Double Taxation Treaty Considerations on Passive Income

This article deals with the tax considerations arising out of tax treaties when dealing with passive income, in particular the manner in which Contracting States share jurisdiction to tax when negotiating tax treaties and the way relief from double taxation is provided.  Articles 10 to 13 of the OECD Model Convention deals with dividends, interest, […]

Written By Stephen Balzan

On November 18, 2016
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This article deals with the tax considerations arising out of tax treaties when dealing with passive income, in particular the manner in which Contracting States share jurisdiction to tax when negotiating tax treaties and the way relief from double taxation is provided.  Articles 10 to 13 of the OECD Model Convention deals with dividends, interest, royalties and capital gains in the following manner. 

ARTICLE 10 – DIVIDENDS

Contracting States negotiating the dividends article would usually agree on a shared jurisdiction to tax in which the State in which the company distributing the dividend is resident (the Source State) will have a primary limited right to tax.  The tax is usually 5% of the gross dividends if the beneficial owner is a company which holds directly at least 25% of the capital paying the dividends.  The rate is of 15% in all other cases.  

On the other hand, the State in which the beneficiary of the dividends is a resident (the Residence State) will have a secondary right to tax with the obligation to grant relief from double taxation.  Contracting States may agree on a different manner in which they share jurisdiction to tax as well as a different manner in which to grant relief from double taxation. 

Malta does not withhold any tax on distribution of dividends irrespective of the residence, nationality, status and domicile of the recipient.  Malta also operates the full imputation system in which the tax paid by the company distributing the dividends is credited in full towards the shareholders’ liability. 

Article 11 – INTEREST 

Contracting States negotiating the interest article would usually agree on a shared jurisdiction to tax in which the State in which the payor paying the interest is resident (the Source State) will have a primary limited right to tax.  The tax does not usually exceed 10% of the gross dividends.  

On the other hand, the State in which the beneficiary of the interest is a resident (the Residence State) will have a secondary right to tax with the obligation to grant relief from double taxation.  Contracting States may agree on a different manner in which they share jurisdiction to tax as well as a different manner in which to grant relief from double taxation.  

Malta does not withhold any tax on distribution of interest, irrespective of the residence, nationality, status and domicile of the recipient.  Interest paid to non-residents is also exempt from tax subject to certain conditions being satisfied. 

Article 12 OECD MC – ROYALTIES 

Contracting States negotiating the Royalties article would usually agree on an exclusive unlimited jurisdiction to tax to the country of residence of the beneficiary of the royalties.  Double taxation is eliminated when the Residence State forfeits its right to tax. 

Contracting States may agree on a different manner in which they share jurisdiction to tax as well as a different manner in which to grant relief from double taxation.  

Malta does not withhold any tax on distribution of royalties, irrespective of the residence, nationality, status and domicile of the recipient.  Interest paid to non-residents is also exempt from tax subject to certain conditions being satisfied.

 Article 13 CAPITAL GAINS 

Contracting States negotiating the capital gains article would usually agree on a shared jurisdiction to tax in which the State in which the Source State will have an unlimited primary right to tax.  On the other hand, the Residence State will have a secondary right to tax with the obligation to grant relief from double taxation.  Contracting States may agree on a different manner in which they share jurisdiction to tax as well as a different manner in which to grant relief from double taxation.  

With respect to gains derived from the transfer of immovable property and from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the source state, the State in which the immovable property is situated (the Source State) will have an unlimited primary right to tax.  On the other hand, the Residence State will have a secondary right to tax with the obligation to grant relief from double taxation.  Contracting States would usually grant an exclusive jurisdiction to tax to the country of residence for other gains which are not mentioned above. 

Malta exempts from tax, capital gains derived by non-residents on the transfer of shares, subject to certain conditions including that the company in which the shares are being sold is not a property company. 

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

Disclaimer: This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.