Intellectual Property and Royalty Income Malta has become an ideal jurisdiction for the location of intellectual property (IP). By offering a robust yet flexible domestic legal framework and by being a member of the World Intellectual Property Organsiation (WIPO), Malta ensures the correct protection of IP. In addition, from a fiscal perspective, the treatment of royalty income and other advances derived from IP is amongst the most favourable in the world. Tax Treatment of Royalty Income Malta offers a number of different favourable tax treatments for royalty income. Mainly, the tax treatment of royalty income depends on its classification as active or passive income. Active Royalties Active royalties are royalties which are derived, whether directly or indirectly, from trade or business. Normally, a company is deemed to be deriving active royalty income when it has three or more separate streams of royalty income. Where a Malta Company receives royalty income as part of its business of licensing patents, trademarks or copyrights, and none of the exemptions outlined further below apply, the income is deemed to be part of its business income and is initially taxed at the rate of 35%. Eventually, upon the
subsequent distribution of the income as dividends or bonus shares, the shareholder (normally an offshore company) would be in a position to claim a tax refund of 6/7ths of the Malta tax, thus effectively reducing taxation in Malta to 5%. Passive Royalties Passive royalties are royalties which are not derived, directly or indirectly, from a trade or business. Normally, a company is deemed to be deriving passive royalty income when it has two or less separate streams of royalty income. Where a Maltese company derives royalty income which is of a passive nature, and none of the exemptions outlined further below apply, initially this income suffers tax at 35%. Once again, upon the distribution of this income as dividends or bonus shares, the shareholder would become entitled for a tax refund. However, in this case rather than a 6/7ths refund, the shareholder could claim a 5/7ths refund of the Malta tax paid by the company, thus reducing the effective tax paid in Malta to 10%, or claim a 2/3rds refund of the Maltese tax paid. The 2/3rds refund may be further reduced by virtue of the Flat-Rate Foreign Tax Credit, resulting in an effective corporate tax rate between 0% and 6.25%.
Š 2014 KSi Malta, a member firm of the KS International an association of independent member firms. All rights reserved. No one should act or rely on information prior to seeking appropriate professional advice on his/her specific situation.
Royalty Income Tax Exemptions Before being subject to the aforementioned tax treatment, there are possibilities that royalty income is not subject to tax in the first place. Fundamentally there are two relevant exemptions: A. No Maltese tax is levied on royalty income arising as long as both the following two conditions are satisfied: i.
the royalty income is of a passive nature (as defined above); and
ii.
the royalty income is derived by non-Maltese resident persons.
Malta offers the lowest effective corporate tax rate in Europe, generally ranging between 0% and 6.25%. Malta levies no withholding taxes on outbound payments of dividends, interest and royalties. Malta has no CFC, Transfer Pricing and Thin Capitalisation legislation.
B. A more general exemption is possible as this applies to
both residents and non-residents, and irrespective if the income is active or not. However, this exemption is only possible in respect of inventions (intellectual property) which are patentable, copyrightable or trade-marketable under Maltese law and are the result of fundamental research, industrial research or experimental development.
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Bernard C. Gauci Senior Advisor bgauci@ksimalta.com
Villa Gauci Mdina Road Balzan BZN 9031 Malta Tel: (+356) 21226176 Fax: (+356) 21226019
Benjamin Griscti Senior Advisor bgriscti@ksimalta.com
www.ksimalta.com
A member of KS International
Š 2014 KSi Malta, a member firm of the KS International an association of independent member firms. All rights reserved. No one should act or rely on information prior to seeking appropriate professional advice on his/her specific situation.