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Income Tax in Malta



Personal Income Tax:

Malta taxes individuals who are both domiciled and ordinarily resident in Malta on their worldwide income.

Any person who is ordinarily resident in Malta but not domiciled in Malta is taxable only on income arising in Malta and on any foreign income remitted to Malta. However, where the spouse is ordinarily resident and domiciled in Malta, then a worldwide basis of taxation should apply for the other spouse.

A non-resident individual is taxed only on income arising in Malta.

Personal income tax rates:

Income is taxable at graduated rates. For year of assessment 2018 (year of income 2017), in the case of single individuals (including married individuals opting for separate computation) there is a tax liability of 12,275 euros (EUR) on the first EUR 60,000 of income (individuals earning up to EUR 19,500 will save up to EUR 90 tax per annum). Married individuals will be liable for EUR 11,095 tax on the first EUR 60,000 of income (couples earning up to EUR 28,700 will save up to EUR 120 tax per annum). For amounts exceeding these thresholds, the tax rate is 35% for both single and married individuals. Subject to certain conditions, the married rates also apply to single parents, widows/widowers, and separated parents.

Basis year 2017:

Tax rates for basis tax year 2017 are as follows:

Married resident taxpayers

Taxable Income
Rate (%)
Deduct
From
To
0
12,700
0
0
12,701
21,200
15
1,905
21,201
28,700
25
4,025
28,701
60,000
25
3,905
Above 60,000
35
9,905

Single resident taxpayers (or married couples opting for a separate computation)

Taxable Income
Rate (%)
Deduct
From
To
0
9,100
0
0
9,101
14,500
15
1,365
14,501
19,500
25
2,815
19,501
60,000
25
2,725
Above 60,000
35
8,725

Parent Rates:

Taxable Income
Rate (%)
Deduct
From
To
0
10,500
0
0
10,501
15,800
15
1,575
15,801
21,200
25
3,155
21,201
60,000
25
3,050
Above 60,000
35
9,050

The parent rates can be claimed by individuals who maintain under their custody a child, or pay maintenance in respect of their child, where such child:

· is less than 18 years of age (or between 18 and 23 years of age if attending full-time education at tertiary level), and

· is not gainfully occupied, or, if gainfully employed, does not earn more than EUR 2,400 per annum.

The parent rates provide more preferential tax bands in lieu of single/separate tax rates.

As of 1 January 2016, the reduced income tax rate of 7.5% was also made applicable in respect of registered players or athletes or licensed coaches (before this, it only applied to registered footballers and water polo players).

Different types of programmes available for individuals.

The Global Residence Programme is aimed at attracting more foreign non-European Union (EU) individuals in taking up residence in Malta without taking up employment in Malta, with foreign-source income remitted to Malta being taxed at a flat rate of 15%. Beneficiaries should satisfy a number of qualifying criteria in order to be eligible for the beneficial tax treatment. In particular, applicants must hold immovable property in Malta for a purchase price of not less than EUR 275,000, or EUR 220,000 for property situated in special areas. Alternatively, individuals may rent property in Malta for an annual rental payment of not less than EUR 9,600, or EUR 8,750 for property situated in special areas.

The Residence Programme Rules 2014 (RPR) replaced the High Net Worth Individual Rules. The RPR reflects the same scheme as that provided under the Global Residence Program, but the former applies to EU/EEA individuals/Swiss nationals. Under the RPR, similarly to the position under the Global Residence Programme Rules, any foreign income derived by beneficiaries or their dependants and remitted to Malta is taxed at the reduced rate of 15% (flat rate), subject to the satisfaction of the conditions included therein.

A Malta Retirement Programme is also in place that is targeted to EU/EEA/Swiss pensioners in receipt of pension income. Such pension income must constitute at least 75% of the pensioner's chargeable income, and such pension must be received in Malta. A number of other statutory conditions apply in order to be eligible for the said programme. Again, under this programme, foreign-source remitted income is taxed at 15%.

The tax rate of 15% referred to in the above programmes is also extended to returned migrants. In this case, a tax-free bracket applies on annual income not exceeding EUR 4,200 for single taxpayers and EUR 5,900 for married taxpayers. A minimum tax liability of EUR 2,325 per annum is payable.

Another initiative specifically targets highly competent and specialised expatriates within the digital products industry. Beneficiaries in receipt of employment income payable from such industry in respect of activities carried out in Malta may opt to be taxed on such income at a flat rate of 15%. In terms of these ‘Qualifying Employment in Innovation and Creativity Rules’, the qualifying contract of employment should give rise to a minimum income of EUR 45,000 (excluding the annual value of any fringe benefits) in respect of a year of assessment, adjusted annually in line with the retail price index.

The United Nations Pensions Programme Rules, 2015 are designed to attract foreign pensioners retiring from the United Nations to retire in Malta. Similar to the Global Residence Programme and other programmes already in place, applicants must hold immovable property in Malta for a purchase price of not less than EUR 275,000, or EUR 220,000 for property situated in special areas. Alternatively, individuals may rent property in Malta for an annual rental payment of not less than EUR 9,600, or EUR 8,750 for property situated in special areas. Again, under this programme, foreign-source remitted income should be taxed at 15%.

The Highly Qualified Persons Rules cater to expatriates (i.e. individuals who are Maltese residents but not domiciled in Malta) in receipt of income payable in terms of a 'qualifying contract of employment' in respect of activities carried out in Malta. Such expatriates may opt to be subject to tax on such income at a beneficial flat rate of 15%.

The Qualifying Employment in Aviation (Personal Tax) Rules, 2016 were introduced with the aim of attracting EEA/Swiss and third country nationals to hold an eligible office in the aviation sector in Malta. The Authority for Transport has been designated as the authority responsible for determining the eligibility, or otherwise, of an individual wishing to apply for these Rules and a successful applicant will be able to benefit from a beneficial tax rate of 15% on employment income from such activities, subject to receiving an annual income of at least EUR 45,000 and subject to the satisfaction of certain other conditions. These Rules apply as from year of assessment 2017.

Residency Rule:

There are few specific rules relating to residence, ordinary residence, domicile, locality of income, or the remittance of income to Malta. Persons are usually held to be domiciled in a country where they have their permanent home. The locality where income arises is determined in accordance with the category of income concerned, and different criteria may apply to different sources of income. Persons are considered to be ordinarily resident in Malta when they are so resident in the ordinary or regular course of their lives. The remittance of income to Malta is a question of fact.

Taxable Income

Employment income:

Gains or profits from employment with a Maltese employer are usually fully taxable, including the value of ‘any benefit provided by reason of any employment or office’. Remuneration received for services rendered outside Malta by persons not domiciled or not ordinarily resident in Malta should not be liable to tax in Malta. Apportionment is used where necessary.

All rewards for services rendered, including fringe benefits and benefits in kind, are taxable, although some exemptions are provided. Taxable benefits include living allowances, housing allowances, tax reimbursements (grossed up), use of car, and paid vacation trips.

Fringe benefits:

Fringe benefits regulations provide the valuation criteria for fringe benefits and the instances where a fringe benefit is deemed not to arise.

Three main categories of fringe benefits are identified by the regulations.

Category 1 - Use of motor vehicles:

The valuation of a fringe benefit arising on the use of a car is calculated on the basis of three elements: the car use value, the maintenance value, and the fuel value. The car use value is equivalent to 17% of the car value, or 10% if the car is more than six years old. In respect of both the maintenance and fuel value, the basis of valuation is 3% of the car value if the latter does not exceed EUR 28,000 and 5% of the car value in any other case. The fringe benefit is equal to the aggregate of these three elements multiplied by a percentage representing the private use of the car. The private use percentage varies depending on the respective car value and may go up to 60%.

The private use element (i.e. the taxable element) of a car cash allowance is 50% of the allowance if the allowance is EUR 2,340 or less, or the cash allowance less EUR 1,170 if the allowance exceeds EUR 2,340.

The following are not deemed to constitute a fringe benefit:

·  The use of a vehicle (value not exceeding EUR 16,310) by a salesperson or a support person who is not a company official, as authorised by the Commissioner for Revenue.

· The use of a company van.

Category 2 - Use of other assets, including accommodation:

Use of immovable property/accommodation involves a chargeable fringe benefit of 5% of the higher of the market value and the original cost of the immovable property. No fringe benefit is deemed to arise in certain situations (e.g. use of an official residence by the holder of public office, temporary accommodation for security purposes). The cost of making the immovable property available for use by the employee (e.g. water, electricity, ground rent, redecoration, repairs and maintenance, professional fees) is also a fringe benefit.

The fringe benefit on the use of other assets (other than immovable property and motor vehicles) stands at 12% of the higher of the market value and the original cost of the asset. The original cost is reduced by 40% in the case of assets that are owned for more than six years. Use of computers, related equipment, and internet connection service is not considered a fringe benefit.

Category 3 - Other benefits:

The value of other fringe benefits is the actual cost to the employer of providing the fringe benefit or the market value thereof. This category of fringe benefits includes, among other items, beneficial loan arrangements, reimbursement of private expenses, discounted goods and services, free or subsidised meals, and gifts. Valuation criteria differ according to the type of benefit, with the possibility of a partial or a full exemption in certain cases.

In the case of share option schemes, a share option becomes taxable when the option is exercised. In this respect, the taxable value of the said share option would be equivalent to 42.85% of the excess of the price that the shares would fetch in the open market on the date of the exercise of the option over the option price of the same shares, subject to the conditions contained in the Fringe Benefit Rules.

Telephony services, computer equipment, recreational and child-minding facilities, health insurance (subject to some restrictions), certain awards, and certain training courses, among other items, provided to employees are not considered to be fringe benefits.

Capital gains and investment income:

Tax on capital gains is imposed on any gain realised on the transfer of immovable property (real estate), shares and other securities (excluding investments that yield a fixed rate of return), business, goodwill, business permits, copyrights, patents, trade names, trademarks, and any other intellectual property (IP), interests in a partnership, and a beneficial interest in a trust. Gains from the transfer of other assets should fall outside the scope of the tax.

The rate of tax is the marginal rate of tax applicable to the particular taxpayer. In the case of transfers of Maltese immovable property (or any rights thereon) made on or after 1 January 2015, the withholding tax (WHT) on such transfers should in general be 8% or 10% (the latter rate applying in the case where the property was acquired before 1 January 2004). Certain other rates of WHT may apply in specific circumstances.

No tax is chargeable on a transfer of certain property by a company to its shareholder or to an individual related to its shareholder in the course of winding up or in the course of a distribution of assets pursuant to a scheme of distribution, where the said shareholder is an individual or one’s spouse who owns or own, directly or indirectly, not less than 95% of the share capital and voting rights of the said company transferring the property, provided a number of conditions are satisfied.

Capital gains arising outside Malta and derived by a person who is either not domiciled or not ordinarily resident in Malta or who is a returned migrant who qualifies for a reduced rate of income tax are not subject to tax, even if remitted to Malta.

Subject to the applicable statutory requirements, non-residents are exempt from tax on any interest, discount, premium or royalties, and capital gains from specified sources (e.g. disposal of units in collective investment schemes and of shares or securities in companies, subject to the satisfaction of certain conditions).

A final WHT system operates under the investment income provisions of the Income Tax Act for certain types of investment income paid by certain payers to specified categories of (Maltese-resident) recipients.

No tax is levied on investments that yield a fixed rate of return. A tax exemption also applies on the transfer of shares in a company listed on a recognised stock exchange (as of year of assessment 2018, this exemption was widened in scope) other than shares held in certain collective investment schemes.

Transfers of immovable property in Urban Conservation Areas:

The final tax rate on transfers of regenerated immovable property situated in Urban Conservation Areas has been reduced to 5% of the transfer value, subject to the satisfaction of a number of conditions.

Furthermore, in the case of a transfer of immovable property situated within an Urban Conservation Area or scheduled by the Malta Environment and Planning Authority, and where such transfer occurs between 1 January 2016 and 30 September 2017, the stamp duty chargeable is at a reduced rate of 2.5%. Such reduced rate is subject to the satisfaction of a number of conditions.

Rental income:

Any person who owns immovable property that has been restored in accordance with any scheme issued for this purpose by the Malta Environment and Planning Authority and rents out such property, a final WHT rate of 10% applies on the gross rental income received in respect of rental for residential purposes and a final WHT of 15% for commercial purposes.

Persons in receipt of income from the rental of residential property and of commercial tenements and clubs (in all cases, not necessarily restored property), provided that the commercial tenements and clubs are not being rented to or from a related body of persons (as defined), have the option to apply a final 15% tax on the gross rental income. 

Otherwise, the rental income is subject to normal rates of tax, but special tax deduction rules apply.



Corporate Income Tax:

Companies that are considered to be ordinarily resident and domiciled in Malta are subject to income tax on their worldwide income. Companies incorporated in Malta are considered resident in Malta. In addition, companies incorporated outside Malta are considered to be resident in Malta if management and control is exercised in Malta.

Rates of corporate tax:

Income tax is the only tax imposed on the profits of companies. The standard rate of income tax is 35%.

Tax incentives:

Tax incentives are offered in the Malta Enterprise Act and in regulations to the act, as well as in the Income Tax Act.

The Malta Enterprise Act contains several incentives for the promotion and expansion of business, covering a wide range of sectors and activities. The incentives available under the act may be divided into six categories, which are described in the following six subsections. Other tax incentives available in Malta are discussed in the subsequent subsections.

Access to finance:

 The Micro Guarantee Scheme provides eligible undertakings with a guarantee of up to 80% on loans of up to EUR100,000, which may be used to finance projects leading to business enhancement, growth and development. Soft loans (loans at lower interest rates) are available to manufacturing enterprises covering 33% of an approved project but they may not exceed 75% of the cost of plant, machinery and equipment. Loan interest subsidies and royalty financing are available for highly innovative projects.

Investment aid:

Companies engaged in specified activities can benefit from tax credits regarding capital expenditure, job creation or reinvestment of profits derived from trade or business in an approved project.

Small and medium-sized business development:

 Grants are available for the creation and development of innovative start-ups and the development of forward-looking small and medium-sized businesses carrying on or intending to carry out an activity that may contribute to the economic development of Malta, provided that certain conditions are fulfilled. The Malta Enterprise Corporation also provides assistance regarding the hiring of experts and the use of information communications technology or e-business (the conduct of business through information technology systems). Grants under this scheme are currently not available or under review. Businesses should monitor any amendments.

Research and development and innovation programs:

 Fiscal incentives and cash grants are offered to stimulate innovative enterprises to engage in research and development.

Royalty income from patents:

The scheme for royalty income from patents is aimed to encourage investment in research, knowledge creation and exploitation of intellectual property. Fiscal benefits are available to individuals and enterprises that own the rights to patented intellectual property and are receiving royalty income.

Enterprise support:

Assistance is offered to businesses to support them in developing their international competitiveness, improving their processes and networking with other businesses.

Employment and training:

The Employment and Training Corporation (ETC) is taking over and administering the employment and training incentives. Enterprises are supported in recruiting new employees and training their staff. These incentives help generate more employment opportunities and training activities.

Income Tax Act:

The Income Tax Act provides for a deduction of 150% of research and development expenditure incurred.

Shipping:

Maltese shipping law is modeled on British legal sources by incorporating measures containing a system of mortgages that provide excellent security. However, Maltese law also includes measures offering attractive fiscal packages to the shipping industry.

An organization qualifies as a shipping organization if it engages in one or more specified activities and if it obtains a license from the Registrar-General to enable it to carry on such activities. The following are the specified activities:

· The ownership, operation (under charter or otherwise), administration and management of a ship or ships registered as a Maltese ship under the Merchant Shipping Act and the carrying on of related financial, security and commercial activities

· The ownership, operation (under charter or otherwise), administration and management of a ship or ships registered under the flag of another state and the carrying on of related financial, security and commercial activities

· The holding of shares or other equity interests in Maltese or foreign entities that are established for any of the purposes stated in the law and the carrying on of related financial, security and commercial activities

·  The raising of capital through loans, the issuance of guarantees or the issuance of securities by a company if the purpose of such activity is to achieve the objectives of the shipping organization itself or for other shipping organizations within the same group

· The carrying on of such other activities within the maritime sector that are prescribed in regulations

A shipping organization may be established as a limited liability company (public or private), a foreign corporate body that has established a place of business in Malta or another type of entity specified in the law.

If the activities of a shipping organization are restricted to the activities and related activities described above, the following favorable tax treatment applies:

· No income tax is imposed on the income derived from the shipping activities of a licensed shipping organization.

· No income tax is imposed on gains arising on the liquidation, redemption, cancellation or any other disposal of shares, securities or other interests, including goodwill, held in a licensed shipping organization owning, operating, administering or managing a tonnage-tax ship while the ship is a tonnage-tax ship.

· No income tax is imposed on interest or other income paid to a person with respect to the financing of the operations of licensed shipping organizations.

Income derived by a ship manager from ship management activities is deemed to be income derived from “shipping activities” and is exempt from income tax under the Income Tax Act if the following conditions are satisfied:

· The company maintains proper accounts relating to its shipping activities.

· The ship manager pays an annual tonnage tax to the Registrar-General.

For these purposes, “shipping activity” is the international carriage of goods or passengers by sea or the provision of other services to or by a ship as may be ancillary to such activities or associated with such activities, including the ownership, chartering or other operation of a ship engaged in all or any of the above activities or as otherwise may be prescribed.

Income derived by a licensed shipping organization from the sale or transfer of a tonnage-tax ship or from the disposal of a right to a ship, which when delivered or completed would qualify as a tonnage-tax ship, is exempt from tax. In 2012, the European Union (EU) Commission initiated a state-aid investigation into Malta’s tonnage tax system. This investigation is still ongoing and, for the moment, the tonnage tax system is suspended.

Collective Investment Schemes or Funds:

 Collective Investment Schemes or Funds must be licensed under the Investment Services Act. Collective Investment Schemes usually take the form of corporate funds, including open-ended (SICAVs) and close-ended funds, or non-corporate funds, such as unit trusts.

The income of Collective Investment Schemes (other than income from immovable property located in Malta and investment income) is exempt from tax. In addition, prescribed funds are subject to withholding tax on their local investment income. These funds are subject to a 15% final withholding tax on bank interest received and to a 10% final withholding tax on other investment income received, such as interest on bonds and government stocks (units issued by the government to which the general public is invited to subscribe). Under regulations issued by the Inland Revenue Department, prescribed funds are funds whose assets in Malta amount to 85% or more of their total assets. Capital gains derived by funds from disposals of investments and assets are also exempt from tax.

Capital gains derived by unit holders on disposals of their units in prescribed funds listed on the Malta Stock Exchange are exempt from tax. Unit holders in unlisted prescribed funds are subject to tax on their gains. Tax at 15% is withheld from the capital gains realized by resident investors on certain disposals of listed shares in non-prescribed funds. For nonresident Collective Investment schemes, the withholding tax provisions apply only if the Disposal of the shares is effected through an authorized financial intermediary. If the disposal of shares in nonresident non-prescribed funds is not effected through an authorized financial intermediary, no withholding tax is due and any capital gains must be disclosed by the resident investor in the individual’s tax return and taxed at the normal rates of income tax, up to a maximum of 35%.

Aviation income:

Income derived from the ownership, lease or operation of aircraft and aircraft engines used in the international transport of passengers or goods (aviation income) is deemed to arise outside Malta regardless of whether the aircraft is operated from Malta. Consequently, a company that is incorporated outside Malta but managed and controlled in Malta (resident but not domiciled for income tax purposes, or a “non-dom co”) must pay tax on income derived from its aviation income on a remittance basis. Aviation income that is not received in Malta is not taxed in Malta. This implies that a non-dom co may control its Maltese tax liability through its remittances and that a non-dom co deriving aviation income that is not received in Malta is exempt from tax on its aviation income.

Capital gains:

 Income tax is imposed on capital gains derived from the transfer of ownership of the following assets only:

·  Immovable property. However, capital gains on transfers of immovable property or rights over immovable property that are subject to the new Property Transfer Tax  are exempt from income tax.

· Securities (company shares that do not provide for a fixed rate of return, units in Collective Investment Schemes and units relating to linked long-term business of insurance [life insurance contracts under which benefits are wholly or partially determined by reference to the value of, or income from, property]).

· Goodwill, business permits, copyrights, patents, trademarks and trade names.

· Beneficial interests in trusts.

· Full or partial interests in partnerships

In certain cases, value shifting and degrouping result in taxable capital gains.

If a person acquires or increases a partnership share, a transfer of an interest in the partnership to that partner from the other partners is deemed to occur, and is accordingly subject to tax.

For purposes of the capital gains rules, “transfer” has a broad definition that is not restricted to sale. It also includes any assignment or cession of any rights, reduction of share capital, liquidation or cancellation of units or shares in Collective Investment Schemes and other types of transactions. The definition does not include inheritance.

Transfers that are exempt from tax include the following:

· Donations to philanthropic institutions

· “Emphyteutical” grants for periods of less than 50 years (the Civil Code defines “emphyteusis” as a contract under which one of the contracting parties grants to the other, in perpetuity or for a time, a tenement for a stated annual rent or ground rent, which the grantee agrees to pay to the grantor, either in money or in kind, as an acknowledgment of the tenure)

· Transfers of chargeable assets between companies belonging to the same group of companies

· Transfers by nonresidents of securities in Maltese companies that are not primarily engaged in holding immovable property in Malta

· Transfers of securities listed on the Malta Stock Exchange as well as transfers of units relating to linked long-term business of insurance if the benefits derived by the units are wholly determined by reference to the value of, or income from, securities listed on the Malta Stock Exchange

· Transfers by nonresidents of units in Collective Investment Schemes

Rollover relief for assets used in business is also available if the asset has been used in the business for at least three years and if it is replaced within one year by an asset used only for a similar purpose.

Taxable capital gains are included in chargeable income and are subject to income tax at the normal income tax rates. Capital losses may be set off only against capital gains. Trading losses may be carried forward to offset capital gains in future years.

Provisional tax of 7% of the consideration or of the value of the donation must be paid by a seller on the transfer of property if the transaction is subject to the capital gains regime. The Commissioner for Revenue may authorize a reduction in the rate of provisional tax if it can be proved that the capital gain derived from the transaction is less than 20% of the consideration. Provisional tax paid is allowed as a credit against the income tax charge.

If a company transfers property to its shareholders, or to an individual related to a shareholder, in the course of a winding up or distribution of assets, who own all of the share capital of the company transferring the property, the transfer is exempt from tax if certain conditions are satisfied.

Property transfer tax. In general, the transfer of immovable property in Malta is taxed at a rate of 8% on the higher of the consideration or market value of the immovable property on the date of the transfer. No deductions may reduce the tax base, except for agency fees subject to value-added tax (VAT). However different tax rates apply in certain circumstances. Broadly, the following are the circumstances in which the different rates apply:

·  If the property transferred was acquired before 1 January 2004, the seller is taxed at 10% of the transfer value.

· A 5% rate applies if the property is transferred before five years from the date of acquisition or if the transferred property is a restored property.

· If the transfer of immovable property acquired through a donation is made more than five years from the date of the donation, a 12% rate applies to the excess of the transfer value over the acquisition value.

· If property not forming part of a project is transferred less than five years from the date of the acquisition, a 5% rate applies to the transfer value.

Securitization:

The total income or gains of a securitization vehicle is realized or deemed to arise during the year in which such income or gains are recognized for accounting purposes. For purposes of calculating the chargeable income or gains of the securitization vehicle for income tax purposes, the following expenses are deductible:

· Relevant expenses provided under Article 14 of the Income Tax Act

· Amounts payable by the securitization vehicle to the originator or assignor

· Premiums, interest or discounts with respect to financial instruments issued or funds borrowed by the securitization vehicle

· Expenses incurred by the securitization vehicle with respect to the day-to-day administration of the securitization vehicle

Tax is chargeable on any remaining total income of the securitization vehicle, and a further deduction of an amount equal to the remaining total income may be claimed at the option of the securitization vehicle, subject to certain provisos and anti-abuse provisions.

Administration:

The year of assessment is the calendar year. Income tax for a year of assessment is chargeable on income earned in the corresponding basis year, which is generally the preceding calendar year. A company may adopt an accounting period other than the calendar year, subject to approval by the Inland Revenue Department.

Companies with a January to June accounting year-end must file their income tax returns by 31 March (extended if filed electronically) of the year of assessment. Companies with other accounting year-ends must file their income tax returns within nine months after the end of their accounting year (extended if filed electronically).

A self-assessment system applies in Malta. The Inland Revenue Department issues an assessment only if it determines that a greater amount of income should have been declared or that the company omitted chargeable income from its tax return.

Companies must make three provisional payments of tax, generally on 30 April, 31 August and 21 December. The provisional payments are equal to specified percentages of the tax due as reported in the last income tax return filed with the Commissioner for Revenue on or before 1 January of the year in which the first provisional tax payment is due. The percentages are 20% for the first payment, 30% for the second and 50% for the third. Companies must pay any balance of tax payable on the due date for submission of the income tax return for that year of assessment.

Penalties are imposed for omissions of income, and interest is charged for late payments of tax. The Inland Revenue Department pays interest on certain late refunds.

Advance Revenue Rulings. Advance Revenue Rulings may be obtained from the Inland Revenue Department on certain transactions, activities and structures. Rulings survive any change in legislation for a period of two years. In all other circumstances, rulings are binding for five years. Renewals may be requested.

Allocation and distribution of profits:

 The distributable profits of a company are allocated to five tax accounts in the following order:

· Final Tax Account
· Immovable Property Account
· Foreign Income Account
· Maltese Taxed Account
· Untaxed Account

The Final Tax Account contains distributable profits that have been subject to a final tax. The Immovable Property Account contains profits connected with immovable property located in Malta. The Foreign Income Account contains, broadly, foreign-source passive income and foreign-source active income attributable to a permanent establishment located outside Malta. The Maltese Taxed Account contains profits that are not included in the Final Tax Account, Immovable Property Account or Foreign Income Account. The Untaxed Account contains an amount of profits or losses that is calculated by deducting the total sum of amounts allocated to the other accounts from the total amount of profits shown in the profit-and-loss account for that year.

The Full Imputation System applies to distributions from the Immovable Property Account, Foreign Income Account and Maltese Taxed Account. Under this system, the tax paid by the company is imputed as a credit to the shareholder receiving the dividends. Profits allocated to the Foreign Income Account and the Maltese Taxed Account result in tax refunds under the Refundable Tax Credit System.

Refundable Tax Credit System:

In 2007, the Maltese House of Representatives passed a law that implemented an agreement with the EU relating to a refundable tax system for all companies distributing dividends to shareholders. The imputation system under which the tax paid by a company is essentially treated as a prepayment of tax on behalf of the shareholder has been retained but a new refund system is introduced. The new refundable tax system applies both to profits allocated to a company’s Maltese Taxed Account and to profits allocated to its Foreign Income Account and is available both to residents and nonresidents.

A person receiving a dividend from a company registered in Malta from profits allocated to its Maltese Taxed Account or its Foreign Income Account that do not consist of passive interest or royalties may claim a refund of six-sevenths of the tax paid by the distributing company on the profits out of which the dividends were paid. As a result of the introduction of the new system, the dividend recipient receives a full imputation credit plus a refund of six-sevenths of the tax paid by the distributing company.

Distributions of profits derived from passive interest or royalties or profits derived from a participating holding in a body of persons that does not satisfy the anti-abuse provision  do not qualify for the six-sevenths refund. Instead, they qualify for a refund of five-sevenths of the tax paid by the company.

The six-sevenths and five-sevenths refunds apply to distributions made by companies that do not claim any form of double tax relief. Dividends paid out of profits allocated to the Foreign Income Account with respect to profits for which the distributing company has claimed any form of double tax relief  are entitled to a refund equal to two-thirds of the tax that was suffered by the distributing company gross of any double tax relief. However, for the purposes of this calculation, the amount of tax suffered by the company is limited to the actual tax paid in Malta by the distributing company.

The refundable tax system is extended to shareholders of foreign companies that have Maltese branches. Tax paid in Malta by branches on profits attributable to activities performed in Malta is refunded when such profits are distributed.

Persons must register with the Commissioner for Revenue to benefit from the tax refunds described above.



Participation exemption and participating holding system:

 Before 1 January 2007, profits derived from a participating holding were taxed at the rate of 35%. On distribution of such profits to nonresident shareholders, such shareholders were entitled to receive a full refund of the tax paid by the company. Effective from 1 January 2007, the Maltese income tax system exempts from tax income and capital gains derived by a company registered in Malta from a participating holding or from the disposal of such holding. This exemption is referred to as the participation exemption. At the option of the shareholders, a full refund may still be obtained.

Effective from 2013, the participation exemption is extended to branch profits. This applies to income and gains derived by a company registered in Malta that are attributable to a permanent establishment (including a branch) located outside Malta or that are attributable to the transfer of such permanent establishment, regardless of whether such permanent establishment belongs exclusively or in part to the particular company, including a permanent establishment operated through an entity or relationship other than a company.

A holding in another company is considered to be a participating holding if any of the following circumstances exist:

· A company holds directly at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares, and such holding confers an entitlement to at least 10% of any two of the following:

o   Right to vote.
o   Profits available for distribution.
o   Assets available for distribution on a winding up.

The Commissioner for Revenue may determine that the above provisions are satisfied if the minimum level of entitlement exists in the circumstances referred to in the proviso to the definition of “equity holding.” See below for the definition of “equity holding.” —

· A company is an equity shareholder in another company, and the equity shareholder company may at its option 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.

· A company is an equity shareholder in a company, and the equity shareholder company is entitled to first refusal in the event of a proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company.

· A 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.

· A company is an equity shareholder that holds an investment representing a total value, as of the date or dates on which it was acquired, of a minimum of EUR1,164,000 (or the equivalent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days.

· A company is an equity shareholder in a company, the holding of such shares is for the furtherance of the equity shareholder’s own business, and the holding is not held as trading stock for the purpose of a trade.

A holding of a company in a body of persons or a collective-investment vehicle that provides for limited liability of investors constituted, incorporated or registered outside Malta, that is not resident in Malta and that is of a nature similar to a partnership en commandite (limited partnership) and whose capital is not divided into shares constituted under the Companies Act, is deemed to constitute a participating holding if it satisfies the provisions of any of the six bullets above.

For the purposes of the above rules, an “equity holding” is a holding of the share capital in a company that is not a property company if the shareholding entitles the shareholder to at least any two of the following rights (equity holding rights):

· Right to vote
· Right to profits available for distribution to shareholders
· Right to assets available for distribution on a winding up of the company

The terms “equity shares,” “equity shareholder” and “equity shareholding” are construed in accordance with the above definition.

The Commissioner for Revenue may determine that an equity holding exists even if such holding is not a holding of the share capital in a company or does not consist solely of such a holding of share capital, provided that it can be demonstrated that at any time an entitlement to at least two of the equity holding rights exists in substance.

A “property company” is a company that owns immovable property located in Malta or any rights over such property, or a company that holds, directly or indirectly, shares or interests in a body of persons owning immovable property located in Malta or any rights over such property.

A company or body of persons carrying on a trade or business that owns immovable property located in Malta or rights over such property is treated as not owning the immovable property or rights over such property if all of the following conditions are satisfied:

· The property consists only of a factory, warehouse or office used solely for the purpose of carrying on such trade or business.

· Not more than 50% of its assets consist of immovable property located in Malta.

· It does not carry on an activity from which income is derived directly or indirectly from immovable property located in Malta.

The application of the participation exemption is subject to an antiabuse provision. The participation exemption applies to participating holdings if the body of persons in which the participating holding is held satisfies any one of the following three conditions:

· It is resident or incorporated in a country or territory that forms part of the EU.

· It is subject to a foreign tax of at least 15%.

· It does not derive more than 50% of its income from passive interest or royalties.

If none of the above conditions is satisfied, both of the following two conditions must be fulfilled:

·  The equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment. For this purpose, the holding of shares by a company registered in Malta in a company or partnership not resident in Malta that derives more than 50% of its income from portfolio investments is deemed to be a portfolio investment.

· The body of persons not resident in Malta or its passive interest or royalties has been subject to a foreign tax of at least 5%.

In addition, Malta has also incorporated the recent amendments to the EU Parent-Subsidiary Directive. Consequently, effective from 1 January 2016, the participation exemption on dividends does not apply if the relevant profits were deductible to the distributing company in the other EU member state.

The participation exemption applies only to gains or profits derived from transfers of holdings in companies resident in Malta. For this purpose, transfers encompass a wide scope of transactions, including, among others, assignment, sale, emphyteusis (a contract under which one of the contracting parties grants to the other a tenement in land for stated rent), sub-emphyteusis, partition, donation and transfer of assets by a company to its shareholders, in the course of winding up of the company or in the course of a distribution of assets to its shareholders in accordance with a scheme of distribution.

Foreign tax relief:

Under tax treaty provisions and the domestic law, a tax credit against Maltese tax is granted for foreign tax suffered. The amount of the credit is the lower of Maltese tax on the foreign income and the foreign tax paid.

Maltese companies may also reduce their tax payable in Malta by claiming double tax relief with respect to British Commonwealth income tax.

Unilateral tax relief, which is another form of double tax relief, applies if treaty relief is not available and if the taxpayer has proof of the foreign tax suffered. The unilateral relief is also available for underlying tax.

Another form of double tax relief is a flat-rate foreign tax credit (FRFTC), which may be claimed by companies that have a special empowerment clause in their Memorandum and Articles of Association. The empowerment clause requirement applies to companies resident in Malta before 1 January 2007 and is effective from 1 January 2011. Companies, other than companies subject to the empowerment clause requirement, can currently claim the FRFTC. A company resident in Malta before 1 January 2007 could claim the FRFTC without an empowerment clause until 1 January 2011. The FRFTC, which is equivalent to 25% of the net income received (before any allowable expenses), applies to all foreign-source income that may be allocated to the Foreign Income Account. An auditor’s certificate stating that the relevant income is foreign-source income is sufficient evidence that profits may be allocated to the Foreign Income Account. The FRFTC is added to chargeable income and credited against the Maltese tax charge. The credit is limited to 85% of the Maltese tax due before deducting the credit.

The interaction of the four types of double tax relief not only ensures that tax is not paid twice on the same income; it also reduces the overall effective rate of the Maltese tax.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.