Malta

Tax residency – A company is tax resident in Malta if it is incorporated in Malta or the management and control of its business is exercised in Malta

Basis – Companies both domiciled and resident in Malta and are taxable on a worldwide income basis. A non-Maltese incorporated company that is resident in Malta through management and control is subject to Maltese tax on income arising in Malta and on income remitted to Malta.

Tax rate – Malta has a headline tax rate of 35% but has a tax credit system where shareholders can claim a tax credit towards their income taxes of up to 6/7 for trading income, 5/7 for passive interest and royalties and 2/3 for other investment income and income to which a foreign tax credit has been availed of, upon distribution of dividends. If the shareholders are nonresidents or are corporate bodies, the tax credit will be refunded to the shareholders upon submitting a claim to the Revenue Commission to that effect. If the shareholders are resident taxpayers, the actual refund amount will depend on the actual personal income tax liability of the resident taxpayer.

Assuming that the shareholders are companies or nonresident individuals, after receiving the tax refund, the effective tax rate on trading income would be 5%, 10% on interest and passive royalties, and 11.66% on other investment income, and income to which a foreign tax credit has been availed of.

Capital gains - Capital gains on disposal of shares received by a corporate investor from a non-resident company (or from a non-resident partnership, subject to certain conditions) may qualify for a participation exemption in Malta. 

The Participation Exemption on capital gains will apply if the Malta holding company complies with one of the following -

• Holds directly at least 5% of the equity shares of the underlying entity. The 5% must confer the right to at least two out of the following three equity rights:
  • the voting rights,
  • the dividend rights
  • the rights to assets on a winding-up of the equity shares; or
• Is an equity shareholder in another entity and is entitled to either sit on the Board or appoint a person to sit on the Board of the other entity; or
• Is an equity shareholder investing at least €1,164,000 (or the equivalent sum in a foreign currency) for an uninterrupted period of not less than 183 days in another entity; or
• Is an equity shareholder and is entitled to, at its option, call for and acquire the entire balance of the equity shares not held by it; or
• Is an equity shareholder and is entitled to the first refusal in the event of proposed disposal, redemption or cancellation of all the equity shares; or
• Is holding shares for the furtherance of its own business, and the holding is not held as trading stock for trade.

Capital Gains derived from the transfer of immovable property situated in Malta may be taxed at a final tax of 8% of the transfer value. Rates from 2% to 12% may apply in certain cases.

Dividends -  Dividends received from a resident company are taxable on the gross amount in the recipient’s hands. If the distributed profits have been taxed, no further tax should be chargeable to the recipient company.

Dividends received from a non-resident company and remitted profits from a foreign PE, may be tax-exempt, subject to complying with one of the following conditions:

• Holds directly at least 5% of the equity shares of the underlying entity. The 5% must confer the right to at least two out of the following three equity rights:
  • the voting rights,
  • the dividend rights
  • the rights to assets on a winding-up of the equity shares; or
• Is an equity shareholder in another entity and is entitled to either sit on the Board or appoint a person to sit on the Board of the other entity; or
• Is an equity shareholder investing at least €1,164,000 (or the equivalent sum in a foreign currency) for an uninterrupted period of not less than 183 days in another entity; or
• Is an equity shareholder and is entitled to, at its option, call for and acquire the entire balance of the equity shares not held by it; or
• Is an equity shareholder and is entitled to the first refusal in the event of proposed disposal, redemption or cancellation of all the equity shares; or
• Is holding shares for the furtherance of its own business, and the holding is not held as trading stock for trade.

Furthermore, the paying company must meet one of the following conditions:

• Is a resident or incorporated in an EU country
• Is subject to foreign tax of at least 15%
• Has 50% or less of its income from passive interest or royalties
• Is not a portfolio investment and has been subject to tax at a rate of at least 5%

Interests - Interest income is subject to taxation at standard rates.

Royalties – Royalty income is subject to income tax.

Foreign-source income – Companies ordinarily residents and domiciled in Malta are taxed on their worldwide income. Profits of a foreign permanent establishment may be exempt from taxes as long as the aforementioned participation exemption condition is met. Companies that are not ordinarily resident or not domiciled are taxed on income accrued in Malta or remitted to Malta.

However, taxable profits of Maltese-resident companies derived from foreign investments; profits of a foreign PE; and profits derived from foreign investments, assets, or liabilities of an onshore bank licensed in Malta, for which no evidence of tax paid is available can qualify for a flat-rate foreign tax credit of 25%.

Withholding taxes – Malta does not levy withholding tax on dividends paid to non-residents. No withholding tax applies to royalty and interest payments, provided that the recipient does not act on behalf of a Maltese domiciled resident.

Losses – Losses arising from taxable income may be carried forward indefinitely. Carryback of losses is not allowed.

Inventory - Inventory valuations are usually made at the lower of cost or market value. In general, the book and tax methods of inventory valuation will be acceptable. Last in first out method (LIFO) is not allowed for taxation purposes.

Anti-avoidance rules – The transfer pricing regime in Malta is not sophisticated. There are included some anti-avoidance provisions and brief references to transactions at arm’s length.

Malta conscripted into local law the EU Anti-Tax Avoidance Directive (ATAD 1) via the L.N. 411 of 2018 – which is now in force since January 1, 2019.

Under the L.N. 411 of 2018, Malta has implemented controlled foreign company (CFC) rules.

Under Maltese law, a CFC may be a Malta’s company foreign permanent establishment (PE) or a subsidiary in which the parent company holds directly or indirectly more than 50% of its voting rights/capital or is entitled to receive more than 50% of the profits – which corporate tax paid is lower than half of the tax that would have been charged on the company or PE under the Malta Income Tax Act.

Malta taxes non-distributed income of the CFC if this is derived from a non-genuine arrangement to create a tax advantage.

CFC rules don’t apply to subsidiaries and PEs with no more than EUR 750,000 of trading profits and non-trading income of EUR 75,000 or less, or companies which profit amount does not exceed 10% of its operating costs.

Malta has also transposed into law the interest deductibility rule, whereby a company can only deduct net interest expenses up to the higher of 30% of its EBITDA or EUR 3 mil.

An Exit tax became effective in January 1, 2020. A Maltese company that transfer assets to a PE outside of Malta, a non-resident operating through a PE that transfer assets or business to outside Malta, or a Malta company that transfers its tax residency from Malta to outside Malta – would be deemed to have accrued a capital gain, which will be subject to tax. The capital gain would be calculated by the market value of the transferred assets less their base cost for tax purposes.

Labor taxes – Employers and resident employees are required to make contributions to the Social security fund at 10% on resident employees’ monthly income, each one, without a maximum limit amount.

Tax credits and incentives – A tax credit for foreign tax paid is usually available. When no evidence of tax paid is available, a company may qualify for a flat-rate foreign tax credit of 25%.

The Malta Enterprise Act and other related legislation provide comprehensive tax incentives for foreign investment on certain activities in Malta, such as manufacturing activities.

There are also tax incentives for securitization vehicles, re-insurance special purpose vehicles and collective investment schemes.

The Micro Invest Scheme provides tax credits up to EUR 30,000 for micro-enterprises. A tax credit may be increased to EUR 50,000 for self-employed women, businesses that are majority owned by women, and start-ups established in Gozo.

Compliance – On average, a Limited company in Malta may require 8 payments and 138 hours per year to prepare, file and pay taxes.

Personal income tax - Maltese ordinarily residents and domiciled in Malta are subject to personal income tax on their worldwide income and capital gains.

Maltese ordinarily residents and not domiciled in Malta are taxed on their income and capital gains arising in Malta and on income arising outside Malta that is remitted to Malta. In such case, foreign-source income not remitted to Malta and capital gains (remitted or not) may be tax-exempt.

Non-residents are only taxed on their income and capital gains from Malta.

Personal income tax rates are progressive from 0% to 30%. Capital Gains are taxable income. However, gains from the disposal of immovable property are taxed at lower rates of 8%, 10% or 12% depending on the circumstances.

Other taxes – In Malta, there are no inheritance, real property, net wealth and municipal taxes. There is a stamp duty applied on certain transfers such as real property or securities. Value-added tax is 18%.