As an international financial services centre, Malta grants various forms of fiscal incentives to Maltese companies and their shareholders, which makes it one of the most tax efficient jurisdictions within the European Union.
Such fiscal incentives include:
- The full imputation system of tax, whereby the tax paid by a Malta company is credited in full towards the shareholders’ tax liability upon payment of a dividend;
- Various forms of relief from double taxation. Malta has concluded more than 70 bilateral double taxation agreements and has other unilateral provisions in its income tax legislation, which ensures that the same income will not suffer double taxation;
- No withholding tax on payments of interest and royalties, subject to certain conditions being satisfied;
- Taxation of capital gains limited to transfers of certain capital assets.
Another important tax incentive provided to shareholders of Maltese limited liability companies is that which is mostly referred to as ‘the refundable tax credit system’, whereby part (in some cases full) of the tax paid by a company on its profits is refunded back to the immediate shareholders of the Malta company on distribution of a dividend.
There are four applicable tax refunds:
1. 5/7ths tax refund – this is generally applicable when the Malta Company is in receipt of income consisting of passive interest and royalties. Passive interest and royalties consist of interest and royalty income which is not directly or indirectly derived from a trade or business and which has suffered foreign tax which is less than 5%. The 5/7ths tax refund is also applicable if the Malta distributing company is in receipt of income from a participating holding, which does not satisfy any one of the anti-abuse provisions for the participation exemption to apply. This results in a net tax leakage in Malta of 10%.
2. 2/3rds tax refund – this is generally applicable when the Malta Company distributing the dividends has benefitted from one of the various forms of relief from double taxation, mainly treaty relief, unilateral relief or the Flat Rate Foreign Tax Credit (FRFTC). The FRFTC is a deemed credit which is only applicable to companies and which is available should the first two forms of relief from double taxation are not applicable. The 2/3rds tax refund is calculated on the total tax paid (i.e. including the foreign tax) in case the Malta Company distributing the dividends claims either the treaty relief or the unilateral relief. The 2/3rds refund is calculated on the Malta tax only if the Malta Company distributing the dividends claims the FRFTC. This results in a net tax leakage in Malta of a rate which is between 0% and 6.25%.
3. 6/7ths tax refund – this is generally applicable in cases where the above-mentioned two refunds are not applicable, which results in a net tax leakage in Malta of 5%. Examples where this type of refund would apply are where the Malta Company distributing the dividends derives its income from trading activities, consultancy services and income or gains derived from immovable property situated outside Malta, where the Malta Company would have opted not to claim any relief from double taxation (otherwise the 2/3rds refund would apply).
4. 100% tax refund – this is applicable in case the Malta Company distributing the dividends is in receipt of income from a participating holding (mainly consisting of dividends and / or capital gains derived from the disposal of such a holding), wherein the Malta Company opts to declare such income or gains received from a participating holding. In brief, a participating holding is an equity investment in a company, which is not a property company (a company that directly or indirectly owns immovable property situated in Malta, subject to a number of exceptions) and which satisfies one of a number of conditions.
- The above-mentioned tax refunds also apply to shareholders of foreign companies that set up branches in Malta to carry out a business or a trading activity in Malta.
- The tax refunds are only applicable when the Malta Company distributes its dividends. If the Malta Company distributes part of its profits, only the tax which has been paid on the distributed dividends would be available for a refund.
- All Malta companies must operate a tax accounting system whereby all profits are allocated to the tax accounts. The tax accounts are the Malta Tax Account (MTA), the Foreign Income Account (FIA), the Immovable Property Account (IPA), the Final Tax Account (FTA) and the Untaxed Account (UA).
- No tax is refunded which represents tax paid on profits which would have been allocated to the UA, IPA or FTA.
- The refunds are effected to the immediate shareholder of the Malta Company distributing the dividends. The immediate shareholder of the Malta distributing company can either be an individual or a dividend feeder company (which can either be a Malta company or a foreign company).
- Tax is refunded in the same currency in which the company’s share capital is denominated, thus avoiding any exchange difference implications.
- Tax is refunded back within a few weeks, thus avoiding any cash flow implications.