Corporate Tax in Malta
Malta is one of the most tax-friendly countries in Europe when it comes to taxes and social contributions paid by companies. Malta’s entrance in the European Union has made it a very interesting investment destination for foreign businessmen hence the modifications brought to the taxation system, especially when dealing with companies. Not only the corporate tax is very flexible (5% final tax), but Malta has also concluded about 70 double tax treaties with other countries in order to reduce the tax burden even more.
The scope of Malta corporate tax
According to the Income Tax Act, Maltese companies are subject to the corporate tax on their worldwide income. Foreign companies carrying business activities in Malta will be levied the corporate tax on the local income only. The taxable income of corporations in Malta comprises:
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business activities,
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professions,
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employment,
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dividends,
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interests,
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incomes made from real estate rental or selling,
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royalties,
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other sources of income.
The corporate tax rates in Malta
The tax rate on corporate income in Malta is 35% on the chargeable income. However, certain types of companies benefit from reduced tax rates up to 5% of tax and, among these, there are international trading companies and international holding companies. Branches and subsidiaries of foreign companies will be levied the same 35% corporate tax rate as domestic companies, but benefit from tax exemptions when repatriating profits to their parent companies.
The encouragement of the research and development industry has led to more corporate tax exemptions for Maltese companies, among which the copyright and the patent royalties exemptions. Also, companies distributing dividends to local and foreign shareholders are entitled to refunds on the taxes paid in Malta.
Corporate tax refunds in Malta
Maltese companies can benefit from refunds of 6/7 parts of the corporate tax. Where a company pays a 35% corporate tax, shareholders can claim 6/7 of the tax. This leads to an effective tax rate of 5%. There are also exceptions to this rule.
Maltese holding companies can receive a full refund of the corporate tax under the participation exemption if it derives profits from holdings in a company registered outside Malta. However, Maltese holding companies may also choose to pay the corporate tax on certain incomes and following the distribution of dividends, the shareholders can claim back the refund on that tax.
The calculation of the corporate tax in Malta
The tax base on which the corporate tax is levied in Malta is made of the profit and losses made by a company in a fiscal year with adjustments on the incomes and expenditures.
Expenses can depend on the type of income. Repairs and costs of equipment maintenance, interests on capital used for acquiring incomes, bad debts and capital allowance that may depend on the type of activity, expenses made with the incorporation of the company and charitable donations can be considered allowable expenses. Unrelieved losses can be carried on an indefinite amount of time if they come from foreign or local sources. The foreign source income falls under the protection of double tax agreements. Tax groups can also benefit from reliefs for income and capital expenses.
When paying the corporate tax in Malta, companies must allocate their profits to one of the following accounts:
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the foreign income account,
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the Maltese taxed account,
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the final tax account,
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the immovable property account,
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the untaxed account.
Tax planning opportunities for foreign investors in Malta
Among the tax planning solutions available for foreign businessmen who decided to relocate their companies to Malta, there are:
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the full imputation system of taxation that allows shareholder receiving dividends to apply for a credit for tax paid at source,
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the participation exemptions applied to dividends and capitals from holding companies qualifying for such exemptions,
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the tax refunds that reduce the tax applied to trading profits at 5% ,
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the extensive network of double taxation agreement Malta has with other countries.
Trusts and foundations as tax planning solutions in Malta
In 2004, Malta changed its Trusts Law in order to remove certain restrictions that forbid trusts to be used by residents. The law also introduced new fiscal provisions that would enable trusts to become an efficient estate planning solution.
Provided certain requirements are met, a Maltese trust offers transparency in terms of taxation, thus becoming an advantageous tax planning solution. Trustees can also opt for the trust to be applied the Maltese corporate tax, this way enabling it to benefit from the refund system like any other company.
Another tax planning vehicle could be provided by Maltese foundations that can be employed to hold assets such as shares and intellectual property resulted from passive income. Our lawyers in Malta will help you set up a trust or a foundation.
Investment funds as a tax planning vehicle in Malta
Malta has a very strict legislation regarding the establishment of investment funds in the country. Moreover, Maltese investment funds can take the form of various business vehicles that address both professional investors and less experienced ones.
Investment funds in Malta are divided into retail UCITS (Undertaking for Collective Investment in Transferable Securities) funds, non-UCITS funds and Professional Investor Funds (PIFs). Among the facilities hedge funds in Malta offer are tax exemptions which include the tax exemption on the net asset value of the fund. Professional Investment Funds may be self-managed or administrated by foreign managers.
Fiscal domicile for determining the payment of the Maltese corporate tax
In order to establish the amount of money a company must pay as a corporate tax in Malta, the authorities will first determine if the company has a fiscal domicile in this country. According to the law, companies which have a management seat in Malta are considered tax residents and will be applied the corporate on their worldwide income. In the case of foreign companies operating through branch offices in Malta, the branches will be taxed on the income generated in Malta.
The rate of corporate tax in Malta is 35%. However, this rate is substantially reduced after the dividends are distributed among the shareholders, and thus the imputation system is imposed. From a taxation point of view, this makes Malta quite unique in Europe.
Our Malta tax advisors can offer more information on the imputation system as part of the corporate tax system.
The Maltese corporate tax imputation system
In order to establish the exact amount of money a business needs to pay the corporate tax on, the dividends must first be distributed among the shareholders, thus giving rise to a company to be taxed on its corporate income only.
Once the Maltese corporate tax is applied, the shareholders are entitled to apply for a partial or total tax refund of the tax paid at a company level. The following conditions must be respected when claiming the corporate tax refund:
- a full corporate tax refund is possible if the income derived from the investment qualifies as a participating holding, or if the dividend income satisfies the participating holding regime;
- a 5/7 refund is given to shareholders whose income is derived from passive interest or royalties, or for income qualifying as a participating holding outside the anti-abuse regulations;
- a 2/3 refund is given to shareholders applying for double tax relief if the income was obtained outside Malta by the Maltese company;
- a 6/7 refund is given to shareholders receiving dividends which are paid from incomes which have not been mentioned.
This way, a Maltese company can become subject to a reduced corporate tax of 5%.
Our accountants in Malta can offer more information on the corporate tax and how refunds can be obtained. All our accountants are CPA-accredited in Malta and thus we offer safe and reliable services.
The relief from double taxation in Malta
Another important aspect of the corporate tax in Malta is related to the reliefs which can be obtained under certain conditions. Maltese companies can benefit from unilateral, double tax treaty or foreign tax reliefs.
The unilateral corporate tax relief mechanism is based on a tax credit received by a Maltese company paying a foreign tax under Malta’s double taxation agreements. The company will need to submit evidence on the provenience of the income and the amount of money paid in another country.
Maltese companies can obtain corporate tax reliefs under the country’s double tax treaty network. Each agreement contains specific conditions which provide for such reliefs.
Other corporate tax reliefs are granted under EU directives, such as the Parent-Subsidiary and the Interest and Royalties Directives. The Participating Exemption Scheme is another way of holding companies to recover the corporate tax. However, these must first meet some requirements imposed by the Office of the Commissioner for Revenue in Malta.
You can rely on us for various accounting services, including for audit services in Malta.
Other facts about the corporate tax in Malta
Malta is one of the most appealing jurisdictions in Europe thanks to its corporate tax system and if you decide to set up a business here, you should know that:
- Malta has a wide network of double taxation agreements which currently contains 70 countries;
- companies generating profits abroad can obtain foreign tax credits at the rate of 25%;
- in order to be deemed a holding company, a Maltese business must own at least 5% of the shares in its subsidiary;
- the participating exemption regime can also apply to companies paying a foreign tax at a minimum rate of 15% and obtaining less than 50% of the income from interests or royalties.
Our lawyers in Malta can provide you details about the taxation system and the existing double tax treaties. You can also contact us for company registration in Malta.
