Malta Company Tax
The corporate tax system features various mechanisms which makes Malta an attractive and competitive EU tax compliant jurisdiction.
The Malta Company Tax System
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.
The Imputation System
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.
Malta Company Tax Highlights
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Investments Which Qualify as a participating holding
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:
- right to vote;
- profits available for distributions; and
- assets available for distribution upon winding up.
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:
- it is a resident incorporated in the EU;
- it is subject to at least 15% foreign tax rate; or
- less than 50% of its income is from passive interest or royalties.
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 equity shared held in the non-resident company do not represent a portfolio investment; and
- the non-resident company or its passive interest or royalties have ben subject to a tax rate of minimum 5%.
Tax Refunds In Malta
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.
The 100% Refund
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.
The 6/7ths 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
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.
The 2/3rds Refund
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.
Example Of The Refund Mechanism
Step 1: Corporate tax charged at company level
|Maltese Registered Company||€|
|Earnings before tax||1,000|
|Income tax payable (35%)||350|
|Earnings after tax||650|
Step 2: Refund mechanism applied to shareholders
|Tax paid on company level||350|
|Tax refund (6/7ths)||300|
|Effective tax payable||50|
Double Taxation Relief
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:
- Unilateral relief
- Double Tax Treaty Network
- Flat Rate Foreign Tax Credit system (FRFTC)
The Unilateral Relief
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:
- That the income arose from abroad;
- That the income suffered foreign tax; and
- The amount of tax paid on that income.
The tax credit cannot exceed the total tax payable in Malta.
Malta’s Double Tax Treaty Network
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.
Treaties in force
- Czech Republic
- Hong Kong
- Isle of Man
- San Marino
- Saudi Arabia
- South Africa
- United Arab Emirates
- United Kingdom
Treaties Signed, but not in force
Tax information exchange agreements in force:
- Cayman Islands
Tax information agreements signed but not in force:
Flat Rate Foreign Tax Credit (FRFTC)
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.
Example of the Flat Rate Tax Credit
|Flat Rate Tax Credit||€|
|Foreign source income||1,000|
|Flat rate foreign tax credit||250|
|Grossed up income||1,250|
|Malt tax payable (35%)||437.50|
|Tax payable in Malta (18.75%)||187.50|
Advanced Tax Rulings 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.
Benefits Of Being a EU Member State
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.
Other Tax Advantages In Malta
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:
- No withholding taxes apply on distribution of the profits or dividends to the shareholders;
- Stamp duty and capital gains exemptions apply to the transfer of shares in a Malta company by non-residents;
- No taxes or restrictions on the distribution of the dividends from the Malta company.
- Tax is paid and refund is received in same currency of company’s share capital.
- No thin-capitalisation rules;
- No transfer pricing rules;
- No withholding taxes on interest and royalties to non-residents;
- No capital duties;
- No wealth taxes;
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