The notion of permanent establishment is implied from the ITA which for the purposes of non-discrimination and in line with the ECJ ‘Avoir Fiscal’ case defines ‘a company registered in Malta’ as ‘a company which, although not resident in Malta, carries on any activity in Malta and in the case of a company which is neither incorporated nor resident in Malta shall mean a company that is registered for this purpose with the Commissioner in such manner as may be prescribed’.

Although Maltese domestic law does not expressly legislate on the concept of permanent establishment and what constitutes a permanent establishment, the ITA makes two separate references to the words permanent establishment in only two instatnces.

In the context of distributions from permanent establishments of Maltese Companies in an other jurisdiction; and
in the context of royalties paid by a Maltese company to its foreign shareholders, however such royalty is attributable to a permanent establishment situated in Malta.

It is only in these two specific cases outside a treaty context that recourse is made to the definition of a permanent establishment as defined in the OECD Commentary as a source of interpretation of the ITA.

Malta’s jurisdiction to tax rules under the ITA are scarce and as a result one must seek to understand when profits are arising in Malta, are therefore connected with Malta, consequently taxable in Malta as a trade is happening in or form Malta; or whether a person is trading with Malta, which refers to profits connected with Malta but not arising in Malta, therefore not connected with Malta and hence not taxable in Malta. In other words, a distinction must be made between the situation where a non-resident trades in or from Malta, and the situation where the non-resident trades with Malta. Hence, Malta sourcing rules that create a jurisdiction to tax much depend on the precise mechanics by which the trade is conducted.

In the case of activities connected with agents, one must make a distinction between the independent agent i.e. a person acting on his own name and not on behalf of his principal - trading with Malta; and a dependent agent i.e a person acting on behalf of and under the direct control of his principal - trading in or from Malta. Hence Non- residents will only be subject to tax on profits generated by the activities carried on by him or his agent in Malta¹ .

Article 5 of the ITMA provides that when a non-resident person derives profits in Malta through a person who acts as his “extension”, then the profits of such non-resident person are taxable in Malta and the non-resident would be assessed and charged in the name of his Maltese resident agent.

A case in point as decided by the Maltese Courts held that any income sourced out of a contract executed in Malta, was considered as income that is effectively connected to Malta and, therefore, taxable in Malta.

It is to be noted that once a foreign entity is considered having a PE in Malta it is required to register as an ‘oversea company’ in accordance with the Companies Act and register with the Maltese Tax Authorities. Thereafter, the PE will be required to fulfil its tax compliance obligations by preparing financial statements and filing a return with the Maltese Tax Authorities.

Maltese law has coined the concepts of a dependent and independent agent² in its domestic law³ . The concepts are similar to what is found in Article 5(5) and (6) of the OECD Model.

An agency PE is created when a non-resident person carries on a business activity in Malta through a closely connected resident person on whom the non-resident exercises a substantial degree of control. This degree of control will be determined on a case by case basis according to the circumstances at hand, the nature of agency and the powers attributable to the agent by the Principal. Consequently the Commissioner will ‘look through’ the resident person and as a consequence the non-resident person will be assessable and chargeable to tax in Malta in the name of the resident person.

Conversely, Maltese law states that where an activity in Malta is carried through a general commission agent or an agent who is not an authorised person carrying on the regular agency of a non-resident person and thus there is the absence of control and a close connection with the non-resident, a non-resident person would not be ‘looked through’. Consequently such income derived by such a transaction would not be assessable to tax in Malta.

The Application of the PE Concept in a Tax Treaty Situation

The ITA does not contain a definition of the term permanent establishment. The common understanding of the term generally follows the OECD Model and the related commentaries. Therefore, in the context of a double tax treaty, a foreign general enterprise’s liability to tax in Malta with respect to income arising in Malta will depend on whether or not the activity of the general enterprise in Malta satisfies the conditions of a PE as laid down in the respective tax treaty between Malta and that other contracting state.

Ownership, Rental or Operation of Real Estate or Movable Tangible Assets

A foreign taxpayer is taxed on all income and capital gains derived from immovable property situated in Malta. Income derived from immovable property by a PE will be allocated to the immovable property account of such PE.

Furthermore it should be noted that when any person directly or indirectly pays a non-resident income that has been sourced in Malta through ownership, rental or operation of real estate or movable tangible assets, is obliged to withhold 35% on that payment and pass it on to the Commissioner as a final withholding tax. To determine whether the ownership, operation or leasing of movable property constitutes a taxable presence in Malta, the views in the Commentary to the OECD MC are also taken into account in order to determine if the activity giving rise to the income is considered as a sourced in Malta in terms of Maltese domestic rules, interpretations and court judgements of what is considered as income form Maltese sources.

Resident Entity as a PE of Foreign Affiliated Entity

Malta generally does not resort to the treatment of a domestic entity as a PE of a foreign affiliated entity. Nevertheless, it is not excluded that if circumstances arise which would result in the subsidiary acting on behalf of the parent company and as a consequence the parent is sourcing income in Malta, such PE based on Maltese source rules could arise.

Online Supplies

There are no differing rules regarding online supplies.

^1. Ref article 4(3) Chapter 123 and article 5(1) of chapter 372 of the Laws of Malta.

^2. Income Tax Management Act, Article 5(6) and (8).

^3. Maltese law defines a ‘commercial agent’ as a person not being in the employment of the principal, who has continuing authority to negotiate the sale or purchase of goods or services on behalf of another person (the principal), or to negotiate and conclude such transactions on behalf and in the name of the principal, but does not include; (i) a person who in his capacity as an officer of a company or association is empowered to enter into commitments binding the company or association; (ii) a partner who is lawfully authorized to enter into commitments binding on his partners; (iii) a person acting as an insolvency practitioner in Malta or in an equivalent position in any other jurisdiction.

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