The Maltese tax authorities have issued guidelines with respect to the taxation of Maltese retirement funds and schemes, as well as the taxation of beneficiaries of retirement income from such schemes. The guidance is aimed at making Malta an attractive jurisdiction for locating pension schemes, such as a UK QROPS.
An occupational retirement scheme is a vehicle to which contributions are made either solely by the employer, or by the employer and employees combined, for the benefit of the employees. The principal purpose of the retirement scheme is to provide benefits payable after retirement, or upon permanent invalidity or death of the beneficiary of the scheme.
Retirement schemes which are licensed in Malta by the MFSA may be recognised by HMRC in the U.K. as Qualifying Recognised Overseas Pension Schemes (“QROPS”). Malta has particularly gained popularity as a pension jurisdiction for British expats’ since the country met HMRC regulations for UK QROPS. Non-UK tax residents may also transfer their QROPS to an attractive and tax-efficient jurisdiction such as Malta and benefit from greater flexibility as regards investments and withdrawals (when compared to similar UK Schemes).
Thus, newly set-up Schemes licensed in Malta may apply for recognition as QROPS with the HMRC. QROPS give their pension holders greater control of their pension and in addition, Malta offers attractive and comprehensive tax breaks to such QROPS investors.
Since QROPS are subject to UK inheritance tax upon the holder’s decease, British authorities have introduced Qualifying Non-UK Pension Scheme (QNUPS) whereby money transferred into these Schemes will be free from such UK inheritance tax.
Malta is a very attractive jurisdiction, since it is the only QROPS compliant jurisdiction offering 100% flexibility on full pension access.
The beneficiary under a Maltese QROPS may only receive benefits from the scheme once he or she shall have attained the age of 55 but before 70 (although benefits may be accessed earlier in limited prescribed circumstances should, for example, should the beneficiary suffer permanent invalidity or death). However, upon maturity, the beneficiary would be entitled to opt to take an annuity and/or a lump sum payment.
Taxation of the fund or the scheme
In terms of Article 12(1)(d) of the Income Tax Act (Cap 123 of the Laws of Malta), the income of any retirement fund or retirement scheme that is licensed, registered or otherwise authorised under the Special Funds (Regulation) Act or any Act replacing the said Act is exempt from income tax provided that this income is not derived from immovable property situated in Malta.
Taxation of income derived from a retirement scheme or fund
The benefits derived from a Malta-based retirement scheme are characterized as pension income having a Malta source. As a result, such benefits are taxable in Malta in the hands of the beneficiary, whether resident in Malta or not, at progressive rates of tax which can go as high as 35%.
Capital sums received by way of commutation of a pension (up to 30%) are exempt from tax in Malta at the level of the beneficiary. When the beneficiary is not resident in Malta for income tax purposes, the same pension income may also be subject to tax in the country of residence of the recipient in terms of the tax laws of that jurisdiction. Reference is then to be made to the double taxation treaty which Malta has in place with that particular State of residence.
Registration of the beneficiaries for Maltese income tax purposes
Beneficiaries receiving retirement benefits considered to be a pension arising in Malta are required to register for Maltese income tax purposes and to submit an annual tax return. These returns will also need to include details of any tax withheld at source or, if distributed free of withholding tax due to the provisions of a double tax treaty, then details of the treaty benefits being claimed would need to be provided, together with evidence of the tax residence of the recipient.
Such evidence should ideally be in the form of a tax residence certificate issued by the tax authority of the jurisdiction in which the beneficiary is resident. Where it is not possible to procure such a certificate, the evidence may take the form of a declaration by the beneficiary to the trustee supported by relevant documentation (e.g. utility bills excluding mobile telephones).
Malta’s double taxation treaties
Some of Malta’s double taxation agreements grant an exclusive right to tax to the country of residence of the recipient. Thus, in respect of Malta based schemes, Malta will not tax the pension income received by non-Maltese residents. Other treaties will grant a shared jurisdiction to tax, meaning that both the source state i.e. Malta as well as the residence state will both have the right to tax. Malta as the source state will have a primary right to tax, while the residence state of the beneficiary will have a secondary right to tax with the obligation to grant relief from double taxation.
Malta has over the past years attracted a number of high-net worth individuals seeking the ideal jurisdiction where to set up their pension schemes. Malta’s current international pension legislation scheme coupled with its EU Membership makes Malta the ideal location to manage and administer cross-border pension vehicles. In addition, Malta offers the following benefits:
- Malta has established itself as a reputable finance centre;
- EU Directives and Regulations in force;
- An accessible and flexible Regulator;
- Retirement schemes are exempt from income and capital gains tax in Malta;
- Passporting rights;
- Highly-skilled and multi-lingual professional workforce;
- Cost-effective administration and management of the schemes;
- Malta being a QROPS jurisdiction.
The Maltese fiscal implications will strengthen Malta’s position for non-Maltese residents to establish Malta based pension schemes and funds. Malta has generally been recognized by the UK HM Revenue & Customs as a jurisdiction to setup pension schemes that are eligible for the status of QROPS under UK Law.
The above agreement with HMRC, the favourable conditions available to Retirement Scheme Administrators and the already thriving funds industry, is expected to continue to generate interest among international practitioners to choose Malta as a jurisdiction of choice for their pension schemes and funds.