The Tax Treatment and Practical Considerations of Directors' fees in Malta

The taxation of directors’ fees in Malta is primarily regulated by the provisions of the Income Tax Act (ITA), supported by guidance issued by the Malta Tax and Customs Administration (MTCA). These rules set out the framework for determining when and how such payments are subject to tax.

While the core principle appears straightforward, practical complexities frequently emerge, particularly regarding jurisdictional tax rights, treatment of cross-border payments, and reporting obligations. This article focuses on the Maltese tax framework, with reference to the OECD Model Tax Convention, and outlines the key practical compliance requirements for both the companies and directors alike.

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What are Director’s Fees?

Director’s fees typically refer to fees or similar payments received for acting as a member of a board of directors. These are governed by Article 4(1)(a) of the ITA and are distinct from remuneration for other services such as employment, advisory, or consultancy work, which fall under Article 4(1)(b) of the ITA.

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Tax Treatment of Directors’ Fees

The MTCA follows the OECD Model Tax Convention, which considers directors’ fees as income arising in the jurisdiction where the company is resident. A company is deemed a resident of Malta if it is either a company incorporated in Malta, or, if incorporated abroad, its effective management and control are exercised in Malta.

Malta’s tax jurisdiction is determined by an individual’s residence and domicile status. The applicable tax treatment is as follows:

• Both resident and domiciled in Malta – Taxable on a worldwide basis, using the resident progressive tax rates (ranging from 0% to 35%)
• Resident or domiciled in Malta – Taxable on a source and remittance basis, using the non-resident progressive tax rates (ranging from 0% to 35%)
• Non-resident and non-domiciled in Malta – Taxable on a source basis, using the non-resident progressive tax rates (ranging from 0% to 35%)

With respect to directors’ fees derived from appointments on Maltese entities, in line with the MTCA guidelines and the OECD Model Tax Convention, given that such fees are deemed as sourced in Malta, they should be taxed herein, irrespective of the residence and domiciled of the individual director.

With particular reference to foreign directors, Article 16 of the OECD Model Tax Convention provides that “Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State”. This means that whilst Malta has the right to tax the Malta sourced directors’ fees, the country of residence of the individual director may also claim the right to tax such income. The residence state of the director may be obliged to grant double taxation relief on the tax paid in Malta.

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Compliance and Reporting Obligations

All directors’ fees, together with the corresponding tax, must be paid through the Final Settlement System (FSS), regardless of whether the payments are made to resident or non-resident directors. Additionally, the submission of an annual tax return may also be required.

For non-resident directors, the submission of an annual tax return is mandatory. Any additional income that the individual is required to declare should be included in the same tax return. The automatic issuance of the tax return can help streamline the process of declaring additional income in Malta.

For Maltese resident directors, the requirement to submit a tax return depends on whether the individual is classified as a filer or non-filer by the MTCA. If the individual earns only income that has been taxed through the FSS, they are considered a non-filer and are not required to submit a tax return. However, if the individual has declared other sources of income in previous years, a tax return will be issued. In such cases, all income received via FSS, including directors’ fees, must be reported in the return, with the corresponding tax already withheld at source.

A company paying directors’ fees which are not paid through the FSS, should disclose the details of the directors in a specific tax return attachment.

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Corporate directors

Where directorship services are provided by a Corporate Service Provider (CSP), fees may be invoiced by the CSP, provided the services are rendered in its corporate capacity and not personally by an individua affiliated to the CSP.

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Conclusion

In Malta, directors’ fees paid to individuals are always subject to tax at source through the FSS, regardless of the director’s residency status. It is the responsibility of both the Maltese companies paying the directors’ fees and the directors receiving them to ensure payments are correctly processed through the FSS. Where applicable, directors must also submit a tax return to declare such directors’ fees along with any additional income which should be subject to tax in Malta. This dual obligation reinforces transparency and compliance with Maltese tax regulations.

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