Tax

Jurisdiction to tax

Under Maltese law, persons who are both ordinarily resident and domiciled in Malta are taxable on their worldwide chargeable income and capital gains. On the other hand persons who are domiciled but not ordinarily resident in Malta and persons who are not domiciled but ordinarily resident are taxable on their income arising in Malta and on their foreign source income which is remitted to Malta. However, such persons are not taxable on any capital gains arising outside Malta notwithstanding that such gains may have been remitted to Malta.

Persons who are not ordinarily resident and not domiciled in Malta are taxable on any income arising in Malta. This implies that in Malta the source basis and the worldwide basis of taxation are used to tax persons whereas the remittance basis is also used in the case of persons who are either resident but not domiciled, or domiciled but not resident in Malta.

Ordinary residence and domicile for tax purposes

 1. Individuals

The charging provision under Maltese tax law is the term ‘ordinarily resident’ and hence a distinction must be drawn between the terms ‘resident’ and ‘ordinarily resident’. With regards to individuals, the term ‘resident’ generally refers to a person who is physically present in Malta for at least 6 months in the relevant calendar year.

The term ‘ordinary residence’ also implies that a physical presence of at least six months in Malta would constitute a determining factor, an objective criteria and would also serve as an indicator of ordinary residence in Malta. However a person may be considered ‘ordinarily resident’ in Malta even though such person may have been physically present in Malta for less than six months (subject to satisfying other criteria). This is due to the fact that generally a number of factors are considered when establishing whether an individual is deemed to be ordinarily resident in Malta for tax purposes. However typically a person is described as being ‘ordinarily resident’ in the place where he returns to most often, the place where one is resident in the ordinary or regular course of one’s life. Accordingly, one must not apply arbitrary criteria when attempting to establish an individual’s place of ordinary residence and each case must be examined on its own merits.

Unlike residence and ordinary residence, domicile is more of a permanent nature and is generally considered to be the place where one intends to reside permanently. Indeed it is widely accepted that an individual’s domicile is the domicile of origin – that is the domicile acquired at birth by virtue of the domicile of the father, or of the mother in the case of children born out of wedlock. In the event that the parents are unknown, the domicile is considered to be the place where the child is found. A person may only have one place of domicile at any given time.

2. Bodies of persons

With regards to bodies of persons, no distinction is made between ‘ordinary residence’ and ‘residence’ in terms of Maltese tax law. Accordingly, in respect of bodies of persons the term ‘ordinary residence’ is considered to refer to the concept of residence. Under Maltese law both the test of incorporation and the test of management and control are applied – an approach which is similarly adopted under UK law. Companies incorporated in Malta on or after 1 July 1994 are deemed to be resident in Malta for tax purposes, irrespective of the place where such companies are managed and controlled. The same principle applies for any other companies incorporated in Malta before such date, with such companies being resident in Malta as from 1 January 1995. On the other hand the test of management and control is applied for companies which are not incorporated in Malta, with such companies considered to be resident in Malta if managed and controlled in Malta.

With regards to domicile generally the place of incorporation is considered to be the place of domicile of a body of persons. Accordingly, a company incorporated in Malta is considered to be both domiciled and ordinarily resident in Malta under Malta’s tax laws. A body of persons may opt to change its domicile by becoming incorporated in another jurisdiction – a process which is referred to as ‘re-domiciliation’ of companies.

Personal Taxation

General

Subject to certain exceptions, any tax due to be paid by individuals subject to tax in accordance with the jurisdictional rules outlined above is charged at progressive rates in accordance with different tax bands. As from basis year 2015, the first €8,500 (or €11,900 under the rates for married individuals) would not be taxable, with the remaining income not exceeding €60,000 being taxed progressively at the rates of 15% and 25% according to the different tax bands. Any income exceeding €60,000 is taxed at the rate of 35% being the maximum tax rate applicable.

Specific regimes applicable to individuals under the Maltese tax laws

As part of Malta’s recent yet rapid rise as a financial services centre, specific rules under the main income tax legislation provide significant tax benefits to specific categories of individuals who are not domiciled in Malta. In this respect, subject to certain conditions various categories of individuals including high net worth individuals, ex-pats, highly qualified persons and other individuals occupying certain posts in the Digital Games and Audio visual industry and qualifying under as Beneficiaries under the following rules benefit from the special tax status as provided therein:

(i)                 The Global Residence Programme Rules;

(ii)                The Residence Programme Rules 2014;

(iii)               The Highly Qualified Persons Rules;

(iv)               The Malta Retirement Programme Rules;

(v)                Qualifying Employment in Innovation and Creativity (Personal Tax) Rules

In general the special tax status acquired by beneficiaries under the Global Residence Programme Rules, the Residence Programme Rules 2014 and the Malta Retirement Programme Rules enables such individuals to benefit from a reduced tax rate of 15% on any foreign income that is remitted to Malta subject to certain conditions. On the other hand, beneficiaries qualifying under the Highly Qualified Persons Rules and the Qualifying Employment in Innovation and Creativity (Personal Tax) Rules qualify for the reduced rate of 15% on any income derived under a “Qualifying Contract of Employment” as defined under such rules.

Individuals may only apply for the special tax status under the Global Residence Programme Rules, the Residence Programme Rules 2014 and the Malta Retirement Programme Rules through the services of an Authorised Mandatary. DFK Malta Tax & Consultancy Limited is registered with the Commissioner for Revenue as an Authorised Registered Mandatary and can assist individuals with their application for the abovementioned benefits. Detailed information relating to these benefits is available in the section Residence in Malta.

Corporate Taxation

General

The jurisdictional rules apply for companies in the same way they apply for individuals. Subject to certain exceptions, companies are charged tax at the flat rate of 35% on all income. Specific exceptions exist – for instance the tax rate charged for income derived from the transfer of any rights over immovable property in Malta. Such income received as the consideration for such transfer is charged at the final tax applicable at rates of between 5% and 10% of the transfer value (depending on the circumstances and subject to certain conditions). Another example of a reduced tax rate relates to certain investment income which is charged at a final withholding tax of 15% subject to certain conditions being satisfied.

The full imputation system of taxation

Malta adopts the full imputation system of taxation whereby shareholders in receipt of dividends are granted a credit equivalent to the corporate tax paid by the company on the profits being distributed. Such credit (capped to the amount of tax paid by the Maltese company on such profits) is offset against the tax charge to be paid on the gross dividend received by the shareholder. The full imputation system is a fundamental pillar of the Maltese tax system and ensures that the shareholder in receipt of the dividend income does not suffer any economic double taxation on such income received.

The Participation Exemption

In terms of the Maltese Income Tax Act (the “ITA”) any income or gains derived by a company registered in Malta (i) from a participating holding or from the transfer of such holding; or (ii) which are attributable to a permanent establishment (including a branch) situated outside Malta or to the transfer of such permanent establishment are exempt from Maltese income tax.

Generally a holding will qualify as a ‘participating holding’ under the ITA if such holding arises where:

(a) a company holds directly at least ten percent of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least ten percent of any two of the following:

(b) the company is entitled, at its option, to acquire the balance of the equity shares in the company in which it holds such investment; or

(c) the company is entitled to first refusal in relation to any disposal of the equity shares in the holding which are not held by such company; or

(d) the company is entitled to be appointed or to appoint a director to the board of directors of the company in which it holds such investment; or

(e) the company holds an investment representing at least €1,164,000 in another company and such investment is held for an uninterrupted period of at least 183 days; or

(f) the company holds such equity shares in the furtherance of its business and not as trading stock for the purpose of a trade.


The ITA includes anti-abuse provisions which must be satisfied in order to be able to claim such exemption. Under such provisions it is held that the exemption contemplated above will only apply if at least one of the following conditions is satisfied by the participating holding:

(i) it is resident or incorporated in a country or territory which forms part of the European Union; or

(ii) it is subject to any foreign tax of at least 15%; or

(iii) it does not derive more than 50% of its income from passive interest or royalties.

If none of the conditions (i) to (iii) above are satisfied, the participating holding must satisfy both of two further conditions: the participating holding must not be a portfolio investment and it must be subject to any foreign tax of at least 5 percent. The ITA also provides that gains or profits relating to a participating holding held in a Maltese resident company is only exempt if such gains or profits arise from the transfer of such holding.

Double Taxation Relief

Arguably the Maltese double tax relief system is one of the main drivers of the Maltese efforts to solidify its standing as a financial services centre of repute. Malta adopts the following methods for Double Tax Relief (“DTR”):

The vast treaty network of close to seventy treaties (largely based on the OECD Model) is complemented by other methods of double tax relief which are available under the Maltese tax laws in the event that treaty relief cannot be claimed – Unilateral Relief, FRFTC or Commonwealth Relief.

The method adopted under Treaty Relief is generally the ordinary credit method which is applied on a source-by-source basis. The same computational rules are applied for Unilateral Relief. Relief is also available for the underlying tax paid on the profits prior to their distribution as dividends. Subject to the satisfaction of certain conditions, such relief for underlying tax may also be claimed for underlying tax suffered on profits distributed from one foreign company to another (forming a chain of dividend distributions).

On the other hand, subject to certain conditions being satisfied FRFTC operates via a notional credit of 25 percent which is applied irrespectively of the foreign tax rate being suffered. Generally the FRFTC is applied by effectively reporting the foreign income net of the foreign tax and grossing up such income by the flat rate of 25 percent. The Malta tax payable is then calculated on the amount grossed up as aforesaid however the 25 percent flat rate credit is then deducted from such amount of tax payable.

Commonwealth Relief is available for double tax suffered in Commonwealth countries in the event that no treaty is in force between the two countries. However in practice Commonwealth Relief is rarely used – mainly due to the fact that unilateral relief may be claimed in the event that treaty relief is unavailable.

The Tax Accounting Rules and the Tax Refund System

Under Maltese tax laws, the distributable profits of Maltese registered companies are allocated to five different accounts for the purposes of tax accounting:

The allocation of distributable profits to the abovementioned accounts is of fundamental importance in terms of dividend distributions. This is due to the fact that shareholders in receipt of dividends distributed from the MTA and the IPA may claim a refund of tax paid on the profits being distributed by way of such dividends provided that such shareholders are registered with the Commissioner for Revenue for such purpose and provided such shareholders satisfy certain conditions. Such shareholders may claim a refund of 2/3rds, 5/7ths and 6/7ths of the tax paid on such profits as aforesaid. The quantum of such refunds generally depends on various factors, e.g. the type of income and whether any double taxation relief was claimed on such income.

The interplay of the full-imputation system, the comprehensive double tax relief system, the Participation Exemption, the refund mechanism and other exemptions (outlined below) may result in a reduced effective tax rate of between nil and 10 percent in certain circumstances.

Other relevant aspects of the Maltese tax system

Other exemptions apply for certain interest income and royalty income derived in cross-border trade (subject to certain conditions being satisfied) whereas no withholding tax is charged on dividend distributions.

With regards to the investment services industry any capital gains derived from the disposal of units in a Collective Investment Scheme (CIS) derived by a non-resident person are exempt whereas certain exemptions also apply for such gains derived by resident persons. In terms of the income derived at the fund level, the income of Malta based schemes (having at least 85% of the value of its total assets located in Malta – referred to as a “prescribed scheme”) is generally exempt if such income is not derived from immovable property in Malta or is classified as investment income in accordance with the provisions of the ITA.


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