Tax system

Malta’s tax system is one of the most sophisticated in Europe. It offers plenty of advantages for high net worth individuals and companies and has different tax regimes for different kinds of companies, foreigners, residents, and citizens.

Such a system is good in the sense the government uses plenty of tax incentives for certain economic activities. However, on the negative side, it means it can be an incredibly complicated and frustrating system.

Still, via deductions, you can lower your corporate tax rate to 0 % (you read that correctly) and that the residence and retirement programs offer a 15 % income tax rate. That means that even if it’s a somewhat complex system, it’s among the best of the best in Europe. Also, even as the VAT is 18 %, which is pretty average, but has compelling lowered rates of 7 % and 5 % on certain products and services (more on that ahead).

If you add to that the fact that Malta has a network of more than 70 double taxation treaties (including discrete jurisdictions such as the Cayman Islands and Macao) and that its system is in full compliance with EU directives… We have a killer combination.

What advantages may be relocating your business to Malta have?

·       Low taxation with plenty of incentives that can even exempt you for corporate tax

·       Onshore EU-status with access to EU directives

·       Tax exemptions on dividends, securities profits, withholding tax on dividends, interest and royalty’s repatriation

·       Robust double tax treaty network

It’s the perfect union between a transparent tax system with plenty of benefits and incentives for investors and full international harmonization. This balance is perfect for high net worth individuals who wish to optimize their taxes, but are not in the disposition of going for a jurisdiction that may have a shady reputation.

And you can do it with almost unmatched onshore tax optimization. You can enjoy a flat 15 % income tax rate and corporate tax refund system that can lower your tax payments to 5 % and even zero under certain conditions.

Is that enough to get your attention?

Let’s begin with the corporate tax. One of the main benefits of the Maltese law is that a company registered in Malta is automatically considered a tax resident. That means that for tax purposes, it doesn’t matter where management and control of the company is located. If it was registered in Malta, then it’s a Malta tax resident that is taxable on its worldwide income. The contrary also applies, a company formed outside of Malta but managed and controlled from Malta can also be considered a Maltese tax resident. Still, the liabilities are limited to income earned from and in Malta.

This is a beautiful tax planning opportunity for income coming from holding dividends, capital gains from participating holding, dividends from non-participating holdings, and passive revenues such as interests and royalties.

Still, you may say: what are the benefits of establishing my company in Malta if the country has a 35 % corporate tax rate? The UK has a top corporate tax rate of 20 %, and Poland, Spain, and Belgium, which are considered high-tax countries with intensely regulated economies for European standards, have a lesser rate.

Well, because shareholders can benefit from tax refunds based on an imputation system that can be claimed when the company distributes the dividends between its shareholders. There are four types of corporate tax refunds:

·       Full refund

·       6/7ths refund

·       5/7ths refund

·       2/3ds refund

That means the tax rate can be reduced to… Zero. Yes, you read that right.

However, passive royalties’ interests would still have a 10 % tax rate.

First, you should know that registered shareholders can claim a refund within the 14 days after the end of the month in which the refund is due. For example, if the refund is due in March, the claimant has until April 14^th to claim the refund. The shareholders will receive their refunds around 2 to 4 months after the company has paid the taxes.

One common strategy is that beneficiaries incorporate a two-tier structure with a holding company and a trading company: dividends and refunds from the trading company are received by the holding company, meaning that no extra taxes are applied over the income. The beneficiaries can retain the funds in the holding company, move them back to the trading company, or distribute them as dividends.

It is fair to ask why does Malta use a complex tax refund system instead of low tax rate and that’s it. First, while the tax rate is paid by the company, the refund is claimable by the shareholders. Thus, there’s a difference between the payer and the recipient. However, there’s also a historical rationale behind the system. Malta has had it for more than half a century, but tried to do away with it for a few years. Nevertheless, the plan backfired and many jurisdictions tried to renegotiate their tax treaties with Malta because provisions changed, which led Malta to go back to the refund system. The tax refund is guaranteed by law and it’s completely safe and is a non-taxable income. It has even been approved by the EU Commission.

Even better for tax purposes: trusts and foundations can hold shares in Maltese companies, which means they can benefit from such refunds. In cases of foreign trusts, a qualified person that must be approved by the Maltese authorities acts as a mediator between the trust and the authorities.

Let’s talk about the 100 % refund for holdings and participating exemptions. Maltese companies that receive income and capital gains from participating holdings qualify for a full refund when the distribution of the revenue is made to its shareholders. Furthermore, it includes participation holding in other companies, such as companies with domestic holdings of securities and capital gains that come from the transfer of a participation holding in a Maltese enterprise, collective investment schemes, EEIG, and both types of partnerships (general and limited).

Which are the conditions to qualify as having a “participation holding”?

·        First, the Maltese company must have 5 % or more of the shares of the subsidiary, which gives it a 5 % entitlement of at least two of the following rights:

o   To vote

o   To profits

o   To available assets for distribution

·       The subsidiary cannot own or have rights an obligation over immovable property in Malta or interests and shares in an organization that owns immovable property in Malta

·       Also, at least one of these conditions is met:

o   The Maltese company that possess the equity holding is also entitled to acquire the rest of the capital of the subsidiary

o   The Maltese company that possess the equity in the subsidiary has pre-exemption rights in the case of disposal, cancelation, or redemption of the rest of the shares

o   The Maltese company that holds the equity has the right to sit on the board of directors of the subsidiary or appoint a member of the board

o   The equity holding is at least €1,164,000 and of an uninterrupted period of at least 183 days

o   The holding is an equity holding, meaning its goal is to preserve its business and not for trading purpose

How can a Malta holding company claim the exemption from income tax from dividends in Malta? If it complies with the above-mentioned conditions, it must also qualify under one of the following:

·        It is an entity, individual, or is incorporated in an EU country.

·        The company has paid at least 15 % of the dividends in foreign taxes.

·        The holding doesn’t derive more than half of its income from passive interest and/or royalties.

If these conditions aren’t met, then both of the following two must be satisfied:

·        The holding isn’t a portfolio investment (holding of shares by a Maltese company in a non-Maltese company that derives more than half from its revenue from portfolio investments means the holding is considered a portfolio investment).

·        The non-Malta resident has been subject to at least 5 % tax.

These conditions are harsh, but are entirely worth it, as they lead to a total refund on Maltese corporate tax.

What happens if your company doesn’t qualify for such a refund? Does that mean the company must pay the hefty 35 % corporate tax? Not entirely, you can also review if you are eligible for the 6/7ths refund for active income.

This refund applies when dividends are paid to the shareholders of a trading company, resulting in an effective 5 %. In the last few years, the scope of this system was widened to include the branches of foreign companies in Malta and non-Maltese companies carrying out businesses in Malta.

If that’s not even the case, but dividends come from passive interest or royalties, the shareholders can apply for the 5/7ths refund.

In both the 6/7ths and 5/7ths refunds, companies cannot claim a double taxation relief in any form. If they do so, they can still request a 2/3rds refund of the tax paid on dividends made out by a foreign income account that consists mainly of income from foreign sources, and the revenue is subject to a double taxation relief claim. Such a refund usually applies when the Malta company that distributes the earnings uses treaty relief, unilateral relief, credits for underlying tax, or FRFTC.

Let’s explain those lastly mentioned reliefs. Treaty reliefs vary, as they depend on the double taxation treaty Malta may have in force with a particular country.

Unilateral relief is a type of relief that can be claimed by a person who obtains foreign-sourced income. It can be requested when a tax treaty between Malta and the other state doesn´t exist. It can be claimed by resident companies and individuals and Maltese branches of foreign companies. The amount cannot exceed the total tax liability in Malta on the income, and it can be used as a credit against the tax in Malta levied on the full amount. To claim the relief, the claimant must prove that:

·        The income has been derived from foreign sources;

·        It has been subject to income tax or a similar tax in the other country;

·        The income tax was paid outside of Malta;

Under unilateral relief provision, a person may claim a credit on the underlying tax paid on profits distributed as debts. It can be claimed on multi-tier corporate structures as long as the Maltese company is related to the foreign company.

A Maltese company can claim the Flat Rate Foreign Tax Credit from its foreign-sourced income. It is a 25 % tax credit over the net overseas income. It can be claimed by companies 1) Resident and domiciled in Malta, 2) Companies resident in Malta, 3) Branches of foreign companies. To obtain it, the claimant must prove that:

·        The company can receive and allocate revenues to its foreign income tax account;

·        Such income is effectively allocated in the foreign account;

How can companies benefit from the Maltese tax system aside from the tax refund incentives?

There are many ways:

·        There are no withholding taxes for non-residents on passive interests and royalties;

·        There are no withholding taxes on dividends;

·        No capital duties or wealth taxes;

·        Malta doesn’t apply withholding tax on dividends, interest, or royalties send abroad, nor they tax capital gains from selling shares in Malta companies;

Likewise, seeing the above-mentioned, it means holding companies also have a series of particular advantages. They can help reduce tax liabilities exponentially, especially on European-sourced income.

We’ve explained it in detail above, but now let’s keep it simpler:

·        EU rules establish that EU trading companies can send dividends to a Maltese parent company without withholding taxes;

·        If the Maltese holding company has a participating interest in the child company, shareholders can pay 5 % tax on the dividends or be tax exempt (depending on the conditions mentioned above);

What about partnerships?

They are considered tax transparent. Nevertheless, the limited partnership will be treated as companies for tax purposes as its capital is divided into shares. A general partnership is always considered a transparent entity, which means that partners should declare their profit in their personal income tax return. That’s also the case with EEIGs.

One of the main advantages of the Maltese system is that you can use holding companies for tax planning, which is a significant tool to reduce leaks on income and gains for your company.

Holding companies can perform these functions in a larger group:

·        Asset ownership and protection

·        Accumulation of capital

·        Consolidation of business segments

·        Receiving dividends from companies

·        Allocating profits to shareholders

·        Reinvesting capital

So, for tax planning purposes, a holding company should:

·       Be a resident in a jurisdiction that allows the extraction of foreign-sourced dividends and incomes at reduced rates of income tax, preferably with double tax treaties.

·        Allows distributing the profit to non-resident shareholders at close-to-zero withholding tax rates.

·       Permits obtaining capital gains from share disposals in foreign companies at close-to-zero tax rates at both foreign and domestic levels.

·        Allows tax-free liquidation of the company.

And guess what? Malta checks all the boxes. Your Maltese holding company may be fully tax-transparent in Malta or at least pay a reduced 5 % tax rate or a bit more.

Now, regarding personal income tax, Malta taxes the following income for residents:

·        Trading income

·        Employment income

·        Dividends, interests, premiums, or discounts

·        Pensions (with exceptions)

·        Income derived from immovable property

And for non-residents:

·        Profits from permanent establishments in Malta

·        Profits from office or employment exercised in Malta

·        Income derived from immovable property in Malta

It applies a bracketed, progressive system:

For singles:

For Married:

For parents:

Now, what do you need to know if you’re an expat in Malta? Do these brackets apply to you? Do you need to pay taxes on your foreign income or only on your Maltese income?

First of all, there are differences between tax residence and tax domicile in Malta. You can be a tax resident in Malta by just applying and being accepted into one of the residence/citizenship schemes in Malta. They must pay taxes on their Maltese income and any income they receive that is remitted to Malta.

On the other hand, domicile is where you’re permanently settled. That’s important to determine which jurisdiction you’ll declare your worldwide income.

Thus, if you’re a resident foreigner, Malta applies a remittance-based system. Thus, you’ll only pay taxes on:

·        Income generated in Malta

·        Capital gains derived from Malta

·        Foreign-sourced income remitted to Malta

As you saw, the top income tax rate in Malta is 35 %. However, certain foreigners pay a flat 15 % income tax rate on their Malta-sourced revenues. It applies to those participating in one of the following programs:

·        Global Residence Programme (RBI)

·        Individual Investor Programme (CBI)

·        Highly Qualified Persons Rules

·        Permanent Residence Programme

That means that all expats that permanently reside in Malta or apply for one of their investment programs may receive this fiscal benefit.

Regarding other taxes, Malta doesn’t have inheritance, wealth, or gift taxes. However, there’s a 5 % stamp duty that applies when immovable property is transferred. Property taxes are adjusted when you sell an inherited property. In that case, you pay 12 % on gains obtained since the property was inherited, instead of paying the 8 % of the property’s value.

Malta applies an 18 % VAT in almost all products and services. However, there are a few exceptions:

Some of the activities that are fully exempt from VAT are:

Ø  Brokerage

Ø  Supply of gold

Ø  Food for human consumption

Ø  Medicines

Ø  Bus and inter-island sea transport

Ø  Insurances

Ø  Transfer of immovable property

Ø  Cultural and religious services

Ø  Credit and banking services

Ø  Education

Ø  Health and welfare

Ø  Water services by public authorities

Ø  Postal services

Ø  Lotteries and gambling

Do you want to know more about tax residency and optimizing your taxes in Malta? Get in touch with some of the best experts in Malta right here. Contact us now!