|.: A Guide to Taxation :.|
Document Prepared by:
The Income Tax Act and the Income Tax Management Act embody provisions to support the development of Malta as an international financial and business Authority. Malta’s tax system is designed to:
The following provides an overview of some salient provisions of Maltese tax law particularly in connection with international business.
DOMESTIC TAX PROVISIONS
The Income Tax Act and the Income Tax Management Act regulate income tax in Malta. Under Malta’s tax system, the total income from all sources, including capital gains, is aggregated into one amount for the purposes of the tax. Individuals who are both ordinarily resident and domiciled in Malta are liable for personal income tax on their worldwide income. Individuals who are either not ordinarily resident or not domiciled in Malta are liable to tax on any income arising in Malta and on foreign sourced income that is received in Malta.
Individuals are charged to tax at progressive rates that reach a maximum of 35% on any amount of income in excess of Lm7,500 (c. US$19,000) in the case of married persons and Lm6,000 (c. US$ 15,000) in the case of other persons.
Under Malta’s tax system a company is considered resident if it is incorporated in Malta or, in the case of a foreign body of persons, if its control and management are exercised in Malta. The company rate of tax is 35% on chargeable income. Malta operates the full imputation system of taxation and any tax paid by the company is imputed to the shareholder in the event of a dividend distribution.
TAX ACCOUNTING FOR COMPANIES
The 1994 amendments to Malta’s tax legislation introduced the requirement that a Maltese company’s taxed income is divided into the “Foreign Income Account” and the “Maltese Taxed Account”. The Foreign Income Account includes all income and capital gains derived from overseas assets and profits derived from an overseas branch, agency or permanent establishment while the Maltese Taxed Account contains the balance of the taxed income that has not been allocated to the Foreign Income Account.
The Untaxed Account is made up of the difference between the company’s accounting profits and the amounts allocated to the Foreign Income Account and the Maltese Taxed Account. The segregation of a company’s profits into these three accounts is necessary since income allocated to the Foreign Income Account benefits from the flat-rate foreign tax credit method of relieving double taxation and also from the tax refund provisions detailed in later sections.
Maltese resident companies are considered to be in the same group of companies if one is the subsidiary of the other or both are subsidiaries of a third company resident in Malta. A company is considered a subsidiary of another company if the parent company owns more than fifty percent of the ordinary share capital and voting rights of the subsidiary and is entitled to more than fifty percent of the profits available for distribution.
Malta’s tax legislation allows a company to surrender tax losses that may be set off against the tax profits of another company in the same group for the corresponding year of assessment. A company that has claimed losses from a group company may carry the losses forward and utilise them for set-off against future profits.
Where assets are transferred between members of the same group of companies it shall be deemed that no capital gain or loss has arisen from the transfer. No duty is payable upon any restructuring of holdings through mergers, demergers, amalgamations and reorganisations within a group of companies.
FINAL TAX ON INVESTMENT INCOME - INTEREST
The final tax provisions on investment income introduced in 1994 are designed to ease the tax collection process on investment income and to encourage the repatriation of funds to, and the retention of funds in, Malta.
The system provides for a final tax of 15% deducted at source on certain categories of investment income paid to Maltese individuals and companies. Interest paid by Maltese banks (in whatever currency), the government and Maltese public corporations are examples of investment income to which the final tax provisions apply. An individual in receipt of investment income on which the 15% tax has been withheld is not required to disclose the existence of such income in the annual tax return. Interest received from overseas deposit accounts is taxable at the normal rates of tax. Interest paid to non-residents is exempt from tax in Malta.
FINAL TAX ON INVESTMENT INCOME - DIVIDENDS
The final tax system is also extended to dividends paid by Maltese companies. Dividends paid out of a company’s taxed income is not subject to any further tax apart from the tax already paid by the company if the person in receipt of the dividend opts not to disclose it in the annual tax return. Dividends paid from untaxed income to a Maltese individual suffer deduction of tax at source of 15% which is withheld by the company and paid to the Revenue. Again, such dividend is not subject to any further tax in the hands of the shareholders if it is not disclosed in the tax return.
The final tax system is also applicable to dividends received from collective investment schemes as explained in later sections.
INTERNATIONAL TAX PROVISIONS
INTERNATIONAL TRADING COMPANIES
A Maltese registered company whose objects are restricted to trading activities of an international nature as defined in the Income Tax Act may be classified as an "International Trading Company (ITC)". There are special provisions in the Act that apply to this type of company, the most important of which are:
Upon receipt of a dividend from an ITC, non-resident shareholders and Maltese resident companies wholly owned by non-residents are:
The following example illustrates how the provisions relating to International Trading Companies work in practice:
INTERNATIONAL HOLDING COMPANIES
The Maltese tax system does not have a specific “international holding company (IHC)” regime. However, a Maltese company having income arising outside Malta may benefit from the various forms of relief of double taxation available under Malta’s tax legislation. In addition, non-resident shareholders of such companies are entitled to certain refunds of tax upon a distribution of dividends as described later on in this document.
RELIEF OF DOUBLE TAXATION
Before the 1994 amendments, double tax relief was only available in Malta under the domestic provisions of the Income Tax Act if the foreign tax had been suffered in a country with which Malta has a double tax treaty or in respect of British Commonwealth income tax. The present regime provides for two further systems of double tax relief in Malta:
A list of Malta’s double taxation agreements is presented in Appendix 1.
Malta allows relief from double taxation on a unilateral basis where overseas tax is suffered on income received from a country with which Malta does not have a tax treaty. The overseas tax suffered is allowed as a credit against the tax chargeable in Malta on the gross amount. The credit shall not exceed the total tax liability in Malta on the receipt.
Unilateral relief for underlying tax suffered is available where the taxpayer is a Maltese company that holds more than 10% of the voting power of the overseas company paying the dividend.
When claiming unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner:
FLAT-RATE FOREIGN TAX CREDIT
The flat-rate foreign tax credit is available to a Maltese company which receives income or capital gains from overseas allocated to its Foreign Income Account. A certificate from the auditor stating that the income falls to be allocated to the Foreign Income Account is sufficient for this purpose.
The flat-rate foreign tax credit is calculated at 25% of the amount of the overseas income or gain received by the company, before deductions. The income plus the credit (less deductible expenses) is subject to full Maltese income tax with relief for the deemed credit. The mechanics of the relief are demonstrated in the following examples:Example 1 (no expenses)
Example 2 (with expenses)
INTERACTION OF THE FOUR RELIEFS
The provisions regarding unilateral relief are available where double taxation relief under a double tax treaty and relief in respect of British Commonwealth income tax are not available to the person making the claim.
The provisions regarding the flat-rate foreign tax credit are applied where none of the other reliefs of double taxation is available. The interaction of the four reliefs is illustrated in Appendix 3 at the end of this document.
PAYMENT OF TAX
A company is assessed and pays tax in the currency in which its share capital is denominated. Any refund of tax is made in the same currency. Any tax payable by a company with respect to profits derived from foreign sourced income is not payable before the earlier of the date of distribution of such profits or eighteen months after the end of the relevant accounting period of the company.
REFUND OF TAX
A non-resident shareholder in receipt of a dividend from an International Trading Company or from a Maltese company’s Foreign Income Account is entitled to a refund of tax paid by the company in respect of the profits distributed. In the case of dividends distributed by an International Trading Company, the refund is of twothirds of the tax paid by the company. Dividends paid by a company out of its Foreign Income Account entitle its non-resident shareholders to a refund of two-thirds of the tax paid by the company on the distributed profits. In those cases where the company distributes dividends out of profits derived from a ‘participating holding’ the non-resident shareholder is entitled to a full refund of the tax paid by the company on the distributed profit.
The tax legislation binds the Revenue to issue the refund not later than the fourteenth day of the month following that in which a valid claim is submitted.
A participating holding normally arises where a Maltese company holds directly at least ten per cent of the equity shares of a non-resident company. However, a holding of shares held as trading stock does not constitute a participating holding. Where the Maltese company owns less than ten per cent of the shares of the overseas company, the holding may still qualify as a participating holding if any one of the following conditions is satisfied:
COLLECTIVE INVESTMENT SCHEMES
The tax provisions relating to the taxation of funds and investment services companies are designed to complement the Investment Services Act (ISA) and to create a fiscal regime which allows for the rapid development of a funds industry in Malta, both at a domestic and international level. Collective Investment Schemes usually take the form of:
EXEMPTIONS AND WITHHOLDING TAX IN RELATION TO CERTAIN FUNDS
For tax purposes, a fund or a sub-fund of a collective investment scheme may be classified as a prescribed or a non-prescribed fund. Essentially a fund in a locally based scheme is classified as a prescribed fund if the value of the assets situated in Malta is at least 85% of the value of the total assets. Other licensed funds, including all funds in overseas based schemes, are classified as non-prescribed funds.
All income of collective investment schemes is exempt from tax in Malta except for the withholding tax applicable to local investment income in the case of prescribed funds. Thus local investment income (excluding dividends) derived by prescribed funds is subject to a final withholding tax. The withholding tax rate is 15% in the case of bank interest and 10% in the case of other investment income. No tax is payable by the investors when they dispose of their investment or when they receive a dividend out of such profits.
No tax is withheld on investment income received by non-prescribed funds. Tax is, however, payable by the Maltese resident investors in such funds when they dispose of their investment or when they receive a dividend. This tax qualifies, subject in certain conditions, for a 15% rate under the final withholding tax system.
Residents who hold securities, such as shares or units in prescribed funds, listed on the Malta Stock Exchange are not subject to tax on capital gains upon the transfer of such shares or units.
INVESTMENT SERVICES COMPANIES
A package of fiscal incentives has been introduced to attract to Malta the management and administrative support that is required for the development of a funds industry in Malta. Maltese investment services companies which are licensed under the Investment Services Act enjoy a generous package of additional deductions, including:
Investment services companies are not able to surrender their losses arising from the additional deductions to other members of the group under the new group relief provisions.
INVESTMENT SERVICES EXPATRIATES
An investment services expatriate is an individual who is not ordinarily resident and not domiciled in Malta or was not resident for a minimum period of three years before taking up employment with or starts providing services to an investment services company. The fiscal incentives, applicable for the first ten years include:
The Insurance Business Act, which was approved by the Maltese Parliament in early 1998, is designed to complete the framework of legislative amendments in the financial services sector that was begun in 1994.
The fiscal incentives outlined above concerning international trading companies, investment services companies and investment services expatriates have been extended to companies and individuals operating in the insurance sector. The Foreign Income Account and refund of tax provisions are now applicable to insurance companies, including captives, operating from Malta and writing risks situated outside Malta.
BACK OFFICE OPERATIONS
Companies providing back office services may be set up as international trading companies and benefit from the tax framework that applies to such companies.
Back office companies must carry on pure management operations such as routine administration services, book keeping and accounting services (excluding work which may only be carried out by a person or firm holding a warrant under the Accountancy Profession Act), information and data processing services, computer bureau, database and computer outsourcing services to companies which are not resident in Malta or otherwise established in Malta. Approval of companies providing back office services in the financial services sector (investment services, banking, insurance etc), must be sought from the Malta Financial Services Sector.
TRUSTS REGISTERED IN MALTA
By means of the Recognition of Trusts Act, 1994, Malta, a civil law jurisdiction, has effectively adopted the Hague convention on the law applicable to trusts. Trusts registered in Malta pay income tax at a flat annual rate of Lm200 (c. US$ 500).
ADVANCE REVENUE RULINGS
The International Tax Unit within the Inland Revenue Department deals with all international tax matters and provides rulings in advance in areas where there might otherwise be uncertainty or fear of infringing Maltese anti-avoidance legislation. In this way, the fiscal implications of investing in or through Malta, or of setting up a base in Malta, or of any particular international transaction will be made clear from the outset. Rulings are available to confirm the tax position on the following particular issues:
These rulings guarantee the tax position for a period of five years and may be renewed for a further five-year period. They will also survive any changes of legislation for a period of two years after the entry into force of the new law.
A number of other amendments have been introduced in order to facilitate and further encourage the development of international financial services in Malta.
The transfer of marketable securities by or issued by collective investment schemes, investment services companies, international trading companies and other companies which are majority owned by non-residents and whose assets and business interests are principally outside Malta is exempt from transfer duty in Malta.
Non-residents, provided they are not owned by, controlled by, or acting on behalf of, a resident of Malta, and provided they are not otherwise operating in Malta through a permanent establishment, are exempt from Maltese tax on the following:
The Income Tax Management Act limits the powers of the Inland Revenue Department to carry out searches and request certain information. These restrictions are intended to conform with the provisions of the Professional Secrecy Act.
In particular, the powers of search cannot be exercised unless the Inland Revenue has reasonable grounds to suspect that an evasion of Maltese tax is involved. A request for information cannot be served on any of the following licensed persons:
except for the purpose of determining the taxable income of the licensed person.