Malta - Taxation of Companies
The Maltese taxation of companies is set up to provide businesses with the secure tax procedures. The Malta tax advantages are underpinned to the double tax relief which is could be beneficial.
What is the Corporate Tax Rate in Malta?
Companies incorporated in Malta are subject to tax at the rate of 35% on their worldwide income and capital gains.
Various fiscal incentives are available to both companies and their shareholders upon the distribution of a dividend.
Double Tax Relief
Under the Malta Tax regime, a double taxation relief in Malta is available under its comprehensive double taxation treaty network.
Till date, Malta has concluded more than 72 double taxation agreements for the avoidance of double taxation.
Malta’s treaties are largely based on the OECD Model Convention and grants relief from double taxation using the credit method. Other methods for the relief from double taxation are available under Maltese income tax legislation.
Malta Corporate Tax on Dividends
The Income Tax Act (Chapter 123 of the Laws of Malta) provides different mechanisms for the relief from double taxation on taxable income in Malta.
Relief from double taxation is granted under the credit method whereby tax paid outside of Malta can be credited against tax due in Malta on the same source of income.
The three reliefs are as follows:
Double taxation treaty relief
The flat-rate foreign tax credit
The payment of dividends, interest and royalties does not attract any withholding taxes as per the Corporate tax system in Malta irrespective of the recipient’s tax residence and status.
Double Taxation Treaty Network
Malta has several double taxation agreements most of which are based on the OECD Model Convention.
A list of countries with whom Malta has a double taxation treaty in force, along with the rates, where applicable, of the maximum Malta withholding taxes imposed by the treaty can be found below.
Since its accession to the EU, Malta has adopted the EU Parent-Subsidiary Directive as well as the Interest and Royalties Directive, and thus, the rates may be even eliminated by the application of these directives between EU member states.
Malta permits relief from double taxation on a unilateral basis. Which means overseas tax suffered on income received from a country with which Malta does not have a tax treaty can be claimed as a credit against tax due in Malta. However, 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 suffered overseas tax; and
the amount of the tax.
In terms of the Income Tax Act, 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 is offered to 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 minus 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).
The flat-rate foreign tax credit is applicable where none of the other reliefs of double taxation is available.
Full Imputation System
Malta operates the full imputation system whereby the tax paid by the distributing company is imputed towards the shareholders’ tax liability upon receipt of a dividend, meaning that no further tax is due by the shareholder upon receipt of a dividend.
Malta Holding Company Tax
Holding companies registered in Malta 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 apply for a participating exemption and consequently, the dividend income will not be subject to income tax in Malta.
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 a participating exemption based on the participating holding rules.
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.
The participation exemption provides that a shareholding in a company qualifies as a participating holding if the Maltese resident company holds equity shares in a company or a qualifying body of persons which does not own immovable property and it:
has at least 10% 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.
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:
1. the said non-resident company is subject to a foreign tax of a minimum of 15%; or
2. the said non-resident company does not derive more than 50% of its income from passive interest and royalties; or
3. 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%.
Additional conditions are to be satisfied in cases where the Parent-Subsidiary Directive for the elimination of withholding taxes have been applied.
Where the participation exemption does not apply or where the company does not opt for income or gains to be exempt, Malta holding companies would be subject to tax on income less any applicable deductible expenses at the Malta corporate tax rate (2019) of 35%.
Upon receipt of a dividend, the shareholders would be eligible to claim a refund of the tax paid by the distributing company on income distributed as dividend, depending on the type and source of income received.
The shareholder of the Malta company would be eligible to receive tax refunds as follows:
1. 100% of the Malta tax paid where the income being distributed was eligible for the participation exemption;
2. 5/7th of the Malta tax paid, where the income received by the company is passive interest or royalties or dividend income from a participating holding which does not fall within the conditions (1) to (3) as detailed above;
3. 2/3rd of the tax payable in Malta, where income has benefited from double taxation relief; and
4. 6/7th of the Malta tax in all other cases.
Malta has a trustee regime and thus shares in Maltese companies may be held by licensed trustees in a fiduciary capacity for and on behalf of subscribers.
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Distribution of Interest and Royalties
No tax is withheld upon the distribution of interest and royalties to non-resident beneficial owners of such income. No tax is withheld upon the distribution of dividends irrespective of the residence and nationality of the shareholders.
Since Malta is a member of the European Union, it has access to EU directives such as:
the EU Parent Subsidiary Directive: the aim of this directive is to set a common system of taxation applicable in the case of parent companies and subsidiaries of different Member States;
the Merger Directive: the objective of the Merger Directive is to remove fiscal obstacles to cross-border reorganizations involving companies situated in two or more Member States;
the Savings Directive: aims at implementing the European Union withholding tax, requiring member states to provide other member states with information on interest paid to achieve effective taxation of the payments in the member state where the taxpayer is resident for tax purposes; and
the Interest and Royalties Directive: the purpose of this directive is to set a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
Other Malta Tax Benefits
There are a number of other provisions that make the Taxation System in Malta an attractive one:
- No thin capitalization rules,
- Flexible transfer pricing rules,
- No withholding taxes on remittances of dividends, interest and royalties to non-residents,
- Advance rulings on international transactions,
- Share capital, accounting and tax can be denominated in a foreign currency,
- The possibility of migration of companies to and from Malta,
- No capital duties - low registration fees,
- The relative ease of incorporation for non-regulated entities, and
- Low registration and maintenance costs.
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