Malta has a competitive tax system including, among others, full imputation, tax refund, participation exemption and notional interest deduction.
A person’s liability to Maltese income tax is dependent upon two concepts, namely, domicile and residence. Persons that are both ordinarily resident and domiciled in Malta are subject to income tax on their worldwid income and certain capital gains. Persons resident but not domiciled in Malta are taxable on any income and certain capital gains arising in Malta and on income arising outside Malta that is received in Malta. Such persons are not taxable on any capital gains arising outside Malta, whether received in Malta or not.
A fundamental pillar of Malta’s tax system is full imputation tax system which completely eliminates the economic double taxation of company profits. Shareholders in receipt of dividends are entitled to a tax credit equal to the tax borne on the profits out of which the dividends are paid. Since the tax rate of 35% applicable to companies is also the highest tax rate in Malta, shareholders will not suffer any additional tax on the receipt of dividends. Where the shareholder’s tax on the dividend is lower than 35%, the amount by which the tax credit exceeds the tax on the dividend will be refunded to the shareholder if the shareholder includes the dividend in his tax return.
Upon a distribution of profits by a company registered in Malta (i.e. a company resident in Malta or a non-resident company with a branch in Malta), its shareholders may claim partial tax refund. The most common tax refund is of 6/7ths, i.e. 30% (6/7ths of 35%) of the taxable profits. Where no double taxation relief has been claimed, the effective tax suffered in Malta on distributed profits will be 5%. Malta’s tax refunds system is applicable to both resident and non-resident shareholders in respect of the tax borne on profits derived from both domestic and international activities, with the exception of profits derived, directly or indirectly, from immovable property situated in Malta.
Maltese tax law provides three main forms of double taxation relief of foreign-source income, i.e.: treaty relief; unilateral relief; and flat rate foreign tax credit (FRFTC). Treaty relief takes the form of a tax credit granted for foreign tax paid on income received from a country with which Malta has signed a tax treaty. The amount of the credit is the lower of Maltese tax on the foreign income and the foreign tax paid. Unilateral relief operates in a similar way to treaty relief, but it only applies where treaty relief is not available. The FRFTC takes the form of a notional tax credit for foreign taxes deemed to have been suffered on qualifying income. The FRFTC is equal to 25% of the net amount received and is to be added to such amount. Attributable expenses are deducted from this aggregate amount to arrive at the taxable income.
Malta’s participation exemption provides for a 100% exemption with respect to profits (namely dividends) derived from a participating holding or from the transfer thereof (namely gains on transfer). Recent amendments have extended the scope of the participation exemption and lowered the threshold for a participating holding.
Malta’s Notional Interest Deduction was introduced with effect from the financial year 2017, which the purpose of achieving an equal treatment of debt and equity financing, by granting an additional deduction for the return on equity financing. Malta’s NID can be claimed by companies and partnerships resident in Malta (including Maltese permanent establishments of foreign entities) against their chargeable income for the year.
Successive Maltese governments have sought to conclude double taxation treaties with important trading partners as well as with emerging countries. This policy is expected to continue in the future.
Furthermore, the beneficial regimes for investment funds and highly qualified expatriates; flexibilities for companies to re-domiciled to/from Malta; relatively swift company incorporation process; step-up income tax basis provided for persons transferring their residence and/or domicile to Malta, all contributed the attractiveness of Malta’s tax system. In addition, Malta currently has no taxes on capital; no withholding taxes on interest, royalties, dividends and proceeds from liquidation and nor is there transfer pricing legislations in Malta.
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