Malta’s status as a member of the European Union, as well as the adoption of the Euro as Malta’s currency in 2008, have made the country a jurisdiction of choice with investors, many of whom decide to locate their businesses in Malta due to an advantageous corporation tax system. Benefits include the attractive tax system as well as a few other factors that come into play when owning a business or registering a company in Malta, such as:
- Malta’s state-of-the-art telecommunications infrastructure
- support services by pro-active Maltese professionals who adopt a ‘can do’ attitude
- a highly qualified and skilled Maltese workforce fluent in various languages (English is an official language)
- Malta’s strategic geographical location
- Malta’s convenient time-zone
- Malta’s stable political environment and democratic government
- Malta’s tax system which is extremely attractive
- an extensive Maltese double tax treaty network and other double tax relief mechanisms (Malta has concluded over 60 double tax treaties)
- relatively low costs for the registration of Malta companies
- Malta’s friendly business environment
One of the attractive benefits to persons who choose Malta as the jurisdiction where to incorporate their companies, is the income tax system available to any Malta business. Malta’s tax legislation provides a number of incentives to shareholders of Malta companies deriving income from their investments and/or trading activities, whether derived from Maltese companies or companies registered outside Malta. The income of Malta companies is subject to a flat income tax rate of 35%. Four forms of relief from double taxation are available including Malta’s far reaching double tax treaty network, so that the Malta company is granted a relief from double taxation in cases where the income of the Malta company would have also suffered tax in a foreign jurisdiction. This ensures that the same income will not be subject to tax twice in two different jurisdictions.
When income received from investments and/or trading activities is distributed by companies by way of dividends, a refund of the tax paid by the companies becomes due, provided that such dividends are distributed out of profits allocated to the foreign income account or to the Maltese taxed account. Profits which stand to be allocated to the foreign income account are those profits and similar income which arise outside Malta, such as dividends, interest, income or gains derived from a participating holding or from the disposal of such holdings, royalties, capital gains, rental income, business profits and investment income. The amount of the tax refund depends on whether the investment constitutes a “participating holding” or otherwise (a detailed explanation of “participating holding” can be found in our brochure on Malta Companies and Taxation or click here. Tax refunds are also available to shareholders receiving dividends from their foreign companies, distributed out of profits arising in Malta through an overseas branch registered in Malta.
Income derived from a participating holding or from the disposal of such holdings 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 excluded from the tax return and as a result be tax free. In the case of income deriving from a participating holding and which thus qualifies for a participation exemption, one may still opt to pay the Malta tax due and claim a 100% tax refund.
Upon receipt of a dividend from companies, shareholders will become entitled to a refund of 6/7ths of the total tax paid (i.e. including the overseas tax). The total tax refund will however be limited to the Malta tax paid, so that the total effective tax rate paid in Malta will be 6/7ths of 35%. This refund is available irrespective of whether business was carried out in Malta or not, further alleviating the burden of taxes imposed on the company.
The Maltese tax refund is reduced to 5/7ths of the total tax paid where the dividend is distributed out of profits derived from passive interest or royalties. Passive interest or royalties consist of interest or royalty income which is not derived directly or indirectly from a trade or business and which has suffered tax (direct or by way of withholding) at a rate which is less than 5%.