Companies, registered or resident in Malta, are subject to income tax on chargeable income at a standard rate of 35% - known as Advanced Company Income Tax (ACIT). However, in view of Malta’s full imputation system of taxation any income tax paid by the company is credited in full to the shareholder upon a distribution of profits, so as to avoid any double taxation of corporate profits. The full imputation system, which has been utilised since 1948 and which is fully compliant with EU directives and ECJ case law, ensures that both resident and non-resident shareholders are entitled for a refund of any tax paid by the company which is in excess of the shareholder’s income tax liability.
Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements. The tax refund is also paid in the same currency, thus eliminating any currency exchange risks. In terms of the provisions of the income tax legislation, a tax refund must be paid by the Inland Revenue Department within 14 days from the end of the month in which it falls due.
The income tax system utilizes different tax accounts for different sources of income namely the Final Tax Account (FTA), the Immovable Property Account (IPA), the Foreign Income Account (FIA), the Maltese Taxed Account (MTA) and the Untaxed Account (UA).
The attribution of chargeable income to the different tax accounts is an important aspect of the Maltese tax system as this determines the possibility of tax refunds upon a distribution of profits. Distributions from the FTA, the IPA and the UA do not give rise to any tax refunds in the hands of the shareholders, however, a distribution from the FIA and MTA entitles the shareholder to claim a refund which is equivalent to either 2/3rds, 5/7ths, 6/7ths, or 100% of the company income tax.
Profits attributed to the FTA include income that has been subject to a final withholding tax, profits arising from capital gains on immovable property which has suffered the property transfers tax, certain investment income and certain tax free profits. Profits attributed to the IPA are those profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, profits from the rent, accommodation revenue by hotels and similar establishments, management fees and annual rental value of immovable property in Malta.
A company’s trading or passive income which is not attributable to the FTA and IPA, is attributed to the FIA or the MTA depending on the source of such income. A distribution from the FIA or MTA enables the shareholder to apply for a tax refund of the company tax.
A tax refund is considered to fall due when the company’s audited financial statements (showing the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on a prescribed form, together with the dividend certificate is submitted by the shareholder of his attorney or representative.
Holding companies and the participating exemption
Holding companies that derive dividend income or capital gains from a ‘participating holding’ may apply for a participation exemption. Alternatively, the Maltese holding company may elect to be subject and pay income tax and upon a distribution of profits the shareholder is entitled to claim a full refund of the company income tax. This means that the shareholders may achieve an effective tax rate of up to 0%.
A shareholding in a non-resident company qualifies as a ‘participating holding’ if the Maltese company holds equity shares in a non-resident company or a qualifying body of persons and it:
i) has a least 10% of the equity shares in the non-resident company; or
ii) is an equity shareholder in the non-resident company and is entitled to purchase the balance of the equity shares of the non-resident company, or it has the right of first refusal to purchase such shares; or
iii) is an equity shareholder in the non-resident company and is entitled to either sit on the Board or appoint a person on the Board of that subsidiary as a director; or
iv) is an equity shareholder which invests a minimum in the non-resident company of €1,165,000 (or the equivalent in a foreign currency) and such investment is held for a minimum uninterrupted period of 183 days; or
v) holds the shares in the non-resident company for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
Furthermore the non resident company in question must either satisfy any one of the following three conditions:
- it is resident or incorporated in the EU,
- it is subject to foreign tax of a minimum of 15%,
- it does not derive more than 50% of its income from passive interest and royalties,
or must satisfy both of the following conditions:
a) the shares in the non-resident company must not be held as a portfolio investment; and
b) the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.
Companies having trading & certain types of passive income
Shareholders in receipt of dividend income emanating from companies having trading activities and certain types of passive income and whose profits are allocated to the FIA or MTA may apply for a tax refund equivalent of 6/7ths of the company tax paid, except where the income is deemed to be ‘Passive interest or royalties’, or double taxation relief has been claimed on such income. This means that the effective tax rate can be reduced to 5%.
"Passive interest or royalties" refers to interest or royalty income which is not derived, directly or indirectly, from a trade or business, where such interest or royalties have not suffered or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%);
Passive interest & royalties
When the income is deemed to be passive interest or royalties the rate of refund possible is of 5/7ths of the Malta tax paid – resulting in an effective tax rate of 10%. Alternatively companies receiving passive interest and royalties may reduce such 10% by applying the Flat Rate Foreign Tax Credit (FRFTC). The FRFTC is a deemed foreign tax of up to 25%. When the FRFTC is applied a refund of 2/3rds of the Malta tax paid on distributions from the FIA is possible hence resulting in an ultimate tax rate of 6.25%.
Advance Revenue Rulings
Certainty can be sought on important aspects through the request of an Advance Revenue Ruling from the International Tax Unit of Inland Revenue Department. Such ruling is valid for a period of five years and is renewable for a further five-year period. The ruling is not mandatory however it not only confirms the tax authorities’ interpretation but also serves to preserve the same tax treatment for two years should there be a change in legislation which may affect the company or its tax treatment.
Other important considerations
- Malta does not levy any withholding taxes;
- Malta has no thin capitalization rules or debt-to-equity ratios;
- Malta has no specific transfer pricing rules;
- Malta has no capital duty and wealth taxes;
- No stamp duties on share transfers in companies owned by non-residents;
- Non residents are exempt from any capital gains on certain share transfers;
- Malta has an extensive treaty network;
- As an EU Member State Malta has adopted the EU’s Parent-Subsidiary Directive and the Interest and Royalties Directive;
- Under the re-domiciliation provisions it is possible to migrate companies into and out of Malta;
- No exchange control regulations and business may be conducted freely in any currency;
- Malta’s financial services legislation and tax laws are complaint with EU directives;
- Malta’s has strong and effective Money Laundering Laws and Regulations
- Malta’s legislation offers regulated professional trustees which may provide fiduciary and trust services.