Overview of the Corporate Tax System in Malta

Corporate tax in Malta is governed by the Income Tax Act, the Income Tax Management Act, subsidiary legislation in the form of Legal Notices and case law delivered by the Board of Special Commissioners and the Court of Appeal. Whereas The Income Tax Act contains general computational rules, the Income Tax Management Act contains rules on the administration of tax. Detailed computational rules on various aspects of income tax are laid down in subsidiary legislation.

There are no separate Acts for regulating the taxation of companies and individuals in Malta. All the provisions of the Income Tax Act, unless specifically mentioned apply both for companies and individuals.

Given that Malta became a member of the European Union as from 1st May 2004, the provisions of Income Tax Act, Income Tax Management Act and the Legal Notices have been aligned to comply with:

• Fundamental Freedoms of the EC Treaty
• EC Treaty Rules on State Aid
• Council Directive (90/435/EEC) of 23 June 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States
• Council Directive (90/434/EEC) of 23 June 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchange of shares concerning companies of Different Member States
• Council Directive (2003/49/EC) of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States
• Council Directive (2003/48/EC) of 3 June 2003 on the taxation of savings income in the form of interest payments

Malta has recently transposed into its domestic law the Arbitration Convention (90/436/EEC of 23 July 1990) on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.

Basis of Taxation

World-Wide Basis of Taxation

A limited liability company incorporated under the Laws of Malta is deemed to be resident and domiciled in Malta. Companies which are resident and domiciled in Malta are subject to tax in Malta on their world-wide income.

Remittance Basis of Taxation

A limited liability company which is not incorporated in Malta is not considered to be domiciled in Malta. Limited liability companies which are not incorporated in Malta are considered to become resident in Malta when their management and control is shifted to Malta. Companies subject to the remittance basis are taxed on:

• Income and capital gains deemed to arise in Malta
• Income deemed arise outside Malta and remitted to Malta

Companies subject to the remittance basis are not taxed on:

• Income deemed to arise outside Malta which is not remitted to Malta
• Capital gains arising outside Malta

Source Basis of Taxation

A limited liability company which is not incorporated under the laws of Malta and which is not managed and controlled in Malta is subject to tax on a source basis i.e. on income and gains arising in Malta.

Management and Control

The Income Tax Act does not define the concept of management and control within context Maltese tax system. The notion of management and control is a factual notion and all facts and circumstances have to be reviewed to establish whether a company or a body of persons were managed and controlled in Malta. There are various factors which may be used strengthen the argument that a company’s management and control was exercised in Malta. These include the following:

• Directors are resident in Malta
• Head office of the company is located in Malta
• Minutes of the board meeting show that most important decisions were taken in Malta
• Management decisions were taken in Malta
• Company operates a Maltese bank account
• Financial statements are audited by a Maltese auditor

Entity Classification

The following entities are treated as a separate legal entity (non-transparent) for tax purposes:

• Partnership en commandit, constituted under the Laws of Malta and whose capital is divided into shares
• Limited liability company incorporated under the Laws of Malta
• Any body of persons constituted, incorporated or registered outside Malta, which are similar to a partnership en commandit or a limited liability company incorporated under the Laws of Malta
• Co-operative Societies

All other entities are treated as transparent tax purposes and tax is directly attributed to the owners of the entity.

Chargeable Income and Capital Gains

Income

All active and passive flows of income derived by a Maltese company are subject to tax unless specifically excluded by the Income Tax Act. These include:

• Any income from trade or business
• Rental income
• Dividends
• Interest
• Annuities and annual payments
• Royalties
• Premiums

Capital Gains

Capital Gains are not taxed separately in Malta. Chargeable gains are added to the other income of the company and charged to tax at the normal corporate rate of tax.

Not all capital gains derived by a Maltese company are chargeable to tax in Malta. Chargeable gains are to the gains on capital assets specifically listed under Article 5 of the Income Tax Act:

• Immovable property situated in Malta
• Rights over securities
• Business
• Goodwill
• Patents
• Trade-marks
• Trade names
• Beneficial interest in a trust

Subsidiary legislation to the Income Tax Act contains special computational rules on the calculation of gains on the transfer of immovable property and shares or securities in company.

Exemptions

Certain items of income are exempted from income tax in Malta:

• Dividends and capital gains from a ‘participating holding’
• The transfer of Malta Government bonds and stocks
• Transfer of securities listed on the Malta Stock exchange
• Interest, discount, premium and royalties derived by a non-resident, provided that the non-resident person is not engaged in a trade or business in Malta through a permanent establishment situated in Malta and the interest, discount, premium or royalties are not effectively connected with such permanent establishment
• Capital gains derived by a non-resident on the transfer of shares in a Maltese company

Deductions

The general rules of the deductibility of expenses prescribe that expenses are deductible to the extent that these are wholly and exclusively incurred in the production of income.

Article 14 (1) of the Income Tax Act lays down specific types of expenses which may be deducted from the taxable income:

• Interest
• Rent
• Bad debts
• Contributions to a pension fund
• Wear and tear allowances
• Expenditure on scientific research
• Expenditure on patents and patent rights
• Capital Expenditure on intellectual property rights
• Trade losses

Wear and Tear Allowances

Companies may deduct from their taxable income wear and tear allowances with respect to assets used in the production of income. Wear and tear allowances are spread evenly over the life of assets and are calculated using the straight line method. Subsidiary legislation lays down the minimum period over which assets may be depreciated for tax purposes.

Any wear and tear allowances which are not absorbed in the year during which they arise may be carried forward indefinitely and deducted from the chargeable income of the company.

Carry-Over of Losses

Losses incurred in a trade or business may be carried forward indefinitely.

Carry-Backwards of Losses

The Income Tax Act does not allow any carry-backwards of losses.

Group Relief

The Income Tax Act contains provisions which enable Maltese resident companies to form part of a group for tax purposes. A group may be formed when:

• One company is the 50% subsidiary of another company
• Two companies are 50% subsidiary of another company

A tax group enables Maltese resident companies to transfer losses between members forming part of the group.

Tax Rate

The corporate tax rate in Malta is 35%.

Relief from double taxation

Relief from double taxation is granted by way of credit. Companies resident in Malta may claim one of the following types of relief from double taxation on their foreign sourced income:

• Double Tax Relief – Relief granted by virtue of Malta’s double tax agreements. Currently Malta has 45 double tax treaties in force based on the OECD MC with both EU and Non-EU countries.
• Unilateral Relief – A domestic type of relief which may be claimed when a double tax agreement is not in force. Certain conditions should be fulfilled.
• Flat-Rate Foreign Tax Credit – This type of relief may be claimed when the taxpayer may not claim any of the two types of relief listed above. The Flat Rate Foreign Tax Credit assumes that tax at the rate of 25% was levied on the foreign sourced income.

For a more detailed description on these types of relief from double taxation please view our section on ‘Relief from double taxation in Malta’

Tax Accounting

Malta operates a system of tax accounting whereby profits are allocated to one of the following tax accounts:

• Final Taxed Account (FTA)
• Immovable Property Account (IPA)
• Maltese Taxed Account (MTA)
• Foreign Income Account (FIA)
• Untaxed Account (UA)

Profits from the FTA and IPA should be distributed first before any distribution made from the MTA and FTA.

Dividend Taxation

The taxation of dividends received follows closely the tax accounting system and depends on the tax account from which the distribution is made.

Dividends from FTA and IPA

Dividends distributed out of the FTA and IPA of a Maltese company are exempt in hands of the shareholder.

Dividends from MTA and FIA

Malta operates a full imputation system with respect to the taxation of dividends. Dividends paid out of the MTA or FTA are subject to tax in Malta however, the shareholder/s is entitled to a full credit of the tax paid by the company on the distributed profits. Since the highest progressive tax rate for individuals is equal to the corporate rate of tax, the full imputation system ensures that dividends from the MTA and FIA not subject to tax. The full imputation eliminates completely the occurrence of economic double taxation at the level of the shareholder.

Dividends from the Untaxed account

Dividends paid out of the UA to resident shareholders are subject to a withholding tax of 15%. Dividends paid out of the UA to a non-resident shareholder are not subject to withholding tax.

Tax Refunds

Resident and non-resident shareholders of a Maltese company may claim certain types of tax refunds upon the distribution of dividends. The tax refund system significantly lowers the effective tax suffered in Malta. For more information on the refund system see our section on ‘The Maltese Tax Refund System’.

Withholding Tax on outbound dividends, interest and royalties

Malta does not levy any withholding tax on payments of dividends, interest and royalties.

Liquidation of a Maltese Company

Distributions to shareholders of a Maltese company by a liquidator in the course of winding up the to the extent to which they represent income derived by the company are deemed to be dividends paid to the shareholders out of the profits derived by the Maltese company.

Controlled Foreign Company Legislation

Malta does not have any controlled foreign company legislation.

Thin Capitalisation Rules

The Income Tax Act does not contain any thin capitalisation rules.

Exit Tax

Malta does not levy any exit taxes.

Wealth Tax

No wealth tax is levied in Malta.

Trade Tax

Malta does not levy any payroll-based tax or trade tax.

For more information contact Franco Falzon