The corporate tax rate in Malta is set at 35% and companies incorporated in Malta are subjected to tax in Malta on their worldwide income.
This is irrespective of where the source of income is from and where it is received. The Maltese tax legislation also consists of processes that help eliminate double taxation.
A full imputation system applies to the taxation of dividends, where the distributing company’s tax is imputed as a credit to the shareholder receiving the dividend.
The country offers a highly efficient fiscal regime that eliminates double taxation on taxed company profits distributed as dividends. The tax system has been deemed compliant with EU non-discrimination principles by the European Commission. It has also gained approval from the Organisation for Economic Co-operation and Development (OECD).
Double Tax Relief in Malta
Under the Malta Tax regime, a double taxation relief is available for the following:
Double Tax Agreements
Malta’s double tax treaties are primarily based on the OECD Model Convention. It grants corporations relief from double taxation through the credit method.
Under unilateral relief, overseas tax incurred on income received from a country where Malta does not have a tax treaty can be claimed as a credit against the tax due in Malta. The credit cannot exceed the total Maltese tax payable.
To claim unilateral relief, the recipient must prove to the commissioner that the source of income was from overseas and is subject to tax outside Malta. One must provide proof for the tax paid abroad. Unilateral relief is only available in cases where there is no double taxation relief.
Flat-rate foreign tax credit (FRFTC)
The flat-rate foreign tax credit can be claimed by Maltese companies that receive income or capital gains from overseas allocated to the company’s Foreign Income Account.
The FRFTC is calculated at 25% of the overseas income or gain received by the company before allowable expenses.
The income, along with the credit less the deductible expenses, will be subject to total Maltese income tax with relief for the estimated credit (up to a maximum of 85% of the Malta tax payable).
Malta Holding Company Tax
Holding companies registered in Malta may apply for the Participation Exemption. The companies must receive dividend income or capital gains from a Participating Holding or from income arising from the disposal of that same holding. Consequently, the income will not be subject to income tax in Malta.
Malta’s Participation Exemption on capital gains extends to the domestic holdings of shares. Capital gains arising from the transfer of a participating holding in a Maltese company are also eligible for the exemption.
Participating holding arises when a company holds equity shares in a non-resident company. It could also be a qualifying committee that does not own immovable property and gives the right to vote. However, they receive a dividend and the right over assets upon the company’s liquidation.
Participating holding applies for:
- The owner of at least 5% of the equity shares in the company
- An equity shareholder in a company that has the option to acquire the entire balance of the equity shares of the non-resident company
- An equity shareholder entitled to the right to the first refusal to purchase such shares
- An equity shareholder entitled to sit on the board or appoint a person as a director
- An equity shareholder with a minimum investment of € 1,164,000, and such investment is held for an uninterrupted period of 183 days
- An equity shareholder for the continuance of its own business, not as trading stock for trade
As per the Malta tax structure, dividends resulting from a participating holding in an EU resident company is exempted from tax in Malta in all cases.
Tax on dividends received from a participating holding in a non-EU resident company are exempt in Malta provided the fulfilment of at least one of the following additional criteria:
- The said non-resident company is subject to a foreign tax of a minimum of 15%.
- The said non-resident company does not derive more than 50% of its income from passive interest and royalties.
- The shares in the non-resident company are not a portfolio investment, and the passive interest or royalties have been subject to tax at a rate that is not less than 5%.
If the Parent-Subsidiary Directive for the elimination of withholding taxes has been applied, additional conditions must be satisfied.
Upon receipt of a dividend, the shareholders would be eligible to claim a refund of the tax paid by the distributing company on income distributed as a dividend, depending on the type and source of income received.
The shareholder of the Malta company would be eligible to receive tax refunds as follows:
- 100% of the Malta tax paid, where the income distribution was eligible for the participation exemption
- 5/7th of the Malta tax paid, where the income received by the company is passive interest or royalties or dividend income from a participating holding, which does not fall within the conditions
- 2/3rd of the tax payable in Malta, where income has benefited from double taxation relief
- 6/7th of the Malta tax in all other cases
Malta has a trustee regime, and licensed trustees may hold shares in Maltese companies in a fiduciary capacity for and on behalf of subscribers.
Since Malta is a member of the European Union, it has access to the EU.
- The EU Parent-Subsidiary Directive: This directive is to set a standard system of taxation, which is applicable in the case of parent companies and subsidiaries of different Member States.
- The Merger Directive: This is to remove fiscal obstacles to cross-border reorganisations involving companies situated in two or more Member States.
- The Savings Directive: This aims to implement the EU withholding tax, requiring member states to provide other member states with information on interest paid. This is to achieve effective taxation of the payments in the member state where the taxpayer resides.
- The Interest and Royalties Directive: This directive sets a standard taxation system applicable to interest and royalty payments made between associated companies of different Member States.
No tax is withheld upon the distribution of interest and royalties to non-resident beneficial owners of such income. The same applies to the distribution of dividends irrespective of the residence and nationality of the shareholders.
Other Malta Tax Benefits
Besides the double tax relief, refunds and exemptions, the tax system in Malta offers more benefits to businesses.
- Fair capitalisation rules
- Flexible transfer pricing rules
- No withholding taxes on remittances of dividends, interest and royalties to non-residents
- Advance rulings on international transactions
- Share capital, accounting and tax can be denominated in a foreign currency
- The possibility to migrate companies to and from Malta
- No capital duties and low registration fees
- The relative ease of incorporation for non-regulated entities
- Low registration and maintenance costs
Malta’s corporate tax structure makes setting up companies in the country feasible. The tax system invites foreign investors, allowing them to maximise benefits for business advantage.