Malta grants double taxation relief by way of the credit system. Four systems of double taxation relief are available in Malta:

Treaty Relief
Commonwealth relief
Unilateral Relief
Flat-Rate Foreign Tax Credit (FRFTC) Relief.

All four methods are based on the credit system as explained below.

Treaty Relief

The ITA empowers the Minister of Finance to enter into double taxation agreements with other countries or territories with the aim of affording relief from double taxation in relation to income tax and any tax of a similar character imposed by the laws of that country or territory. Double taxation agreements are effective in Malta by means of the enactment, by the Minister of Finance, of subsidiary legislation incorporating such international agreements. Double taxation agreements supersede any rules contained in the ITA and as such, treaty override is not possible in Malta.

Most of Malta’s treaties are based on the OECD Model Convention which provides for the allocation of taxing rights to one or the other treaty countries, typically the country of residence. When Malta is the country of residence and the other treaty country is to tax by way of source, relief is given by Malta in the form of a credit for tax suffered in the other treaty country or jurisdiction. This credit is limited to the amount of tax suffered in Malta.

As such, treaty relief will be available if the relevant double taxation agreement is applicable. The person claiming a credit for foreign tax paid against tax paid in Malta with respect to a particular financial year must be a resident of Malta during that period. The claim must be made within two years.

At the time of writing, Malta has a network of over sixty three double taxation treaties whilst nine other treaties have been signed but not yet ratified.

Commonwealth Relief

Commonwealth relief is form of double taxation relief available in connection with taxes paid to British Commonwealth countries, with the exception of the UK. In practice this form of double taxation relief finds little application.

Unilateral Relief

Unilateral relief is credit which is extended by Malta unilaterally in respect of foreign tax suffered on foreign source income from any jurisdiction. Unilateral relief functions on the basis of the credit method in the same way as treaty relief however, as opposed to treaty relief which is dependent on the scope of application of a double taxation treaty entered into between Malta and another country or territory, unilateral relief may also be applicable to underlying taxes, i.e. taxes suffered by the foreign subsidiaries distributing profits by way of dividends to the Maltese shareholder.

Unilateral relief is only available to a person resident in Malta or a company registered in Malta during the year immediately preceding the year of assessment. Foreign tax suffered must be of a nature similar to income tax as imposed under the ITA. The taxpayer making the claim must also prove the quantum of foreign tax suffered on the foreign source income. Unilateral relief only applies where treaty relief is not available. In practice, however, unilateral relief may still be claimed if it is more beneficial for the taxpayer to do so.

Application of the Credit Method

Under both treaty relief and unilateral relief, foreign income must be computed gross of foreign tax. Credit relief is then given for the foreign tax against the Malta tax payable on that gross amount up to the amount of Malta tax chargeable on that gross amount according to the rules contained in the ITA.

In situations where relief for double taxation in the form of unilateral relief is not available or is not claimed then foreign tax paid by a Maltese taxpayer may be claimed as a deduction based on the argument that the foreign tax is an expense wholly and exclusively borne in the production of the income although this is rarely more beneficial than the credit method.

Limitation of Credit

Foreign tax credit under both the treaty and unilateral relief methods is limited to the amount of tax chargeable in Malta by source and by country according to the ITA. No credit is allowed with respect to foreign tax that is paid in excess of the minimum statutorily payable in the country of source according to its domestic law or the applicable treaty.

Credit for Underlying Tax

Malta grants a unilateral credit for the foreign tax not deducted directly or at source on payment of a dividend made to a Maltese resident taxpayer (i.e. the underlying tax suffered by the income from which the dividends were paid). The same credit is also available under the treaty relief method, but only where expressly provided for by the relevant treaty. Credit for underlying tax may also be claimed in respect of foreign taxes paid by lower-tier subsidiaries in a holding chain that pay dividends to the claimant of credit for foreign tax against Malta tax. Such relief is available with respect to any amount of subsidiaries and sub-subsidiaries provided a direct or indirect holding of at least 10% of the voting power exists.

The Flat-Rate Foreign Tax Credit

The Flat-Rate Foreign Tax Credit (FRFTC) is a form of unilateral relief which is only available to Maltese registered companies and Maltese branches of non-resident companies. This method of deemed foreign tax credit is beneficial in situations where little or no foreign tax is suffered on foreign source income. This is because a credit for deemed foreign tax will be received and consequently no proof of foreign tax suffered is required.

In order to qualify for this type of relief, the company must be specifically empowered in its objects to receive foreign-source income and an auditor’s certificate that the income in question is foreign source income is required as evidence that such income stands to be allocated to the Foreign Income Account (but not including dividends paid out of the foreign income account of another Malta company). The FRFTC is only given where none of the other forms of double taxation relief is available. In practice, however, the FRFTC may be claimed by the taxpayer company if it is more beneficial to do so rather than claiming the conventional treaty or unilateral foreign tax credit.

The FRFTC is an amount equal to 25% of the foreign source income received by the Malta company or branch net of foreign tax. Foreign source income must be grossed up with the FRFTC and tax @ 35% applied on the aggregate amount. The FRFTC is then deducted from the resulting tax charge on the aggregate amount. The FRFTC is limited to 85% of the tax payable on income that stands to be allocated to the foreign income account and deducting therefrom any foreign tax under treaty relief, Commonwealth relief or unilateral relief.

Example:

Income	1000
Foreign Tax	100
Net Income	900
FRFTC	225
Chargeable Income	1125
Tax @ 35%	393
Less FRFTC	(225)
Tax payable	168

Interaction of the Reliefs

In principle, a taxpayer must resort to the treaty relief first. It is only where this is not available that access to the other methods becomes available. Unilateral relief may be claimed in those cases where treaty relief and relief in respect of Commonwealth income tax are not available to the taxpayer. Likewise, the FRFTC may be applied only in those cases where treaty relief, relief in respect of Commonwealth income tax and unilateral relief are not available to the person making the claim. In practice, however, much depends on the interpretation of the words “are not available to the person making the claim”. Since the onus to provide proof of foreign tax paid is on the taxpayer, the latter is in practice free to make use of the method of relief against foreign tax which is most advantageous to him.

Excess FTC Carry-Forward

Excess foreign tax credit may not be carried forward.

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