Business entities established in Malta are subject to tax at the standard rate of 35%. However, the following incentives may potentially reduce the tax payable in Malta to zero:
A. Full imputation system – all income tax paid by the company is credited in full to the shareholder upon a distribution of profits, thus avoiding double taxation of corporate profits.
B. Refundable tax credit system – shareholders receiving dividends from a Maltese company can claim tax refunds in respect of the Maltese tax paid as follows:
- 6/7th tax refund – claimed in respect of taxed business profits or foreign passive income; and
- 5/7th tax refund – claimed in respect of taxed passive interest and royalties; and
- 2/3rd tax refund – claimed in respect of foreign passive income on which double taxation relief has been claimed.
The word “refund” implies the needs for each taxpayer to pay the corporation tax due. Yet, tax refunds are remitted to the shareholder within 14 days of tax payment provided that:
- A valid tax refund claim has been submitted to the Commissioner of Inland Revenue; and
- Tax due by the distributing company has been settled; and
- The Maltese company has filed all its tax and VAT returns.
An illustration on the manner of how the tax refundable credit system works in practice is included below:
C. Participation Exemption – dividends received from an overseas investment may be exempt from Maltese tax provided that:
- There is a holding of at least 10%; and
- The investment is made in an EU subsidiary; or
- The profits which are being distributed to Malta have been subject to tax of at least 15%; or
- The profits being distributed are not made up of passive interests or royalties which were subject to an overseas tax rate of less than 5%.
A Maltese company may alternatively charge these dividends to tax at the standard tax rate of 35%, and on a distribution of profits, the shareholder can claim a 100% tax refund of the Maltese tax paid.
D. Double Taxation Relief – Malta has an extensive tax treaty network with more than sixty treaties in force. Malta will grant relief from double taxation suffered, provided proof of tax paid is made available. An updated list of Tax treaties ratified by Malta is available on www.mfsa.com.mt
E. Flat Rate Foreign Tax Credit (FRFTC) – this is a method of eliminating juridical double taxation which can reduce tax leakage in Malta to 6.25%. It is generally applied to foreign passive income, such as interests and royalties. No proof of foreign tax paid is required.
Below is an example on how FRFTC can be utilised in order to minimise the tax leakage on foreign passive income:
F. Advance Revenue Rulings – certainty of the Malta Inland Revenue’s interpretation on the taxability of a company or of its profits can be obtained by requesting an Advanced Revenue Ruling from the Inland Revenue Department. This ruling is usually valid for five years and can be renewed for a further period of five years.
- No withholding taxes;
- Strong reputation for the Jurisdiction
- No thin capitalisation rules;
- No CFC legislation;
- No specific transfer pricing rules (albeit certain anti-abuse provisions are found in the law);