Maltese companies are subject to tax at the rate of 35% on their worldwide income and capital gains. Foreign companies, incorporated outside Malta carrying out business activities in Malta are liable to tax on income arising in Malta. Malta grants various fiscal incentives to both companies and their shareholders upon distribution of a dividend.
A full imputation system applies to the taxation of dividends, where the distributing company’s tax is imputed as a credit to the shareholder receiving the dividend. In simple terms, it is a measure against double taxation where company profits are taxed at the source. However, dividends distributed to shareholders from taxed company profits are not taxed again.
Double Tax Relief in Malta
Maltese tax law provides three main forms of double taxation relief of foreign-source income, i.e.: treaty relief; unilateral relief; and flat rate foreign tax credit (FRFTC)
Double Tax Agreements (Treaty Relief)
Malta’s double tax treaties are primarily based on the OECD Model Convention, it has concluded more than 70 double taxation agreements for the avoidance of double taxation. It grants corporations relief from double taxation through the credit method.
Unilateral Relief
Under unilateral relief, overseas tax incurred on income received from a country where Malta does not have a tax treaty can be claimed as a credit against the tax due in Malta. The credit cannot exceed the total Maltese tax payable.
To claim this type of relief, the taxpayer must prove to the commissioner for Revenue that foreign tax was paid.
Flat-rate foreign tax credit (FRFTC)
The Flat Rate Foreign Tax Credit (FRFTC) is a type of relief which can be availed of where the other forms of relief from double taxation listed above are not available. It is a form of relief for a deemed tax and therefore the taxpayer is not required to provide any evidence of foreign tax paid. The flat-rate foreign tax credit can be claimed by Maltese companies that receive income or capital gains from overseas allocated to the company’s Foreign Income Account.
The FRFTC is calculated at 25% of the overseas income or gain received by the company before allowable expenses. The income, along with the credit less the deductible expenses, will be subject to total Maltese income tax with relief for the estimated credit (up to a maximum of 85% of the Malta tax payable).
For more information on double tax reliefs in Malta, get in touch with us by sending an email on info@e2s.com.mt.
Participation Exemption
Malta’s Participation Exemption regime was introduced back in 2007. Dividends and capital gains derived from a participating holding will be exempt from Maltese tax. Capital gains arising from the transfer of a participating holding in a Maltese company are also eligible for the exemption.
The participating holding must be an equity holding, meaning that at
least two of the following equity holding rights are satisfied:
- Right to votes.
- Right to profits available for distribution.
- Right to assets available for distribution on a winding up
of the company.
A participating holding arises when any one of the following criteria is met:
- The owner of at least 5% of the equity shares in the company
- An equity shareholder in a company that has the option to acquire the entire balance of the equity shares.
- An equity shareholder is entitled to the right to the first refusal to purchase such shares
- An equity shareholder is entitled to sit on the board or appoint a person as a director
- An equity shareholder with a minimum investment of € 1,164,000, and such investment is held for an uninterrupted period of 183 days
- Holds shares for the furtherance of their own business, not for the purpose to trade stock.
As per the Malta tax structure, dividends resulting from a participating holding in an EU resident company is exempted from tax in Malta in all cases. Tax on dividends received from a participating holding in a non-EU resident company are exempt in Malta provided the fulfilment of at least one of the following anti-abuse provisions:
- It is resident or incorporated in a country or territory which forms part of the EU; or
- It is subject to any foreign tax of at least 15%; or
- It does not have more than 50% of its income derived from passive interest or royalties.
Where none of these conditions is satisfied then both of the following two conditions must be satisfied for the participation exemption to apply:
- The investment in the participating holding must not be held as a portfolio investment; and
- The passive interest or royalties derived by the participating holding would have been subject to tax at a rate of at least 5%.
Alternative to the Participation Exemption
Malta also offers the possibility of a 100% tax refund in respect of qualifying income. Whereas the participation exemption, not having to pay any tax, grants a cash flow advantage; in some instances, the company may be required to provide evidence of tax paid in Malta, in which case it would use the full refund system.
For more information on the Participation Exemption in Malta, get in touch with us by sending an email on info@e2s.com.mt.
Tax Refunds
Malta’s Tax Refund System Upon a distribution of profits by a company registered in Malta (i.e., a company resident in Malta or a non-resident company with a branch in Malta), its shareholders may claim the following tax refunds of the Malta tax charge of the distributing company:
Upon receipt of a dividend, the shareholders would be eligible to claim a refund of the tax paid by the distributing company on income distributed as a dividend, depending on the type and source of income received.
100% of the Malta tax paid, where the income distribution was eligible for the participation exemption
5/7th of the Malta tax paid, where the income received by the company is passive interest and royalties or dividend income from a participating holding, which does not fall within the conditions. This results in an effective tax rate of 10%. Where interest and royalties have been subject to foreign tax at a rate of 5% or more, it will no longer be considered passive, and therefore qualify for the 6/7th refund.
2/3rd of the tax payable in Malta, where income has benefited from double taxation relief. Where the income is allocated to the FIA and DTR has been claimed, the tax refund is 2/3rds of the Malta tax charge after deducting FRFTC but before deducting other types of DTR. The Malta tax suffered on FIA income after the tax refunds where the FRFTC has been claimed, the effective Malta tax suffered will be between 2.49% and 6.25%.
6/7th Most commonly, the tax refund available to shareholders of Maltese companies amounts to 6/7ths of the tax paid in Malta. This intrinsically results in an effective tax rate of 5% as a reduction from the standard corporate tax rate of 35%.
Tax Accounting
A company in Malta is required to allocate its profits to the following accounts:
- Final Taxed Account (FTA)
- Immovable Property Account (IPA)
- Foreign Income Account (FIA)
- Maltese Taxed Account (MTA)
- Untaxed Account (UA)
For more information on Tax Refunds in Malta, get in touch with us by sending an email on info@e2s.com.mt.
EU Directives
Malta is a member of the EU and therefore has access to EU directives such as the EU Parent Subsidiary Directive, the Merger Directive, the Savings Directive and the Interest and Royalties Directive.
The EU Parent-Subsidiary Directive: Has the aim of achieving a standard system of taxation within the European Union. Furthermore, this will apply to parent companies and subsidiary companies based in different EU member states. It has the aim to eliminate double taxation on profit distributions between associated companies in the various EU Member States.
The Merger Directive: This is to remove fiscal issues to cross-border reorganisations involving companies situated in two or more Member States.
The Savings Directive: This aims to implement the EU withholding tax, requiring member states to provide other member states with information on interest paid. This is to achieve effective taxation of the payments in the member state where the taxpayer resides.
The Interest and Royalties Directive: This directive sets a standard taxation system applicable to interest and royalty payments made between associated companies of different Member States.
No tax is withheld upon the distribution of interest and royalties to non-resident beneficial owners of such income. The same applies to the distribution of dividends irrespective of the residence and nationality of the shareholders.
Branches
Maltese law offers the possibility to companies incorporated or constituted outside Malta to conduct business in or through Malta by setting up a branch in Malta. Malta is ideal judication to establish a branch, since it offers various benefits for the oversea company such as:
- A straightforward and quick registration process
- No physical presence required in Malta for registration. With that being said, the foreign company must have a local representative for its branch in Malta.
- Attractive tax treatments
- Malta has an extensive double tax treaty network.
- Malta is an economically stable country and setting up your branch in Malta can help you set foot in the European Union with ease.
A branch of an oversea company would be taxable in Malta only on income arising in Malta and on income arising outside Malta but remitted in Malta. The branch will have a tax rate of 35% and for non resident shareholders refunds on tax might be provided. In many cases, the overall effective tax rate can be as low at 5%. Additionally, the branch’s dividends are not subject to any withholding taxes and can only be taxed as the domestic tax rate.
Branches in Malta can also benefit from the many tax treaties formed with many countries which protects the company from being taxed twice.
For more information on establishing a branch in Malta, get in touch with us by sending an email on info@e2s.com.mt.
