1.1 Imputation System
Malta has always had a full imputation system of taxation, and therefore tax paid by a company is credited in full to the shareholder upon the payment of a dividend. The company tax rate is of 35% and is equal to the maximum rate of personal tax in Malta.
1.2 Different Categories of Company Income
Maltese companies are obliged, for tax purposes, to keep separate and distinct three categories of distributable reserves as follows:
- Maltese Taxed Account
- Maltese Untaxed Account
- Foreign Income Account
1.3 The Maltese Taxed Account and the Maltese Untaxed Account relate exclusively to income derived from local sources - and as such do not fall within the scope of this Memorandum.
The Foreign Income Account is the vehicle through which the foreign investor, as shareholder of a Maltese company, acquires the fiscal advantages from investing in Malta - vide below.
2. THE FOREIGN INCOME ACCOUNT
The foreign income account is the income account into which must be recorded the net income (i.e., income less attributable expenses) receivable by a Maltese company from overseas in connection with the following sources of income:
Royalties and other similar income
Other similar income emanating from assets situated outside Malta and which is liable to tax in Malta.
Profits resulting to a company licensed as a bank in Malta from investments, assets or liabilities situated outside Malta.
All profits or gains which are liable to tax in Malta and are attributable to a branch or permanent establishment situated outside Malta.
Dividends paid out of the Foreign Income Account of another company resident in Malta.
Nevertheless, the following categories of companies are not entitled to channel their foreign income into a Foreign Income Account:
- Insurance companies and companies controlled by insurance companies,
- Banks having over 5% of their daily deposits made by persons resident in Malta,
- International Trading Companies.
2.2 Tax Implications of the Foreign Income Account
The tax consequence of a Foreign Income Account is that dividends distributed from the foreign income account of a Maltese company will attract a refund to the shareholder of part or all of the tax paid by the company when:
either (a) the shareholder is not resident in Malta;
or (b) the shareholder is a Maltese company which is fully owned by persons not resident in Malta.
The amount of Malta tax which is refunded will be as follows:
Source of income being distributed Tax refunded From "Participating holding Company" Full refund - 100% From any other source Two thirds - 66.67%
2.3 Qualifying Participation's / Participating Holding
In order to obtain a full tax refund, the income being distributed as a dividend must have been derived from an overseas company in which the Maltese company holds a "qualifying participation" (or has "participating holding").
"Qualifying participation" (or participating holding) exists where the Maltese corporate shareholder (the receiving company) holds equity shares in a non-resident company, and satisfies any ONE of the following conditions:
a) its holding amounts to 10% or more of the equity shares in the overseas company; or
b) it is entitled to call for and acquire all other equity shares of that company; or
c) it is entitled to the first refusal of all other equity shares in the event of disposal; or
d) it is entitled to be represented on the Board or to appoint a director of that company ; or
e) the value of its shareholding exceeds Lm 500,000 (approx. US$1.5 million); or
f) the shares are held in the overseas company for the furtherance of the business of the Maltese company but excluding shares held as trading stock.
An advance ruling can be obtained from the Inland Revenue to determine whether this condition has been satisfied.
Note: Income received by a Maltese company from its qualifying participation will be allocated to its Foreign Income Account and will be taxed. Subsequently, the tax paid will be refunded to the shareholder.
2.4 Effective Refund
All Maltese companies holding a Foreign Income Account will be taxed in the normal way, that is tax at 35% must be paid to the Inland Revenue, but, any refund due to the shareholders shall be effected within 14 days of such payment. This means that the maximum time lapse between the payment of tax by the company and the refund to the shareholder is 14 days. In order to avoid cash flow problems, such tax will only be due when the dividends are effectively distributed or 18 months after the end of the accounting period, whatever is the earlier.
3 DOUBLE TAX RELIEF
3.1 Different Double Tax Relief Systems
Relief from double taxation has been extended to ensure that no Maltese company will suffer double taxation on the same income. Furthermore, provisions have been included to ensure that, where no proof of the foreign tax suffered is available, a company may claim a flat rate foreign tax credit of 25% of the net income provided a certificate from the auditor is obtained stating that the income in question arose from overseas.
The four different regimes for the relief of double taxation, are:
(i) Double Tax Treaty Relief
When tax has been suffered in a country with which Malta has a double tax treaty, then the terms of the treaty will apply;
(ii) Relief from Commonwealth Income Tax
When tax has been suffered in a Commonwealth country, then relief will be established in line with Commonwealth treaty terms.
(iii) Unilateral Relief
When tax has been suffered in a non-Commonwealth country with which Malta does not have a double tax treaty, then Unilateral Relief will apply (vide 4 below).
(iv) A Flat Rate Foreign Tax Credit of 25%
When none of the above relief's can be, or is, applied, the Flat Rate Relief can be invoked (vide 5 below).
3.2 Interaction of the four relief's from Double Taxation
The tax payer may not choose which system of relief from double taxation to apply. The four regimes interact according to the provisions of the Income Tax Act, which outlines the priority in the order listed above so that eligibility to one relief in the above priority automatically excludes application of any other relief in respect of the same source of income.
In any case the Maltese Inland Revenue is finally responsible for determining which system of relief is available and the eligibility to any one regime and this will depend on the documentation presented.
The Company, however, is not compelled to claim double tax relief on all sources of income, but may choose not to claim any relief at all on any particular source/s of income, if this is beneficial to it. (vide example III below).
4. Unilateral Relief
4.1 Where income allocated to the Maltese company's Foreign Income Account has been taxed abroad BUT the company cannot benefit from the Double Taxation Treaty Relief or from the Relief for commonwealth Income Tax the company may claim Unilateral Relief.
4.2 In order to claim unilateral relief, the recipient must show that:
(a) the income was derived from abroad;
(b) that it suffered tax abroad;
(c) must possess proof of the amount of foreign tax suffered;
(d) the foreign tax suffered must be of a similar character to that imposed under the Maltese Income Tax Act (but includes province, state or municipality taxes).
4.3 When calculating the unilateral relief, the foreign tax shall be allowed as a credit against the Maltese tax arising on the gross amount received, i.e., in calculating the income received no deduction must be made of the foreign tax suffered). However, this credit cannot exceed the total Maltese liability.
4.4 Unilateral Relief is also available for tax suffered on dividends ("underlying tax") received by a Maltese company that holds over 10% of the voting power of the foreign company paying the dividend. This relief is available also in case of countries with which Malta enjoys a Tax Treaty, provided that, the treaty does not state otherwise.
The extent of underlying relief granted on dividends received (provided these are made out of taxed income of the subsidiary) is equivalent to the tax suffered by the subsidiary foreign company before the dividend was paid.
4.5 The mechanics of the unilateral relief can be demonstrated in the following examples:
Example A Example B USD USD Net foreign income received in Malta 1,000 1,000 Add: Foreign tax suffered 400 600 Chargeable income 1,400 1,600 Maltese tax @ 35% 490 560 Less: Unilateral relief 400 560* (i.e. foreign tax suffered) Tax payable 90 --
* Limited to total tax arising in Malta
5. FLAT RATE FOREIGN TAX CREDIT
5.1 Where foreign income allocated to the Maltese company's Foreign Income Account cannot obtain relief under any of the above relief's, (or chooses not to comply with requests for eligibility to the other relief regimes) the flat rate foreign tax credit may be claimed.
The flat rate foreign tax credit is a credit given to all income:
(a) which is receivable by a company resident in Malta, except from an offshore company;
(b) which is allocated to the foreign income account of the company, but excludes profits resulting from dividends paid out of the foreign income account of another Maltese resident company;
(c) in respect of which documentary evidence exists showing that the said income was derived from abroad. For this purpose, a certificate issued by an auditor shall be satisfactory evidence. There is no requirement to show that the income suffered tax abroad.
5.2 The flat rate foreign tax credit is 25% of the foreign income, before any deductions whatsoever. However, in the case of income derived from dividends, capital gains, interests, royalties, and other foreign investments, the tax credit is calculated on income after deducting the foreign tax suffered (if any) but no other deduction whatsoever.
5.3 The amount of the credit cannot exceed 85% of the Maltese tax payable on the relevant foreign income.
5.4 The Mechanics of the Flat Rate Foreign Tax Credit
To claim this tax credit, all that is required is :
- An auditor's certificate (or other evidence) stating that the income has derived from abroad.
- The flat rate foreign tax credit due, is added to the foreign income received in Malta (see par. 5.2 above). The aggregate sum obtained shall be the amount that is chargeable to tax.
- The resulting aggregate will be taxed at the normal company tax rate at 35%.
- The amount of the tax payable shall be reduced by the amount of the flat rate foreign tax credit due in respect of the foreign income.
PROVIDED that, where the amount of flat rate foreign tax credit exceeds 85% of the tax normally payable, the amount of such excess shall not be available for set off or refund.
These workings can be illustrated by the following examples:
EXAMPLE I: No expenses USD Net foreign income received in Malta 1,200 Add: flat rate foreign credit (25%) 300 Chargeable income 1,500 Maltese tax @ 35% 525 Less: flat rate foreign credit 300 Malta tax payable 225
EXAMPLE II: With deductible expenses deductible Net foreign income received in Malta 1,200 Add: flat rate foreign credit (25%) 300 1,500 Deductible expenses 100 Chargeable income 1,400 Maltese tax @ 35% 490 Less: flat rate foreign credit 300 Malta tax payable 190
Note: The higher the level of expenses, the lower the effective rate of tax payable in Malta. For this reason, the flat rate credit regime is especially attractive to commercial activities which have high levels of deductible expenses.
EXAMPLE III: Where total credit exceeds 85% of Maltese tax liability
Claim made Claim made on all income on income from source "A" only USD USD Foreign income - A 500 500 B 300 300 800 800 Add: Flat rate foreign credit: on A 125 125 on B 75 -- 1000 925 Less: expenses 600 600 Chargeable income 400 325 Malta tax @ 35% 140 113 Flat rate foreign tax credit (limited to 85% of Malta tax) 119 96 Tax Payable 21 17
Note: When the credit exceeds the 85% limitation. It is not always beneficial to claim relief on all sources of income. It may be recommendable to distinguish between the different sources of foreign income and base the claim accordingly.
6. INTERRELATION BETWEEN FOREIGN SOURCE INCOME IMPLICATION AND DOUBLE TAX RELIEF
The practical consequence of the interrelation between the foreign source income implication and the double tax relief is that:
- The tax liability of a company in respect of its foreign source income is primarily reduced by the application of Double Tax Relief; and,
- In the hands of the shareholders, i.e., upon the distribution of the dividends, the shareholder receives a refund equivalent to 2/3 or to all the tax paid by the Company on the Foreign Source Income.
This interrelation can be illustrated by these two examples:
Example 1: Profits distributed to a non-resident (distributed within 18 months of balance sheet date) USD Net foreign income 800 Flat rate foreign tax credit (25%) 200 1,000 Less expenses 300 Chargeable income 700 Malta tax @ 35% 245 Less: Flat rate foreign tax credit 200 Tax payable by company 45 Tax refund (2/3) 30 Net tax cost to shareholder 15
Example II: Income from a participating holding distributed to a non-resident (distributed within 18 months of balance sheet date) USD Net Foreign Income 800 Sold: Flat rate foreign tax credit (25%) 200 1,000 Less expenses 300 Chargeable income 700 Malta tax at 35% 245 Less: Flat rate foreign tax credit 200 Tax payable by company 45 Tax refund (100%) 45 Net tax cost to shareholder ---
7. ADVANCED TAX RULING
7.1 Within the Malta Financial Services Centre a separate International Tax Unit has been set up which is exclusively responsible to manage all matters relating to tax within the international financial services sector. This includes the provision of advance tax rules on the following:
- eligibility as a "Qualifying Participation";
- the tax treatment of any financial investment;
- qualification as an International Trading Company;
- whether any anti avoidance regulation will be adopted against any particular transaction or transactions;
7.2 A ruling (which must be given within 30 days from application) will remain binding for a period of 5 years, renewable for a further 5 years. In case of a change in the legislation on which the ruling was based, the ruling will still survive for a period of 2 years after the said change in the legislation.
8. MALTA'S TAX TREATIES
8.1 The Company and its shareholders can benefit from the vast network of tax treaties to which Malta is a partner. Malta's tax treaty partners are :
Australia Finland Norway Austria France Netherlands Belgium Germany Pakistan Bulgaria Hungary Sweden Canada Italy Switzerland Cyprus Libya United Kingdom United States of America
In addition treaties have been initialed or signed with the following countries:
China Kuwait Poland (operative in 1996) (initialled) (operative 1996) Czech Republic Luxembourg Republic of Korea (initialled) (signed) (initialled) India Malaysia Slovak Republic (operative 1997) (initialled) (initialled) Tunisia (initialled)
8.2 According to the existing tax treaties the tax imposition by Malta's partners on dividends, royalties and interest arising abroad and payable to Maltese beneficiaries is generally limited to the following rates on the gross income paid generally:
DIVIDENDS INTEREST ROYALTIES Major Minor % for Major Rates Rates share- share- share- holding holding holding COUNTRY Australia 15.00 15.00 N/A 15.00 10.00 Austria 15.00 15.00 N/A 5.00 10.00 Belgium 15.00 15.00 N/A 10.00 10.00 Bulgaria 15.00 15.00 N/A 15.00 10.00 Canada 15.00 15.00 N/A 15.00 10.00 China 10.00 10.00 N/A 10.00 10.00 Finland 5.00 15.00 25.00 10.00 10.00 France 5.00 15.00 10.00 10.00 10.00 Germany 5.00 15.00 25.00 10.00 10.00 Hungary 5.00 15.00 25.00 10.00 10.00 Italy 15.00 15.00 N/A 10.00 10.00 Libya 0.00 0.00 N/A 0.00 0.00 Netherlands 5.00 15.00 25.00 10.00 10.00 Norway 15.00 15.00 N/A 10.00 10.00 Pakistan 15.00 15.00 N/A 10.00 10.00 Sweden 5.00 15.00 25.00 10.00 10.00 U.K. 0.00 0.00 N/A 25.00 0.00 U.S.A. 5.00 15.00 10.00 12.50 12.50
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.