Company Taxation

For income tax purposes, a company is defined as any partnership constituted in terms of the Companies Act, 1995, the capital of which is divided into shares. The definition of a company includes any body of persons constituted, incorporated or registered outside Malta, co-operative societies and partnerships ‘en commandite’.

The tax rate for companies is 35%. The tax is charged on world wide profits in the case of companies registered and resident in Malta. In the case of a company which is either not registered or not resident in Malta, whether or not it operates through a branch in Malta, tax is charged on those profits arising in Malta. Oversea companies registered in Malta that establish a place of business in Malta are charged to tax on income arising in Malta, and on that remitted to Malta, but are entitled to deduct a proportion of head office expenses attributable to their Malta operation. Companies are deemed to be resident in Malta when their control and management are exercised in Malta. Broadly, tax residency for companies is closely associated with the place where the directors’ meetings that make fundamental business decisions are held.

The basis on which company tax is charged is the net accounting profit shown in the company’s audited accounts adjusted to take into account tax depreciation and deductions. Tax losses may be carried forward and offset against future profits without any time limitation. Companies forming part of a group may benefit from group relief provisions in respect of allowable losses which are surrendered in favour of the claimant company. Group relief only applies to companies resident in Malta and such companies are deemed to form part of a group if one or more companies are owned, directly or indirectly, as to at least fifty-one per cent. Group relief is only available if the companies forming part of the group adopt a coterminous accounting period and had formed part of the group for the whole year. Allowable losses are surrendered in favour of the claimant company thus reducing the tax liability of the latter. Losses are surrendered before capital allowances which remain to be carried forward in the accounts of the surrendering company. The claimant company assumes the losses surrendered after taking into account its own capital allowances.

The accounting period for any year of assessment (which is the calendar year beginning on 1 January) is the year immediately preceding it. Companies may however apply for a change in the accounting year-end. Since a basic period may not be less than, or more than, twelve months, a system of apportionment is adopted to effect changes in accounting dates. Terminal adjustments are available in order to compensate any reassessment of the same profits that may take place during the changeover period. Apart from this, there are no commencement or cessation provisions.

Malta operates a full imputation system of taxation. When a Malta registered or resident company distributes a dividend, it deducts tax from the dividend at the rate paid by the company. When the dividend is then taxed on the shareholder, it is taxed at the gross amount and the taxed paid by the company is credited against the shareholder’s total tax liability. When paying out a dividend, the company retains 35% of the gross amount. The shareholder has the option not to declare this dividend if his tax liability is within the 35% bracket which is the highest rate of personal tax. Shareholders may elect to apply for a refund of the tax paid by the company.

The profits earned by the company are allocated to the ‘Maltese taxed account’, the ‘foreign income account’ and the ‘untaxed account’. The Maltese taxed account comprises taxable profits net of the rate of tax in force in the year the profits are earned. The foreign income account includes the taxable income from foreign sources after taking into account the Maltese tax paid net of double taxation relief. The untaxed account is the arithmetical difference between the total profits of the company for the year and the taxable profits (net of tax) allocated to the Maltese taxed account and the foreign income account. Segregation is important for the purpose of drawing up the appropriate dividend warrants when distributions are made to the shareholders.

Malta has negotiated tax treaties with a significant number of countries. The treaties are drawn up on the OECD model with some variations in a minor number of agreements. In those instances where a double tax treaty is not in force, Malta allows unilateral relief in respect of income which has suffered tax overseas. The flat rate foreign tax credit is another form of double tax relief and is available to Maltese companies in respect of income or capital gains from abroad and which has been allocated to the foreign income account