Basis of Malta Corporate Taxation

Companies incorporated under Maltese laws are deemed automatically to be both resident and domiciled in Malta and are subject to Malta tax on a worldwide basis, that is, on any income or gains whether arising in Malta or not.

Companies that are redomiciled to Malta from another jurisdiction would be considered incorporated in Malta from the date of re-domiciliation and should be deemed to be resident and domiciled in Malta with effect from such date.

Companies incorporated under foreign laws whose control and management is exercised in Malta are regarded as resident in Malta and are subject to Malta tax on Malta source income (including capital gains) and income arising outside Malta (excluding capital gains) remitted to or received in Malta.

Companies incorporated under foreign laws that are not regarded as resident in Malta i.e., when their control and management is not exercised in Malta, are subject to tax only on income arising in Malta.

Rate of Corporate Taxation

Companies are taxed on their business profits (after deducting expenses) at the flat rate of 35%.

Full imputation Tax system

Malta is the only EU member state which adopts a full imputation tax system wherein tax paid by a company in Malta is, on the distribution of dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability.

Since the 35% tax rate applicable to companies is equivalent to the maximum progressive rate of tax applicable to individuals, a dividend distribution would typically result in no further tax payable at the level of the shareholder.

Tax Refunds and Participation Exemption

Aside from allowing for full imputation, Malta’s fiscal system also provides for an EU-approved tax refund mechanism and participation exemption regime.

The attribution of chargeable income to different tax accounts determines the entitlement and rate of tax refunds upon a distribution of profits.

The different tax accounts for the different sources of income are namely:

1. the Final Tax Account (FTA),

2. the Immovable Property Account (IPA),

3. the Foreign Income Account (FIA),

4. the Maltese Taxed Account (MTA); and

5. the Untaxed Account (UA).

A shareholder in receipt of a dividend distributed by a Malta company out of profits, which have been allocated to its MTA or FIA is entitled to claim a refund of the Malta tax on those profits, provided that the shareholder is duly registered for this purpose.

The applicable refunds available on the distribution of dividends to shareholders are:

The 6/7ths refund

This is the normal refund applicable to companies in respect of trading activities.

The 5/7ths refund

This refund applies to passive interest or royalties that are not derived, directly or indirectly, from a trade or business and where any foreign tax suffered thereon is less than 5%.

The 2/3rds refund

This refund applies to activities being conducted by banks, financial institutions on business outside of Malta or most foreign passive institutions on which double taxation relief is claimed.

The 100% refund

This refund applies to any tax paid upon any income or gains derived by the Maltese company from a ‘participating holding’ (see below) or from the disposal of such holding.

Participation Exemption

Alternative to the 100% refund, a Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever on any income or gains derived by it from the participating holding or from the disposal of such holding.

Participating Holding

The 100% refund or participation exemption is applicable when the profits out of which the relevant dividend is distributed are derived (dividends and/or capital gains) by the Maltese company from a participating holding.

The Income Tax Act (Chapter 123 of the Laws of Malta) provides for six alternative situations in which an equity holding would be treated as a participating holding, the most common situation being where a Maltese company holds directly at least ten percent of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least ten percent of any two of the following:

1. right to vote;

2. profits available for distribution; and

3. assets available for distribution on a winding up.

Apart from satisfying the conditions of the participating holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions:

1. it is resident or incorporated in the EU; or

2. it is subject to foreign tax of a minimum of fifteen (15) percent; or

3. it does not derive more than fifty (50) percent of its income from passive interest and royalties.

Alternatively, if none of the above-mentioned three conditions are satisfied, the satisfaction of both two ancillary conditions would need to be satisfied. These two additional criteria are that:

1. the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment; and

2. the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

Applicability

The refundable tax credit system also applies to Malta tax paid on profits attributable to a Malta branch. Accordingly, companies are allowed to claim a refund of tax paid by their Maltese branch.

Other Features of Maltese Corporate Taxation

– Typically, Malta does not levy a withholding tax on outbound dividend, interest and royalty payments;

– Exemption from tax on transfers of shares and securities held by non-residents (except for shares in companies owning real estate in Malta);

– Extensive double taxation treaty network (including all EU Member States) and other forms of double taxation relief (see ‘Double Tax Relief’);

– No express thin capitalisation, CFC rules or transfer pricing rules;

– As a member of the EU, Malta offers access to the EU Directives;

– No wealth or capital taxes in force.