During 2017, Malta made the final revisions to its corporate tax system to include the possibility to claim tax refunds for residents and non-residents. Additionally, features such as the participation exemption, were introduced to make Malta a more attractive tax planning jurisdiction. This makes Malta an attractive and competitive EU tax compliant jurisdiction.
The corporate tax rate in Malta is 35%. However, due to the full imputation system Malta has a favourable tax system for both domestic based companies and international corporations. The effective tax can be as little as 5% using the various incentives for businesses in Malta.
Shareholders of a Maltese entity, who are tax resident in Malta, receive full credit for tax paid by the company on profits distributed as dividends. This avoids double taxation on that same income. Excess imputation tax credits are refundable where the shareholder is liable for tax in Malta on the dividends at a rate which is lower than the corporate tax rate of 35%.
Companies in Malta benefit from a participation exemption both on dividends from such holdings and gains arising from disposal of such holdings. Malta’s participation exemption also extends to domestic holdings of shares and capital gains received from a transfer of a participating holding.
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The following qualifies participating holdings as tax exempt:
A. a company holds directly at least 10% of the equity shares of a company whose capital is divided into shares and entitles the entity to at least 10% of any two of the equity holding rights:
B. a company is equity shareholder and entitled at its options to call for and acquire the entire equity shares not currently held by that company (to the extent permitted by law);
C. a company is equity shareholder and entitled to first refusal in the event of proposed disposal, redemption or cancellation of the equity shares currently not held by that company;
D. a company is equity shareholder and is entitled to either sit on the Board or appoint a person to sit on the Board of the company;
E. a company is equity shareholder holding an investment representing a total value of €1,164,000 in the company uninterrupted for a period of at least 183 days;
F. a company is an equity shareholder in the company where the holding of shares is not held as the purpose of trade, but for its own business.
Equity shares means holding of the share capital in a company and entitles the shareholder to at least two of the three rights; the right to vote, the rights to profit and the rights to assets available for distribution.
The participation exemption applies also to holdings in other entities such as a Maltese limited partnership who’s capital is not divided into shares, is a non-resident body of persons which has similar characteristics, and as a collective investment vehicle where the liability of the investors is limited.
Capital gains from the disposal of the participating holding may be exempt from tax in Malta in terms of the Participating Exemption provisions at the option of the company. If the company receives dividends from income from the participating holding, such income may also be exempt from tax in Malta at the option of the company provided that the holding company falls within the following safe harbours:
If the participating holding does not fall within the safe harbours, the income derived may still be exempt from tax in Malta if both the conditions below are satisfied:
The shareholders of a Maltese company who receive dividends may choose to claim a tax refund of all or part of the Maltese tax paid at the level of the company. The amount of refund that can be claimed depends on the type and source of income received by the company.
Refunds are by law to be settled within 14 days from the day the refund becomes due and given that a complete and correct income tax return of the company and its shareholders is filed. The tax due is paid in full when a complete refund claim is made.
Shareholders of companies having a branch in Malta, and receiving dividends from the branch’s profits, are also eligible for tax refunds in Malta. However, no refund may be claimed for tax paid on income derived directly or indirectly from immovable properties Malta.
Shareholders can claim a full refund of tax paid by the company on dividends received from participating holdings. This means an effective combined tax rate of zero. Such dividends received from participating holdings must fall within the safe harbour zones or satisfy the anti-abuse provisions. Tax paid on capital gains upon disposal of such holding are also eligible for a 100% refund.
Dividends paid to shareholders out of any other income not mentioned above can be entitled to claim a refund of 6/7ths of the tax paid by the Maltese company. That means an effective tax rate of 5% for the shareholders of the company.
The 5/7ths refund is applicable when dividends are distributed out of profits derived from passive interest or royalties, or dividends received from a Participating Holding which does not fall within the safe harbours or satisfy the anti-abuse provisions.
The 5/7ths refund results in an effective tax rate of 10% on passive interest and royalties for shareholders.
In case of double taxation relief is claimed from any foreign income received by the Maltese company, shareholders may claim a refund of 2/3rds of the tax paid on the tax paid.
Malta has an effective system for relief of double taxation. There are three main mechanisms to claim a refund for double taxation on foreign income:
This mechanism provides a tax treaty between Malta and the rest of the world, where no formal treaties are in place. This means that tax suffered in a foreign country can be claimed as a tax credit against the tax chargeable on the gross chargeable income in Malta. This credit is issued provided that sufficient evidence is provided to the commissioner. This includes:
The tax credit cannot exceed the total tax payable in Malta.
Malta has signed over 70 Double Taxation Treaties around the world including double taxation agreements with the EU Member States. Taxpayers satisfying the conditions are entitles to a double tax relief on income from outside of Malta. The relief is granted in the form of a credit.
Isle of Man
United Arab Emirates
A Maltese company receiving income from abroad can benefit from the flat rate foreign tax credit. It is a notional tax credit for tax suffered on the qualifying foreign source income and allocated to the company’s foreign income account.
The mechanisms tax credit on the foreign source income is 25%. It is calculated by grossing up that income by the available credit before charging the Maltese income tax rate of 35% and finally deducting the credit.
The credit is available provided an auditor’s certificate on the income is submitted. The total available credit, which is subject to some maximum restrictions, is set of against the tax due in Malta.
Malta has adopted a formal ruling procedure to provide legal certainty on the legal application of a transaction. The rulings are issued within 30 days of the application and will survive for 5 years and a change in law for 2 years. Even if the situation is not expressly regulated by law, a guidance letter can be issued in order to ascertain legitimate expections the tax payer can rely on.
Being part of the EU, Malta has adopted the EU Parent-Subsidiary Directive eliminating withholding taxes on cross border transactions of dividends from subsidiaries and parent companies. Furthermore, the Interest and Royalties Directive exempts interest and royalty payments to a company in a member state from tax paid in another member state.
Apart from the treaties, credit and refunds available to Maltese companies and its shareholders, there are various other tax advantages to benefit from in Malta. These are:
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