Malta’s corporate tax system is based on three main pillars, namely the imputation system of tax, the various forms of relief from double taxation and the refundable tax credit system. Malta Companies are taxed in Malta at a flat rate of 35% on their worldwide income and capital gains. Although the corporate tax rate for Malta companies can be seen to be relatively high when compared to the corporate tax rate applicable in other jurisdictions, it is reduced by means of various incentives applicable to both Maltese companies and their shareholders.
A limited liability company may be incorporated in Malta for the purpose of carrying on any trading activities, both in Malta and overseas. Malta companies can also be set up to hold investments, both in Malta and overseas.
Malta Companies – Jurisdiction to Tax
In terms of Malta law, a company which is incorporated in Malta is deemed to be resident and domiciled in Malta for tax purposes and would therefore be taxable in Malta on a worldwide basis, irrespective of where its management and control is situated.
A company incorporated outside of Malta may still be considered to be tax resident in Malta where its management and controlled is exercised in or from Malta. Such company‘s liability to tax would be limited to chargeable income or gains earned in Malta and to foreign taxable income which is received in Malta. Foreign source gains would not be taxable in Malta, even if such funds are remitted to Malta. On the other hand, companies which are neither resident nor domiciled in Malta are only subject to Malta tax on income and capital gains arising in Malta.
The full imputation system
The full imputation system is a system whereby the corporate tax paid by the Malta Company is imputed in full towards the shareholders tax liability upon receipt of a dividend. The highest tax rate applicable to individual shareholders is 35%, which is equivalent to the Malta’s corporate rate of tax. This means that shareholders, whether individuals or corporate, will not be subject to further tax on receipt of a dividend in view of the fact that the tax paid by the company at corporate level will be imputed in full towards the shareholders’ tax liability.
The refundable tax credit system
Shareholders of Malta companies are entitled to a refund of part of the tax paid by the company upon receipt of a dividend. The general rate is of 6/7ths, while the rate of refund will be 5/7ths if the profits derived by the company consist of passive interest or royalties as defined. The rate of refund is reduced to 2/3rds if the Malta Company claims relief from double taxation.
Various forms of relief from double taxation
Malta has to date concluded more than 70 double taxation agreements based on the OECD Model Convention on income and capital. Where double taxation treaty relief is not applicable, Malta grants relief from double taxation on a unilateral basis. Malta companies may also claim relief from double taxation by means of the Flat Rate Foreign Tax Credit (FRFTC), where treaty and unilateral relief from double taxation are not available. Malta wants to ensure that the same income or gain will not be subject to income tax twice in two different jurisdictions.
Other features of Malta’s tax system
No thin cap rules – Malta does not have thin capitalization rules, which means that a Malta company may be entirely funded by loans, except for the minimum share capital required by Malta’s company law.
No CFC rules – Malta does not have any CFC rules.
No specific transfer pricing rules – Malta does not have any specific transfer pricing rules, which regulate transactions between related parties. Malta has however always adopted the arm’s length principle.
Participation exemption regime – Malta adopts a participation exemption regime which exempts from Malta tax income or gains derived from a participating holding or from the disposal of such a holding, subject to certain conditions being satisfied. Malta also exempts from Malta tax income or gains derived from foreign permanent establishments and from the disposal of such establishments, subject to certain conditions being satisfied.
Capital gains limited to an exhaustive list of assets – Capital gains derived from the transfer of certain assets will be subject to tax in Malta. Such list of assets include immovable property, securities, goodwill, interest in a partnership, business, licences, patents, trademarks and other intellectual property amongst others. A number of exemptions apply.
No withholding tax on payment of dividends, interest and royalties to non-residents – Interest and royalties derived by non-residents are exempt from Malta tax (subject to certain conditions being satisfied) and therefore payments of interest and royalties to non-residents are not subject to any Malta withholding tax. The same applies to payments of dividends, in view of the imputation system described above.
No stamp duty – No stamp duty is paid by companies and their shareholders, which are given a stamp duty determination by the Maltese income tax authorities. Such companies include companies which are owned by persons who are neither resident nor domiciled in Malta, which own overseas investments and which have more than 90% of their business interests situated outside Malta.