Malta has a voluminous tax treaty network and has signed and ratified over 75 double taxation treaties which override any provisions to the contrary under Maltese domestic legislation.
Malta does not apply any withholding tax on dividends, interest, or royalties by Maltese companies to non-Maltese recipients.
A company incorporated in Malta is deemed to be both tax resident and domiciled in Malta and thus is taxed in Malta at a 35% rate on a basis. Foreign companies which are incorporated outside Malta but are managed and controlled from Malta and/or which carry out business activities in Malta are subject to tax in Malta on income and capital gains that arise in Malta and foreign income which is remitted to Malta.
As a general rule, expenses are deductible where they are incurred wholly and exclusively in the production of the company’s income, provided that these expenses are not expressly excluded as deductible by the income tax act.
In addition, Malta companies and permanent establishments of non-Maltese companies may deduct a ‘notional interest on risk capital’ as part of their expenses, subject to the approval of their shareholders.
Full imputation system
Malta applies a full imputation system whereby a shareholder in a Maltese company may claim for a full or partial refund of the tax paid by the Maltese company, depending on the type and source of income received.
The shareholder of the Malta company would be eligible to receive a tax refund as follows:
- 100% of the Malta tax paid where income or gains are derived from an investment which qualifies as a Participating Holding (PH) and in the case of dividend income, where such PH falls within the safe harbours or satisfies the anti-abuse provisions as detailed below.
- 5/7ths of the Malta tax paid, where the income received by the company is passive interest or royalties or income from a PH which does not fall within the safe harbours or satisfy the anti-abuse provisions.
- 2/3rds of the tax payable in Malta, where income has benefited from double taxation relief.
- 6/7ths of the Malta tax in all other cases.
Participation exemption
Income or gains deriving from participating holdings may be exempt from tax under the participation exemption regime.
A participating holding occurs when a company resident in Malta holds shares in another entity and holds directly at least 5% of the equity shares in a company, body of persons or collective investment scheme, which holding confers an entitlement to at least 5% to any two of the following rights:
- Right to vote;
- Right to profits available for distribution;
- Right to assets available for distribution on a winding up; or
Is an equity shareholder and is entitled to purchase the balance of the equity shares or has the right of first refusal to purchase such shares or is entitled to sit as, or appoint, a director on the Board; or
Is an equity shareholder which holds an investment of a minimum of €1.164 million (or the equivalent sum in another currency) and such investment is held for an uninterrupted period of at least 183 days; or
Holds the shares or units for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
With respect to dividends, the participation exemption is applicable if the entity in which the participating holding is held:
- is resident or incorporated in a country or territory which forms part of the European Union; or
- is subject to tax at a rate of at least 15%; or
- has 50% or less of its income derived from passive interest or royalties; or
- is not a portfolio investment and it has been subject to tax at a rate of at least 5%.
However, this additional anti-abuse4 requirements do not apply in the case of gains derived from the transfer of a participating holding. Such gains are therefore exempt with no further prerequisites.
Furthermore, the exemption also extends to income attributable to a permanent establishment (“PE”) (including a branch) of a Maltese company where the PE is situated outside Malta, and gains derived from the transfer of such permanent establishment. The exemption applies irrespective of whether such PE belongs exclusively or partly to the Maltese company and also applies where the PE is operated through an entity or relationship, other than a company, in which the Maltese company has an interest.
The profits or gains to which the exemption applies are calculated on an arm’s length basis, i.e. as if the permanent establishment is an independent enterprise operating in similar conditions.
Any gains or profits derived by non-residents on a disposal of shares or securities in a company resident in Malta are exempt from tax in Malta, provided that the company does not have, directly or indirectly, any rights over immovable property situated in Malta, and the beneficial owner of the gain or profit is not resident in Malta and not owned and controlled by, directly or indirectly, nor acts on behalf of an individual/s ordinarily resident and domiciled in Malta.
Tax consolidation
Malta recently introduced Income Tax Consolidation Rules for companies. These rules aim at simplifying the income tax calculation and allowing for consolidated tax reporting within a ‘fiscal unit’.
Starting from year of assessment 2020 on wards, eligible companies may opt to form a fiscal unit. Such fiscal unit will comprise a ‘principal taxpayer (i.e. a parent company) and its selected subsidiaries (including non-Maltese subsidiaries) if any two of the following criteria are met:
- the parent company holds at least 95% of the voting rights in the subsidiary;
- the parent company is beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary.
- the parent company would be beneficially entitled to at least 95% of any assets of the subsidiary available for distribution to its ordinary shareholders on winding up.
The option to be treated as principal taxpayers may be made by Malta resident companies, Malta branches of non-resident companies, Malta branches of non-resident companies that carry out activities in Malta and Malta trusts and foundations when they are treated as companies in terms of the Income Tax Act.
Any income or gains derived by members of the fiscal unit will be attributable to the principal taxpayer and will be taxable in the hands of the principal taxpayer at the rate applicable thereto.
Transactions occurring between members of the fiscal unit will not be taken into account in the calculation of the taxable income, expect for the transfers of immovable property situated in Malta and shares in property companies.
All expenses incurred by members of the fiscal unit (which are not ignored transactions) will be deemed to be incurred by the principal taxpayer and will only be deductible against the income attributable thereto.
Furthermore, any tax refund due to a shareholder of a member of a fiscal unit will be considered when determining the tax rate applicable to the fiscal unit.
In practice this means that when the fiscal unit is created, the principal taxpayer takes responsibility for duties and obligations of its subsidiaries. On the other hand, duties and obligations of these subsidiaries are suspended. Therefore, the principal taxpayer will be required to file a self-assessment and tax return for all entities within the fiscal unit.
The principal taxpayer is also responsible for the payment of tax, any additional tax and interest due by the fiscal unit, jointly and severally with its 100% owned members of the fiscal unit.
Moreover, the principal taxpayer is required to prepare each year audited consolidated balance sheet and audited consolidated profit and loss account covering members of all fiscal unit.
Anti-avoidance
Where the final tax payable by the principal taxpayer is lower than 95% of the aggregate of the tax that would have been payable by all members of the fiscal unit (should they not form the fiscal unit), then the difference between the tax otherwise payable and the actual tax paid will be considered as an advance made to the shareholders of the principal taxpayer.
That advance will be deemed to be an untaxed distribution of a dividend to the shareholders of the principal taxpayer and subject to tax accordingly.
Benefits of the regime
These rules create a cash flow advantage in comparison with the application of the tax refund system. When opting for the fiscal unit, the shareholders of a Malta company will be allowed to avail of the same effective tax rate without the requirement that the Malta subsidiaries pay tax at 35% rate and without waiting for the tax refund to be received. As a result, the cash that would otherwise be needed whilst waiting for the refund will be readily available for reinjection in the business or even distribution to the shareholders.
Another benefit of these rules is that the fiscal unit will be able to account for potential tax refunds and benefit from the attractive consolidated tax rate even if the members of the fiscal unit do not distribute any dividend.
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Copyright © MJM Europe Limited 2020. All rights reserved.
Copyright © MJM Europe Limited 2020. All rights reserved.