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Taxation of companies

As a member of the EU, Malta has adopted all EU tax directives which include the parent subsidiary directive, the mergers directive and the interest and royalties’ directive.

Basis of taxation

Companies incorporated under Maltese laws are automatically deemed to be resident and domiciled in Malta for tax purposes. Such companies are taxed on their worldwide income.

Companies incorporated under foreign laws are regarded as resident in Malta in those cases where their control and management are exercised in Malta. These companies are subject to tax on a source and remittance basis ie. subject to tax on Malta source income (including capital gains) and on income arising outside Malta (excluding capital gains) and remitted to Malta.

Companies that are not resident in Malta are taxable on chargeable income and capital gains arising in Malta, although a number of exemptions may apply in respect of certain income.

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

The chargeable income of a company, which includes its taxable income and capital gains, is taxed at 35%.

Taxable income

Taxable income of a company is the profit reported in the company’s audited financial statements subject to certain adjustments necessary to arrive at taxable profits. Adjustments would typically include the write back of depreciation and a deduction for statutory capital allowances, the write back of expenses that are not deductible for income tax purposes such as: amortisation including amortisation of goodwill, provision for bad debts, donations, pre-trading expenses and unrealised differences on exchange. The general rule for the deductibility of expenses for tax purposes is that expenses are only deductible when they are incurred wholly and exclusively in the production of the income.

Trading tax losses incurred by the company may be carried forward indefinitely until offset against taxable profits. Capital losses may not offset trading profits; however capital losses may be carried forward and offset against future capital gains. Trading losses may be offset against capital gains.

In the case of a group of companies, the trading losses incurred by one company may be surrendered to another company or companies within the same group. For income tax purposes companies belong to the same group when: each is resident in Malta and not resident in any other country; and one is a subsidiary of the other or both are subsidiaries of the same parent company resident in Malta.

The company surrendering the losses and the company receiving the losses (claimant) must have accounting periods that begin and end on the same dates. Group relief for a particular year may only be claimed with respect to losses incurred in that same year; however once losses are surrendered, the claimant company can continue to carry them forward indefinitely or until fully absorbed. Capital losses do not qualify for group relief.

Capital gains

Tax on capital gains is levied on gains arising from the transfer of securities, business, goodwill, a beneficial interest in a trust and intellectual property rights. Capital gains are added to the taxpayer’s income for the year and tax is charged on the total amount. Provisional tax is payable at the time of such transfers at the rate of 7% of the consideration.

Transfers of immovable property situated in Malta are subject to a final withholding tax of 12% of the transfer value (or of the gain with respect to certain transfers). However, a transferor of immovable property may, in certain circumstances, opt to be taxed at the standard rates on the gain arising on the transfer rather than be subject to the final withholding tax. The provisional tax paid will be allowed as a credit against the tax due. A refund is paid by the Inland Revenue in the case of excess credit.

Provisional tax paid on transfer of immovable property is not final except when immovable property was acquired by the transferor by inheritance prior to 25th November 1992. The capital gains are to be included in the tax return and subject to tax at the normal rates applicable.

There is an exemption from capital gains tax in the case of transfers made between companies in the same group or companies controlled and beneficially owned directly or indirectly as to more than 50% by the same shareholders. Moreover, there is an exemption from tax on capital gains accruing to persons not resident in Malta (where such persons are not owned and controlled by, directly or indirectly, nor acts on behalf of individuals who are ordinarily resident and domiciled in Malta) arising from the transfer of shares in a company which is not deemed to be a property company.

Full imputation system

Malta operates a full imputation system in respect of the taxation of dividends thereby avoiding economic double taxation. Under the full imputation system dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profit out of which the dividends are paid. Shareholders are taxed on the gross dividend at the regular rates, but are entitled to deduct the tax credit attached to the dividend against their total income tax liability.

As a result no further Maltese tax is due by the shareholder on a distribution of dividends made by a company registered in Malta.

Tax accounting and tax refunds

Companies are subject to tax in every year of assessment on the income derived in the preceding calendar or financial year. A company may opt to have a financial year end that is not 31 December however the approval of the Inland Revenue is required in such cases.

The Maltese income tax system utilises 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 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 allocated 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 Malta tax paid at the level of the company. Shareholders are required to be registered to receive such refunds, and the extent of tax so refunded depends on the type and source of income derived by the Maltese operating company.

The standard refund is equivalent to 6/7ths of the Malta tax paid in the case of income allocated to the FIA and MTA, resulting in a Malta effective rate of tax of 5%.

The 6/7ths refund may not be availed of in the following circumstances:

  • when the dividend is paid out of profits that qualify as passive interest or royalties the refund due will be 5/7ths of the tax paid in Malta (gross of any double taxation relief claimed in Malta in respect of tax paid outside Malta on the taxed profits). The term passive interest or royalties includes interest or royalties which are not derived, directly or indirectly, from a trade or business and on which no foreign tax was suffered or any foreign tax suffered thereon is less than 5%.
  • if the dividend is paid out of profits allocated to the FIA and in respect of which the company had claimed double taxation relief, the refund should amount to 2/3rds of the tax paid in Malta (gross of any double taxation relief claimed in Malta in respect of tax paid outside Malta on the taxed profits).

The refund increases to 100% when the profits distributed are derived from a participating holding, A participation holding is defined as a shareholding by a Maltese company in a non-resident company or a qualifying body of persons and where it:
  • has at least 10% of the equity shares in the non-resident company; or
  • 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,
  • 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
  • is an equity shareholder which invests a minimum in the non-resident company of 31,164,000 (or the equivalent in a foreign currency) and such investment is held for a minimum interrupted period of 183 days; or
  • 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, if none of the above conditions are met, the holding must satisfy both of the following conditions:
  • the shares in the non-resident company must not be held as 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%.

A ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company. It is important to note that the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment.

At the option of the Maltese holding company, any dividends derived from a participating holding may be omitted from the chargeable income of the company (subject to the anti-abuse provisions mentioned above) in terms of the participation exemption.

In most cases, the participation exemption or 100% tax refund referred to above also apply to gains on a disposal of a participating holding even when such gains are of a trading nature. However, the anti-abuse conditions referred to above do not apply to gains on the disposal of a participating holding.

Relief of double taxation

Malta grants relief for double taxation by way of treaty relief, unilateral relief (in cases where tax is suffered on income received from a country with which Malta does not have a treaty), commonwealth relief and the flat-rate foreign tax credit (FRFTC). Double taxation relief applies on the basis of the ordinary credit method on a source-by-source and country-by-country basis.

The FRFTC takes the form of a notional tax credit equivalent to 25% of the income, for foreign taxes deemed to have been paid on income which is allocated to the Foreign Income Account. The income with respect to which the FRFTC is claimed is grossed up by the amount of the available credit. The grossed up income less any allowable expenses is subjected to 35% tax and the taxpayer is then entitled to a credit against the tax so determined, amounting to the amount by which the income was grossed up, but the credit shall in no case exceed 85% of the tax payable.

The examples below illustrate the mechanics of the full imputation system applicable in Malta and the related tax refunds:

Passive Income Trading Income
Having PH Having PH claims FRFTC No PH claims FRFTC Passive interest and Royalties
Profit before tax 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0
Gross up for the FRFTC - 250.0 250.0 - -
1,000.0 1,250.0 1,250.0 1,000.0 1,000.0
Tax thereon at 35% 350.0 437.5 437.5 350.0 350.0
Credit for FRFTC - 250.0 250.0 - -
Tax Payable 350.0 187.5 187.5 350.0 350.0
Gross dividend received 1.000.0 1000.0 1000.0 1000.0 1000.0
Tax charged at 35% 350.0 350.0 350.0 350.0 350.0
Credit for tax at source 350.0 350.0 350.0 350.0 350.0
full full 2/3rds 5/7ths 6/7ths
Refund to shareholders 350.0 87.5 125.0 250.0 300.0
Effective tax rate 0% 0% 6.25% 10% 5%

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.

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 or his attorney or representative.

The tax refund system and the application of the tax accounting is applicable to both companies incorporated in Malta as well as foreign companies resident in Malta and registered as such with the tax authorities.

Advance revenue rulings

Certainty can be sought on important aspects through the request of an Advance Revenue Ruling from the International Tax Unit of the 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.

RSM Malta is a member of the RSM network. Each member of the RSM network is an independent accounting and advisory firm each of which practices in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. © RSM International Association, 2015