group or (ii) companies controlled and beneficially owned – 50% – directly or indirectly by the same shareholders.
No tax is levied in respect of non – Malta residents – if not owned directly or indirectly, or act on behalf of individuals who are ordinarily resident and domiciled in Malta) arising from the transfer of shares in a company – excluding (Malta located) real estate companies.
Tax Accounting & Tax Refunds
Companies are subject to tax in every assessment year on income arising in the previous calendar or financial year; normally 31st December, but that can be changed – subject to the approval of the Inland Revenue.