Maltese Tax System
Maltese Tax System Overview
Malta employs a full imputation tax system, allowing shareholders receiving dividends from Maltese companies to either credit the 35% corporate tax paid by the company against their Maltese income tax or claim a refund if their personal tax rate is lower than the corporate rate.
For individuals who are both resident and domiciled in Malta, the tax system covers worldwide income. Transfers of shares, crucial for international business, are generally exempt from transfer duties. Additionally, Malta does not impose thin capitalization rules, controlled foreign corporation legislation, transfer pricing regulations, or capital and wealth taxes. Instead, it applies progressive tax rates for individuals.
Residents who are not domiciled in Malta are taxed only on income generated within Malta or on income that, although earned abroad, is remitted to Malta (excluding capital gains). This can offer significant tax planning benefits for expatriates and non-domiciled residents.
Double Taxation Relief
Malta provides double taxation relief (DTR) either through treaties or unilaterally. This relief is given in the form of an ordinary credit for foreign taxes paid on foreign income. This applies to both Maltese resident companies and branches of foreign companies.
The ordinary credit covers both withholding and underlying taxes (on dividends) for direct subsidiaries and up to 10% participation in sub-subsidiaries across all tiers. If foreign taxes exceed Malta’s 35% tax rate, no additional Maltese tax is due. Alternatively, the Flat Rate Foreign Tax Credit (FRFTC) is available, which allows for a deemed foreign tax of 25% on foreign income received. This method can reduce effective tax rates to between 7.47% and 18.75%.
FRFTC Application
The FRFTC can be claimed on income attributable to the foreign income account (FIA income) if the company is eligible to receive such income. FIA income includes royalties, dividends, interest, rents, capital gains, and other income from foreign investments, as well as profits from foreign branches, foreign assets of Maltese banks and financial institutions, and Malta-licensed insurance companies related to overseas risks.
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There are no thin capitalization rules, controlled foreign corporation legislation, transfer pricing or capital or wealth tax rate of 35% (progressive rates apply to individuals).
Persons who are resident but not domiciled in Malta are only taxed on income arising in Malta or on income (not including capital gains) which although arising outside Malta is remitted to Malta. This may give rise to very attractive tax planning opportunities for expatriates and resident non-domiciled companies.
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Double Taxation Relief
Double taxation relief (DTR) is provided, under an applicable treaty or unilaterally, in the form of an ordinary credit for foreign taxes suffered on foreign income. This applies both for resident companies and registered branches of foreign resident companies.
The ordinary credit applies to both withholding and underlying tax (for dividends) of direct subsidiaries and 10% (participation in) sub-subsidiaries to all tiers. Thus, if foreign taxes exceed the Malta tax charge (35%), no further Malta tax is payable. An alternative form of DTR, the Flat Rate Foreign Tax Credit (FRFTC) is also available whereby foreign income is deemed to have suffered foreign tax of 25% of foreign income received. The application of this DTR method can reduce tax suffered to between 7.47% and 18.75%
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FRFTC
The FRFTC may be claimed on income allocable to the foreign income account (FIA income) if the company is empowered to receive FIA income. (FIA income consists of royalties and similar income arising outside Malta; income/gains derived from a participating holding, dividends, interest, rents, capital gains and other income derived from investments situated outside Malta; profits of permanent establishments; profits from foreign assets/liabilities of Malta licensed banks and financial institutions and profits of Malta licensed insurance companies related to risks situated outside Malta.)
Tax Refunds
Perhaps the characteristic that sets apart the Maltese tax system from other tax systems is the possibility given to shareholders to claim a cash refund of the tax paid by a Maltese company following a distribution of profits. Duly registered shareholders of Maltese companies in receipt of a dividend may typically claim, from the Commissioner of Inland Revenue, a partial refund of 6/7ths of the tax paid by the company. After the refund is received, the effective tax suffered in Malta is 5%. If a credit for foreign tax of 5% or more is claimed, the incidence of Maltese tax is eliminated.
6/7ths Refund Practical example:
Profit of the company:
€1,000,000
TAX:
€350,000
Dividend distribution to
shareholder:
€239,000
Refund (6/7ths of 350):
€300,000
A 5/7ths and a 2/3rds refund may also apply in specific circumstances depending on the nature of the income of the distributing company and whether double taxation relief is claimed on that income. A 100% refund may also be claimable in particular circumstances (see participation exemptions below).
Refunds of tax may be claimed irrespective of the activity conducted and whether the source of the income derived by the distributing company is in Malta or outside Malta, with the exception of profits derived from immovable property.
Total funds received by a shareholder:
Net Dividend:
€650,000
Tax Refund:
€300,000
TOTAL:
€950,000
Effective TAX: