Introduction to Malta’s corporate income tax regime
Malta continues to position itself as a viable and attractive destination for business and investment, in part by virtue of its competitive tax regime. The chargeable income of a Maltese company – which includes its taxable income and capital gains – is taxed at 35%.
A number of entities, if structured appropriately, may be exempt from tax, including:
certain collective investment schemes;
most retirement funds or retirement schemes; and
organisations of a public character.
A company incorporated in Malta is treated as domiciled and resident in Malta, and is subject to tax on its worldwide income and capital gains. A company that is not incorporated in Malta is resident in Malta if its management and control are exercised in Malta. The test of management and control is usually applied by reference to the place where the shareholder and director meetings are held and where the company's important decisions are made.
Like other taxpayers, a company that is resident but not domiciled in Malta is subject to tax on chargeable income and capital gains arising in Malta and on chargeable income arising outside Malta and remitted to Malta, but not on capital gains arising outside Malta that are received in Malta. That a foreign company has a branch in Malta does not, in itself, constitute residency. A company that is neither resident nor domiciled in Malta is taxable on chargeable income and capital gains arising in Malta, unless such income and gains are subject to a specific exemption.
Despite the default 35% corporate tax rate, as a result of Malta's full imputation and tax refund system, the effective tax rate in Malta may be reduced to 5%.
Full imputation system
Although any shareholder of a Maltese company is, in principle, subject to tax in Malta on any dividends derived from such company, any economic double taxation is relieved through the operation of a full imputation system of taxation. Consequently, the tax paid by the Maltese company on the profits that it distributes as a dividend in favour of its shareholder is credited in full against the Malta tax liability of that shareholder.
The 35% default tax rate applicable to companies is equivalent to the maximum progressive rate of tax applicable to individuals. Therefore, a dividend distribution received by either a corporate or a natural shareholder (resident in Malta or otherwise) would typically result in no further tax payable at the level of the shareholder. In fact, a shareholder that is subject to tax at a rate lower than 35% may claim a refund of the excess tax paid in Malta at the level of the company. Many states recognise the fact that Malta is one of the few remaining countries to operate a full imputation system. Consequently, most of Malta's tax treaties effectively enable Malta to continue to operate its full imputation system in a cross-border context.
Tax refund system
Over time, Malta has developed its imputation system to allow for a tax refund mechanism applicable at the level of the shareholders. A shareholder in receipt of dividends distributed out of certain profits of a Maltese company can claim a refund of the tax paid in Malta by such company on those profits.
The amount of the refund to which the shareholder is entitled depends on:
the nature of the underlying profits out of which the dividend is distributed by the company; and
the claiming of double taxation relief by the company on such profits.
In most cases, the refund entitlement of a shareholder would be six-sevenths of the Malta tax suffered by the Maltese company on the profits out of which the dividend is distributed.
However, this rate may be reduced in the following circumstances:
Where the profits out of which a dividend is distributed consist of passive interest or royalties, the refund is reduced to five-sevenths of the Malta tax suffered on those profits.
A tax refund at the rate of two-thirds of the Malta tax applies to dividends distributed out of certain profits in respect of which the distributing company has claimed a foreign tax credit to relieve cross-border double taxation.
On the other hand, a company in receipt of dividends (or gains) derived from an investment that qualifies as a participating holding may either:
a) elect to apply the participation exemption, in which case such income (or gains) will be exempt from Malta tax; or
b) include such income (or gains) as part of the taxable income of the Maltese company, which would entitle its shareholder in receipt of a dividend out of those profits to a full refund of the Malta tax paid by the company on that income (or gains).
No such tax refunds as those referred to above can be claimed in connection with income derived, directly or indirectly, from immovable property situated in Malta. In addition, in certain situations – for example, where the Maltese company is beneficially owned by Malta resident and domiciled individuals – income derived by said company on which tax refunds are claimed requires reclassification as investment income and is taxable accordingly.
While this is not required, due to the fact that any shareholder is entitled to claim tax refunds, a double-tier structure may have a number of advantages for the taxpayer, such as postponing dividend payments to non-residents, thereby deferring any foreign tax charges without incurring any further tax in Malta.
In certain jurisdictions it may also be beneficial to use a double-tier structure to ensure that the total income (including any tax refund) being received by the non-resident shareholder is received in the form of a dividend, which may be taxed more favourably (for example, exempt where a participation exemption regime is in place) in its country of residence than any tax refund. Moreover, no withholding taxes are levied on distribution of the dividends or payment of interest and royalties to non-resident shareholders. There are also no taxes or restrictions on export of the dividends from the Maltese company.