Tax

Companies registered in Malta which are effectively managed and controlled therein are considered to be resident and domiciled in Malta and thus are subject to income tax in Malta on a worldwide basis at the standard corporate tax rate of 35%.

Malta operates a full imputation system of taxation where, upon a dividend distribution, the immediate shareholders receive a full credit of the tax paid on the distributable profits at the level of the distributing company.

The full imputation system mentioned above, is accompanied by the tax refund mechanism applicable to non-resident shareholders.  Following a distribution of profits in favour of the non-resident shareholders, they are entitled to claim a refund of the Malta tax which was paid at the level of the distributing company. The nature and source of the income should be taken into consideration to determine the amount of refund which the shareholder can claim. The tax refund system can reduce the effective tax rate from 35% to 5%, in some cases even lower..

The different types of refunds are highlighted hereunder:

• 100% tax refund on dividend income derived from an investment which qualifies as a participating holding provided that the anti-abuse provisions are met and/or from the disposal of such holding;
• 5/7ths tax refund if the income received is passive interest or royalties or income and/or capital gains derived from a participating holding which does not qualify for the participation exemption;
• 2/3rds tax refund if double taxation relief has been claimed;
• 6/7ths tax refund in all other cases.

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The fiscal units regime  

Further to the above relating to the tax refund mechanism applicable to non-resident shareholders, the Consolidated Group Rules were introduced in 2019 to ease the cashflow burden on taxpayers caused by the time gap between the tax payment and the subsequent refund issued by the Malta tax authorities. Under these rules, companies within a group may, subject to certain conditions, elect to be treated as a Fiscal Unit. This effectively allows the parent company and its qualifying subsidiaries to be considered as a Single Taxpayer for income tax purposes.

The main conditions for forming a Fiscal Unit are the following:

1. The parent company must have one or more 95% subsidiaries
2. All companies must have coterminous accounting year end
3. None of the members should have any outstanding Income Tax, VAT or FSS liability or returns due.

One of the main advantages of forming a Fiscal Unit is the ability to pay tax at a lower effective rate, rather than paying tax at the standard rate of 35% and having to go through the refund mechanism when dividends are distributed. Apart from offering a significant liquidity advantage, this setup, unlike the traditional tax payment and refund system in Malta, does not require companies within a Fiscal Unit to distribute dividends to benefit from the reduced effective tax rate.

Malta claims taxing rights on individuals based on their residence, domicile and source of income. Individuals who are ordinarily resident and domiciled in Malta are taxed on their worldwide income or capital gains, irrespective of whether such income or gains are remitted to Malta or not. On the other hand, individuals who are resident but not domiciled in Malta, or domiciled but not resident in Malta, are taxable on their income and capital gains arising in Malta and on any foreign income arising outside of Malta that is remitted to Malta.  Thus, any foreign capital gains derived by individuals resident but not domiciled in Malta will not be subject to income tax in Malta even if such capital gains are received in or remitted to Malta. In the case of an individual who is neither resident nor domiciled in Malta, the person will only be taxable on income arising in Malta.

In accordance with article 56 of the Income Tax Act (ITA), individuals resident but not domiciled in Malta have their income taxed in Malta on the basis of progressive rates, which rates vary from zero percent (0%) to a maximum of thirty five percent (35%), depending on their chargeable income and whether the individual is eligible to apply the single, parent or married rates (Refer to Annex 1). Moreover, since Malta has over seventy double tax treaties in force, individuals who take up residence in Malta will retain the right to request a claim for relief of double taxation in line with article 74 of the ITA.  In addition, individuals resident but not domiciled in Malta may be subject to a minimum tax of €5,000 in Malta if their income arising outside of Malta is greater than €35,000.

Read More: Personal Taxation in Malta