A company that is registered in Malta is entitled to claim an exemption from tax in respect of income that is attributable to a permanent establishment of the said company that is situated outside Malta. The exemption also extends to gains derived by the company from the transfer of such permanent establishment.
The exemption applies regardless of whether the permanent establishment belongs exclusively or in part to the company. For example, if the permanent establishment outside of Malta is jointly operated with third parties, those part of the profits attributable to the permanent establishment which are derived by the company registered in Malta will be exempt from Maltese income tax.
The income that is considered to be derived from the permanent establishment (and which therefore may be exempt from income tax) is required to be calculated as though the permanent establishment is an independent enterprise operating in similar conditions and at arm’s length.
Similarly to the participation exemption, this exemption is optional and accordingly, a company registered in Malta has a right not to apply the exemption and therefore to include the profits or gains which would have otherwise been exempt from tax in its tax return and pay tax on such profits or gains at the standard corporate rate of income tax. Accordingly, if the profits or gains are taxed, these will be allocated to the company’s Foreign Taxed Account. In this case, the shareholders will be entitled to a refund of tax equivalent to 100% of the tax paid by the company upon distribution of a dividend. However, in the event that a company opts for the exemption, the profits or gains will be allocated to the Final Tax Account and such profits can be distributed to the shareholders without any further tax liability.
This exemption also contains an anti-abuse provision which allows the Commissioner to deny the use of the exemption in certain situations. In essence, the legislation provides that where in the opinion of the Commissioner a series of transactions are effected with the sole or main purpose of reducing the amount of tax payable by a person, such a person will nonetheless be charged to tax as if this exemption did not apply.