From 1st January 2007 a new set of provisions to the income tax act and the income tax management act have come into force further strengthening Malta’s bid to become a important financial centre within the EU by 2015 , the date set by the Maltese Government.
Malta practices a full imputation system of taxation which is unique within the EU. The basic concept of this system is that income received net of tax is grossed up in the hands of the recipient and taxed once more at the applicable rates of tax of that individual or body corporate. The tax suffered on the income is than taken as a tax credit and a refund or a topping up of the tax will then take place according to which rate of tax is the higher. This system coupled with a classical system gives rise to plenty of tax planning opportunities , which is what is making Malta so popular with investors worldwide.
The corporate tax rate is of 35%. However upon a distribution of a dividend, shareholders can claim a refund of up to 6/7 of the tax suffered on the dividend bringing the net effective tax down to 5%. This refund is paid within a maximum of 6 weeks from the payment of the company tax .
If a Maltese registered company owned in full or in part by non resident shareholders received dividend income from a Participating holding(PH) i.e.: dividend income from outside Malta, a full refund may apply to the shareholders upon distribution of a dividend . In certain cases the company may benefit from what is known as a participation exemption (PE) whereby a company need not pay the tax on this income from the outset.
The definition for PH is as follows:
• When a company holds directly at least 10% of the equity shares of the company, or
• Has the option to acquire up to 10% of the share capital, or
• Is entitled to first refusal in the event of a proposed disposal off all equity shares, or
• Has the right to sit on the board of directors, or
• Holds an investment of at least €1.2 Million in a company not resident in Malta and which is held for an interrupted period of 183 days or,
• Where these share are held for the furtherance of the business, such holding should not be held as trading stock for the purpose of a trade.
The definition is being extended to include certain partnerships (thus enhancing Malta’s competitiveness as a holding company jurisdiction.)
In order for a company to qualify for a PE it is enough to satisfy these provisions. However for new companies (incorporated on or after 1st January 2007 and for existing companies after 31st December 2010) the following anti abuse provisions apply:
A. The foreign entity in which the PH is held must be resident or incorporated in a country or territory which form part of the EU. OR
B. Is subject to any foreign tax at a rate of at least 15% OR
C. Less than 50% of its income must be derived from passive interest or royalties
If ALL three conditions are NOT met then BOTH of the following conditions must be satisfied:
A. the PH must not constitute a portfolio investment AND
B. either the body of persons not resident in Malta or
C. its (the body of persons) passive interest or royalties have been subject to foreign tax at a rate of not less than 15%
If a company satisfies the conditions for a PH and the anti abuse provisions it can opt not to declare this income in its tax return outright and no tax will be due.
Alternatively the company may opt to declare this income (might be beneficial in cases where the foreign shareholders would need to show that income has suffered tax). In such case the company will benefit from a full refund payable within a maximum of 6 weeks from payment of the tax.
If a company satisfies the definition of PH but not the anti abuse provisions it will still benefit from the 6/7 refund. (i.e: It will have to pay the corporate tax of 35% and upon a distribution of a dividend the shareholder will apply for the a refund of the tax paid , effectively bringing down the net tax charge to 5% )
Companies receiving passive interest or royalties from abroad, a 5/7 refund will apply on tax suffered in Malta upon a distribution of a dividend.
Passive interest or royalty income is defined as income which is NOT derived directly or indirectly from a trade or business where such interest or royalties have not suffered any foreign tax, directly, by way of withholding, or otherwise , at a rate of tax which is less than 5%
Such income will be taxed normally in the hands of the Maltese company (i.e. 35%) but will only result in 5/7 refund when distributed (ie:10%)
The possibility exists to ask the Inland revenue department for an advance revenue ruling on whether such income falls under these provisions or not.
|Source of Income||Corporate Tax Paid||Refund of tax to shareholders||Effective Tax|
|Dividend income from holding activities with participating holding in subsidiary||NIL||NIL||Zero|
|Capital gains accruing from the disposal of a participating holding||NIL||NIL||Zero|
|Dividend income from holding activities without participating holding in subsidiary or other company income not falling within any other category||35%||6/7ths of corporate tax paid||5%|
|Trading Income||35%||6/7ths of corporate tax paid||5%|
|Passive income (interest, royalties etc)||35%||5/7th of corporate tax paid||10%|
|Source of Income:||Profit||Tax Paid||Distribution to shareholders||Net of Tax|
|Dividend from participating holding or capital gain from disposal of same||250.00||NIL (exempt)||250.00||NIL (exempt)|
|Dividend from non-participating holding||250.00||87.50||162.50||75.00|
|Effective dividend and tax received by shareholders||--||--||737.50||212.50|
|Effective receipt in total by shareholder||--||--||950.00||--|
|Effective tax rate||--||--||5%||--|
Relief From Tax Suffered Abroad
Besides the refund system which we have just discussed, Malta also has a number of mechanisms of relief from tax suffered abroad on foreign income. Thus income brought into Malta from dividends, interests, or royalties which have suffered tax at source can claim this tax by way of relief from Malta’s tax due.
|Gross Foreign Income||100|
|Tax suffered at source||10|
|Net foreign income received in Malta||90|
|Corporate tax at 35%||31.50
|Less tax suffered at source taken as a relief in Malta||10|
|Net tax paid in Malta||21.50|
In certain situations where it might not be possible to proof that tax has been suffered abroad or even in situations where no tax has been suffered abroad it is possible to apply what is known as the flat rate foreign tax credit (FRFTC) , whereby a relief is applied on a notional tax rate suffered abroad even if that income has not suffered any tax at all .
|Add flat rate foreign tax credit||25|
|Total National Income||125|
|Corporate tax at 35%||43.75|
|Less flat rate foreign tax credit||25.00|
|Net Tax Paid||18.75|
This type of relief can also be applied where tax has been suffered abroad and it is deemed more beneficial to use the FRFTC as in the two examples shown above.