[6/7 * 35 = 5].
E.g. If gross profits amount to Euro 100,000, the company would pay Euro 35,000 in tax, but the shareholder would typically be entitled to claim back Euro 30,000 in tax refunds.
The above rule is subject to certain exceptions: there is one case where the Malta tax refund is higher (a full 100% refund is given) and 2 cases where the Malta tax refund is lower.
Case where the Malta tax refund is higher than 6/7
A full (100%) refund applies to a Malta holding company which derives profit/gains from a participating holding in a non-resident entity. In such cases, the Malta holding company may decide:
(a) either to apply an outright exemption for Malta tax (the Malta holding company exemption known as the participation exemption (that is it may opt not to pay the 35% tax in the first place); or
(b) to include such income /gains as part of the taxable income of the Malta company and pay tax at 35%. Following the distribution of dividends by the Malta holding company out of the referred income/gains, the recipient shareholders would be entitled to a full (100%) refund of the Malta tax paid by the company on such income/gains. This scenario could be desirable in cases where, for some reason or another, the shareholder prefers to receive a part of his earnings in refunds rather than exclusively in dividends.
Cases where Malta Tax Refund is lower than 6/7
There are two cases where the Malta tax refund is lower than the normal 6/7 refund enjoyed by shareholders of typical trading companies:
- Where the profits out of which a dividend is distributed consist of “passive interest or royalties”, the refund is set at 5/7 of the Malta tax suffered on those profits. There exists “passive interest or royalties” if (i) income is not derived from a trade or business AND (ii) such interest or royalties have not suffered foreign tax or suffered foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%). If any one of these conditions is lacking, there will be no passive interest or royalties and one would fall under the more beneficial 6/7 refunds regime.
- Where double taxation relief is claimed, dividends paid out of profits allocated to the foreign income account in respect of which profits the distributing company has availed itself of any form of double tax relief are subject to a 2/3 refund.
Malta’s tax refund system
Resident and Non-Resident Shareholders
Yes, Malta’s tax refund system applies both to resident and non-resident shareholders. However a number of claw back provisions ensure that the refund system is not attractive for resident shareholders. There is, however, an important exception to this rule when the resident shareholder is not ordinarily resident and domiciled in Malta. In this latter case the claw back provisions do not apply where the shareholding in a Malta company is held via a foreign entity.
Non-resident shareholders are not taxed in Malta on the refunds they receive.
Payment of Malta tax refunds
A claim for refunds of Malta tax by a registered shareholder of a Malta company is paid by the Malta tax authorities within 14 days from the end of the month of a valid application being submitted.
Implications of Malta’s full imputation of Taxation System
In Malta’s full imputation system of taxation, the tax paid by the Malta company on the profits which it distributes as a dividend in favor of its shareholder is credited in full against the Malta tax liability of that shareholder. It is essentially intended to eliminate economic double taxation (taxation of corporate profits in the hands of 2 different persons: the company and its shareholder). Since companies are chargeable to tax at a flat rate of 35% which rate is equal to the marginal rate of 35% applicable to individuals, no further tax is due upon receipt of a dividend by an individual shareholder. However, should an individual shareholder be liable to tax at a progressive rate which is lower than the 35% rate (levied on the profits of the company) then he is entitled to a tax refund equivalent to the “excess” tax paid by the company.
Malta withholding tax upon distribution of dividends
Malta does not levy withholding tax on distributions of dividends to non-resident shareholders. Moreover, as long as certain conditions are met, Malta would not levy any withholding tax on payments of interest and royalties to persons not resident in Malta.
Capital Gains derived by a Maltese Company
Capital Gains are not taxed separately in Malta: they are added to the other income of the company and charged to tax at the normal corporate rate of tax. Moreover, not all capital gains derived by a Maltese company are chargeable to tax in Malta.
Chargeable gains relate to the gains on capital assets specifically listed under Article 5 of the Income Tax Act:
Immovable property situated in Malta
Rights over securities
Beneficial interest in a trust
Capital gains derived by non-resident shareholders
Upon the sale/disposal of their Malta Company
Article 12 (c) (ii) of the Income tax Act provides that there shall be exempted from tax in Malta any gains or profits accruing to or derived by any person not resident in Malta on a disposal shares or securities in a company whose assets do not consist wholly or principally of immovable property situated in Malta.
Malta’s jurisdiction to tax
The corporate tax and refund system described above applies to companies resident in Malta. Companies incorporated in Malta are considered ordinarily resident and domiciled in Malta and would consequently be taxed in Malta on a worldwide basis.
Nevertheless a foreign company may be tax resident in Malta should it result that its business is controlled and managed in/from Malta.
Companies which are resident or domiciled in Malta but not ordinarily resident and domiciled are subject to tax in Malta:
(i) on income and chargeable gains arising in Malta;
(ii) on income arising outside Malta which is received in Malta (remittance basis).
No tax is payable on capital gains arising outside Malta to a company which is not ordinarily resident in Malta or nor domiciled in Malta.
Companies which are neither incorporated nor resident in Malta are only chargeable on Malta source income and/or capital gains. This would be the case, for instance, of a company incorporated and resident in a foreign jurisdiction which establishes a permanent establishment (i.e. a branch) in Malta.
Taxation Upon Malta branch
A company which is not incorporated nor resident in Malta and which carries out an activity in Malta should register its Malta branch with the Registrar of Companies and with the Malta tax authorities. In accordance with EU directives, separate branch accounts must be kept. For tax purposes, profits in respect of the branch are treated as profits attributed to a permanent establishment in Malta and the tax principles applicable to Malta companies will apply. Thus, branches which are duly registered with the Commissioner of Inland Revenue are covered by the tax accounting system and the refundable tax credit system, just like a company. Branch profits will be taxed at 35% and the company’s shareholders may register for refunds and recoup part of that tax paid in accordance with the principles stated above.
Most frequent trading structure adopted
For persons wishing to trade, the creation of 2 Malta companies is often the norm: a Malta Trading company and a Malta holding company. The 2 main reasons for having the shares in the Malta trading company being held by a Malta holding company are:
(i) to create an entity which may accumulate the sum of the dividends and refunds received in respect of the Malta Trading’s activity; and/or;
(ii) possibly to be able to distribute such accumulated profits (sum of dividends and refunds received in respect of the Malta Trading’s activity) as a dividend to a foreign EU holding company with a view of benefiting from the Parent Subsidiary Directive [this essentially depends on how the Member State in question has implemented the parent subsidiary directive].
Malta company Taxation
Profits generated Overseas
In terms of Maltese law, a company registered in Malta is domiciled and resident in Malta and therefore taxable in Malta on a worldwide basis. This does NOT mean, however, that a Maltese company which operates abroad may never be taxed in that country.
Double Taxation Agreements
It is very important to consider the effect of any double taxation treaty existing between Malta and the foreign jurisdiction. Unlike many low tax / offshore jurisdictions, Malta has concluded double taxation agreements with many countries (including most EU countries).
A double tax treaty is essentially an agreement between two countries which determines which country has the right to tax a person or company in specified situations. Therefore, the main aim of double tax treaties is to ensure that the same income is not taxed twice. Generally speaking, in terms of Malta’s double taxation agreements with other countries, when by virtue of the laws of the two contracting states a company is considered as a tax resident of both contracting states, the company is deemed to be a tax resident only in the state in which its place of effective management and control is situated, independently of where the company is incorporated.
Double tax treaties usually also provide for double tax relief so that even if income is taxed twice at least it would be possible to deduct overseas tax which has already been suffered. Moreover, Maltese legislation provides that when the terms of any double taxation agreement conflict with the provisions of domestic Maltese legislation, the terms of such agreement will prevail over inconsistent Maltese legislation.
For the reasons indicated above, it is highly recommended that persons wishing to open a company in Malta seek foreign professional advice especially if there is the risk that the company will be effectively managed from abroad.
Generally speaking the more substance given to the Maltese company, the less it may be seen as a tool utilised for the artificial diversion of profits from one country to another.
The Council Resolution on coordination of the Controlled Foreign Corporation (CFC) and Thin Capitalisation rules lays down a number of cases where, in the opinion of the EU Commission, profits are deemed to be artificially diverted.
What is the rate of VAT in Malta?
The above has dealt with direct taxation in Malta. Indirect taxation such as VAT is subject to different rules. VAT in Malta on goods and services is generally subject to a rate of 18%.