Corporate Taxation in Malta
Malta’s Distinct Taxation System
Companies incorporated in Malta are subject to a flat income tax rate of 35% on their profits. However, it is important to recognize that various specific tax exemptions exist, such as the Malta copyright tax exemption and the Malta tax exemption for patent royalties.
When companies are taxed at the standard rate of 35%, shareholders are entitled to a refund of part or all of the tax paid by the Maltese company after the distribution of dividends. In general, tax refunds are available to all shareholders for profits, except those derived from immovable property situated in Malta and those already subject to a final tax, like bank interest with a 15% withholding tax.
Hence, while corporate taxation in Malta is nominally high (35%), shareholders can recover part or even the entirety of the tax paid by the Maltese company, making the Maltese taxation system distinctive and advantageous.
Shareholders’ Tax Refunds
Shareholders are eligible for a tax refund of 6/7th of the Malta tax paid by the Maltese company. Therefore, although the Maltese company faces a 35% tax rate, shareholders can claim back 6/7 of this tax.
In this case, the effective tax liability amounts to 5%. (6/7 * 35 = 5)
For example, if gross profits amount to €100,000, the company would pay €35,000 in tax, but shareholders would typically be entitled to claim back €30,000 in tax refunds.
There are specific exceptions to this rule. In one case, a Malta holding company that profits from a participating holding in a non-resident entity receives a full (100%) refund. In this scenario, the Malta holding company may opt to apply a Malta holding company exemption, also known as the participation exemption, or include such income/gains in the taxable income of the Maltese company, paying tax at 35%. After distributing dividends, shareholders are entitled to a full (100%) refund of the Maltese tax paid by the company on such income/gains.
There are also two cases where the Malta tax refund is lower than the standard 6/7 refund:
- When profits out of which dividends are distributed consist of “passive interest or royalties,” the refund is set at 5/7 of the Malta tax paid on those profits. Passive interest or royalties are those not derived from a trade or business and have not suffered foreign tax at a rate of less than 5%.
- If double taxation relief is claimed, dividends paid from profits allocated to the foreign income account, for which the distributing company has applied double tax relief, are subject to a 2/3 refund.
Resident and Non-resident Shareholders
Malta’s tax refund system applies to both resident and non-resident shareholders. However, clawback provisions ensure that the refund system is less appealing for resident shareholders, with an exception for resident shareholders who are not ordinarily resident and domiciled in Malta. Non-resident shareholders are not subject to taxation in Malta on the refunds they receive.
Payment of Malta Tax Refunds
Malta tax authorities typically disburse refunds to registered shareholders of Maltese companies within 14 days from the end of the month in which a valid application is submitted.
Implications of Malta’s Full Imputation of Taxation System
Malta employs a full imputation system of taxation, wherein the tax paid by the Maltese company on the profits distributed as dividends to shareholders is credited in full against the Malta tax liability of the shareholder. This system aims to prevent economic double taxation. Since companies are taxed at a flat rate of 35%, which equals the marginal rate for individuals, no additional tax is due when a dividend is received by an individual shareholder. If an individual shareholder is subject to a lower progressive tax rate than the 35% rate on corporate profits, they are entitled to a tax refund equivalent to the “excess” tax paid by the company.
Withholding Tax on Dividend Distributions in Malta
Malta does not impose withholding tax on the distribution of dividends to non-resident shareholders. Additionally, as long as certain conditions are met, Malta will not levy withholding tax on interest and royalty payments to non-residents.
Capital Gains Derived by a Maltese Company
In Malta, capital gains are not subject to individual taxation; instead, they are combined with the company’s overall income and taxed at the standard corporate tax rate. It’s worth noting that not all capital gains earned by a Maltese company are subject to taxation in Malta.
Taxable capital gains pertain to gains originating from specific categories of capital assets as detailed in Article 5 of the Income Tax Act, which include:
- Immovable property located in Malta.
- Rights associated with securities.
- Business assets.
- Trade names.
- Beneficial interests in a trust.
Capital Gains of Non-resident Shareholders from the Sale of a Maltese Company
Under Article 12 (c) (ii) of the Income Tax Act, gains or profits resulting from the sale of shares or securities in a company whose assets do not primarily consist of immovable property in Malta are exempt from taxation in Malta if the recipient is not resident in Malta.
Malta’s Territorial Tax System
The tax and refund system discussed earlier applies to companies resident in Malta. Companies incorporated in Malta are typically considered ordinarily resident and domiciled in Malta and are taxed on a worldwide basis. However, a foreign company may become tax-resident in Malta if it is effectively managed in or from Malta.
Companies resident or domiciled in Malta but not ordinarily resident and domiciled in Malta are subject to tax in Malta on:
Income and chargeable gains arising in Malta.
Income derived outside Malta but received in Malta (remittance basis).
No tax is payable on capital gains realized outside Malta by a company that is neither ordinarily resident nor domiciled in Malta.
Companies that are neither incorporated nor resident in Malta are only taxed on Malta-source income and/or capital gains. This includes a foreign company incorporated in a different jurisdiction but establishes a permanent establishment (e.g., a branch) in Malta.
Overseas Company Taxation for Malta Branches
Foreign companies not incorporated nor resident in Malta that operate in Malta are required to register their Malta branch with the Registrar of Companies and Malta tax authorities. As per EU directives, separate branch accounts must be maintained. For tax purposes, branch profits are treated as profits attributed to a permanent establishment in Malta, and the tax principles applicable to Maltese companies apply. Branch profits are subject to a 35% tax rate, and the company’s shareholders can apply for refunds to recoup a part of that tax, similar to the principles discussed above.
Common Trading Structures
The most common trading structure frequently employed involves the establishment of two Maltese companies: a Malta Trading company and a Malta holding company. The rationale behind having the shares of the Malta trading company held by a Malta holding company typically revolves around two primary objectives:
To create a legal entity capable of aggregating the total dividends and refunds obtained in connection with the activities of the Malta Trading company.
Potentially, to enable the distribution of these accumulated profits, which comprise the total dividends and refunds received from the operations of the Malta Trading company, in the form of dividends to a foreign EU holding company. The feasibility of this approach depends on the specific implementation of the Parent Subsidiary Directive by the relevant Member State.
Malta Company Taxation for Profits Generated Overseas
Under Maltese law, a company registered in Malta is deemed domiciled and resident in Malta, hence subject to taxation on a worldwide basis. However, this does not imply that a Maltese company operating abroad is exempt from taxation in the foreign country.
Double Taxation Agreements
It is of paramount importance to take into account the impact of any existing double taxation treaty between Malta and the foreign jurisdiction. Unlike many low-tax or offshore jurisdictions, Malta has entered into double taxation agreements with numerous countries, including most EU member states.
A double tax treaty represents an accord between two nations that establishes which country has the authority to tax an individual or a company in specific circumstances. The primary objective of double tax treaties is to prevent the same income from being subjected to double taxation. Broadly speaking, under Malta’s double taxation agreements with other countries, if a company is regarded as a tax resident in both contracting states as per their respective laws, the company is considered a tax resident solely in the state where its place of effective management and control is located, regardless of where the company is incorporated.
Double tax treaties typically include provisions for double tax relief. This ensures that even if income is taxed twice, it is possible to offset the foreign tax already paid. Furthermore, Maltese legislation stipulates that in cases where the terms of any double taxation agreement conflict with domestic Maltese laws, the agreement’s terms will take precedence over inconsistent Maltese legislation.
Value Added Tax (VAT) Rate in Malta
The preceding discussion primarily focused on direct taxation in Malta. Indirect taxation, such as the Value Added Tax (VAT), is governed by different rules. In Malta, the standard VAT rate applied to goods and services is generally set at 18%.
Given the aforementioned factors, it is highly advisable for individuals looking to establish a company in Malta to seek professional guidance, especially if there is a possibility that the company will be managed effectively from abroad. In general, the more substantial the operations of the Maltese company, the less likely it is to be viewed as a tool for the artificial shifting of profits from one country to another.
The Council Resolution on the coordination of Controlled Foreign Corporation (CFC) and Thin Capitalization rules sets out specific cases where, according to the European Commission’s opinion, profits are considered to be artificially diverted.
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