Malta: The Tax Regime, Double Taxation Treaties and Double Taxation Relief

In assessing the tax efficiency of a jurisdiction, the following factors need to be taken into consideration:

  • The tax rate on income in the home jurisdiction
  • Withholding taxes suffered on income paid from one jurisdiction to the home jurisdiction
  • Double taxation relief given in the home jurisdiction for taxes paid elsewhere
  • Withholding taxes on subsequent dividends from the home jurisdiction

The Maltese Tax Refund System and the Effective Tax Rate

Companies operating in Malta are subject to a corporate tax rate of 35%. However, shareholders enjoy low effective rates of Maltese tax as Malta’s full imputation system of taxation allows generous unilateral relief and tax refunds on the distribution of profits:

Trading Income – Shareholders can apply for a tax refund of 6/7ths of the tax paid by the company on those trading profits that have been used to pay a dividend. This results in an effective Maltese tax rate of 5% on trading income.

Passive Income – Where profits are derived from passive income (ie. interest and royalties) the tax refund to the shareholder is 5/7ths of the tax paid by the Maltese company. This results in an effective Maltese tax rate of 10% on passive income.

Where the Maltese company has obtained double taxation relief on the foreign passive income the tax refund to the shareholder is 2/3rds of the tax paid by the Maltese company.

Participating Holding Exemption

The participating holding exemption, exempts the dividends and capital gains derived from a participating holding in a non-resident company, from income tax.

To qualify as a participating holding, the shareholding of the Maltese company in the foreign company must satisfy at least one of the following conditions:

  • The holding is 10% or more of the equity capital of the foreign company or
  • The holding is a substantial equity investment of at least €1,164,000 and the holding is held for an uninterrupted period of at least 183 days or
  • The Maltese company:
    • Holds at least 1 equity share and has an option over the balance or
    • Holds at least 1 equity share and has power to appoint a director

Double Tax Relief for Maltese Companies

Maltese companies enjoy exemption from or reduced withholding taxes on income paid from another jurisdiction.

Income received from foreign sources may have been liable to foreign taxes and may also be subject to withholding taxes. Mitigation of these taxes can be obtained by claiming unilateral relief.

Foreign tax suffered, is allowed as a tax credit against the tax chargeable in Malta. The credit allowed must not exceed the total tax liability in Malta and to claim the unilateral relief the company must demonstrate that:

  • The income arose from a foreign source
  • The income was subject to foreign tax
  • The amount of the foreign tax suffered

Flat Rate Foreign Income Tax Credit

An alternative option to claiming double tax relief, is to claim a flat rate foreign income tax credit.

The flat rate foreign tax credit is calculated at 25% of the foreign income or gain before allowable expenses.

The net foreign income received, plus the tax credit, less allowable expenses, is then subject to Maltese income tax at 35% with relief for the deemed credit (up to a maximum of 85% of the Maltese tax payable). An example is provided below:

  table

The effective tax rate on net income after expenses is therefore 13.38%.

On distribution of the profits, the shareholder can claim a 2/3rds tax refund on the tax suffered by the Maltese company, effectively reducing the overall tax rate even further.

Tax Treaty and EU Directive Relief

Malta has an extensive network of double taxation treaties. A list of Malta’s double tax treaties is detailed in the Appendix below. As a full member of the EU, Malta has access to the benefits of the EU Parent Subsidiary Directive and the EU Interest and Royalty Directive.

taxation table

For further information, kindly contact 77 Great Estates on (00356) 2125 2455; (00356) 9944 7444; skype: info.77GreatEstates or info@77GreatEstates.com.

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