Partner Contribution – Debono and Associates
2021-01-26
Since joining the EU in May 2004 and the Eurozone in 2008, Malta has become an attractive financial services centre which serves as a base for international investors for their activities. Malta offers various benefits to companies that are either resident or registered in Malta including a skilled workforce, low operational costs, various tax incentives and a double tax treaty network with over seventy countries.
Company Tax Rate
In terms of Maltese income tax legislation, a company is a resident in Malta if it is incorporated in Malta. If the company is incorporated outside Malta, it is still resident in Malta, if its effective management and control are exercised in Malta. Companies are subject to tax in Malta at the standard corporate tax rate of 35%.
Full Imputation System
Malta adopts the full imputation system, which means that shareholders of a Malta company, will be entitled to a tax credit equivalent to the tax paid by the company upon a distribution of profits. The purpose of the imputation system is to eliminate any economic double taxation that might arise on the distribution of dividends, meaning that company profits will not be subject to tax twice, first at the corporate level, then at the shareholder level. The highest rate of tax applicable to individual shareholders is equivalent to the corporate rate of tax (35%), meaning that no further tax will be due on the distribution of profits.
Tax Accounting for Companies
Companies must allocate their profits to one of the following tax accounts:
- Foreign Income Account (FIA) – royalties, dividends, capital gains, interest and other passive income arising outside Malta are allocated to this account.
- Maltese Taxed Account (MTA) – profits of a company which are not allocated to the FIA and which have suffered Malta tax are allocated to this account.
- Immovable Property Account (IPA) – profits derived from transfers of immovable property situated in Malta and from other activities which are related directly or indirectly to immovable property situated in Malta are allocated to this account.
- Final Tax Account (FTA) – profits which are exempt from tax and which are also exempt in the hands of the shareholders upon distribution are allocated to this account.
- Untaxed Account (UA) – the difference between the company’s accounting profits (or losses) and the total amounts allocated to the above four tax accounts are allocated to this account.
The proper allocation of profits to the correct tax accounts is of utmost importance in view of the refundable tax credit system explained below. Refunds of tax by shareholders can only be claimed in respect of dividends which are distributed from the FIA and MTA. Distributions from the FTA, IPA and UA do not entitle the shareholders to a tax refund.
Tax refunds can only be claimed by shareholders who are registered to receive them and the number of refunds received will depend on the nature and source of income derived by the Malta distributing company.
Refundable Tax Credit System
Shareholders of companies registered in Malta are entitled to a tax refund upon the distribution of profits. In general, the tax refund amounts to 6/7ths of the tax paid by the company resulting in a maximum effective tax rate of 5% after-tax refunds. Where double taxation relief is claimed by the company in respect of foreign tax suffered, the effective tax rate can be reduced further to 0%.
In the circumstances where the profits distributed are made up of passive interest or royalties, the tax refund is reduced to 5/7ths of the tax charge, resulting in a maximum net tax paid in Malta of 10% after-tax refunds. Passive interest and royalty income is income which has not been derived directly or indirectly from a trade or business and where such interest or royalty income has not suffered or suffered any foreign tax, directly, by way of withholding or otherwise, at a rate of tax which is less than 5%.
Where the company has opted to claim relief from double taxation on its income which stands to be allocated to its foreign income account, refunds to shareholders will amount to 2/3rds of the total tax paid (including foreign tax). If the relief from double taxation claimed is the Flat Rate Foreign Tax Credit (refer to the section on Double Taxation Relief) the tax refund will amount to 2/3rds of the Malta tax paid.
In general, the tax refunds are calculated on the total tax paid including foreign tax, subject to the tax refund not exceeding the Malta tax suffered. The only exception is where the FRFTC is claimed, as mentioned above.
The following is an example illustrating the 6/7ths refund:
Company
Profit before tax €1,000
Tax at 35% (€ 35 0)
Profit after tax €650
Shareholder
Refund on the distribution (6/7ths tax refund) €300
Effective rate of tax on profit before tax 5%
Double Tax Relief in Malta
Under the Malta Tax regime, relief from double taxation is available under various mechanisms.
Double Tax Agreements
To date, Malta has concluded more than 72 double taxation agreements for the avoidance of double taxation with various countries.
Malta’s double tax treaties are largely based on the OECD Model Convention and grants relief from double taxation using the credit method.
Unilateral Relief
Malta grants also relief from double taxation under unilateral relief whereby overseas tax incurred on income received from a country with which 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 of Maltese tax payable.
To claim the unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner:
- That the income arose from overseas;
- That the income was subject to tax outside of Malta; and
- Proof of tax paid abroad.
Unilateral relief is only available in cases where there is no double taxation relief.
Flat-rate foreign tax credit (FRFTC)
The flat-rate foreign tax credit can be claimed by Maltese companies which receive income or capital gains from overseas and which income is allocated to the Foreign Income Account of the company.
The FRFTC is calculated at 25% of the amount of the overseas income or gain received by the company, before allowable expenses.
The income along with the credit less deductible expenses will be subject to full Maltese income tax with relief for the estimated credit (up to a maximum of 85% of the Malta tax payable).
Participation Exemption
Malta Holding companies that are in receipt of dividend income or capital gains from a ‘participating holding’ or from income arising from the disposal of that same holding may benefit from the participation exemption.
Malta's participation exemption on capital gains is also extended to domestic holdings of shares, hence capital gains arising from the transfer of a participating holding in a Malta company are also eligible for the exemption.
A participating holding arises when a company holds equity shares in a company or a qualifying body of persons which does not own immovable property and which give it any two of the right to vote, the right to receive a dividend and right over assets upon the liquidation of the company. Moreover, a participating holding must meet one of the following criteria:
- Has at least 5% of the equity shares in the other company; or
- Is an equity shareholder in a company and the equity shareholder company is entitled to the option to call for and acquire the entire balance of the equity shares of the non-resident company and is entitled to the Right to the first refusal to purchase such shares; or
- Is an equity shareholder in a company and is entitled to sit on the Board or appoint a person to sit on the Board of that company as a director; or
- Is an equity shareholder in a company which invests a minimum sum of €1,164,000 and such
- investment is held for an uninterrupted period of 183 days; or
- Holds the shares in the company for the continuance of its own business and the holding is not held as trading stock for the purpose of a trade.
- 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 at least one of the following additional criteria is fulfilled:
- The said non-resident company is subject to a foreign tax of a minimum of 15%; or
- The said non-resident company does not derive more than 50% of its income from passive interest and royalties; or
- The shares in the non-resident company are not a portfolio investment and the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.
Two Tier Structures
To take maximum advantage of the refundable tax credit system, it is very common for a Malta trading company to be owned by a Malta holding company. The Malta holding company will serve as a dividend feeder company, receiving dividends from the Maltese trading company and tax refunds from the Maltese tax authorities. This avoids the problem of classification of income in those foreign countries which consider the tax refund as a dividend or any other income.
Any dividends and tax refunds received by the Malta holding company can be either distributed to the ultimate beneficial owners in the form of dividends or reinvested in the operating company. Malta does not impose any withholding tax on the distribution of dividends and due to its full imputation system of taxation, the tax suffered at the level of the Malta trading company will be granted as a credit against the tax due by the Malta holding company upon receipt of a dividend. Therefore the Malta holding company will not incur any further tax on the dividends received from the Malta trading company.
Exemption from Stamp Duty
Companies whose business activities are mainly carried out outside Malta are eligible for an exemption from stamp duty on the transfer of shares. This exemption from duty also applies where more than half of the ordinary share capital, voting rights and rights to profits are held by persons who are not resident in Malta. Stamp duty is paid by the person acquiring the shares. The above-mentioned exemption also applies to the transfer of shares by/to such companies.
No Withholding Tax
Malta does not impose any withholding tax on the outbound payment of dividends, interest and royalties.
