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Msida MSD 1751
Malta Business Tax Services
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Business Tax Advisory
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Christopher J. Naudi +356 2347-1440
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Tax Policy and Controversy
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Global Compliance and Reporting
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International Tax and Transaction Services – Transaction Tax Advisory
Robert Attard +356 2347-1458
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Christopher J. Naudi +356 2347-1440
Mobile: +356 9942-5892 Email: chris.naudi@mt.ey.com
A.
B. Taxes on corporate income and gains
Corporate income tax. Companies that are considered to be ordinarily resident and domiciled in Malta are subject to income tax on their worldwide income. Companies incorporated in Malta are considered ordinarily resident and domiciled in Malta. In addi tion, companies incorporated outside Malta, the management and control of whose business are exercised in Malta, are considered to be ordinarily resident but not domiciled in Malta and are sub ject to tax in Malta under the remittance basis of taxation.
Rates of corporate tax. Income tax is the only tax imposed on the chargeable income of companies. The standard rate of income tax is 35%.
Tax incentives. Tax incentives are offered in the Malta Enterprise Act and in regulations to the act, as well as in the Income Tax Act. The Malta Enterprise Act contains several incentives for the pro motion and expansion of business, covering a wide range of sec tors and activities. The incentives available under the act may be divided into six categories, which are described in the following six subsections. Other tax incentives available in Malta are dis cussed in the subsequent subsections.
Access to finance. The Access to Finance Scheme provides eli gible undertakings with a guarantee of up to 80% on loans, which may be used to finance projects leading to business establish ment, enhancement, growth and development. The guarantee may be used to cover a specific percentage of a loan that may not exceed EUR10 million.
Research and development and innovation programs. Fiscal in centives and cash grants are offered to stimulate innovative enter prises to engage in research and development.
Business Development. A tax credit or cash grant of up to EUR200,000 is offered to undertakings to facilitate value-added projects that contribute to the regional development of Malta. This incentive is available until 31 December 2023.
Patent box regime. Effective from 1 January 2019, Malta intro duced a patent box regime that grants the option to eligible persons deriving qualifying income from qualifying intellectual property (IP) to benefit from a super deduction. The maximum super deduction, which may be available after applying the nexus ratio, is equal to 95% of the net income or gains derived from the qualifying IP, resulting in an effective tax rate of 1.75%. Taxpayers wishing to benefit from the patent box regime must request a determination from Malta Enterprise.
Enterprise support. Assistance is offered to businesses to support them in developing their international competitiveness, improving their processes and networking with other businesses.
Employment and training. The Employment and Training Corporation (ETC) administers the employment and training incentives. Enterprises are supported in recruiting new employ ees and training their staff. These incentives help generate more employment opportunities and training activities.
Shipping. On 19 December 2017, the European Commission issued a press release confirming that it conditionally approved the Malta Tonnage Tax System (MTTS) under the European Union (EU) state-aid rules for a period of 10 years.
The updated MTTS rules retain a blanket exemption from Maltese income tax for the shipping income of eligible shipping organizations. The exemption from income tax should also apply with respect to income derived by eligible shipping organizations from activities that are ancillary to shipping activities, subject to a capping based on gross revenues. The blanket exemption of the MTTS is available if, in addition to meeting some other condi tions, the eligible shipping organization has paid the prescribed tonnage taxes.
In addition to the above exemption, eligible shipping organiza tions should also continue to be able to benefit from other gener ally available provisions, including the following:
• An exemption on dividends distributed by eligible shipping organizations if the underlying profits were exempt from Maltese income tax pursuant to the MTTS
• An exemption on capital gains derived by nonresidents on the transfer of shares held in a Maltese company
• The non-taxation of passive capital gains arising on the transfer of a ship
• A blanket stamp duty exemption for companies having the majority of their business interests located outside Malta Shipping organizations that should be eligible to apply the MTTS are those having ships engaged in the international carriage of goods or passengers by sea and those having cable-laying ships, pipe laying ships, crane ships and research ships. Among others, the MTTS should be available to shipping organizations charter ing tonnage tax ships on a bareboat basis if either of the follow ing circumstances exist:
• The ship is bareboat chartered to a shipping organization form ing part of the same group of companies.
• The licensed shipping organization demonstrates, to the satisfaction of the Registrar-General, that all of the following condi tions are satisfied:
The ship was bareboat chartered due to short-term overca pacity.
The term of the charter does not exceed three years. The bareboat chartered-out capacity does not exceed 50% of the shipping companies’ fleet, calculated on a group basis.
In such a case, excess capacity specifically acquired for charter ing out is not treated as eligible under the MTTS. Certain thresh olds relating to the proportion of European Economic Area (EEA)-flagged vessels are to be met for a shipping organization to be eligible to apply the MTTS.
Ship managers may also benefit from the MTTS with respect to any income derived from ship management activities.
In line with previously existing limitations and limitations com mon to tonnage tax regimes in the EEA, shipping organizations
operating the following vessels are not able to avail themselves of the updated MTTS:
• Fishing and fish factory ships
• Private yachts and ships used primarily for sport or recreation
• Fixed offshore installations and floating storage units
• Non-ocean-going tugboats and dredgers
• Ships whose main purpose is to provide goods or services nor mally provided on land
• Stationary ships employed for hotel or catering operations in the form of floating hotels or restaurants
• Ships employed mainly as floating or cruising gambling estab lishments or casinos
• Non-propelled barges
Collective Investment Schemes or Funds. Collective Investment Schemes or Funds must be licensed under the Investment Services Act or notified under the Investment Services Act (List of Notified AIFs) Regulations. Collective Investment Schemes usually take the form of corporate funds, including open-ended (SICAVs) and close-ended funds, or non-corporate funds, such as unit trusts.
The income of Collective Investment Schemes (other than income from immovable property located in Malta and local investment income earned by prescribed funds) is exempt from tax. Income earned by Collective Investment Schemes from immovable property situated in Malta is brought to charge in the same manner as that applicable to other persons, such as companies (see Property transfer tax in the case of gains derived from the transfer of im movable property situated in Malta). For local investment income earned by prescribed funds, such prescribed funds are subject to a 15% final withholding tax on bank interest received and to a 10% final withholding tax on other investment income received, such as interest on bonds and government stocks (units issued by the government to which the general public is invited to subscribe). Under regulations issued by the Minister for Finance, prescribed funds are funds whose assets in Malta amount to 85% or more of their total assets. Capital gains derived by funds from disposals of investments and assets are also exempt from tax.
Capital gains derived by nonresident unit holders on the disposal of their units in Maltese Collective Investment Schemes are gen erally exempt from income tax in Malta. Similarly, capital gains derived by unit holders on disposals of their units in prescribed funds listed on the Malta Stock Exchange are generally exempt from tax. Unit holders in unlisted prescribed funds are subject to tax on their gains. Tax at 15% is withheld from the capital gains realized by resident investors on certain disposals of listed shares in non-prescribed funds. For nonresident Collective Investment Schemes, the withholding tax provisions apply only if the dis posal of the shares is effected through an authorized financial intermediary. If the disposal of shares in nonresident non-prescribed funds is not effected through an authorized finan cial intermediary, no withholding tax is due and any capital gains must be disclosed by the resident investor in the individual’s tax return and taxed at the normal rates of income tax, up to a maxi mum of 35%.
Aviation income. Income derived from the ownership, lease or operation of aircraft and aircraft engines used in the international transport of passengers or goods (aviation income) is deemed to arise outside Malta regardless of whether the aircraft is operated from Malta. Consequently, a company that is incorporated out side Malta but managed and controlled in Malta (resident but not domiciled for income tax purposes, or a “non-dom co”) must pay tax on income derived from its aviation income on a remittance basis. Aviation income that is not received in Malta is not taxed in Malta.
Notional interest deduction. The notional interest deduction (NID) is an optional deduction that may be applied by companies or partnerships resident in Malta, as well as by nonresident companies or partnerships having a permanent establishment located in Malta. The NID may only be claimed against profits that stand to be allocated to the company’s Foreign Income Account or Maltese Taxed Account, or to profits that would have been so allocated in the case of undertakings other than companies (Eligible Profits). The NID may be claimed only if it is demon strated that all shareholders or owners of the undertaking approve the claim of such deduction with respect to the particular year of assessment. The NID for a year of assessment is calculated as follows:
Y = A x B
Y represents the NID that may be claimed in the relevant year of assessment.
A represents the reference rate that is equivalent to the risk-free rate plus a premium of 5%. The risk-free rate is determined by the current yield to maturity on Malta government stocks with a remaining term of approximately 20 years.
B represents the risk capital of the undertaking at the end of the accounting period ending in the year preceding the year of assessment less the invested risk capital to the extent of either of the following:
• Such invested risk capital is not employed by the undertaking in producing any income in the year preceding the year of assessment and if any income been produced, it could have been exempt from tax under the terms of the Income Tax Act.
• Such invested risk capital is employed in producing income in the year preceding the year of assessment that is exempt from tax under the terms of the Income Tax Act.
For companies and partnerships resident in Malta, risk capital consists of the following:
• Share or partnership capital of the undertaking
• Any share premium
• Positive retained earnings
• Loans or other debt borrowed by the undertaking that do not bear interest
• Any other reserves resulting from a contribution to the under taking
• Any other positive balance that is shown as equity in the under taking’s financial statements
For permanent establishments of nonresident companies or part nerships, risk capital consists of the capital of the undertaking that is attributable to the permanent establishment located in Malta.
The NID that may be claimed during a year of assessment is capped to an amount equal to 90% of the undertaking’s Eligible Profits gross of the NID for the year preceding the year of assess ment. Any excess NID may, at the option of the undertaking, be carried forward indefinitely for deduction and be added to the deduction due for the following years until it is absorbed.
If an undertaking claims the NID, an amount equal to 110% of the profits relieved from tax for the undertaking claiming the NID is to be allocated to the undertaking’s Final Tax Account in the following manner:
• An amount corresponding to 100% of the amount of profits that are so relieved from tax shall be allocated directly to the Final Tax Account (Direct Allocation).
• An additional reallocation of profits of an amount correspond ing to 10% of the relieved profits, out of the tax account to which such relieved profits would, ignoring the NID Rules, otherwise fall to be allocated (Additional Reallocation). The Additional Reallocation is to be effected after the second allo cations in accordance with the terms of Sub-rules 5(4) and 5(7) of the Tax Accounts (Income Tax) Rules.
The Direct Allocation and the Additional Reallocation shall not be effected with respect to deemed interest that is claimed as a deduction in terms of Sub-rule 3(1) of the NID Rules against interest income deemed to be received by the shareholder or partner of the undertaking in terms of Rule 5 of the NID Rules. Second allocations refer to those profits that companies must be reallocated from the Maltese Taxed Account and/or Foreign Income Account to the Immovable Property Account in order to achieve the following:
• Ensure that those profits that are to be allocated to the Immovable Property Account in gross are so allocated
• Reflect the ownership and usage of immovable property located in Malta by the company and/or other Maltese related compa nies, where applicable
This limits the shareholders’ or partners’ ability to claim, under the refundable tax credit system, a refund of a portion of the Maltese tax paid by the undertaking on a distribution of the taxed profits by the undertaking. If the undertaking does not have sufficient profits to allocate to the Final Tax Account the Additional Reallocation, the amounts not so allocated are ignored.
The NID Rules further provide that the amount claimed as the NID by the undertaking should give rise to an equal deemed interest income, which is subject to Maltese tax in the hands of the undertaking’s shareholders or partners in a proportion corre sponding to the proportion of the nominal value of the risk capital pertaining to each shareholder or partner or as otherwise allowed by the Commissioner for Revenue. The deemed interest income is treated as interest for tax purposes, and all provisions dealing with taxation of interest apply, except for the investment
income provisions (which provide for a 15% final tax). As a result, if the shareholder or partner is tax resident outside of Malta, the nonresidents exemption applicable to interest income may apply.
Shareholders or partners receiving this deemed interest income are entitled to deduct against it any NID that they are eligible for, pursuant to their own risk capital. The 90% limitation referred to above does not apply in this respect. The Direct Allocation and the Additional Reallocation to the Final Tax Account may not be effected with a respect to the NID claimed as a deduction by a shareholder or partner against interest income deemed to be received by the shareholder or partner.
Capital gains. Income tax is imposed on capital gains derived from the transfer of ownership of the following assets only:
• Immovable property. However, gains on transfers of immovable property or rights over immovable property that are subject to the new property transfer tax (see Property transfer tax) are not subject to income tax.
• Securities (company shares that do not provide for a fixed rate of return, units in Collective Investment Schemes and units relat ing to linked long-term business of insurance [life insurance contracts under which benefits are wholly or partially deter mined by reference to the value of, or income from, property]).
• Goodwill, business permits, copyrights, patents, trademarks, trade names and any other IP.
• Beneficial interests in trusts.
• Full or partial interests in partnerships.
In certain cases, value shifting and degrouping may result in taxable capital gains.
If a person acquires or increases a partnership share, a transfer of an interest in the partnership to that partner from the other part ners is deemed to occur, and is accordingly subject to tax.
For purposes of the capital gains rules, “transfer” has a broad definition that is not restricted to sale. It also includes any assign ment or cession of any rights, reduction of share capital, liquida tion or cancellation of units or shares in Collective Investment Schemes and other types of transactions. The definition does not include inheritance.
Transfers that are exempt from tax include the following:
• Donations to philanthropic institutions
• Transfers of chargeable assets between companies belonging to the same group of companies
• Transfers by nonresidents of securities in Maltese companies that are not primarily engaged in holding immovable property in Malta
• Transfers of securities listed on the Malta Stock Exchange as well as transfers of units relating to linked long-term business of insurance if the benefits derived by the units are wholly deter mined by reference to the value of, or income from, securities listed on the Malta Stock Exchange
• Transfers by nonresidents of units in Collective Investment Schemes
Rollover relief for assets used in business is also available if the asset has been used in the business for at least three years and if it is replaced within one year by an asset used only for a similar purpose.
Taxable capital gains are included in chargeable income and are subject to income tax at the normal income tax rates. Capital losses may be set off only against capital gains. Trading losses may be carried forward to offset capital gains in future years.
Provisional tax of 7% of the consideration or of the value of the donation must be paid by a seller on the transfer of property if the transaction is subject to the capital gains regime. A higher rate of provisional tax applies if the property being transferred consists of securities in a property company or an interest in a property partnership. The Commissioner for Revenue may authorize a re duction in the rate of provisional tax if it can be proved that the capital gain derived from the transaction is less than 20% of the consideration. Provisional tax paid is allowed as a credit against the income tax charge.
In the course of a winding up or distribution of assets, if a com pany transfers property to its shareholders, or to an individual related to a shareholder, who owned 95% of the share capital of the company transferring the property in the five years immedi ately preceding the transfer, the transfer is exempt from tax if certain conditions are satisfied.
Property transfer tax. Under Article 5A of the Income Tax Act, in general, the transfer of immovable property in Malta is taxed at a rate of 8% on the higher of the consideration or market value of the immovable property on the date of the transfer. No deduc tions may reduce the tax base, except for agency fees subject to value-added tax (VAT). However, different tax rates apply in certain circumstances. Broadly, from a corporate perspective, the following are the circumstances in which the different rates apply:
• If the property transferred was acquired before 1 January 2004, the seller is taxed at 10% of the transfer value.
• A 5% rate applies if the property not forming part of a project is transferred before five years from the date of acquisition or if the transferred property is a certain restored property.
• If immovable property was acquired through a donation more than five years from the date of transfer, a 12% rate applies to the excess of the transfer value over the acquisition value.
If several conditions are satisfied, companies that have issued debt securities to the public on the Maltese Stock Exchange and that are transferring immovable property forming part of a proj ect may opt out of the above provisions and have the relevant proceeds brought to charge under Article 27G of the Income Tax Act.
Securitization. The total income or gains of a securitization vehi cle is realized or deemed to arise during the year in which such income or gains are recognized for accounting purposes. For pur poses of calculating the chargeable income or gains of the
securitization vehicle for income tax purposes, the following ex penses are deductible:
• Relevant expenses provided under Article 14 of the Income Tax Act
• Amounts payable by the securitization vehicle to the originator or assignor
• Premiums, interest or discounts with respect to financial instru ments issued or funds borrowed by the securitization vehicle
• Expenses incurred by the securitization vehicle with respect to the day-to-day administration of the securitization vehicle
Tax is chargeable on any remaining total income of the securiti zation vehicle, although a further deduction of an amount equal to the remaining total income may be claimed at the option of the securitization vehicle, subject to certain provisos and anti-abuse provisions.
Administration. The year of assessment is the calendar year. Income tax for a year of assessment is chargeable on income earned in the corresponding basis year, which is generally the preceding calendar year. A company may adopt an accounting period other than the calendar year, subject to approval by the Commissioner for Revenue.
Companies with a January to June accounting year-end must file their income tax returns by 31 March (extended if filed elec tronically) of the year of assessment. Companies with other ac counting year-ends must file their income tax returns within nine months after the end of their accounting year (extended if filed electronically).
A self-assessment system applies in Malta. The Commissioner for Revenue issues an assessment only if it determines that a greater amount of income should have been declared or that the company omitted chargeable income from its tax return.
Companies must make three provisional payments of tax, gener ally on 30 April, 31 August and 21 December. The provisional payments are equal to specified percentages of the tax due as reported in the last income tax return filed with the Commissioner for Revenue on or before 1 January of the year in which the first provisional tax payment is due. The percentages are 20% for the first payment, 30% for the second and 50% for the third. Companies must pay any balance of tax payable on the due date for submission of the income tax return for that year of assess ment.
Penalties are imposed for omissions of income, and interest is charged for late payments of tax. The Commissioner for Revenue pays interest on certain late refunds.
Advance Revenue Rulings. Advance Revenue Rulings may be obtained from the Commissioner for Revenue on certain transac tions, activities and structures. Rulings survive any change in legislation for a period of two years. In all other circumstances, rulings are binding for five years. Renewals may be requested.
Allocation and distribution of profits. The distributable profits of a company are allocated to the following five tax accounts:
• Final Tax Account
Immovable Property Account
Foreign Income Account
Taxed Account
Untaxed Account
The Final Tax Account contains distributable profits that have been subject to a final tax. The Immovable Property Account contains profits connected with immovable property located in Malta. The Foreign Income Account contains, broadly, foreignsource passive income and foreign-source active income attribut able to a permanent establishment located outside Malta. The Maltese Taxed Account contains profits that are not included in the Final Tax Account, Immovable Property Account or Foreign Income Account. The Untaxed Account contains an amount of profits or losses that is calculated by deducting the total sum of amounts allocated to the other accounts from the total amount of profits shown in the profit-and-loss account for that year.
The Full Imputation System applies to distributions from the Immovable Property Account, Foreign Income Account and Maltese Taxed Account. Under this system, the tax paid by the company is imputed as a credit to the shareholder receiving the dividends. Profits allocated to the Foreign Income Account and the Maltese Taxed Account result in tax refunds under the Refundable Tax Credit System (see Refundable Tax Credit System).
Refundable Tax Credit System. In 2007, the Maltese House of Representatives passed a law that implemented an agreement with the EU relating to a refundable tax credit system for all companies distributing dividends out of taxed profits to shareholders. The imputation system under which the tax paid by a company is essentially treated as a prepayment of tax on behalf of the share holder was retained but this refundable tax credit system was introduced. The refundable tax credit system applies both to prof its allocated to a company’s Maltese Taxed Account and to profits allocated to its Foreign Income Account and is available both to residents and nonresidents.
A person receiving a dividend from a company registered in Malta from profits allocated to its Maltese Taxed Account or its Foreign Income Account that do not consist of passive interest or royalties may claim a refund of six-sevenths of the tax paid by the distributing company on the profits out of which the dividends were paid. As a result of the introduction of the new system, the dividend recipient receives a full imputation credit plus a refund of six-sevenths of the tax paid by the distributing company.
Distributions of profits derived from passive interest or royalties or dividends derived from a participating holding in a body of persons that does not satisfy the anti-abuse provision (see Participation exemption and participating holding system) do not qualify for the six-sevenths refund. Instead, they qualify for a refund of five-sevenths of the tax paid by the company.
In addition, the five-sevenths refunds apply to distributions made by companies that do not claim any form of double tax relief. Dividends paid out of profits allocated to the Foreign Income Account with respect to profits for which the distributing com pany has claimed any form of double tax relief (double tax treaty
relief, unilateral relief or the flat-rate foreign tax credit; see Foreign tax relief) are entitled to a refund equal to two-thirds of the tax that was imposed on the distributing company gross of any double tax relief. However, for the purposes of this calcula tion, the amount of tax imposed on the company is limited to the actual tax paid in Malta by the distributing company.
The refundable tax credit system is extended to shareholders of foreign companies that have Maltese branches. Tax paid in Malta by branches on profits attributable to activities performed in Malta is refunded when such profits are distributed.
Persons must register with the Commissioner for Revenue to benefit from the tax refunds described above.
Participation exemption and participating holding system. The Maltese income tax system grants companies registered in Malta the option to exempt from income tax dividends received from a participating holding or capital gains derived from the disposal of such holding. This exemption is referred to as the participation exemption.
A holding in another company is considered to be a participating holding if any of the following circumstances exist:
• A company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, and such holding confers an entitlement to at least 5% of any two of the following:
— Right to vote
— Profits available for distribution
— Assets available for distribution on a winding up
The Commissioner for Revenue may determine that the above provisions are satisfied if the minimum level of entitlement exists in the circumstances referred to in the proviso to the definition of “equity holding.” See below for the definition of “equity holding.”
• A company is an equity shareholder in another company, and the equity shareholder company may at its option call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held.
• A company is an equity shareholder in a company, and the equity shareholder company is entitled to first refusal in the event of a proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company.
• A company is an equity shareholder in a company and is enti tled to either sit on the board or appoint a person to sit on the board of that company as a director.
• A company is an equity shareholder that holds an investment representing a total value, as of the date or dates on which it was acquired, of a minimum of EUR1,164,000 (or the equiva lent sum in a foreign currency) in a company and that holding in the company is held for an uninterrupted period of not less than 183 days.
A holding of a company in certain partnerships, certain bodies of persons or collective-investment vehicles that provide for limited
liability of investors constituted, incorporated or registered out side Malta is deemed to constitute a participating holding if it satisfies the provisions of any of the six bullets above.
For the purposes of the above rules, an “equity holding” is a hold ing of the share capital in a company that is not a property com pany and which shareholding entitles the shareholder to at least any two of the following rights (equity holding rights):
• Right to vote
• Right to profits available for distribution to shareholders
• Right to assets available for distribution on a winding up of the company
The terms “equity shares,” “equity shareholder” and “equity share holding” are construed in accordance with the above definition.
The Commissioner for Revenue may determine that an equity holding exists even if such holding is not a holding of the share capital in a company or does not consist solely of such a holding of share capital, provided that it can be demonstrated that at any time an entitlement to at least two of the equity holding rights exists in substance.
A “property company” is a company that owns immovable prop erty located in Malta or any rights over such property, or a com pany that holds, directly or indirectly, shares or interests in a body of persons owning immovable property located in Malta or any rights over such property.
A company or body of persons carrying on a trade or business that owns immovable property located in Malta or rights over such property is treated as not owning the immovable property or rights over such property if all of the following conditions are satisfied:
• The property consists only of a factory, warehouse or office used solely for the purpose of carrying on such trade or business.
• Not more than 50% of its assets consist of immovable property located in Malta.
• It does not carry on an activity from which income is derived directly or indirectly from immovable property located in Malta.
The application of the participation exemption is subject to an antiabuse provision. The participation exemption applies to par ticipating holdings if the body of persons in which the participating holding is held satisfies any one of the following three conditions:
• It is resident or incorporated in a country or territory that forms part of the EU.
• It is subject to a foreign tax of at least 15%.
• It does not derive more than 50% of its income from passive interest or royalties.
If none of the above conditions is satisfied, both of the following two conditions must be fulfilled:
• The equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio invest ment. For this purpose, the holding of shares by a company registered in Malta in a company or partnership not resident in
Malta that derives more than 50% of its income from portfolio investments is deemed to be a portfolio investment.
• The body of persons not resident in Malta or its passive interest or royalties has been subject to a foreign tax of at least 5%.
In addition, Malta has also incorporated the amendments to the EU Parent-Subsidiary Directive. Consequently, effective from 1 January 2016, the participation exemption on dividends does not apply if the relevant profits were deductible to the distribut ing company in the other EU member state.
The participation exemption applies also to gains or profits de rived from transfers of holdings in companies resident in Malta, but certain restrictions are envisaged. Conversely, the participa tion exemption cannot be applied with respect to dividends re ceived from a participating holding in companies tax resident in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for a minimum period of three months during the financial year in question, unless it is proved to the satisfaction of the Commissioner for Revenue that the company maintains sufficient significant people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned from the jurisdiction.
Moreover, the participation exemption is extended to branch profits. This applies to income and gains derived by a company registered in Malta that are attributable to a permanent establishment (including a branch) located outside Malta or that are attributable to the transfer of such permanent establishment, regardless of whether such permanent establishment belongs exclusively or in part to the particular company, including a permanent establishment operated through an entity or relationship other than a company.
Foreign tax relief. Under tax treaty provisions and the domestic law, a tax credit against Maltese tax is granted for foreign tax paid. The amount of the credit is the lower of Maltese tax on the foreign income and the foreign tax paid.
Maltese companies may also reduce their tax payable in Malta by claiming double tax relief with respect to British Commonwealth income tax.
Unilateral tax relief, which is another form of double tax relief, applies if treaty relief is not available and if the taxpayer has proof of the foreign tax paid. The unilateral relief is also available for underlying tax.
Another form of double tax relief is a flat-rate foreign tax credit (FRFTC), which may be claimed by companies that have a spe cial empowerment clause in their Memorandum and Articles of Association. The FRFTC, which is equivalent to 25% of the net income received (before any allowable expenses), applies to all foreign-source income that may be allocated to the Foreign Income Account. An auditor’s certificate stating that the relevant income is foreign-source income is sufficient evidence that prof its may be allocated to the Foreign Income Account. The FRFTC is added to chargeable income and credited against the Maltese tax charge. The credit is limited to 85% of the Maltese tax due before deducting the credit.
The interaction of the four types of double tax relief not only ensures that tax is not paid twice on the same income; it also reduces the overall effective rate of the Maltese tax.
C. Determination of trading income
General. Chargeable income is the net profit reported in the com panies’ audited financial statements, subject to certain adjustments. Expenses incurred wholly and exclusively in the production of income are deductible.
Expenses that are not deductible include the following:
Amortization of goodwill
All types of provisions
Voluntary payments
• Expenses recoverable under insurance
• Pre-trading expenses (except for expenditure incurred with respect to staff training, salaries or wages and advertising within the 18 months preceding the date on which the company begins to carry on its trading activities)
• Unrealized exchange differences
• Other expenses that are not incurred in the production of income
Inventories. Inventories are normally valued at the lower of cost or net realizable value in accordance with generally accepted accounting principles.
Tax depreciation (capital allowances). Tax depreciation allowances include initial allowances and annual wear-and-tear allowances.
Initial allowances are granted at a rate of 10% with respect to new industrial buildings and structures.
Wear-and-tear allowances for plant and machinery are calculated using the straight-line method. Industrial buildings and structures are also depreciated using the straight-line method.
The following are the minimum number of years over which the principal categories of plant and machinery may be depreciated.
Asset Years
Computers and electronic equipment 4 Computer software 4 Motor vehicles 5*
Furniture, fitting and soft furnishings 10 Aircraft, airframes, aircraft engines, aircraft engine or airframe overhaul, and aircraft interiors and other parts 4 Ships and vessels 10
Other machinery 5 Other plant 10
* The cost of non-commercial motor vehicles is limited to EUR14,000.
The annual straight-line rate for industrial buildings and structures, including hotels and certain offices, is 2%.
Capital allowances are generally subject to recapture on the sale of an asset to the extent the sale proceeds exceed the tax value after capital allowances. Any amounts recaptured are added to taxable income for the year of sale or are used to reduce the cost
of a replacement asset. To the extent sales proceeds are less than the asset’s depreciated value, an additional allowance is granted.
Groups of companies. A company that is part of a group of com panies may surrender tax-trading losses to another member of the group. Two companies are deemed to be members of a group of companies for tax purposes if they are resident in Malta and not resident in any other country for tax purposes, and if one of the companies is a 51% subsidiary of the other or both are 51% sub sidiaries of a third company that is resident in Malta. A company is considered to be a 51% subsidiary of another company if all of the following conditions exist:
• More than 50% of the subsidiary’s ordinary shares and more than 50% of its voting rights are owned directly or indirectly by the parent company.
• The parent company is beneficially entitled to receive directly or indirectly more than 50% of profits available for distribution to the ordinary shareholders of the subsidiary.
• The parent company is beneficially entitled to receive directly or indirectly more than 50% of the assets of the subsidiary avail able for distribution to the ordinary shareholders of the subsidiary in the event of a liquidation.
The group company surrendering the losses and the group com pany receiving the losses must have accounting periods that begin and end on the same dates, except for newly incorporated companies and companies in the process of liquidation.
Tax consolidation rules. With effect from accounting periods starting on or after 1 January 2019, the Consolidated Group (Income Tax) Rules allow groups to elect to form a “fiscal unit” and bring to charge the income derived by the companies within the fiscal unit on a consolidated basis of taxation. For the pur poses of these rules, the term “company” includes any entity that is treated as a company, including a partnership that has elected to be treated as a company but excludes securitization vehicles and licensed finance leasing companies.
A “fiscal unit” is formed through the submission of an election made by the parent company for itself and its 95% subsidiaries to form such a fiscal unit. A 95% subsidiary is a company in which the parent company’s shareholding therein satisfies any two of the following conditions:
• The parent company holds at least 95% of its voting rights.
• The parent company is beneficially entitled to at least 95% of any profits available for distribution to its ordinary sharehold ers.
• The parent company would be beneficially entitled to at least 95% of any assets of the subsidiary company available for dis tribution to its ordinary shareholders on a winding-up.
All companies forming part of the fiscal unit must have their accounting periods beginning and ending on the same dates.
Once such a fiscal unit is formed, the parent company is treated as the principal taxpayer and is required to submit the income tax return for the whole fiscal unit. The 95% subsidiaries are treated as transparent subsidiaries and are not required to submit any income tax returns. To be in a position to submit the consolidated
income tax return, the principal taxpayer is required to prepare an audited consolidated balance sheet and profit-and-loss account covering the fiscal unit in accordance with the relevant require ments contained in the Companies Act.
In determining the chargeable income of the fiscal unit, the fol lowing rules apply:
• The principal taxpayer must bring forward in its consolidated income tax return any tax attributes carried forward by the transparent subsidiaries, such as unabsorbed capital allowances, tax trading losses and/or tax credits, and profits carried forward by the transparent subsidiaries in their respective taxed accounts other than the untaxed account in their income tax returns cov ering the previous year of assessment.
• The principal taxpayer is deemed to have derived all income earned by the transparent subsidiaries and entitled to claim a deduction of the expenses incurred by the transparent subsidiar ies.
• Any transactions between the companies forming part of the fiscal unit must be ignored, and exemptions should remain available.
• Income derived by a transparent subsidiary that is not tax resi dent in Malta is deemed income attributable to a permanent establishment, which the principal taxpayer has outside Malta.
• If the principal taxpayer is a company that is not incorporated in Malta but tax resident in Malta, the principal taxpayer is subject to tax on the following:
— All income and capital gains derived by a transparent subsidiary incorporated in Malta
— All income and capital gains arising in Malta that are derived by a transparent subsidiary incorporated outside Malta
— All foreign-source income derived by a transparent subsid iary incorporated outside Malta but tax resident in Malta that is either received in or remitted to Malta
In determining the tax liability of the fiscal unit, the principal taxpayer is entitled to claim double taxation relief with respect to any tax incurred by any of the transparent subsidiaries outside Malta. The chargeable income derived by the fiscal unit is taxed at a rate that is determined by deducting from the applicable corporate tax rate the result of dividing the total amounts claim able by all members of the fiscal unit and/or persons entitled to receive distributions from the principal taxpayer by the charge able income of the fiscal unit.
If the parent company’s shareholding in a subsidiary satisfies the relevant conditions with a percentage of 100%, the tax payment by the fiscal unit is determined in a manner that the principal taxpayer deems fit. Otherwise, the tax due by the fiscal unit may also be apportioned to a transparent subsidiary that is a 95% subsidiary but not a 100% subsidiary, in accordance with an agreement agreed to by the principal taxpayer and all the other minority shareholders.
Certain anti-abuse provisions are envisaged.
Relief for losses. Tax losses incurred in a trade or business may be carried forward indefinitely to offset all future income.
Unabsorbed tax depreciation may also be carried forward indefi nitely, but may offset only income derived from the same source. A carryback of losses is not allowed.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate (%)
Value-added tax; standard rate 18 Stamp duty on various documents and transfers of ownership
Sales of real property
Transfers of marketable securities
Life insurance policies
Other insurance policies 11 Excise duty, on various commodities including alcohol and alcoholic beverages, manufactured tobacco, energy products, mobile telephone services, cement, pneumatic tires, ammunition cartridges, chewing gum, water and other non-alcoholic beverages, and plastic sacks and bags; although levied on producers or importers when they distribute the products for general consumption, the duty is ultimately borne by consumers because it is included in the price of the products
E. Miscellaneous matters
Foreign-exchange controls. When Malta became a member of the EU, it abolished foreign-exchange controls and introduced some reporting obligations under the External Transactions Act.
Anti-avoidance legislation. Maltese law includes no specific transferpricing rules. However, it does contain general anti-avoidance provisions to prevent the avoidance of tax through arrangements that are solely tax-motivated. Under these provisions, the Commissioner for Revenue may ignore an arrangement and add an amount to chargeable income if it establishes that a transaction has the effect of avoiding or postponing tax liability.
Anti-Tax Avoidance Directive 1. Malta has transposed the EU Anti-Tax Avoidance Directive 1 (ATAD 1). The ATAD 1 intro duces some major tax policy changes into Maltese law by providing for a group of norms that were previously not contemplated in Maltese tax law. It provides for structured mandatory con trolled foreign company (CFC) rules (to deter profit shifting to a low or no-tax jurisdiction) and exit taxation (to prevent compa nies from avoiding tax when relocating assets). In addition, the ATAD 1 introduces interest limitation rules to discourage artifi cial debt arrangements designed to minimize taxes and a general anti-abuse rule (GAAR) to counteract aggressive tax planning. Although Maltese law did previously provide for some basic interest limitation rules, the policy impact of interest-limitation rules driven by the ATAD 1 is expected to be significant. Because the wording of the GAAR contemplated by the ATAD 1 is com parable to the wording in Article 51 of the Income Tax Act, the ATAD 1’s introduction of a new GAAR is not expected to have a significant impact.
From a domestic perspective, the provisions of the ATAD 1 apply from 1 January 2019 (and from 1 January 2020 in the case of exit taxes) to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies. This includes entities that are not resident in Malta but have a permanent establishment in Malta, provided that they are subject to tax in Malta as companies.
Anti-Tax Avoidance Directive 2. Malta has also transposed the EU Anti-Tax Avoidance Directive (ATAD 2). The ATAD 2 expands on the minimum standards targeting tax avoidance on certain hybrid mis matches that were originally contemplated by the ATAD 1 to target additional hybrid mismatches. While the ATAD 1 was aimed at hybrid mismatches arising from differences in the legal characterization of financial instruments and entities, the ATAD 2 widens the definition of “hybrid mismatch” to incorporate hybrid transfers, hybrid perma nent establishment mismatches and imported mismatches. It also addresses reverse hybrid mismatches and tax residency mismatches.
The provisions of ATAD 2 are effective from 1 January 2020 and apply to all companies and other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies, including entities that are not resident in Malta but have a permanent establishment in Malta insofar as they are sub ject to tax in Malta as companies. The only exception applies to reverse hybrid mismatches. The applicable measures for reverse hybrid mismatches entered into effect on 1 January 2022, and they will also apply to all entities that are treated as transparent for Maltese tax purposes, such as partnerships that have not elected to be treated as a company.
Exchange of information requirements. Both the United States Foreign Account Tax Compliance Act (FATCA) and the Organisation for Economic Co-operation and Development (OECD) Common Reporting Standard were transposed into local law. Malta, as a mem ber state of the EU, has also transposed the provisions requiring the automatic exchange of information relating to advance cross-border rulings or advance pricing arrangements. Similarly, Malta has also transposed the provisions of the Mandatory Disclosure Regime.
Transfer pricing. Although Maltese tax law does not provide any detailed transfer-pricing requirements or guidelines, certain provi sions incorporate a concept analogous to the arm’s-length principle. In the absence of detailed guidelines, the Maltese tax authorities tend to the refer to the OECD Transfer Pricing Guidelines. Consequently, it is advisable that the terms of any cross-border transaction entered into between two associated enterprises adhere to the arm’s-length princi ple as contemplated in the guidelines. No transfer-pricing documenta tion requirements apply other than Country-by-Country Reporting.
On 22 December 2021, the Commissioner for Revenue published draft Transfer Pricing Rules for public consultation. The aim is to introduce these new rules with effect from 1 January 2024 or after. If it is adopted in the current form, the rules would apply to companies that are not considered to be a micro, small or medium-size enterprises and whose aggregate arm’s-length value of its cross-border arrangements in the relevant year exceeds a value that is yet to be determined. Companies falling within the pur view of these transfer-pricing rules would be required to ensure
that any cross-border arrangement entered into with an associate enterprise be at arm’s length. Based on the draft rules, the arm’slength amount is to be determined on the basis of such method ologies to be prescribed via guidelines to be published by the Commissioner, and companies are expected to maintain transferpricing documentation on a timely basis. The draft rules also provide for a formal framework pertaining to Unilateral Transfer Pricing Rulings and Advanced Pricing Arrangements.
F. Treaty withholding tax rates
Under Maltese domestic tax law, dividends, interest, discounts, premiums and royalties paid to nonresidents are not subject to withholding tax. Interest and royalties paid to nonresidents are exempt from income tax in Malta if they are not effectively con nected with a permanent establishment in Malta through which the nonresidents engage in a trade or business.
Under Malta’s tax treaties, the maximum tax rates applicable to dividends paid by Maltese companies to persons resident in the other treaty jurisdictions do not exceed the tax rate payable by the recipient companies in Malta.
Malta has also signed and transposed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument, or MLI). The MLI entered into force on 1 April 2019.
The following table provides the maximum withholding tax rates for dividends, interest and royalties under Malta’s tax treaties.
Dividends Required Rate Rate percentage for minor for major for major shareholding shareholding shareholding Interest Royalties % % % % %
Albania 15 5 25 5 5
Andorra
Armenia 10 5 10 5 5
Australia (e) 15 15 (a) 15 10
Austria (e) 15 15 (a) 5 10/– (c)
Azerbaijan 8 8 (a) 8 8
Bahrain 0 0 (a) 0 0
Barbados 15 5 5 5 5
Belgium 15 15 (a) 10 10/– (c)
Botswana 15 5 25 8.5 5/7.5
Bulgaria 0 0 (a) 35 10
Canada 15 15 (a) 15 10
China Mainland 10 5 25 10 10
Croatia 5 5 (a) 0 0
Cyprus 15 15 (a) 10 10
Czech Republic 5 5 (a) 0 5
Denmark 15 0 25 0 0
Egypt 10 10 (a) 10 12
Estonia 15 5 25 10 10
Finland (e) 15 5 10 0 0
France 15 0 10 5 10
Georgia 0 0 (a) 0 0
Germany 15 5 10 0 0
Dividends Required Rate Rate percentage for minor for major for major shareholding shareholding shareholding Interest Royalties % % % % %
Greece 10 5 25 8 8
Guernsey (e) (a) Hong Kong
SAR 0 0 (a) 0 3
Hungary 15 5 25 0/10 10
Iceland 15 5 10 0 5
India 10 10 (a) 0/10 10
Ireland (e) 15 5 10 0 5
Isle of Man (e) 0 0 (a) 0 0
Israel 15 0 10 5
Italy 15 15 (a) 10 10/– (c)
Jersey (a)
Jordan 10 10 (a) 10 10 Korea
(South) 15 5 25 10/– (d) 10 Kosovo 10 0 10 5 0 Kuwait 0 0 (a) 0 10
Latvia 10 5 25 10 10 Lebanon 5 5 (a) 0 5
Libya 15 5 10 5 5
Liechtenstein 0 0 (a) 0 0
Lithuania (e) 15 5 25 10 10 Luxembourg 15 5 25 0 10 Malaysia (a) 15 15 Mauritius 0 0 (a) 0 0
Mexico (a) 5/10 10 Moldova 5 5 (a) 5 5 Monaco 0 0 (a) 0 0
Montenegro 10 5 25 10 5/10
Morocco 10 6.5 25 10 10
Netherlands 15 5 25 10/– (c) 10
Norway 15 0 10 Pakistan 15 15 20 10 10
Poland 10 0 10 5 5
Portugal 15 10 25 10 10
Qatar 0 0 (a) 0 5
Romania 5 5 (a) 5 5
Russian Federation 15 15 – (a) 15 5
San Marino 10 5 25 0 0
Saudi Arabia 5 5 (a) 0 5/7
Serbia (e) 10 5 25 10 5/10
Singapore (a) 7/10 10 Slovak
Republic (e) 5 5 (a) 0 5 Slovenia 15 5 25 5 5
South Africa 10 5 10 10 10
Spain 5 0 25 0 0
Sweden 15 0 10 0 0
Switzerland 15 0 10 10 0
Syria (a) 10 18
Tunisia 10 10 (a) 12 12
Turkey 15 10 25 10 10
Dividends Required Rate Rate percentage for minor for major for major shareholding shareholding shareholding Interest Royalties % % % % %
Ukraine 15 5 20 10 10
United Arab
Emirates
(a)
United Kingdom (e) (a) 10 10
United States (b) 15 5 10 10 10
Uruguay 15 5 25 10 5/10
Vietnam 15 5 50 10 5/10/15
(a) Not applicable.
(b) These are the general rates, but other rates may apply in specified circum stances.
(c) The dash signifies that certain royalties are not taxable in the state where the royalties are deemed to arise.
(d) The dash signifies that certain interest payments are exempt from tax.
(e) These are jurisdictions for which the synthesized text (term employed by the OECD in defining the document to be published by the competent authorities to facilitate the understanding of the MLI) modifying the relevant double tax treaty by the MLI has been issued by the Commissioner for Revenue.
Malta has signed tax treaties with Armenia, Curaçao, Ethiopia and Ghana, but these agreements are not yet in force.