The Maltese Companies Act 1995 is based primarily on UK company law principles in addition to being harmonised with EU Directives. The most popular type of corporate entity by far is the company though Maltese law still provides for the possibility of setting up three types of commercial partnerships; a partnership en nom collectif, and a partnership en commandite or limited partnership.
Limited Liability Company
World-Wide Basis of Taxation: companies incorporated under the laws of Malta are deemed to be resident and domiciled in Malta. These companies are subject to tax of 35% on their world-wide income.
However this can be reduced significantly due to tax refunds and mechanisms such as the double tax relief. As such, foreign shareholders of a Malta company may attain an effective tax rate of 5% on profits on trading activities, and 0% in many cases of holding assets, in particular outside of Malta.
Under the tax accounting system in Malta, profits derived by a Maltese company are allocated to one of the following accounts:
– Final Taxed Account (FTA)
– Immovable Property Account (IPA)
– Foreign Income Account (FIA)
– Maltese Taxed Account (MTA)
– Untaxed Account
The taxation of dividends received, therefore depends on the tax accounting system and tax account from which the distribution is made.
Distribution of profits, by way of dividends, entitles the shareholders of a Malta registered company to claim certain types of refunds of the corporate tax paid. Tax Refunds may be claimed when income is allocated and distributed from the Maltese Taxed Account and Foreign Income Account.
- No refunds may be obtained on income allocated to the Final Taxed Account and Immovable Property Account.
- Refunds may be claimed both by Maltese resident and non-resident shareholders. Under certain conditions, the tax refund may also be subject to further tax in Malta.
- Shareholders will be entitled to 6/7th refund of the Malta tax payable, reducing the effective tax rate to 5%.
This tax refund may be claimed on the distribution of any income allocated to the Foreign Income Account (FIA) and Maltese Taxed Account (MTA) of a company by way of dividend, on condition that the income is not qualified as passive interest or royalties and the company does not seek double taxation relief on the foreign sourced income.
- Shareholders may claim a refund of 5/7 of the tax actually paid, if income is made up of passive interest and royalties and the dividend is paid from company’s Foreign Income Account or Maltese Taxed Account.
- Interest and royalties are considered passive when they are not in essence derived from a trade or business and have suffered a foreign tax of less than 5%. When interest and royalties have suffered 5% or more foreign tax, the 5/7 refund cannot be claimed. However in this case the 6/7 refund can be claimed.
- 2/3rds refund of the Malta tax paid may be available where the dividend is paid out of the company’s Foreign Income Account and double taxation relief is claimed.
- It is also possible to claim a full refund of tax paid where a dividend is paid out of profits derived from income and gains from a ‘participating holding’, where the participation exemption is not benefitted from. This may also take the form of a corporate refund.
Double Tax Relief
In terms of the Income Tax Act, companies which have derived income or gains deemed to arise outside of Malta, may claim one of the following types of relief:
- Double Tax Treaty Relief
This takes form of a credit which is granted against the tax paid in a country with which Malta has concluded a treaty. Malta currently has more than 50 double tax treaties in force, most of which are based on the OECD Model Convention. In most of its tax treaties, Malta has agreed to relieve double taxation using the credit method.
- Unilateral Relief
Unilateral relief is applicable in respect of foreign taxes by way of credit against Malta tax where there is no treaty with the country concerned. The unilateral relief works very much in the same way as treaty relief.
- Flat Rate Foreign Tax Credit
The Flat Rate Foreign Tax Credit (FRFTC) is a 25% tax credit on the net foreign sourced income. However, for this to be applied, certain conditions need to be satisfied:
A company claiming FRFTC may claim a tax credit of 25% assumed to be levied abroad irrespective of whether this has happened. FRFTC is calculated on the net income received from abroad before any allowable deductions.
International Holding Company
If more than 10% of equity shares are held in the underlying company or an investment of 1.17million held for a minimum uninterrupted period of 183 days, dividends received from subsidiary company may benefit from the participation exemption. Another option is the payment of the 35% tax and upon distribution of dividend to the shareholders there can be a 100% tax refund.
Branches of overseas companies in Malta
Remittance Basis of Taxation: a company which is not incorporated in Malta but managed and controlled in Malta is considered resident but not domiciled in Malta. Such companies are subject to tax on the remittance basis, and are therefore taxed on:
o Income and capital gains deemed to arise in Malta;
o Income deemed to arise outside of Malta and remitted to Malta.
Companies subject to the remittance basis are not taxed on:
o Income deemed to arise outside of Malta which is not remitted to Malta;
o Capital gains arising outside of Malta
Shareholders of Companies not incorporated under the laws of Malta which are managed and controlled in Malta and of companies not incorporated under the laws of Malta and not managed in Malta but which operate through a branch in Malta may also claim refunds of the tax paid by the permanent establishment/branch in Malta.
En nom Collectif
This type of partnership and a partnership en commandite which does not have divided shares, according to the Malta Income Tax Act, is transparent for tax purposes. Tax can be calculated according to the applicable personal tax rate. Therefore partners declare their shares of profit in their personal tax returns.
When shares of a limited partnership have been divided into share then they will be treated as a company for income tax purposes.
Further features of Maltese Corporate tax law:
– Malta does not levy any withholding tax on outbound dividends, interest and royalties.
– Malta does not have any controlled foreign company legislation
– Malta does not have any thin capitalisation rules
– Malta does not levy any exit taxes
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