Malta’s Corporate Tax Refund System Made Simple

Malta’s Corporate Tax Refund System Made Simple

Malta’s Taxable Base

A company incorporated in Malta is considered to be ordinarily resident and domiciled in Malta and is therefore subject to Malta tax on its world-wide income at the standard rate of 35%.

A company incorporated outside Malta but which is controlled and managed in or from Malta would be treated as resident in Malta for tax purposes and would, as a result, be subject to tax in Malta on:

  • chargeable income arising in Malta;
  • chargeable income arising outside Malta to the extent that such income is remitted to Malta;
  • chargeable gains realised in Malta. Chargeable gains realised outside Malta would not be taxable in Malta even if remitted to Malta.

Since the 35% tax rate to which a Maltese company is subject is equivalent to the maximum progressive rate of tax applicable to its shareholders, a dividend distribution would typically result in no further tax payable at shareholder level.

the 35% tax rate is heavily reduced by application of Malta’s refundable tax credit system

Moreover, the 35% tax rate is heavily reduced by application of Malta’s refundable tax credit system explained further below.

Tax Accounts

A Maltese company is required to allocate its distributable profits to the following tax accounts in accordance with the nature and source of the said profits:

  • Foreign Income Account – allocation of income derived principally from activities carried out outside Malta;
  • Immovable Property Account – allocation of income derived from immovable property situated outside Malta;
  • Final Tax Account – allocation of tax exempt profits (where the exemption is retained at shareholder level upon distribution) and profits subject to a final tax;
  • Maltese Tax Account – allocation of income which is not allocated to the Foreign Income Account, Final Tax Account, or the Immovable Property Account;
  • Untaxed Account – allocation of the difference between total distributable profits/accumulated losses and those amounts allocated to any of the other taxed accounts.

The 5% Effective Tax Rate

Upon a distribution of dividends … the recipient shareholder/s would be entitled to claim a refund … resulting in a Malta effective rate of tax of 5%

Upon a distribution of dividends by a Malta company in favour of its shareholder/s and out of profits allocated to its Foreign Income Account and/or its Maltese Taxed Account, the recipient shareholder/s would be entitled to claim a refund of 6/7ths of the Malta tax suffered at the level of the Malta company on its said profits, resulting in a Malta effective rate of tax of 5%.

However, should the Malta company have claimed relief for double taxation in respect of profits allocated to its Foreign Income Account and out of which dividends were distributed, its shareholder/s would only be entitled to a refund of 2/3rds of the Malta tax paid by the Malta company on the said profits.

A shareholder can expect that the claim for a refund of tax be paid by the relevant authority in Malta within 14 days of a valid application being submitted.

The 100% Refund – Participation Exemption

Dividends and capital gains derived by a Maltese company from a qualifying ‘participating holding’ in a subsidiary would be exempt from tax in Malta. A Maltese company would have a ‘participating holding’ in a subsidiary where the following conditions are satisfied:

  1. The shares held by the Maltese company in the subsidiary carry at least two of the following rights: (i) a right to votes; and/or (ii) a right to profits available for distribution; and/or (iii) a right to assets available for distribution in the event of a winding up; and
  2. The subsidiary does not own immovable property situated in Malta (or rights over such property) and does not hold, directly or indirectly, shares or interests in a body of persons which owns immovable property situated in Malta (or rights over such property); and
  3. At least one of the following 6 additional qualifying criteria is satisfied:
  • the Maltese company holds more than 10% of the shares in the subsidiary; or
  • the Maltese company holds shares in the subsidiary having an acquisition value of at least €1,164,000 and it retains the shares for an uninterrupted period of at least 183 days; or
  • the Maltese company holds shares in the subsidiary and is entitled, at its option, call for and acquire the balance of shares in the subsidiary; or
  • the Maltese company holds shares in the subsidiary and is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of the shares in the subsidiary; or
  • the Maltese company holds shares in the subsidiary and is entitled to sit on the board or to appoint a person to sit on the board of the subsidiary as a director; or
  • the Maltese company holds shares in the subsidiary for the furtherance of its own business and not as trading stock.

Dividends and capital gains derived by a Maltese company from a qualifying ‘participating holding’ in a subsidiary would be exempt from tax in Malta

The participation exemption would always be available in respect of capital gains derived from a participating holding (even upon a disposal of a participating holding, in whole or in part, in a Malta resident company).

On the other hand, the participation exemption would only be available in respect of dividends derived from a participating holding in a non-resident subsidiary and only if any one of the following additional conditions is satisfied:

  • the subsidiary is resident or incorporated in a country or territory which forms part of the European Union; or
  • the subsidiary is subject to foreign tax at a rate of at least 15%; or
  • no more than 50% of the subsidiary’s income is derived from passive interest or royalties; or
  • the Maltese company’s holding in the subsidiary is not a portfolio investment and the said subsidiary is subject to any foreign tax at a rate which is not less than 5%.

Malta’s Double Tax Treaty Network

A B C D
 AlbaniaAustraliaAustria

 

BahrainBarbadosBelgium

Bulgaria

 

 CanadaChinaCroatia

Cyprus

Czech Republic

 

Denmark 
E F G H
EgyptEstonia 

 

FinlandFrance  GeorgiaGermanyGreece

Guernsey

 

Hong KongHungary 
I J K L
 IcelandIndiaIreland

Isle of Man

Israel

Italy

 

 JerseyJordan   KoreaKuwait   LatviaLebanonLibya

Liechtenstein

Lithuania

Luxembourg

 

M N P Q
MalaysiaMexicoMontenegro

Morocco

NetherlandsNorway PakistanPolandPortugal

 

 

 Qatar 
R S T U
 RomaniaRussia 

 

San MarinoSaudi ArabiaSerbia

Singapore

Slovakia

Slovenia

South Africa

Spain

Sweden

Switzerland

Syria

 TunisiaTurkey   United Arab EmiratesUnited KingdomUnited States of America

Uruguay

 

Treaties signed but not in force

Belgium, Mauritius, Moldova, Ukraine

Tax Information Agreements in force

Bahamas, Bermuda, Cayman Islands, Gibraltar, United States of America

Tax Information Agreements signed but not in force

Macao

Contact Be. Legal Advocates to find out more about Malta’s attractive tax system

About Dr Doran Magri Demajo

Dr Doran Magri Demajo is a Partner at Be Legal and is primarily responsible for corporate law, employment law, financial services and Maritime law.
View all posts by Dr Doran Magri Demajo

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