5. Taxation

A. Taxation Of Individuals

An individual who is ordinarily resident and domiciled in Malta is taxable in Malta on their worldwide income, whether received in Malta or not. If an individual is either ordinarily resident in Malta or domiciled in Malta, but not both, they are subject to tax on income arising in Malta, on income arising abroad but received in Malta, and on capital gains arising in Malta. Individuals who are neither ordinarily resident nor domiciled in Malta are subject to tax in Malta on income and capital gains arising in Malta only. Personal income tax is charged at progressive rates up to a maximum rate of 35 per cent.

There is a favourable residency scheme for individuals seeking to move their tax residency status to Malta and be subject to tax in Malta at a flat rate of 15 per cent on any income or gains arising in Malta and on any income arising outside Malta that is remitted to Malta. Such a scheme is intended for individuals wishing to retire in Malta, and thus an individual obtaining residency by the terms of such a scheme cannot perform employment activities in Malta. Under this scheme, known as the Permanent Residence Scheme, persons who satisfy certain high-net-worth requirements, are not citizens of Malta, and satisfy further criteria, can apply for, and receive, a permanent residence permit. The current scheme is being restructured, with a view toward bringing it up to date and enhancing it.

Furthermore, a favourable 15 per cent flat rate of tax has been recently introduced for executive employees in the financial services industry. Individuals who are not domiciled in Malta and who hold an executive position in the financial services industry in Malta may now opt to have their employment income derived from such office taxed at a flat 15 per cent rate. This beneficial rate of tax may only be applied if the employee derives income from a qualifying contract of employment, has an annual income of at least EUR75,000, as adjusted annually for inflation, and satisfies various conditions in relation to the type of employment, professional qualifications, and personal status.

B. Taxation Of Companies

Companies incorporated in Malta are subject to income tax in Malta on their worldwide income, as they are considered to be ordinarily resident and domiciled in Malta by virtue of their incorporation. Companies registered outside Malta are considered resident in Malta if the management and control of the company is exercised in Malta, whereas companies that are neither resident nor domiciled in Malta are only subject to income tax in Malta on income and capital gains arising in Malta. The above is subject to the specific provisions of any double tax treaties. Branches are taxed at the same rate of income tax as domestic companies.

Malta does not have a separate system of corporate taxation. Companies are taxed in Malta at a flat rate of 35 per cent.

However, shareholders of Malta companies are entitled to claim a tax refund of part of the tax suffered at the level of the Maltese company on any distributions made by the company to its shareholders. The standard tax refund amounts to six-sevenths of the Malta tax paid on the profits out of which the dividend distribution was effected, and is reduced to five-sevenths where the dividend is distributed out of profits emanating from passive interest or royalties, and to two-thirds where the dividend is distributed out of income derived from foreign based investments and in respect of which the Maltese company has claimed double taxation relief.

Maltese law also provides for an exemption from income tax in Malta for any income or gains derived from a participating holding. A participating holding is the holding of shares by a company resident in Malta in another company (or a body of persons as described below) where the former:

  • has at least 10 per cent of the equity shares in another company
  • is an equity shareholder in the other company and on account of its holding (and even if it holds less than the 10 per cent of the equity shares), the company has a certain level of control and/or other rights (e.g. share pre-emption rights, director appointment rights) in another company
  • is an equity shareholder that holds an investment representing a total value of not less than EUR1,164,000 (or its equivalent in another currency) and such investment is held for an uninterrupted period of not less than 183 days, or
  • holds the shares in the other company for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

A participating holding may also be held in a body of persons that is not a company but is a body of persons similar to a Maltese partnership en commandite, the capital of which is not divided into shares.

For the participation exemption to apply, certain safe-harbour provisions must be satisfied by the company in which a participating holding is held. Some of these provisions are easy to satisfy, and they include, inter alia, that the holding is in a company that is incorporated or tax resident in a country which is part of the EU.

Alternatively, for income or gains derived from a participating holding, instead of claiming a straight tax exemption in terms of the participation exemption, a company may opt to be taxed at the normal corporate tax rate of 35 per cent and, on a distribution of such profits to the shareholders, the shareholders can claim a 100 per cent tax refund.

C. Double Taxation Relief In Malta

Malta has signed over 55 double taxation agreements, mostly based on the Organisation for Economic Cooperation and Development Model Convention, which ensure that the same income is never taxed twice in different jurisdictions. Relief from double taxation is also afforded through Commonwealth income tax relief, unilateral relief and a flat-rate foreign tax credit.

The flat-rate foreign tax credit (FRFTC) applies where the other forms of relief from double taxation are not available, including where there is no evidence of foreign tax suffered. This type of relief is available to a Malta company in receipt of income and/or capital gains from overseas which are allocated to its foreign income account. The FRFTC assumes that a foreign tax at the rate of 25 per cent was suffered by the Malta company.

D. Taxation Of Dividends

Malta adopts a full-imputation system of taxation whereby the tax suffered at a Maltese company level is imputed back at the shareholder level. Accordingly, shareholders of a Maltese company do not suffer any tax in Malta on any dividends derived from a Maltese company.

Furthermore, no withholding tax is charged on any dividends distributed by a Maltese company.

E. Taxation Of Trusts

Taxation in the case of trusts arises when at least one of the trustees is a person resident in Malta. Tax is charged on any income attributable to a trust to the extent that such income is allocated to beneficiaries.

However, Maltese legislation provides for tax transparency in certain situations whereby the income derived by the trust is deemed not to be attributable to the trust, but instead is considered to be income derived directly by the beneficiaries. Tax transparency applies when all the beneficiaries of the trust are persons who are not ordinarily resident and not domiciled in Malta or whose income is totally exempt from tax in terms of the tax exemptions applicable to non-resident persons on interest, royalties or gains. Furthermore, for tax transparency to apply, the income attributable to a trust should consist of income arising outside Malta, or of interest, royalties, or gains that are exempt from tax in Malta in the hands of a non-resident person. Where tax transparency applies, and the income of the trust consists solely of income arising outside Malta, non-resident beneficiaries would not suffer any tax in Malta on such income even though the income attributable to the trust is considered to be derived directly by the beneficiaries.

Moreover, a novel (and attractive) feature of Maltese trusts law is that a Maltese trust may elect to be treated as a company ordinarily resident and domiciled in Malta for Maltese tax purposes whereby all the provisions (and attractive features of Maltese tax law) applicable to a Maltese company would equally apply to the trust, including, without limitation, the tax refund mechanism described above.


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