The principal taxes making up the Maltese tax system are the following:
1. Income tax, including tax on companies and tax on some forms of capital gains;
2. Indirect Taxes:
(i) Value Added Tax;
(ii) Customs duties and excise duties;
(iii) Duty on documents and transfers, incorporating the so-called 'stamp duty' levied on documents as well as a duty levied on transfers of certain assets, including transfers upon death;
(iv) Social security contributions - payable by self-employed and employed individuals, according to an earnings-based scale of contributions.
(v) Other taxes: mainly taxes of a licensing type, such as the registration tax imposed on vehicles, etc.
B. MAIN FEATURES OF THE INCOME TAX
1. Concepts of income taxation
The tax system is unitary in nature in that a total income figure is brought to charge. Accordingly, income from all sources less all allowable deductions and exemptions is aggregated into one figure and brought to charge at the relevant rate.
Deductions allowed in the computation of chargeable income are regulated by the general principle that the expenses in question must have been 'wholly and exclusively incurred in the production of the income' - apportionment is admitted in practice.
The tax system was substantially simplified, as a result of amendments made over the last few years, with the introduction of features such as a final withholding tax for investment income; the abolition of personal deductions and tax rebates for individuals, and so forth.
2. Taxable income
The Income tax is not a schedular tax - notwithstanding this fact, however, the law specifically lists a number of sources of income, including:
(i) Trade or business
(ii) Profession or vocation
(iii) Employment or office
(v) Interest and discounts
(vi) Pensions, charges, annuities, and other annual payments
(vii) Rents and other profits arising from immovables or real rights thereon
(ix) Other gains or profits
It is also important to note that there is no specific Capital Gains Tax. Tax is levied, through the Income Tax Act itself, on capital gains realised upon the transfer of principally two classes of property: (1) immovable property or real rights thereon; and (2) securities, business goodwill, and intellectual property. Such gains are deemed to be included within the definition of 'income' and are therefore included in the global figure for the taxable income of the person concerned and taxed accordingly.
3. Classes of taxpayer
The law recognises three principal classes of taxpayer: persons (which, besides individuals, also includes bodies of persons); companies (including partnerships en commandite with capital divided into shares); and ecclesiastical entities.
This series of articles will focus upon the Maltese Income tax system with reference to two categories of taxpayers: (1) individuals, and (2) limited liability companies.
C. CHARGE TO TAX
The extent to which income is brought to charge under the Income Tax Act depends upon 2 factors:
(i) The situs of the income, i.e. whether the income arises in or outside Malta; and
(ii) The status of the taxpayer, determined with reference to the concepts of residence and domicile.
Determining chargeability to tax necessarily involves examining the situs of the income in conjunction with the status of the taxpayer.
1. Situs of the income
The Income Tax Act does not make specific rules in this regard. Most issues are in fact determined with reference to a number of rules used in practice: e.g. income from immovable property is deemed to arise where the property is situated; interest and other debt claims, where the debtor is resident, and so forth.
2. Taxpayer status
The relationship between taxpayer status and chargeability to Income tax is illustrated in the following table:
CATEGORY OF PERSON LIABILITY 1. Domiciled and ordinarily World-wide basis. resident 2. Lacking either ordinary Income arising in Malta, plus residence or domicile remittances of foreign income. Capital gains arising outside Malta are exempt from tax, whether remitted to Malta or not. 3. Temporary resident Malta-source income (if any), plus remittances of foreign income if conditions as to intention and physical presence are satisfied. Capital gains arising outside Malta are exempt from tax, whether remitted to Malta or not. 4. Non-resident Malta-source income only (N.B. special tax regimes). Malta-source interest and royalty income are generally exempt from Malta tax. Capital gains realised on the sale of units in collective investment schemes and of securities in companies which do not have local immovables as their sole or main asset are also exempt from Malta tax. 5. Returned migrant May elect for a special tax regime. 6. Permanent residence permit Income arising in Malta, plus holder remittances of foreign income. Taxed at a reduced rate of tax.3. Domicile
Maltese domicile is established on the basis of UK principles emanating from case-law, including:
(i) Domicile is established with reference to the concept of a permanent home.
(ii) Everybody must have a domicile: no-one can have more than one domicile at any one time.
(iii) Domicile of origin is obtained at birth in the case of an individual, (being the domicile of the father at birth) and upon registration in the case of a company.
(iv) An individual of age and not incapacitated at law may acquire a domicile of his own choice by (1) physically going to live in another country, with (2) the intention to live there permanently. An individual's domicile of origin revives whenever his domicile of choice is lost pending the acquisition of a new domicile of choice.
4. Residence / ordinary residence
The issues of residence and ordinary residence are determined purely as questions of fact. It follows that there are no hard-and-fast rules to go by in this context.
An individual is considered to be resident in Malta when he is habitually physically present in Malta. The concept of ordinary residence builds on this notion to imply a situation where an individual is resident in Malta in the ordinary or regular course of his life.
A company, on the other hand, is considered to be resident in Malta if (1) it is incorporated in Malta, or (2) in the case of a company incorporated outside Malta, if the control and management of the company's business is exercised in Malta.
5. Double taxation
Double taxation is avoided principally through three forms of double taxation relief, namely, through a substantial, and ever-growing, network of double taxation treaties; as well as through the very recently introduced Unilateral Relief and Flat-Rate Foreign Tax Credit provisions (refer to our article "Malta - An International Financial Services Centre").
THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.