Tax Malta, Tax Efficiency Malta, Gaming Malta, Shipping Malta, Financial Services Malta, Trusts Fiduciary in Malta
Tax Incentives
Introduction
Income tax in Malta is levied on all sources of income including that arising from a trade or business, profession or vocation, employment or office, dividends, interest and discounts, pensions, charges, annuities and other annual payments, rents and other profits arising from immovables, royalties and other gains or profits. Certain capital gains are treated as income. Fringe benefits provided in virtue of an employment or office are deemed to constitute income for tax purposes.
The tax is levied for the year preceding that of the year of assessment. The tax year runs from 1 January to 31 December that forms the basis year. Thus the year of assessment 2011 refers to the calendar year 2010. A Final Settlement System is in use whereby tax is deducted from earnings during the basis year thus ensuring that all the tax from employment income, and pensions, is collected in the same year. Self employed individuals and limited liability companies are obliged of remit provisional tax payments on a quarterly basis during the current year of assessment. Any tax still unpaid is remitted on the date the tax return is due for filing. For individuals, the filing date is the 30 June whilst for companies the return is due by not later than nine months from the accounting year-end.
No deductions from taxable employment income are allowed. Self employed individuals and limited liability companies may deduct all expenses wholly and exclusively incurred in the production of the income, including capital allowances (tax depreciation) at the specified rates. There are special rules for deductions allowable for the purpose of calculating capital gains and certain unearned income.
Personal income is brought to charge at the rates applicable for the relevant year of assessment. Companies are subject to a rate of tax of 35%. Certain types of income and certain individuals may benefit from reduced rates of tax.
Malta operates a full imputation system under which dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profits out of which the dividends are paid. Shareholders are taxed on the gross dividend at the personal rates but are entitled to deduct the tax credit attaching to the dividend against their total income tax liability. Dividend income and investment income subject to the final withholding tax of 15% need not be declared in the personal tax return. Recipients of dividends may elect for a refund of the Malta tax paid by the company.
Tax Refund System
The tax measures currently in force in Malta provide excellent opportunities to those companies set up to carry out international trading as well as investment and holding activities. The main advantage is that Malta is the only EU member state that operates the full imputation system of taxation. Shareholders of Maltese companies are entitled to claim a refund of the tax paid by the company whenever distributions are made to them. Maltese law also provides for a participation exemption regime on certain profits derived from a qualifying participating holding.
There are several other advantages encompassed within Malta’s international tax provisions. No withholding taxes are applied when dividends are paid by Maltese companies. Tax exemptions apply whenever interest and royalties are paid to non-residents and no tax is levied on the transfer of shares held by non-residents (provided shares are held in a company which does not own property in Malta). Malta has an extensive double taxation treaty with over 40 jurisdictions. The double taxation relief provisions are supplemented by other forms of double taxation relief in the absence of a double taxation treaty. So far, Malta does not have any thin capitalisation or transfer pricing rules.
The standard corporate rate of tax in Malta is 35% of the chargeable income for the fiscal year. Maltese companies are required to allocate profits after tax to various tax accounts, namely, the final tax account, the immovable property account, the Maltese taxed account, the foreign income account and the untaxed account. Profits deriving directly or indirectly from immovable property situated in Malta and allocated to the immovable property account do not qualify for tax refunds. Whenever distributions are made from the Maltese taxed account or the foreign income account, shareholders receiving such distributions become entitled to claim a refund of the Malta tax paid by the company on those profits out of which distributions are made. Tax refunds also apply where a company operates through an oversea branch in Malta.
The refunds currently available are:
- 6/7ths refund: This type of refund is generally due on those profits earned from trading activities. Taking into account such refund, the effective rate of tax works out at 5%.
- 5/7ths refunds: This type of refund is generally due in respect of income derived from passive interest and royalties. The effect rate of tax works out at 10%.
- 2/3rds refund: Available in those instances where the company has claimed double taxation relief. The refund depends on the type of double taxation relief availed of and is limited to the tax paid in Malta.
- 100% refund: Applies when profits are derived from a participating holding.
Participation Exemption
Participation Holding
A participating holding exists where a company holds directly at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares and where such holding confers at least 10% of any of following: (i) a right to votes; (ii) a right to profits available for distribution and (iii) a right to assets available for distribution on the winding up of the company. The taxation authorities in Malta may also establish that an equity holding exists even where there is no holding of shares but where it is proven that at least two of the condition rights exist. A participating holding also exists when the following criteria are met:
- The investment in the non-resident company amounts to EUR 1,164,700 or more, subject to a time duration test of 183 days
- The Maltese company has the option to acquire the remaining balance of the equity shares in the non-resident company
- The Maltese company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the remaining balance of the equity shares in the non- company
- The Maltese company is entitled to sit on the Board of the non-resident company
- The holding of shares in the non-resident company is for the furtherance of the business of the Maltese company provided further that the shares are not held for trading purposes
Participation Exemption
Profits derived from a participating holding or from gains realised on the disposal of such holding may, subject to certain conditions, be exempted from tax in Malta. The exemption is available where the non-resident company or similar entity (in which the Maltese company owns the holding) is resident or incorporated in the EU; or is subject to foreign tax of at least 15% or does not have more than 50% of its income derived from passive interest or royalties. Where none of the above 3 conditions are met, the exemption is subject to an alternative test where both of the following 2 conditions must be satisfied – (1) the holding is not a portfolio investment and (2) the non-resident company or entity or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.
A Maltese company receiving gains or profits from a participating holding or its disposal has an option not to claim the participation exemption but may pay tax at 35% instead. In such case, the company’s shareholders may (following a distribution of profits derived from the holding) claim a 100% refund of the tax paid by the company. This option affords flexibility in planning holding structures.
Company Redomiciliation
The re-domiciliation of companies in Malta is regulated by the ‘Continuation of Companies Regulations 2002’ (Legal Notice 344 of 2002) which came into effect on the 26 November, 2002. In terms of the regulations, foreign companies formed and incorporated under the laws of an approved country other than Malta may be continued in Malta in terms of the Companies Act. Similarly, a company incorporated in Malta may be continued in a jurisdiction other than Malta as permitted by the laws of the other jurisdiction. The ‘Continuation of Companies Regulations 2002’ are indeed relevant to all types of companies including those companies carrying out certain licensed activities. The approved countries are EU members, EEA members (Norway, Iceland, Liechtenstein), O.E.C.D. countries, British Virgin Islands, Cayman Islands, Bermuda, Guernsey, Jersey, Gibraltar, Isle of Man, Bahamas.
A body corporate formed and incorporated or registered under the Laws of an approved jurisdiction other than Malta may, provided that certain conditions are met, request the Registrar of Companies to be registered as being continued in Malta. This would allow the body corporate to continue its operations in Malta without having to wind up the Company in its jurisdiction. Redomiciliation is governed by Legal Notice 344 of 2002, Continuation of Companies Regulations, 2002.
The regulations are divided into two parts. Part 1 deals with the Continuation in Malta of a Foreign Company, while part 2 deals with the continuation outside Malta of companies incorporated in Malta.
A number of conditions need to be satisfied for a foreign Company to be able to continue its operations in Malta. The country of original registration must have the appropriate legislation in place allowing company’s domiciled within its territory to effectively re-domicile their activity to another country. The charter, statutes or memorandum and articles or any other instrument constituting or defining the Company must also authorize the Company to do so. A request to the Registrar to be considered for registration as continuing in Malta under the Act must be submitted together with supporting documentation.
Recent changes enacted to Malta Law also provide for ‘Step-up’ provisions which allows a Company being re-domiciled to Malta or a Company resulting following a merger which meets the EC Merger Directive, to claim a step up in the tax base costs of any assets held outside Malta. Effectively, this will enable the Company to revalue its overseas assets to fair market value at the time the re-domiciliation process is undertaken. The re-valued cost, which should be notified to the IRD, will constitute the new acquisition cost of the assets when calculating any subsequent gain. It is also worth noting that capital allowances available under the Income Tax Act will henceforth be calculated on the stepped-up value of the assets.
Capstone provides specialised advice in connection with re-domiciliation procedures.
Continuation in Malta of a Foreign Company
A formal application is to be submitted to the Registrar of Companies in Malta requesting that the foreign company may be continued in Malta. The request is to be accompanied by a resolution of the shareholders evidencing the decision to re-domicile in Malta and authorising the directors of the company to proceed with the necessary formalities. A copy of the Memorandum and Articles of Association, or a similar constitutive document, in the English language is required which may in certain cases require amendments in order to comply with the provisions of the Companies Act. This document is to be accompanied by a certificate of good standing issued by the country where the company is incorporated.
In addition to the documents mentioned in the foregoing paragraph, the directors of the company are required to make certain declarations. These declarations will include the name of the company and the name under which it is to be registered in Malta, the name of the country where the company is presently incorporated and the date of incorporation. The directors are to confirm the decision taken by the members to re-domicile in Malta and that the company has notified the foreign jurisdiction of its intention to migrate to Malta. The directors’ declaration is to confirm that there are no proceedings for any breach of law in the country of incorporation. They are further to state that the company is solvent and that they are not aware of any circumstances which could negatively affect in a material manner the solvency position of the company within the period of the next twelve months. A list of the present directors is also to be provided.
The Registrar of Companies may also require confirmation that the continuation of the company in Malta is permitted by the laws of the country in which it was formed. The Registrar may also require evidence relating to the consent of such number, or proportion, of the shareholders, debenture-holders and creditors of the company so that it may be continued in Malta.
Continuation of a Malta Company Abroad
The ‘Continuation of Companies Regulations 2002’ contain similar provisions to enable companies incorporated in Malta to be continued in an approved country or jurisdiction. The formalities are indeed similar to those applicable for foreign companies wishing to be continued in Malta. The Registrar of Companies will only give consent for a company to be continued outside Malta provided certain conditions are satisfied. In particular, no proceedings for the dissolution of the company may have been commenced. If any shares have been pledged, the pledge is to give consent in writing for the company to be continued in another country or jurisdiction. The company is to ensure that it is not in breach of any of its duties or obligations under the Companies Act. The company is to publish a notice in the Gazette and a daily local newspaper announcing its resolution to continue outside Malta. The Registrar of companies will only give consent after the lapse of three months from the date of the publication of such notice and provided that no objections from creditors are received.
Double Taxation Relief
In order to encourage international trade, Malta has so far concluded Double Taxation Treaties with a significant number of countries. This policy is expected to continue in the future. Relief is extended in terms of the unilateral relief and a system of flat rate foreign tax credit. Relief in respect of Commonwealth income tax is also available.
Double Tax Treaties
Malta has entered into a considerable number of double-tax treaties. Generally speaking, the treaty benefits are available to all Maltese companies other than companies incorporated in terms of the Malta Financial Services Centre Act (offshore companies). All the treaties, other than the Swiss treaty, are based on the OECD Model Convention.
The following countries have entered into a double-tax treaty with Malta.
| Country | From | Country | From | Country | From |
|---|---|---|---|---|---|
| Albania | 2001 | Italy | 1976 | Syrian Arab Rep | 2001 |
| Australia | 1986 | Korea (Rep of) | 1999 | Tunisia | 2002 |
| Austria | 1977 | Latvia (Rep of) | 2001 | United Kingdom | 1961 |
| Belgium | 1976 | Lebanon | 2001 | United States* | 1997 |
| Bulgaria | 1988 | Libya | 1973 | Barbados | NIF |
| Canada | 1987 | Luxembourg | 1996 | Estonia | NIF |
| China | 1995 | Malaysia | 2001 | Iceland | NIF |
| Croatia | 2000 | Netherlands | 1976 | Iceland | NIF |
| Cyprus | 1994 | Norway | 1978 | Jordan | NIF |
| Czech Republic | 1998 | Pakistan | 1974 | Kuwait | NIF |
| Denmark | 1999 | Poland | 1995 | Lithuania | NIF |
| Egypt | 2002 | Portugal | 2003 | Morocco | NIF |
| Finland | 1977 | Romania | 1997 | Russia | NIF |
| France | 1979 | Slovakia | 2001 | Singapore | NIF |
| Germany | 1973 | South Africa | 1998 | Slovenia | NIF |
| Hungary | 1993 | Sweden | 1977 | Thailand | NIF |
| India | 1976 | Switzerland* | 1977 | Turkey | NIF |
| Ukraine | NIF |
*Limited to profits derived from operation of ships and aircraft in international traffic
NIF – not in force
Unilateral Relief
Unilateral relief is only given if no relief is available in respect of treaty relief or Commonwealth income tax relief. Unilateral relief applies to income which arises outside Malta, has been subject to tax by a foreign body and comprises the income of a person resident in Malta. The relief is only given provided that tax authorities are satisfied that the foreign income has been taxed abroad. The overseas tax may be allowed as a credit against the Malta tax chargeable on the gross amount provided that it does not exceed the Malta tax liability on that income. Unilateral relief is also available where the taxpayer is a Maltese company which holds at least 10% of the voting powers of the overseas company paying the dividend.
Commonwealth Releif
This type of relief applies in those cases where there is no double tax treaty. Relief from Maltese tax is granted in respect of any tax charged under a law of a Commonwealth country (other than Malta and the United Kingdom) if that country’s law also provides for a similar relief in respect of tax charged on income both in that country and in Malta. Where the Commonwealth country’s rate of tax does not exceed the Malta rate, a non-resident will receive a credit in Malta equivalent to one-half of the Commonwealth country’s rate of tax. If the Commonwealth country’s rate of tax exceeds the Maltese rate, a non-resident will receive a credit equivalent to the amount by which the Maltese rate of tax exceeds one-half of the Commonwealth country’s rate of tax.
Flat Rate Foreign Tax Credit
The flat rate foreign tax credit is available to Maltese companies in respect of income or capital gains from abroad and which has been allocated to the foreign income account. The flat rate foreign tax credit is calculated at 25% of the net amount of the overseas income or gain received by the company but before deducting allowable expenses. The income plus the credit less the allowable expenses is subject to Malta tax but relief for the deemed credit is restricted to 85% of the Malta tax paid. Relief is given only on the production of a certificate from the company’s auditor stating that the income arose from overseas.
| Example 1 ( without expenses) | Euro |
|---|---|
| Net Foreign Income | 1000 |
| Grossing up for flat rate foreign tax credt -25% | 250 |
| Gross Income | 1250 |
| Malta Tax Rate 35% | 438 |
| Less flat rate foreign tax credit (maximum 85% of Lm438 = Lm372 but limited to Lm250 | 250 |
| Malta Tax Payable | 188 |
Flat rate foreign tax credit examples
| Example 2 ( with expenses) | Euro |
|---|---|
| Net Foreign income (before deductions) | 1000 |
| Grossing up for flat rate foreign tax credit - 25% | 250 |
| Gross Income | 1250 |
| Gross Income | 1250 |
| Deductible expenses | 200 |
| Chargeable Income | 1050 |
| Malta Tax at 35% | 368 |
| Less Flat Rate Foreign (maximum 85% of Lm368 + Lm313 but limited to Lm250 | 250 |
| Malta Tax Payable | 118 |
Table of Treaty Rates
The following is a summarised table of the percentage rates of withholding tax on payments made from treaty countries to Malta.
| Country | Dividends | % share to | Interest | Royalties | |
|---|---|---|---|---|---|
| qualify | |||||
| Minor S/H | Major S/H | ||||
| Australia | 15 | 15 | 15 | 15 | |
| Austria | 15 | 15 | 5 | 10 | |
| Belgium | 15 | 15 | 10 | 10 | |
| Bulgaria | nil | nil | 15 | 10 | |
| Canada | 15 | 15 | 15 | 10 | |
| China | 10 | 10 | 10 | 10 | |
| Cyprus | 15 | 15 | 10 | 10 | |
| Czech Republic | 5 | 5 | 25 | nil | 5 |
| Denmark | 15 | 0 | 25 | 0 | 0 |
| Finland | 15 | 5 | 10 | 10 | 10 |
| France | 15 | 5 | 25 | 10 | 10 |
| Germany | 15 | 5 | 25 | 10 | 10 |
| Hungary | 15 | 5 | 25 | 10 | 10 |
| India | 15 | 10 | 10 | 15 | |
| Italy | 15 | 15 | 25 | 10 | 10 |
| Korea Rep | 15 | 5 | 10 | Nil | |
| Libya | 15 | 15 | 25 | 15 | 15 |
| Luxemburg | 15 | 5 | 25 | 10 | 10 |
| Netherlands | 15 | 5 | 10 | 10 | |
| Norway | 15 | 15 | 20 | 10 | 10 |
| Pakistan | 15 | 15 | 20 | 10 | 10 |
| Poland | 15 | 5 | 10 | 10 | |
| Romania | 5 | 5 | 5 | 5 | |
| South Africa | 15 | 5 | 10 | 10 | |
| Sweden | 15 | nil | 10 | nil | nil |
| United Kingdom | nil | nil | 10 | 10 |
Permanent Residence Permit
[This scheme has temporarily been suspended for non EU nationals]
A Maltese Permanent Residence Permit entitles the holder to reside in Malta without any restriction on the amount of time actually spent in Malta. Entry visas are not required to travel to Malta and therefore permanent residents have complete freedom of movement to travel in and out of the country and within EU borders.
Benefits – Permanent resident holders are taxed at a flat rate of 15% on income remitted to Malta, subject to a minimum annual tax liability of EUR 4,150 per annum after relief from double taxation. The tax payable is worked out on income and capital gains arising in Malta and on foreign income, excluding capital gains, remitted to Malta. Therefore no tax liability is created on any capital gains arising outside of Malta irrespective of whether they are remitted to Malta or not. Any excess income brought to Malta, proceeds from the sale of the principal residence in Malta (subject to conditions), encashments of investments and any income accumulated during the resident’s stay may be repatriated, provided that there are no outstanding tax liabilities payable in Malta. There are no estate duties to be paid but duty is levied on the transfer of immovable property situated in Malta as well as shares held in Maltese companies. The duty payable on the purchase of immovable property is fixed at the rate of 5%.
Permit holders are not to engage in any gainful occupation or any form of business activities in Malta and import duty or VAT on the importation into Malta of used household and personal effects, motor vehicle, furniture and other domestic articles is waived if such goods are imported within the first 6 months of obtaining the residency license.
Application conditions and procedure – When applying for a Permanent Residence Permit, candidates may include dependants, namely children under18 years of age, their spouse, parents and grandparents if being maintained by the applicant.
A prospective permanent resident must provide evidence that he/she either owns assets outside Malta worth at least EUR 349,000 or is in receipt of an annual income of at least EUR 23,000 arising outside Malta.
The applicant will be required to remit to Malta at least EUR 13,950, plus EUR 2,330 per each dependent annually and must, within one month from taking up residence, either purchase residential premises in Malta at a cost of not less than EUR 116,000 in the case of a house, or EUR 69,000 for a flat, or rent/lease suitable accommodation at a cost of not less than EUR 5,150 per annum.
An application for a Permanent Residence Permit must be supported by the following documents:
- evidence that applicant has an annual income of Eur23,000 or capital assets of at least Eur349,000 and that he is in a position to remit to Malta a minimum annual income of Eur13,950 plus Eur2,330 for each dependent. This evidence can take the form of a bank reference, bank statements or certificates of deposit or securities or income tax returns.
- a Police or Judicial Good Conduct Certificate, in respect of each adult (18 years and over) whose name appears on the said application, issued from the place of residence of the individual. This certificate should confirm that applicant/dependants has never had any convictions (save for minor traffic offences) and is not undergoing any criminal proceedings. If the certificate issued by the Authorities does not contain wording to this effect, the applicant is required to make a sworn declaration (affidavit) attesting same facts.
- a copy of the Marriage Certificate in the case of a married couple (where applicable)
- a copy of the Birth Certificate of applicant and dependants (where applicable)
- A written declaration by the applicant stating that parents and/or grandparents are financially dependent on the applicant (where applicable).
- 3 Passport-sized photos of applicant and each dependant;
- certified true copy of Passport of applicant and each dependant;
- brief curriculum vitae of applicant;
- tax identification number of applicant in country of current residence;
- if applicant has already acquired or rented property in Malta, a copy of the deed of purchase of property or of the lease / rental agreement should be submitted. If property has not yet been acquired, such deed of purchase of property or of the lease / rental agreement should be submitted to the Inland Revenue Department within 12 months of taking up residency in Malta.
The application process may take up to three months. The applicant is to take up residence in Malta within 12 months of the issue of the permit.
