Taxation. 1. Individual Taxation in Malta

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1 Taxation The combination of Malta s tax system and its extensive double tax treaty network (over 50) means that, with proper planning and structuring, investors can achieve considerable fiscal efficiency using Malta as a base. Businesses set up in Malta benefit from the application of the full imputation system and refundable tax credit scheme on revenues as dividends to shareholders, resident and non resident; Malta has a strong, yet flexible single regulatory body in the Malta Financial Services Authority (MFSA). The MFSA is responsible for all licensed financial services activity on the Islands, and is structured in line with world best practice. Malta is a leading force in the development of regulatory policy and is fully involved with OECD, the EU and the Commonwealth in policy development. Malta also offers an ideal tax residency status for individuals. 1. Individual Taxation in Malta The tax liability of individuals depends on their residence, ordinary residence and domicile. Persons who are ordinarily resident and domiciled in Malta are subject to income tax in Malta on their worldwide income and certain capital gains. Persons who are either not ordinarily resident in Malta or are not domiciled in Malta are subject to Maltese income tax on their income arising in Malta and on their foreign income (but not foreign capital gains) that is received in Malta. Individuals temporarily resident in Malta do not pay tax on the income or capital gains arising outside Malta, whether remitted or not. A joint tax return must be filed for husband and wife. With effect from 1 January 2009, the rates for married couples are: Taxable income (EUR) Rate ( % ) up to 11, ,901 21, ,201 28, ,701 and over 35 1

2 With effect from 1 January 2009, the rates for other individuals resident in Malta including married couples opting for a separate computation with regard to their employment and/or trading income and/or any pension received are: Taxable income (EUR) Rate ( % ) up to 8, ,501 14, ,501 19, ,501 and over 35 Individuals are subject to tax on income arising in a calendar year (the basis year). Such income is assessed to tax in the year following the year in which it arises (i.e. the year of assessment). For example, the income for the year ending on 31 December 2010 is assessable to income tax in Income tax is chargeable in respect of gains or profits from any employment or office, including the estimated annual value of any quarters or board or residence. In the context of employment income, expenses are deductible only to the extent that they are wholly, exclusively and necessarily incurred in the performance of the duties of the employment or office. Fringe benefits payable to employees are taxable with other employment income. With respect to dividends, in general, Malta operates a full imputation system under which dividends paid by a resident company carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. Shareholders are taxed on the gross dividend at the applicable tax rates, but are entitled to deduct the tax credit attaching to the dividend against their total income tax liability. This tax may be treated as a final tax at the taxpayer s option. Profits distributed to a resident individual shareholder are subject to a 15% withholding tax. The shareholder can opt to declare the dividends in the tax return, so that the dividends are taxed at the ordinary rates and a credit for the withholding tax is granted. Interest paid by Maltese banks, the government of Malta and public corporations and authorities may be subject to a final withholding tax of 15%, in which case the income will not be reported in the tax return. Alternatively, the recipient of this investment income may elect to receive the income without deduction of tax, in which case the income will need to be declared in the tax return and be subject to income tax in the ordinary way. This does not apply to non residents. 2

3 The High Net Individuals Scheme The Government of Malta has recently launched a special tax status for High Net Worth Individuals. The status ensures to attract a better quality of individuals to reside in Malta. Individuals who are granted the said special tax status under the terms and conditions shall be charged to tax on their chargeable income at the rate of 15% (with a minimum tax liability of 20,000 for EU/EEA/Swiss nationals and 25,000 for non EU/EEA/Swiss nationals). The special tax status aims at managing tax residency in line with Malta s international obligations and current international norms whilst truly targeting and accepting High Net Worth Individuals. Main conditions for the Scheme include, health insurance, minimum number of stay in Malta of 90 days and all applicants are required to hold a Qualifying Property Holding being an immovable property owned in Malta for a value of 400,000 or more, or a rental of an immovable property in Malta for not less than 20,000 annually. The High Net Individuals Scheme This scheme is set to attract highly qualified persons to occupy eligible office with companies licensed and/or recognized by the Malta Financial Services Authority. Eligible office comprises employment in one of the positions where local knowledge and expertise is lacking (such as Actuarial Professionals, CEOs, CFOs etc.). In principle, individual income from a qualifying contract of employment in an eligible office is subject to tax at a flat rate of 15% provided that the income amounts to at least 75,000 (seventy five thousand euro) adjusted annually in line with the Retail Price Index. The 15% flat rate is imposed up to a maximum income of 5,000,000 (five million euro), with amount in excess of this figure being exempt from tax. 3

4 2. Malta Corporate Taxation There is no separate system of corporation tax in Malta, and a company (set up to carry on any type of lawful activity whether local or international) is subject to income tax in much the same way as an individual. In general, a full imputation system is used. Under this system, dividends paid by a company registered in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed. This system applies to both resident and non resident shareholders. Shareholders are taxed on the gross dividend at the applicable tax rates, but are entitled to deduct the tax credit attaching to the dividend against their total income tax liability. A company incorporated in Malta is, for Malta tax purposes, ordinarily resident and domiciled in Malta. That company would, accordingly, be taxed in Malta on a worldwide basis. On the other hand, a company incorporated outside Malta may be resident in Malta (but not ordinarily resident and domiciled in Malta) if its business is controlled and managed in/from Malta. Such a company would, as a result, be liable to tax in Malta: (i) on all chargeable income earned in or derived from Malta; and (ii) on all chargeable gains realised in Malta; and (iii) on all chargeable income arising outside Malta to the extent that such income is remitted to Malta. The tax system distinguishes between taxed income and untaxed income. Taxed income is further divided into the Final Tax Account, the Immovable Property Account, the Maltese Taxed Account and the Foreign Income Account, depending on the nature of the income. The imputation system described above does not apply to distributions made out of the Final Tax Account. Any item of income generated or gains realized by a company registered in Malta would be allocated to one of the mentioned tax accounts, depending on the nature and source thereof. The allocation of income or gains to the tax accounts is important for the purpose of determining the extent of: (i) the Malta company s entitlement to claim double taxation relief in terms of Maltese law; and (ii) the refund entitlement available at the level of the shareholders of the Malta company. Companies are chargeable to tax in Malta at the flat rate of 35% although the combined overall Malta effective rate of tax applicable in respect of income or gains accruing to or realised by a company may be reduced substantially by application of the domestic participating holding regime or refundable tax credit system. 4

5 Dividend Income and Gains A Malta company in receipt of dividends from a participating holding in a non resident entity other than a Property Company may, at its option: apply a participation exemption such that the dividend income would be exempt from tax in Malta; OR pay tax on the profits at the flat rate of 35%. In such circumstances, however, pursuant to a dividend distribution of such profits by the Malta company in favour of its shareholder/s the said shareholder/s would be entitled, to a full (100%) refund of the Malta tax paid by the Malta company on the profits out of which a dividend was distributed. The same options would be available with respect to capital gains or other profits derived from the transfer by a Malta Company of a participating holding in either a resident or a non resident entity which is not a Property Company. The most common 2 criteria to be satisfied by a Malta company to have a participating holding in an entity are that it holds at least 10% of the equity shares in that entity; or it made a minimum equity share investment representing a total value of 1,164,000 and held the same for an uninterrupted period of 183 days. Equity shares are shares which entitle the holder to any TWO of the following rights: (i) voting rights; (ii) dividend rights and (iii) an entitlement to assets available for distribution in the event of a winding up. Furthermore, the Commissioner of Inland Revenue is entitled to establish that an equity holding exists even where there is no holding of share capital, but where it can be demonstrated that in substance there is at any time an entitlement to any two of the above rights. In terms of anti abusive provisions, the participation exemption or full refund mechanism would only be available in respect of dividends received from a participating holding provided that the non resident entity in which the participating holding is held: i. is resident or incorporated in an EU country or territory; or ii. is subject to any foreign tax at a rate of at least 15%; or iii. derives less than 50% of its income from passive interest or royalties. Should none of the above listed three conditions be satisfied, two alternative cumulative conditions may be satisfied instead: iv. the holding by the Malta company must NOT be a portfolio investments; and v. the non resident entity or its passive interest or royalties must have been subject to any foreign tax at a rate of at least 5%. 5

6 Dividend Income and Gains A shareholder in receipt of a dividend distributed by a company resident in Malta out of profits allocated to its Foreign Income Account (typically foreign source passive income) and/or its Maltese Taxed Account (typically trading income or domestic source passive income) would be entitled to claim a refund of a portion of the Malta tax suffered or paid on the profits out of which the dividend was distributed. The said refund would typically be of six sevenths (6/7) of the Malta tax suffered at the level of the Malta company on profits allocated to its Foreign Income Account or its Maltese Taxed Account and out of which the dividend was distributed. However, the said refund is reduced to five sevenths (5/7) of the Malta tax suffered at the level of the Malta company on profits allocated to its Foreign Income Account and out of which the dividends were distributed in the event that such profits consist of passive interest or royalties or of dividends derived from a participating holding when the anti abuse provisions are not satisfied. Alternatively, the refund entitlement would be reduced to two thirds (2/3) of the Malta tax paid by the Malta company on profits allocated to its Foreign Income Account and out of which the dividends were distributed in the event that the Malta company would have claimed relief for double taxation in respect of the said profits 6

7 Incentives Shipping: Shipping organizations are exempt from income tax on income derived from shipping activities as defined in the Merchant Shipping Act. Instead, they are subject to an annual tax based on tonnage. Non resident shipping companies are taxable on all profits from the carrying of passengers, mail, livestock or goods shipped in Malta, but not on profits arising from the goods that are brought solely into Malta for trans shipment or by a casual call in the port. In effect, most non resident shipping companies are exempt on a reciprocal basis. Aviation: Income derived from the ownership, leasing or operation of an aircraft used in the international transport of passengers or goods, is deemed to be sourced outside Malta and it is not subject to tax in Malta in the hands of a resident non domiciled person, provided such income is not received in Malta. Procedures The income tax year is the calendar year (year of assessment). Corporate profits are assessable on the basis of the immediately preceding accounting year (basis year). For example, the profits of the year ending on 31 December 2011 (basis year) are assessable to income tax in 2012 (year of assessment). An accounting date other than 31 December may be used with the consent of the Inland Revenue and subject to the conditions imposed by it. A company must file a tax return, with supporting financial statements, by 9 months after the end of the accounting date or 31 March of the relevant year of assessment, whichever is later. Companies must make three provisional tax payments that have to be effected by 30 April, 31 August and 21 December of each basis period. Furthermore, any unsettled tax must be settled by the due date of the tax return. The tax due on the profits of a company which has more than 90% of its business interests outside Malta or on foreign source profits is payable 18 months after the end of the relevant accounting period or on the date of distribution of such profits, whichever is earlier. 7

8 3. Value Added Tax (VAT) Malta VAT is levied on the supply of goods and services made in Malta for consideration by a taxable person acting as such, on intra Community acquisitions, acquisitions of new means of transport and excise goods as well as on importations. Malta VAT Legislation, as EU Member State is in line with EU Directives and Regulations, save any derogations agreed with the EU on accession. A standard rate of 18% applies to all taxable supplies of goods and services, all importations and intra Community acquisitions of goods which are not expressly taxable at other rates or exempt from VAT. Goods and services outlined in Schedule 8 of the VAT Act are taxed at a reduced rate of either 5% or 7%. The zero rate applies to those goods and services outlined in Schedule 5 Part 1 of the VAT Act, which deals with supplies of goods and services that are exempt with credit. The zero rate is, in general, applied to exports and like transactions; international goods traffic; intra Community supplies, international transport and ancillary services; certain supplies by brokers or other intermediaries; supplies of sea vessels, aircraft, gold, food, pharmaceutical goods; certain transport services and supplies of goods on board cruise liners. 8

9 For further information, please contact our offices as follows: Steven Galea 37, St. Mary Street, Naxxar NXR 1406, Malta Telephones: (fax) Website: 9