Malta Company taxation
Malta Taxation of a company incorporated / resident in Malta
What is the taxation of a company incorporated in Malta?Companies incorporated in Malta are subject to a flat rate of Malta income tax of 35% on their profits. Nevertheless, it is pertinent to note that a number of specific tax exemptions exist in various areas such as the Malta copyright tax exemption and the Malta tax exemption for patent royalties.
When companies are taxed at the standard rate of 35%, following the distribution of dividends, shareholders are entitled to a refund of part or of all the tax paid by the Malta company. Generally speaking, tax refunds are available to all shareholders in respect of the distribution of all profits other than those derived from immovable property situated in Malta and those which have already suffered a final tax (such as bank interest on which a 15% final withholding tax at source has been imposed).
Therefore, though corporate taxation in Malta is relatively high (35%), shareholders are entitled to claim back part or even the whole of the tax paid by the Malta company. This is what makes the Malta taxation system attractive, ingenious and unique.
How much does the shareholder get back in Malta tax refunds?The amount of Malta tax refunds is set at 6/7th of the Malta tax paid by the Malta company. Thus the Malta company would be subject to taxation at 35%, but shareholders would be entitled to claim back 6/7 of this tax back.
In such a scenario, the effective tax liability is of 5% [6/7 * 35 = 5].
E.g. If gross profits amount to Euro 100,000, the company would pay Euro 35,000 in tax, but the shareholder would typically be entitled to claim back Euro 30,000 in tax refunds.
The above rule is subject to certain exceptions: there is one case where the Malta tax refund is higher (a full 100% refund is given) and 2 cases where the Malta tax refund is lower.
Case where the Malta tax refund is higher than 6/7
A full (100%) refund applies to a Malta holding company which derives profit/gains from a participating holding in a non-resident entity. In such cases, the Malta holding company may decide:
(a) either to apply an outright exemption for Malta tax (the Malta holding company exemption known as the participation exemption (that is it may opt not to pay the 35% tax in the first place); or(b) to include such income /gains as part of the taxable income of the Malta company and pay tax at 35%. Following the distribution of dividends by the Malta holding company out of the said income/gains, the recipient shareholders would be entitled to a full (100%) refund of the Malta tax paid by the company on such income/gains. This scenario could be desirable in cases where, for some reason or another, the shareholder prefers to receive a part of his earnings in refunds rather than exclusively in dividends.
2 cases where the Malta tax refund is lower than 6/7:
There are two cases where the Malta tax refund is lower than the normal 6/7 refund enjoyed by shareholders of typical trading companies:
1. Where the
profits out of which a dividend is distributed consist of "passive interest or royalties", the refund is set at 5/7 of the
Malta tax suffered on those
profits. There exists "passive interest or royalties" if (i) income is not derived from a trade or business AND (ii) such interest or royalties have not suffered foreign tax or suffered foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than five per cent (5%). If any one of these conditions is lacking, there will be no passive interest or royalties and one would fall under the more beneficial 6/7 refunds regime.
2. Where double
taxation relief is claimed, dividends paid out of profits allocated to
the foreign income account in respect of which profits the distributing
company has availed itself of any form of double tax relief are subject
to a 2/3 refund.
Does Malta’s tax refund system apply both to resident and non-resident shareholders?Yes, Malta’s tax refund system applies both to resident and non-resident shareholders. However a number of claw back provisions ensure that the refund system is not attractive for resident shareholders. There is, however, an important exception to this rule when the resident shareholder is not ordinarily resident and domiciled in Malta. In this latter case the claw back provisions do not apply where the shareholding in a Malta company is held via a foreign entity.
Non-resident shareholders are not taxed in Malta on the refunds they receive.
When are Malta tax refunds paid?A claim for refunds of Malta tax by a registered shareholder of a Malta company is paid by the Malta tax authorities within 14 days from the end of the month of a valid application being submitted.
Are refunds discretionary?When refunds are due according to law they are payable according to law. Article 48A(8) of the Income tax Management Act clearly provides that "A refund due as aforesaid shall constitute a debt due by the Commissioner to the claimant". Therefore, when refunds are due the Commissioner must pay up.
What are the implications of Malta’s full imputation system of taxation?In Malta’s full imputation system of taxation, the tax paid by the Malta company on the profits which it distributes as a dividend in favor of its shareholder is credited in full against the Malta tax liability of that shareholder. It is essentially intended to eliminate economic double taxation (taxation of corporate profits in the hands of 2 different persons: the company and its shareholder). Since companies are chargeable to tax at a flat rate of 35% which rate is equal to the marginal rate of 35% applicable to individuals, no further tax is due upon receipt of a dividend by an individual shareholder. However, should an individual shareholder be liable to tax at a progressive rate which is lower than the 35% rate (levied on the profits of the company) then he is entitled to a tax refund equivalent to the "excess" tax paid by the company.
Does Malta apply withholding tax upon the distribution of dividends to non-resident shareholders?No, Malta does not levy withholding tax on distributions of dividends to non-resident shareholders. Moreover, as long as certain conditions are met, Malta would not levy any withholding tax on payments of interest and royalties to persons not resident in Malta.
How are Capital gains derived by a Maltese company treated?Capital Gains are not taxed separately in Malta: they are added to the other income of the company and charged to tax at the normal corporate rate of tax. Moreover, not all capital gains derived by a Maltese company are chargeable to tax in Malta. Chargeable gains relate to the gains on capital assets specifically listed under Article 5 of the Income Tax Act:
1. Immovable property situated in Malta
2. Rights over securities
7. Trade names
8. Beneficial interest in a trust
What about Capital gains derived by non-resident shareholders (being non-resident beneficial owners) upon the sale/disposal of their Malta Company?Article 12 (c) (ii) of the Income tax Act provides that there shall be exempted from tax in Malta any gains or profits accruing to or derived by any person not resident in Malta on a disposal shares or securities in a company whose assets do not consist wholly or principally of immovable property situated in Malta.
Malta’s jurisdiction to tax
The corporate tax and refund system described above applies to companies resident in Malta. Companies incorporated in Malta are considered ordinarily resident and domiciled in Malta and would consequently be taxed in Malta on a worldwide basis.
Nevertheless a foreign company may be tax
resident in Malta should it result that its business is controlled and
managed in/from Malta.
Companies which are resident or domiciled in Malta but not ordinarily resident and domiciled are subject to tax in Malta:
(i) on income and chargeable gains arising in Malta;
(ii) on income
arising outside Malta which is received in Malta (remittance
No tax is payable on capital gains arising outside Malta to a company who is not ordinarily resident in Malta or nor domiciled in Malta [Proviso to Art 4(1) ITA]
Companies which are neither incorporated nor
resident in Malta are only chargeable on Malta source income and/or
capital gains. This would be the case, for instance, of a company
incorporated and resident in a foreign jurisdiction which establishes a
permanent establishment (i.e. a branch) in Malta.
How is a Malta branch of an overseas company taxed in Malta?A company which is not incorporated nor resident in Malta and which carries out an activity in Malta should register its Malta branch with the Registrar of Companies and with the Malta tax authorities. In accordance with EU directives, separate branch accounts must be kept. For tax purposes, profits in respect of the branch are treated as profits attributed to a permanent establishment in Malta and the tax principles applicable to Malta companies will apply. Thus, branches which are duly registered with the Commissioner of Inland Revenue are covered by the tax accounting system and the refundable tax credit system, just like a company. Branch profits will be taxed at 35% and the company’s shareholders may register for refunds and recoup part of that tax paid in accordance with the principles stated above.
Which is the most common trading structure adopted?For persons wishing to trade, the creation of 2 Malta companies is often the norm: a Malta Trading company and a Malta holding company. The 2 main reasons for having the shares in the Malta trading company being held by a Malta holding company are:
(i) to create an entity which may accumulate the sum of the dividends and refunds received in respect of the Malta Trading’s activity; and/or;
(ii) possibly to be able to distribute such accumulated profits (sum of dividends and refunds received in respect of the Malta Trading’s activity) as a dividend to a foreign EU holding company with a view of benefiting from the Parent Subsidiary Directive [this essentially depends on how the Member State in question has implemented the parent subsidiary directive].
What is the Parent Subsidiary Directive?
As indicated in the preceding answer, the
Parent Subsidiary Directive may come in handy where the shares of a
Malta company are held by a parent company located in another EU Member
Essentially the Parent Subsidiary Directive provides that:
(i) intragroup cross-border payments of dividends must be exempted from withholding tax by the Member State of the Subsidiary [Art 5];
(ii) the Member State of the recipient Parent company must either refrain from taxing the incoming dividend altogether (exemption method), or tax it, but in that case credit, against the parent’s corporation tax, the corporation tax already paid by the subsidiary in its Member State (indirect credit: credit for underlying tax) [Art 4].
There are several
conditions to be satisfied for entitlement to the benefits of this
Directive, as well as certain exceptions. The Directive
affords Member States certain discretionary power to apply domestic or
Treaty based anti-abuse provisions in relation to the substantive rules
of the Directive. For these reasons, it is advisable to obtain tax
advice in the country where the foreign parent is established in order
to assess how the payment of dividend by the Malta company to the
foreign parent will be treated (from a Malta perspective, there would be
no withholding tax on such payment).
May a foreign jurisdiction tax profits of a Malta company which have been / will be taxed in Malta?
In terms of Maltese law, a company registered in Malta is domiciled and resident in Malta and therefore taxable in Malta on a worldwide basis. This does NOT mean, however, that a Maltese company which operates abroad may never be taxed in that country.
Cases of dual residence may arise, for
instance when one State attached importance to the place of
incorporation whereas another attached importance to the place of
Moreover, many jurisdictions are often allowed to tax profits of foreign companies attributed to permanent establishments in their territory. Moreover, most jurisdictions have rules on deemed residence and tax avoidance, which could allow them to tax overseas companies deemed to be resident in their territory even though they may not be incorporated there. In particular, a foreign jurisdiction may attempt to tax the profits of an overseas company if such company is deemed to be a resident in its territory because its effective management or/and control is exercised therein.
The criteria of "effective management" is infact widely used under many OECD based double tax treaties to which Malta is a party. The place of effective management is usually considered to be the place where key management and commercial decisions are in substance made. An entity may have more than one place of management but it may only have one place of effective management at any one time. In determining the place of effective management all relevant facts should be considered. These include:
- Where board meetings of directors are held. The frequency of meetings, and whether they actually exercise control over the company are also relevant factors;
- Where senior day to day management is carried out;
- Where the company’s headquarters are located;
- Where the company’s accounting records are
Other indicators linking the company with Malta include the fact that:
- The Malta company’s income & expenditure passes through a Maltese bank account;
- The Malta company may possibly employ one or more individuals in Malta, possibly a Malta resident director. According to EU law, social security contributions are normally paid in the place where the worker works: therefore paying social security contributions in Malta may possibly help to prove that the particular individual employed by the company (who may be the director) actually works in Malta.
- The Malta company
rents premises in Malta and has other expenditure in Malta (e.g.
telephone bills, rinternet connection costs, accountancy costs,
In other words, to have ’ effective management’ in Malta in terms of many double tax treaties to which Malta is party, the company promoters should endeavour to give substance to the creation of the Malta company.
It is very important to consider the effect of any double taxation treaty existing between Malta and the foreign jurisdiction. Unlike many low tax / offshore jurisdictions, Malta has concluded double taxation agreements with many countries (including most EU countries).
A double tax treaty is essentially an agreement between two countries which determines which country has the right to tax a person or company in specified situations. Therefore, the main aim of double tax treaties is to ensure that the same income is not taxed twice. Generally speaking, in terms of Malta’s double taxation agreements with other countries, when by virtue of the laws of the two contracting states a company is considered as a tax resident of both contracting states, the company is deemed to be a tax resident only in the state in which its place of effective management and control is situated, independently of where the company is incorporated.
Double tax treaties usually also provide for double tax relief so that even if income is taxed twice at least it would be possible to deduct overseas tax which has already been suffered. Moreover, Maltese legislation provides that when the terms of any double taxation agreement conflict with the provisions of domestic Maltese legislation, the terms of such agreement will prevail over inconsistent Maltese legislation.
Another form of relief for
foreign tax suffered is Unilateral relief. Here, foreign tax is offered
as credit against Malta tax when there is no treaty with the country
concerned. Flat rate foreign tax credit (FRFTC) is a special
type of unilateral relief which is only available to companies. It is
offered only when the company proves (through an auditor’s certificate)
that the source income is foreign and when other forms of relief are not
available. In all cases where relief is available, if the foreign tax
exceeds Malta tax chargeable on the same amount of foreign income, the
excess cannot be allowed as credit.
Some foreign jurisdictions also have rules on thin capitalisation, transfer pricing and/or controlled foreign companies which may negate the benefits of a forming a Maltese company.
For the reasons indicated above, it is highly recommended that persons wishing to open a company in Malta seek foreign professional advice especially if there is the risk that the company will be effectively managed from abroad.
Generally speaking the more substance given to
the Maltese company, the less it may be seen as a tool utilised for the
artificial diversion of profits from one country to another. The Council Resolution on coordination of the Controlled Foreign Corporation (CFC) and Thin Capitalisation rules lays down a number of cases
where, in the opinion of the EU Commission, profits are deemed to be
How will dividends distributed by a Maltese Company to a foreign EU resident corporate shareholder be treated in its country of residence?
Apart from the parent subsidiary directive which applies when an EU based subsidiary distributes profits to its holding company, one should refer to principles of EU law and of course, to the national law of the country of residence.
According to a policy document published by the EU Commission entitled “Dividend taxation in the internal market” Member States must tax foreign EC dividends in the same manner as domestic dividends. This was, confirmed by the judgment of the Court of Justice of the European Union in the Manninen and in the Lenz cases. These provide that Member States providing various forms of tax relief for domestic dividends in order to prevent economic double taxation of distributed company profits must extend the same level of relief in respect of dividends paid by companies of other Member States. It is suggested that readers residing in EU Member States contact their tax advisers in their country of residence in order to see whether and how this principle is implemented in practice.