Companies incorporated in Malta are subject to income tax on their worldwide income as they are considered to be ordinarily resident and domiciled in Malta by virtue of their incorporation. Companies registered outside Malta are considered resident in Malta if management and control is exercised therein, whereas companies that are neither resident nor domiciled in Malta are only subject to income tax on income and capital gains arising in Malta.
Companies registered or resident in Malta are subject to income tax on chargeable income at a standard rate of 35%. However it is significant to note that Malta has adopted the full imputation system whereby dividends paid by a Malta company do not attract any further tax since they carry a tax credit equivalent to the tax paid by the company upon the distribution of profits. This means that the shareholder is entitled to claim a refund which may be equivalent to either 2/3rds, 5/7ths, 6/7ths or 100% of the income tax paid by the Malta company upon the distribution of a dividend.
The Refund System
The full imputation system utilized by Malta ensures that both resident and non-resident shareholders are entitled to receive a refund of any tax paid by the company. The practical implication of this is that upon receipt of a dividend from their Malta company which operates trading income, shareholders will become entitled to a refund of 6/7ths of the total tax paid. However, the total tax refund is limited to the Malta tax paid meaning that the total effective tax rate paid in Malta will be 5%.
The tax refund is minimized to 5/7ths of the total tax paid by the company in the case of companies which distribute dividends out of profits derived from passive interest or royalties, resulting in a net tax paid in Malta of 10%. Furthermore, the shareholder of a Maltese company which derives any type of income, including passive interest or royalties, may claim a 2/3rds refund. This type of refund may be claimed even when the Maltese company has claimed relief from any one of the four forms of double taxation available under Maltese tax legislation. This results in a maximum effective tax payable of 6.25%, which can be reduced further depending on the company’s expenses.
A shareholding in a non-resident company qualifies as a participating holding if the Maltese company holds equity shares in a non-resident company or a qualifying body of persons and it:
- holds directly at least 10% of the equity shares of the non-resident company; or
- is an equity shareholder in the non-resident company and is entitled at its option to purchase the balance of the equity shares of the non-resident company or has the right of first refusal to purchase such shares; or
- is an equity shareholder in the non-resident company and entitled to be represented on the Board of directors; or
- is an equity shareholder which invests a minimum of €1,164,000 in a company not resident in Malta and such investment is held for a minimum uninterrupted period of 183 days; or
- holds the shares in the non-resident company for the furtherance of its own business of the Malta company but not held as trading stock for the purpose of trade.
A shareholder of a Maltese company may claim a full refund of the tax paid on the dividends and capital gains received from a participating holding if the holding in the non-resident company satisfies at least one of the following anti-abuse provisions:
- it must be resident or incorporated in the EU;
- it must be subject to foreign tax of a minimum of 15%;
- it must not derive more than 50% of its income from passive interest or royalties.
Income derived from a participating holding or from the disposal of such holding will qualify for a participation exemption, which is intended to exempt from tax dividends and gains derived from such holdings. The income derived from a participating holding which qualifies for a participation exemption, may be altogether excluded from the tax return and as a result no tax will be due.
Maltese legislation provides for four types of relief from double taxation of foreign source income.
- Treaty Relief: Malta has concluded over 50 double taxation agreements which are mostly based on the OECD Model Convention. Such treaties ensure that the same income is never taxed twice in different countries. In order to claim double tax relief in Malta, evidence of tax paid in a foreign country is required and it is also necessary that the person claiming such relief be resident in Malta in the year preceding the year of assessment.
- Commonwealth Relief: This is relief granted for taxes paid to British Commonwealth countries in respect of income derived from those countries.
- Unilateral Relief: This shall be applicable when calculating a person’s tax liability in those cases where double taxation relief and relief in respect of Commonwealth income tax are not available to the person making the claim. Through such relief, any overseas tax suffered is allowed as a credit against the tax chargeable in Malta which is levied on the gross amount. Unilateral relief for underlying tax is also available where the taxpayer is a person who holds more than 10% of the voting power of the overseas company paying the dividend.
- Flat Rate Foreign Tax Credit (FRFTC): This is only available to Maltese companies which receive income from overseas in cases where the other forms of relief from double taxation are not available. The flat rate foreign tax credit is calculated at 25% of the amount of the overseas income or gain received by the company, before allowable expenses.
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. One of the implications of such is that a branch of an oversea company is treated as a permanent establishment for tax purposes. This means that it would be taxable in Malta only on those profits ‘attributable’ to the Maltese permanent establishment. Income tax would be charged at the rate of 35% if such oversea company is any body of persons constituted, incorporated or registered outside Malta. Furthermore, all fiscal benefits granted to companies incorporated or resident in Malta are also extended to branches therefore use of a branch may create an optimal solution in international tax planning strategies.
Apart from all the above-mentioned beneficial qualities of the Maltese tax regime, other specific incentives further apply to particular niche areas of the market particularly in relation to aircraft, shipping, manufacturing, I-gaming, media and entertainment companies as well as in the field of financial services.