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Taxation of individuals


An individual who is both ordinarily resident and domiciled in Malta is subject to tax on worldwide income, that is, on income and capital gains arising in Malta or abroad, whether or not received in Malta. An individual, who is either resident in Malta or domiciled in Malta, but not both, is subject to tax on income arising in Malta, on income arising abroad but received in Malta, and on capital gains arising in Malta. Individuals who are neither resident in Malta nor domiciled in Malta (temporary residents) are subject to tax only on income and capital gains arising in Malta.

In general, individuals are considered to be resident in Malta if they spend more than 183 days in a calendar year in Malta. Individuals are considered ordinarily resident if Malta is their habitual place of residence.

A resident individual of Malta means an individual who resides in Malta, except for such temporary absences that the Commissioner of Inland Revenue believes are reasonable and not inconsistent with the claim to be resident in Malta. Residence in a foreign country does not establish non residence in Malta because an individual may be resident in more than one country simultaneously. An individual physically present in Malta for 183 days (not necessarily consecutive) in a calendar year is generally considered to be resident in that particular year, regardless of the individual’s nationality.

The concept of domicile is not defined in local legislation but is a term of private international law. Individuals are normally regarded as domiciled in that country that they regard as their permanent home and to which they intend to return one day. An individual may not have more than one domicile at a time. Domicile of origin is acquired at birth and is the strongest type of domicile an individual may have. Domicile of origin may be replaced by domicile of choice if an individual has spent extensive time in another country and if it can be proved the individual has the intention to live and settle permanently in that country.

Income subject to tax

An individual’s chargeable income is composed of an individual’s aggregate income from all sources, after omitting exempt items and deducting allowable expenses.

Employment income

Income tax is imposed on earnings from employment of office, including pensions.

Employment income includes the value of any fringe benefits, determined in accordance with the Fringe Benefit Rules. Such rules contemplate that any benefit provided by reason of employment by an employer or related company to an employee or to a member of his family is deemed to constitute a fringe benefit. Some of the fringe benefits regulated by the said rules include: use of a company car or car allowance, use of company property, provision of free or subsidised board and free non-business travel.

No deductions are allowed against employment income. The gross amount of income (inclusive of social security contributions) earned from full-time employment and from part-time employment that is not subject to the final withholding tax of 15% (see Part-Time Income further on) is taxed at the normal income tax rates.

Employment income, including the value of fringe benefits, is subject to deduction at source under the final settlement system.

Self- Employment and business income

Business income includes any gains or profits from a trade, business, profession, or vocation, including profits arising from the sale of any property acquired by an individual for the purpose of making a profit through a sale, undertaking or scheme.
Trading profits are calculated in accordance with generally accepted accounting principles, and are adjusted to arrive at chargeable income. For details regarding allowable deductible business expenses, see Business deductions further on. Taxable self- employment and business income is aggregated with other income and taxed at the rates set out in Rates section further on.

Rental income

Rental income is taxed with other income at the rates set forth in Rates section below. Bank interest, license fees and rents payable may be deducted if incurred in the production of rental income. Each property is treated as a separate source of income. Losses from one property may not be offset against income from another.

Allowable deductions against rental income include interest, license fees and ground rents payable. An additional 20 % maintenance allowance, calculated on the difference between rents receivable less license fees and ground rents payable, is also allowed.

Investment income

Investment income includes the following items:

  • bank interest;
  • interest, discounts or premiums payable by the Maltese government;
  • interest, discounts or premiums payable by a corporation or authority established by law;
  • interest, discounts or premiums payable in respect of a public issue in Malta by a company, entity or other legal person, whether resident in Malta or otherwise;
  • capital gains arising on the disposal of shares or units in a collective investment scheme licensed under the Investment Services Act , if the collective investment scheme redeems, liquidates or cancels such shares or units; and
  • capital gains arising on the surrender or maturity of units and similar instruments relating to the long- term business of insurance.

Resident individuals may opt to pay 15% final withholding tax on investment income. This may be treated as a final tax at the recipient’s option, and need not be disclosed in the individual’s personal income tax return. However, the recipient may declare such investment income, and apply the normal tax rates. The recipient of investment income may inform the payor not to withhold tax. In such circumstances, the recipient must declare the investment income in his or her personal tax return and apply the normal tax rates.

Interest and royalties paid to non-residents are exempt from tax in Malta, unless they are effectively connected to a permanent establishment in Malta through which the non-residents engage in a trade or business.

Dividends

Dividends include the following:
  • bonus shares;
  • distributions made by a partnership en commandite, whose capital is divided into shares, or by a limited liability company, to its partners or shareholders, respectively, and any amount credited to them as partners or shareholders; and
  • distributions made by a cooperative society to its members and any amount credited to them as members, including any patronage refund, bonus certificate or bonus shares, made, paid or allotted.

Malta operates a full imputation system under which 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. The full imputation system applies to both resident and non-resident shareholders. If a dividend is paid to resident individuals out of the untaxed account (the difference between tax and accounting profits), a 15% withholding tax is imposed. This withholding tax does not apply to non-residents.

Dividends paid out of profits exempt from tax under the terms of the Business Promotion Act are not taxable in the hands of the shareholders.

Directors’ fees

Fees and remuneration received by individuals for serving on the board of directors of a corporate body are taxed at the regular rates of tax as set forth in Rates section.

Part-time income

Employees, pensioners and students engaged in part-time work earning up to 37,000 annually may benefit from a special rate of tax. For details, see Rates section.

Taxation of employer provided share option

When a company grants an option to its employees to acquire shares, such share options become taxable when the option is exercised. In this respect, the value of the said share option would be 42.85% of the excess of the price which the shares would fetch in the open market on the date of the exercise of the option over the option price of the same shares, subject to the conditions contained in the Fringe Benefit Rules.

Any gain realised from the transfer of shares acquired through the exercise of a share option constitutes a capital gain and should be taxable. A number of specified benefits are exempt under certain conditions, such as health insurance and the use of a computer and related equipment.

Capital gains and losses

Capital gains derived from the transfer of ownership of the following assets are taxable: real property; securities; business goodwill; copyrights; patents; trademarks and trade names; or the assignment or conveyance of any rights over such property. Capital gains arising from transfers of inherited property by heirs are exempt. Taxable capital gains are included with other income and taxed at the rates set out in Rates section.

Capital losses may not offset trading profits; however, capital losses may be carried forward and offset against future capital gains. Trading losses may offset capital gains.

Non residents are exempt from tax on gains derived from the disposal of shares in a Maltese Company that is not primarily engaged in holding real estate property located in Malta.

Deductions

Personal deductions and allowances

No personal deductions or allowances are allowed against taxable employment income, except for certain deductions by expatriates employed by investment service companies and insurance companies.

Business deductions

Self-employed individuals may deduct all expenses incurred wholly and exclusively in the production of income, including capital allowances (tax depreciation) at specified rates.

To be deductible for tax purposes, expenses must be wholly and exclusively incurred in the production of the income to which they relate. Adjustments must be made to arrive at chargeable income, including the addition of disallowable expenses such as accounting depreciation, amortisation of goodwill, provisions, donations, stamp duty expenses and start-up expenses.

Unabsorbed capital allowances and trading losses may be carried forward indefinitely. The rules that apply to companies also apply to individuals carrying on a business, profession or vocation.

Rates

Residents

The following tables present the 2009 tax rates for married persons filing jointly and single persons and married persons filing separately:

Married Persons Filing Jointly
Taxable Income
Exceeding Not Exceeding Rate Deduct
%
0 11,900 0 0
11,901 21,200 15 1,785
21,201 28,700 25 3,905
28,701 - 35 6,775


Single Persons and Married Persons Filing Separately
Taxable Income
Exceeding Not Exceeding Rate Deduct
%
0 8,500 0 0
8,501 14,500 15 1,275
14,501 19,500 25 2,725
19,501 - 35 4,675

The income of married persons filing jointly is taxed at the rates listed in the first table. Income tax is charged in the name of the responsible spouse, who is selected by the spouses or by the Commissioner of Inland Revenue. Both spouses must sign the tax return and both remain jointly and severally responsible.

Married persons may opt to be taxed separately at the rates listed in the second table if both the husband and wife earn taxable income that is derived from a trade, business, profession, vocation, employment, office or pension. Other income, such as interest, dividends and rents, must be added to the income of the spouse with the highest earned income.

Single and separated persons are taxed at the rates listed in the second table. However, if a single parent maintains a child, does not receive financial assistance from the other parent, and does not live or reside at the same house with the other parent , such person may opt to be taxed at the rates applicable to married persons.

Employees, pensioners and students engaged in part-time work earning up to 37,000 annually may benefit from a special rate of tax. Income up to 37,000 derived from part-time employment is taxed at a flat rate 15% and is withheld at source by the employer. Part-time self-employed persons may also benefit from this reduced rate of tax. Recipients need not declare such income in their personal income tax return. Any part-time income earned in excess of 37,000 must be declared in the individual’s income tax return and is taxed at the normal rates of tax.

Permanent residents

The Permanent Residence Scheme is a scheme applicable to foreigners wishing to retire, settle or stay indefinitely in Malta. To qualify for the permanent residence scheme, individuals must meet the following requirements:
  • the permanent resident must have a proven net worldwide capital of 3349,000, or an annual income of 323,000. The capital need not be brought into Malta;
  • an applicant for permanent residency must either own a residence valued at not less than 3116,000 for a house or 369,000 for an apartment. Alternatively, the permanent resident may lease or rent immovable property at not less than 34,150 per annum;
  • the permanent resident must produce a certificate of conduct from his or her last place of residence;
  • the permanent resident may not work or otherwise engage in business and political activities in Malta;
  • the minimum annual income to be remitted to Malta is 313,950 per person, plus 32,300 for each dependent.

Permanent residents are taxed at a rate of 15% on all income received or remitted to Malta, whether from foreign or Maltese source. Such income is subject to a minimum tax liability of 34,193 after allowing for any double taxation relief that the permanent resident may be entitled to.

The permit holder should not be engaged in a gainful occupation in Malta, but if he derives earned income in Malta this would be taxed separately at the standard rates applicable to other residents without a tax free portion. This is usually allowed by special permission from the Minister.

Foreign employees

Foreign individuals may be employed in Malta if the employer is in possession of a work permit. Such individuals are taxed on income and capital gains arising in Malta (unless exempt) and on income remitted to Malta. Foreign source income which is not remitted to Malta is not subject to Malta tax and capital gains are not taxable even if they are remitted to Malta.

Returned migrants

An individual born in Malta who, after emigrating, returns as a resident in Malta after an aggregate period of not less than 20 years is subject to a special tax regime similar to that of resident permit holders. An individual who takes the option is taxed on income and capital gains arising in Malta and on foreign source income (excluding capital gains) which is remitted to Malta.

A returned migrant is taxed at a flat rate of 15%, with a tax free portion of 35,900 in case of a married computation and 34,200 in case of a single computation. This special regime applies if the returned migrant has received in Malta at one or more times during the year immediately preceding the year of assessment an amount of income of not less 314,000 arising outside Malta (an additional 32,400 for every dependant relative including a spouse is required) and chargeable to tax subject to a minimum annual tax liability of 32,325 after double taxation relief.

Any income from a trade or business or employment income arising in Malta is taxed separately at the standard rates applicable to other Maltese residents without a tax free portion.
Non-residents

Non-residents, regardless of whether married or single are subject to tax at the following rates on income arising or received in Malta:

Taxable Income
Exceeding Not Exceeding Rate Deduct
%
0 700 0 0
701 3,100 20 140
3,101 7,800 30 450
7,801 - 35 840

If taxable income is paid to a non-resident, a 25% withholding tax must be deducted at source and remitted to the Inland Revenue Department within 30 days. Any tax withheld is credited to non resident tax payers in full against their final tax liability for the year. This withholding tax does not apply to dividends paid out of previously taxed profits (see Investment income section), to income previously subject to withholding tax under the Final Settlement System (FSS, see Tax filing and payment procedures section further on), or to interest and royalties.

Other taxes

Wealth or net worth tax

Malta does not impose wealth or net worth tax.

Inheritance and gift taxes

Stamp duty is imposed on heirs who inherit immovable property and shares. The rate of duty is 5% for immovable property and 2% for shares.

Malta does not impose gift tax.

Tax filing and payment procedures

Malta does not impose wealth or net worth tax.

The assessment year (tax year) is the calendar year. For an assessment year, income tax is imposed on income earned in the preceding calendar year (basis year).

Individuals whose annual income has all been subject to tax at source, such as employment income, dividend income, and investment income, need not file an income tax return but the Commissioner of Inland Revenue will issue a statement containing the tax due, if any, based on the information available to him.

Individuals who have earned income not subject to tax at source must submit an income tax return together with the self-assessment and calculation of tax due by 30 June of the assessment year. Any tax due must also be paid by 30 June of the assessment year.

Tax liability for employees is paid through the Final Settlement System (FSS) of withholding on salaries and wages.

Self-employed individuals must make advance payments of tax, known as provisional tax, in three instalments on 30 April, 31 August and 21 December. The amount paid in the three instalments collectively must equal the total tax liability reported in the last return submitted to the Commissioner of Inland Revenue. The Provisional tax payments are credited against the total tax liability for the year in which they are paid. Heavy penalties are imposed for late submission of income tax returns and for omissions of income on which Malta tax is due. Interest at a monthly rate of 0.75% is imposed on late payments of tax.

Double taxation relief

Individuals resident in Malta may benefit from other forms of double tax relief, including Commonwealth income tax relief and Unilateral relief. The flat rate foreign tax credit applies only to companies.

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, 2014