A company incorporated in Malta is considered to be resident and domiciled in Malta. A company incorporated outside Malta is considered to be resident in Malta only if the management and control of its business is exercised in Malta.
Companies ordinarily resident and domiciled in Malta are subject to income tax on their worldwide income and on some chargeable capital gains. Companies that are either resident or domiciled in Malta but not ordinarily resident and domiciled in Malta are chargeable to tax in Malta on income and chargeable gains arising in Malta and income arising outside Malta and remitted to Malta.
A number of tax advantages are possible as explained below:
Full Imputation Tax System and Tax Refunds
The standard rate of Malta tax on income and chargeable gains is 35%. Upon receipt of a dividend, shareholders of a Malta company may however claim a refund of all or part of the Malta tax paid at the level of the company. In order to determine the amount of refund which one may claim, the type and source of the income received by the company must be considered. Shareholders of a company that have a branch in Malta and who are receiving dividends out of branch profits subject to tax in Malta qualify for the same Malta tax refunds as shareholders of a Malta company.
Companies are required to allocate their distributable profits to tax accounts, depending on the nature of income. The following are the 5 tax accounts:
Foreign Income Account (FIA);
Maltese Taxed Account (MTA);
Final Taxed Account (FTA);
Immovable Property Account (IPA); and
Untaxed Account (UA).
Full refund (0% Tax)
A full refund of the tax paid by the company may be claimed by shareholders in respect of:
income or gains derived from an investment which qualifies as a Participating Holding; or
in the case of dividend income, where such Participating Holding satisfies the anti-abuse provisions.
Refund of 6/7th (5% effective Tax)
This is the most applied and used method of corporate tax refund. In cases of dividends from trading income, shareholders are entitled to claim a refund of 6/7ths of the Malta tax paid by the company. Thus, shareholders will benefit from an effective rate of Malta tax of 5%.
Refund of 5/7th (10% Effective tax)
The following are two cases where a 5/7ths refund is given:
when the income received is passive interest or royalties; or
in cases of income arising from a participating holding which does not satisfy the anti-abuse provisions.
Refund of 2/3rds
Shareholders who claim double taxation relief in respect of any foreign income received by a Malta company are limited to a 2/3 refund of the Malta tax paid.
Relief of Double Taxation
Malta companies may benefit from:
Unilateral relief, including a credit system for relief of underlying tax;
Double Taxation Agreements;
Flat Rate Foreign Tax Credit system (FRFTC).
The unilateral relief mechanism provides for a tax credit in cases where foreign tax has been suffered irrespective of whether Malta has a double tax treaty with such jurisdiction or not. To benefit from unilateral relief, a taxpayer must provide evidence:
That the income arose overseas;
That the income suffered foreign tax; and
Of the amount of foreign tax suffered.
The foreign tax suffered will be credited against the tax chargeable in Malta on the gross chargeable income. The credit shall not exceed the total tax liability in Malta on the foreign sourced income.
Double Taxation Agreements
Malta has nearly 70 double taxation agreements in operation, with most of these based on the OECD model. Such agreements are aimed at removing the possibilities of having the same type of income or gain being taxed twice.
Income derived from a participating Malta holding company in a non-resident entity or from its disposal are exempt from tax, subject to certain anti-abuse provisions being satisfied. Alternatively they may be taxed at 35% and the shareholder may, following distribution, claim a full refund of the Malta tax paid by the company thereon.
Participation exemption applies if the Malta holding company satisfies one of the following conditions:
owns more than 10% in the underlying investment (may be a company, partnership or collective investment scheme);
has invested more than Eur1.165 million for an uninterrupted period of not less than 183 days;
the investment is not of a trading nature;
holds at least 1 share in the underlying investment and it has the option of first refusal over the balance of the shares;
holds at least 1 share in the investment and be entitled to appoint a person to the Board.
To exempt income from tax the company must satisfy one of the additional conditions:
resident or incorporated in the EU;
subject to a tax rate of at least 15%;
it does not derive more that 50% of its income from passive sources.
If any of the above conditions are not satisfied, the investment holding should not be a portfolio of investments and be subject to tax of at least 5%.
Flat Rate Foreign Tax Credit
Companies receiving foreign income may benefit from the FRTC, provided that they provide an auditor’s certificate stating that the income arose overseas. The FRFTC mechanism assumes a foreign tax suffered at 25%. In this case, a 35% tax is chargeable on the company’s net income grossed up by 25% FRFTC, with the 25% credit being applied against the Malta tax due.
The following are examples of the different mechanisms of tax refunds:
Other Tax Benefits
Malta does not have thin capitalisation rules, and specific transfer pricing rules;
There are no withholding taxes on the distribution of Malta company dividends to shareholders;
Source country withholding taxes on payment of royalties can be reduced or eliminated in terms of the EU’s Interest and Royalties Directive;
Malta has adopted the EU Parent-Subsidiary Directive which disposes of cross border transfer of dividends from subsidiary to parent companies within EU;
Tax is paid and refund is received in same currency of Malta company’s share capital;
No capital duties;
No wealth taxes.
There is no withholding tax on:
interest payable to non-residents, subject to certain conditions being satisfied;
royalties, subject to certain conditions being satisfied.
A stamp duty exemption can be obtained (upon satisfaction of certain straightforward conditions) by a Maltese company following is incorporation, and the exemption will apply in respect of the transfer of any shares issued by or held by the Maltese company.
Value Added Tax
Malta VAT is applied to all goods and services imported by Maltese entities and products and services made in Malta are also subject to VAT. Taxable goods and services in Malta includes also leasing or hiring of products or services or attributing or rendering a right. The standard VAT rate in Malta is 18%, but there are also two reduced rates of 7% (tourism accommodations) and 5% (on some other goods and services).
There are a number of:
zero rated supplies or exempt with credit, including: exports, intra-Community goods and services, certain ships and aircrafts;
products and services exempt without credit including: insurance and financial services, lottery and gambling, educational and health facilities.
Advance tax rulings
It is possible to request a formal ruling to provide certainty on the application of domestic tax law to a specific transaction. Such rulings will be binding on the Tax Department for 5 years and survive a change in law for 2 years, and it is generally issued within 30 days of application. An informal system of feedback from the Tax Department is also available through which a letter of guidance may be given.
Compliance with EU Law
Malta has implemented all the relevant EU directives and its framework is fully compliant with EU law.
Partnerships & Sole Traders
Partnerships may elect to be treated as a company for all purposes of the Income Tax Act. Such election may be made irrespective of whether the income derived by the partnership consists of income during the course of a trading activity or from a passive activity.
Partnerships En Commandite are usually taxed at partners level but if capital is divided into shares it will be subject to tax at partnership level (like a company).
Partnerships En Nom Collectif are taxed at partners’ level, using a progressive tax rate, with maximum at 35%.
Sole Traders are taxed at owner's level using a progressive tax rate, with maximum at 35%.
Other Entities Tax
In addition / instead of the above fiscal incentives, Malta provides specific incentives to other types of entities, including Investment Firms, Payment Institutions, Investment Funds, Securitisation, Gaming and eSport firms and this can be found in this website under their specific sections.