As a result of Malta’s rich legal heritage, unique tax system and EU Membership, Maltese companies are a very cost-effective and tax efficient international business vehicle. Malta has been an EU Member since 2004 and part of the Eurozone since 2008. Amendments to Maltese Income Tax law taking effect on 1 January 2007, following EU Commission scrutiny, resulted in an attractive EU-approved tax system which, with proper planning and advice, can lead to the lowest effective tax rates in the EU. Of particular interest for international businesses are the Tax Refund System, the Participation Exemption Regime, the absence of withholding taxes on dividends, interests and royalties, the exemption from tax on transfers of shares and securities held by non-residents (except for shares in companies owning real estate in Malta), access to the EU Treaty Freedoms and Tax Directives as well as a wide double taxation treaty network.

Basis of Taxation

Any person resident and domiciled in Malta is subject to tax on worldwide income. A company incorporated in Malta is automatically deemed to be resident and domiciled in Malta and is subject to tax on worldwide income at the standard income tax rate of 35%. However, persons resident but not domiciled in Malta, and vice versa, are subject to taxation on income and gains arising in Malta and/or arising outside Malta that is remitted to (or received) in Malta. Capital gains arising outside Malta are not subject to tax even if remitted to Malta. A company incorporated outside Malta would be considered to be resident (but not domiciled) in Malta for tax purposes if its effective management and control is in Malta; giving rise to significant tax planning opportunities in the context of business activities generating foreign source income.

Tax Accounting and the Refund System

Perhaps the characteristic that sets apart the Maltese tax system from other tax systems is the possibility given to duly registered shareholders of Maltese companies to claim from the Commissioner of Inland Revenue a cash refund of the tax paid by the company following a distribution of profits allocated to the FIA or MTA. The most widely applicable tax refund is that of 6/7ths of the tax paid by the company which would lead to an effective overall tax suffered in Malta of 5% as explained in the diagram. A 5/7ths and a 2/3rds refund may also apply in specific circumstances depending on the nature of the income of the distributing company and whether double taxation relief is claimed on that income. A 100% refund may also be claimable in case of a participating holding.

The particular system of tax accounts is the backbone of Maltese income and gains tax law. Maltese law bases the allocation in the context of jurisdiction and source rules. However, the law provides clear guidelines of which items of income should be allocated to which tax account. There are five tax accounts, the Immovable Property Account (IPA), the Foreign Income Account (FIA), the Untaxed Account (UA), the Final Tax Account (FTA) and the Maltese Tax Account (MTA). The segmentation of distributable profits into the five different tax accounts interplays with the refundable tax credit system. Below is a brief explanation of the items of income allocated to the tax accounts.

Immovable Property Account

Profits, gains or income derived directly or indirectly from immovable property situated in Malta are allocated to this account. Dividends paid out of profits allocated to the IPA of other companies is also allocated to the IPA of the recipient company.

Final Tax Account

This account will hold profits which have been exempt from tax under the provisions of any Maltese law and where distributions of such profits by the company is exempt from tax in the hands of the shareholder. Dividends paid out of the FTA of another company will be allocated to the FTA of the recipient. The FTA will also include profits arising out of a participating holding and certain incomes which were relieved by tax credits.

Foreign Income Account

Income derived from investments outside Malta will generally be allocated to the FIA. Profits will include streams such as royalties, dividends, capital gains, interests, rents and profit distributed out of the FIA of other companies.

Maltese Taxed Account

This account will include any of those profits that are not included in the FIA, IPA or FTA and have suffered tax.

Untaxed Account

Consists of a balancing figure made up of those profits (or losses as the case may be), which represent the total distributable profits (a positive amount) or the total accumulated losses (a negative amount) as the case may be, and deducting therefrom the total sum of the amounts allocated to other taxed accounts.

Tax Refunds

Upon certain distributions, the shareholders of Maltese companies may file a claim with the Commissioner to obtain a cash refund of the Advanced Company Income Tax following a distribution of profits allocated to the FIA or MTA. The table below contains an analysis of the refund available, if any upon distribution;

Tax refunds are ordinarily effected within 14 days. Further, the tax refund does not constitute taxable income for the taxpayer.

Taxation of Dividends

Malta is one of the few countries that operate a full imputation system of taxation. This means that dividends received by a Maltese resident shareholder from a Maltese company are subject to tax in the hands of that shareholder. However, that shareholder would be entitled to a credit of the tax paid by the distributing company on the profits from which that dividend is distributed. This would typically mean that no further tax would be payable by the shareholder on receipt of the dividend.

No withholding taxes are typically applicable on the distribution of dividends, interest and royalties payments by a Malta company to non-residents. There are also no formal transfer pricing rules applicable in Malta. Similarly no CFC rules or thin- capitalization rules apply.

Collective Investment Schemes

For the purposes of the Income Tax Act (hereinafter ‘ITA’) a Collective Investment Scheme (hereinafter ‘CIS’) must be licensed and may be categorized as corporate or unincorporated but nevertheless it is defined as being;

“any scheme or arrangement which has as its object or as one of its objects the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:

The scheme or arrangement operates according to the principle of risk spreading; and either
The contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
At the request of the holders, units are or are to be repurchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or
Units are, or have been, or will be issued continuously or in blocks at short intervals.”

Domestic Tax Treatment

Tax treatment under Maltese tax law should be considered on two tiers, the fund and then the investor level. Basically, tax treatment at the level of the CIS is determined after an analysis of whether the CIS is a prescribed or a non-prescribed fund. The ITA defines a prescribed fund licensed after 1 March 2001 as being a Malta based scheme that declares to the Commissioner of Inland Revenue that at least eighty-five percent of the total assets allocated to it are situated in Malta. All other funds are considered non-prescribed funds and, unless derived from immovable property situated in Malta, any income received by such fund is exempt from tax in Malta.

Although jurisdictions tend to favor neutrality, the domestic tax treatment of CISs varies considerably. In this respect applying treaties to CISs where there are a multitude of income streams and jurisdictions becomes problematic. In this context on 31 May 2010, the OECD Committee on Fiscal Affairs released the report ‘The granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles’. According to the report in order for a CIS to qualify for treaty benefits a CIS must;

qualify as a person in its own right; and
be a resident of a contracting state; and
is considered the beneficial owner of certain types of income.

If considered as such, Maltese resident CIS would benefit from Malta’s extensive double taxation treaties. However, considering a CIS as person of a contracting state has been met with certain reservations. When intending to apply double tax treaties to CIS, the determination as to whether a specific CIS is to be considered a person should be analyzed on a case by case basis. In this context, recent Maltese double tax treaties contain language that would allow Maltese CIS to be treated as person for treaty purposes. Hence, CIS are included in the definition of “person” in the treaties with Bahrain and Uruguay, whilst the treaty with Liechtenstein refers to ‘a scheme or arrangement which is licensed or otherwise authorized under the Investment Services Act’. Other recent treaties use similar wording and essentially directly refer to the Maltese CIS.

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