A Company incorporated in Malta is treated as domiciled and ordinarily resident in Malta and taxable on world-wide income at 35%. A Company incorporated outside Malta but that is managed and controlled in Malta is considered to be resident in Malta and taxed on income arising in Malta and income arising abroad and remitted to Malta. However, as Malta has adopted a full imputation system any income tax paid by the company is credited in full to the shareholder upon a distribution of dividends, thus avoiding double taxation of corporate profits. Shareholders may claim for a tax refund for tax paid by the company in excess of the shareholders’ income tax liability.
Since joining the EU in May 2004, Malta has developed as a reputable financial centre offering an attractive environment for international business and investment. This was also thanks to a tax efficient regime approved by the EU, the main highlights are as follows:
a) Tax refund system and participation regime approved by the EU;
b) Full imputation system, unique in Europe;
c) No withholding tax on dividends paid by a Maltese company;
d) No thin capitalisation or transfer pricing rules;
e) An extensive network of double taxation treaties; and
f) Advance revenue rulings on international tax matters.
The general rules applying to such tax refunds are as follows:
a) Not taxable itself;
b) Paid by the Commissioner of Inland Revenue on production of dividend warrants;
c) To be paid not later than 14 days after month end when it becomes due; and
d) Paid in same currency as profits chargeable to tax;
There are 4 Types of Refunds shareholders of a Maltese Company may avail of:
a) 6/7ths refund, typically due on trading profits;
b) 5/7ths refund , due in respect of passive interest & royalties;
c) 2/3rds refund, due where the company has claimed double taxation relief; and
d) 100% refund, due where the profits are derived from a Participating Holding (detailed below)
Profits deriving directly or indirectly from immovable property situated in Malta do not give a right to tax refunds.
An equity holding qualifies as a participating holding when any of the following conditions are satisfied:
a) the company holds directly at least 10% of the equity shares of a company, whose capital is wholly or partly divided into shares. The holding must confer an entitlement to at least 10% of any two of the following:
i. Right to vote;
ii. Profits available for distribution; and
iii. Assets available for a distribution on a winding up; or
b) the equity shareholder company is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or
c) the equity shareholder company is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
d) the equity shareholder is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or
e) the equity shareholder holds an investment representing a total value, as on the date or dates on which it is acquired, of a minimum of €1,164,000 in a company and that holding in the company is held for an uninterrupted period of not less than 183 days; or
f) the equity shareholders holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
Such status is available where the non-resident company or similar entity (in which the Maltese company owns the holding) is:
a) resident or incorporated in the EU; or
b) subject to foreign tax of at least 15%; or
c) does not have more than 50% of its income derived from passive interest or royalties
Where none of the above 3 conditions are met, than such status is granted subject to an alternative test where both of the following 2 conditions must be satisfied:
a) the holding is not a portfolio investment; and
b) 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%.
Thus a qualifying participating holding qualifies for a participation exemption. This exemption applies to all dividends and gains derived from such holdings.
Income qualifying for a participation exemption need not be declared in the company’s income tax return. On the other hand such income may be declared and a 100% tax refund claimed.
Double Taxation Relief
Malta has tax legislation in place so that no withholding tax is imposed on outgoing dividends, interest and royalties regardless of the recipient’s tax residence and status, whereas income received from a foreign source which has been subject to overseas tax may avail itself of various forms of double taxation relief.
a) Double taxation Agreements, over 50 agreements in place mostly based on OECD model;
b) Commonwealth income tax relief, available against tax paid in Commonwealth countries subject to reciprocity where a double tax treaty is not available;
c) Unilateral relief, where neither of the above may be applied overseas tax suffered overseas is allowed as a credit against tax chargeable in Malta on the gross amount.
For the above forms of tax relief evidence must be provided to the local tax authorities of overseas income derived and overseas tax suffered.
When neither of the above tax reliefs may be applied and evidence of foreign tax suffered is not available, flat-rate foreign tax credit (FRFTC) may be applied. The FRFTC assumes a deemed foreign tax of 25% of the income received in Malta, regardless of the amount of tax actually paid overseas and this may be claimed even where no overseas tax was actually paid. The 25% deemed foreign tax is allowed as a credit against the Malta tax due on the gross income after allowing for any deductible expenses.