By virtue of two separate legal notices, the interest on late payments of income tax and VAT has been reduced from 0.54% to 0.33% per month. The change is effective from 1 January 2020.
By virtue of two separate legal notices, the interest on late payments of income tax and VAT has been reduced from 0.54% to 0.33% per month. The change is effective from 1 January 2020.
As from year of assessment 2020, any person incurring qualifying IP expenditure and from which qualifying IP income is derived, may claim a deduction which may reduce the chargeable income from qualifying IP by 95%. The assets that are considered as qualifying IP are defined in the Rules and include registered patents and assets covered by protection rights, however, exclude brands, trademarks and trade names. Every item of qualifying IP in relation to which income is derived and against which the Patent Box Regime Deduction is claimed, need to be vetted and approved by the Malta Enterprise. The deduction is aimed for assets which are developed by the person rather than for acquired assets. The deduction is however not limited to assets developed in Malta but require that the beneficiary maintains sufficient substance as is commensurate with the type and extent of activity being carried out. The Rules also require that the income brought to charge is in line with the Transfer Pricing Method in terms of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The introduction of the Patent Box Regime is particularly interesting for persons investing in the development of patents or other innovative products from which income or gains arise. Indeed, this regime may drastically reduce the taxable income of the person and may also be applied upon the disposal of the relevant asset.
Following the publication of the Consolidated Group (Income Tax) Rules by means of Legal Notice 110 of 2019, Malta introduced fiscal unity rules providing for a consolidated tax group. As a result, certain groups of companies may, from the year of assessment 2020 (basis year 2019), opt to be treated as one single taxpayer.
Unlike the group relief provisions already contained in the Income Tax Act which provide for the surrendering of tax losses to other members of the same group, the fiscal unity rules provide for a consolidated tax group.
Also, the definition of a group in these rules is different and much wider than the definition contained in the Income Tax Act allowing both Maltese companies as well as foreign entities that fall within the definition of a company to form part of the consolidated group. The foreign entities need not be tax resident in Malta to form part of the fiscal unit, but it is necessary that they are tax registered in Malta.
It is interesting to note that certain trust arrangements as well as certain foundations may also form part of the consolidated tax group. This will give flexibility to certain structures. On the other hand, the rules exclude certain types of foundations, securitisation vehicles and finance leasing companies.
Requirements for the Formation of a Fiscal Unit
A parent company, as the principal taxpayer, may make an election for itself and its one or more subsidiaries to form a fiscal unit provided that in the year prior to the year of assessment it holds at least 95% of two of the following rights in each subsidiary (hereinafter refer to as 95% subsidiary):
Where the election is made, each 95% subsidiary will form part of the same fiscal unit of its parent company, with such subsidiaries being referred to as “transparent subsidiaries.” Where the transparent subsidiary is itself a parent company, its 95% subsidiaries will also join the fiscal unit. The principal taxpayer’s election becomes effective as from the year of assessment in which it is made, provided that it is made prior to tax return submission due date of the transparent subsidiaries.
Such an election is possible provided that the accounting periods of all the members within the fiscal unit are the same and subject to the consent of any minority shareholders. Naturally, no company shall form part of more than one fiscal unit at any one time.
Upon registering as a fiscal unit, the principal taxpayer assumes the rights, duties and obligations under the Income Tax Acts relative to the fiscal unit. The subsidiaries within the fiscal unit shall be deemed to be transparent entities for Malta income tax purposes. Balances of items allowed to be carried forward, tax credits, tax account balances (excluding the untaxed account) of the transparent subsidiaries at the end of the basis year preceding the year in which the election is made are considered to be balances of the principal taxpayer. Such carryforward is subject to the consent of the minority shareholders and if minority shareholders do not approve, then such balances will be suspended for as long as the transparent subsidiary remains part of the fiscal unit.
The Fiscal Unit’s Chargeable Income and Tax Payable
Intra-group transactions or transactions between members of the fiscal unit are referred to as “ignored transactions” and are disregarded for tax purposes. An exception relates to transfers of immovable property situated in Malta and transfers of property companies.
A property company is defined in the Income Tax Act as a company which owns immovable property situated in Malta or any real rights thereon or a company which holds, directly or indirectly, shares or other interests in any entity or person, which owns immovable property situated in Malta or any real rights thereon where 5% or more of the total value of the said shares or other interests so held is attributable to such immovable property or right.
Naturally, transfers of immovable property and property companies cannot be characterised as ignored transactions as otherwise such transfers would become exempt when transferred within a fiscal unit.
Given that the subsidiaries are deemed to be transparent subsidiaries, any income and gains which is not regarded as ignored transactions derived by such transparent subsidiaries, is directly allocated to the principal taxpayer.
Income or gains allocated to the principal taxpayer retain their character and source. The rules however contemplate a number of deemed source rules. For example, income or gains derived by a non-Malta tax resident transparent subsidiary is deemed to be attributable to a permanent establishment of the principal taxpayer situated outside Malta insofar as the transparent subsidiary maintains sufficient substance therein.
Similarly, expenditure and capital allowances incurred by transparent subsidiaries and which is not regarded as an ignored transaction, is directly allocated to the principal taxpayer or the parent company.
This tax consolidation provides for a full integration of the tax position of its members and hence is different in scope than the group relief provisions referred to above.
Furthermore, any foreign income tax suffered by a company forming part of the fiscal unit is deemed to have been incurred by the principal taxpayer, and relief from double taxation in accordance with the Income Tax Act is allowed accordingly.
The main advantage of the tax consolidation or the fiscal unity is that a group may achieve the same effective tax rate without the need for the distributing company or transparent subsidiary to pay the relevant tax and also avoid the need to make claims and await the receipt of the refunds.
The tax consolidation regime is optional, but should a fiscal unit be formed, the principal taxpayer is required to prepare, on a yearly basis, a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit accompanied by an audit report. Given the criteria described above to form a fiscal unit, the companies included in the consolidated accounts for the tax consolidation regime may differ from thse included in the consolidated accounts as required in terms of the Companies Act.
The principal taxpayer is responsible for filing the tax return/declaration of the fiscal unit, with other members of the fiscal unit being exempted from filing their respective tax returns. However, members of the fiscal unit are jointly and severally liable for the payment of tax, additional tax and interest. The tax liability by the fiscal unit may be apportioned between the principal taxpayer and the transparent subsidiaries.
These tax consolidation rules provide for an anti-abuse rule where the tax payable by the principal taxpayer cannot be lower than 95% of the aggregate tax that would have been payable by the companies within the fiscal unit had an election under these rules was not applied for.
Benefits of Tax Consolidation
As highlighted earlier on, the main benefit of the tax consolidation or fiscal unity is the cash flow advantage especially when compared to the current operation of the partial shareholder tax refunds upon a distribution of taxed profits. The new tax consolidation rules reduce the tax due to the combined overall effective tax rate without the need to wait for the income tax refund on distributed taxed profits. However, the tax consolidation may also be useful within a local context since it is wider in scope than the surrendering of tax trading losses. Clearly in view of the embedded anti-abuse provision, the purpose of these rules is not to provide a tax advantage.
It is evident that the tax consolidation rules will bring further compliance obligations, particularly the need to prepare and submit consolidated financial statements. Additionally, tax computations will still be required for each company and also for the fiscal unit as a whole in order to compare the tax liabilities and satisfy the anti-abuse provision. On the other hand, there is less compliance with respect to the filing of the income tax returns or declarations as only one return or declaration is submitted by the principal taxpayer.
The Notional Interest Deduction (NID) has already eased the number of tax refund claims filed by shareholders upon a receipt of taxed dividends but we expect that these rules will be availed of by large groups. The introduction of tax consolidation rules is long-awaited and is welcome as it brings Malta at level with other financial centers.
Malta implemented the EU Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD) by means of Legal Notice 411 of 2018 EU ATAD Implementation Regulations, 2018. The below provides an overview of the different new tax measures which will become applicable as from 1 January 2019, except for the exit taxation rule which will become applicable as from 1 January 2020.
The aim of ATAD is to implement at EU level the BEPS (Base Erosion and Profit Shifting) recommendations made by the OECD and the G20 in October 2015. ATAD lays down anti-tax avoidance rules in the following fields:
The regulations apply to taxpayers including companies as well as other entities such as trusts and similar arrangements that are subject to tax in Malta in the same manner as companies. The definition also applies to entities that are not resident in Malta but have a permanent establishment (PE) in Malta provided these are subject to tax in Malta as companies.
Limitation to the Tax Deductibility of Interest Payments (Rule 4)
Regulation 4 of L.N. 411 aims at limiting the deductibility of interest payments as it was recommended in the Final Report on BEPS Action 4 (interest deductions and other financial payments) and included as a minimum standard in ATAD. The objective of this rule is to discourage multinational groups from reducing their overall tax base through financing group companies in high-tax jurisdictions with debt. Notably, the scope of the interest limitation rule encompasses both related party borrowing and third party borrowing.
As from 1 January 2019, subject to certain conditions and limitations, “exceeding borrowing costs” shall be deductible only up to 30% of the corporate taxpayers’ earnings before interest, tax and amortization (“EBITDA”) or up to an amount of EUR 3 million, whichever is higher. Corporate taxpayers who can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can fully deduct their exceeding borrowing costs (so called “escape clause”).
“Exceeding borrowing costs” correspond to the amount by which the deductible “borrowing costs” of a taxpayer exceed taxable “interest revenues and other economically equivalent taxable revenues” that the taxpayer receives. Thus, in order to determine the amount of exceeding borrowing costs, it is necessary to understand which costs fall within the scope of borrowing costs and what is considered as interest revenues and other economically equivalent taxable revenues.
Borrowing costs to take into account are interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance, including, without being limited to:
As far as interest revenues and other economically equivalent taxable revenues are concerned, neither ATAD nor the LN 411 of 2018 clarifies what is to be considered as revenues which are economically equivalent to interest. However, since the definition of borrowing costs also refers to “other costs economically equivalent to interest”, there should be a symmetry in the interpretation of the two concepts.
The optional provision of ATAD according to which EBITDA and exceeding borrowing costs can be determined at the level of the consolidated group (in case of tax consolidation) has also been introduced in this regulation.
Entities which are out of the scope of the rule
Financial undertakings are out of the scope of the interest limitation rule. Financial undertakings are the ones regulated by the EU Directives and Regulations and include among others credit institutions, investments firms, insurance and reinsurance companies, certain pension institutions, alternative investment funds (“AIF”), undertakings for collective investment in transferable securities (“UCITS”), as well as central counterparties and central securities depositories.
In addition, standalone entities, i.e. entities that are not part of a consolidated group for financial accounting purposes and have no associated enterprise or PE are able to fully deduct their exceeding borrowing costs. In other words, these entities are not subject to the new interest limitation rule.
Loans which are out of the scope of the rule
Malta chose to limit the scope of the new rule through the inclusion of the following two optional provisions under ATAD:
Carry forward of unused exceeding borrowing costs and unused interest capacity
Exceeding borrowing costs which cannot be deducted in one tax period because they exceed the limit set in the rule, can be carried forward in whole or in part without any time limitation.
In addition, unused interest capacity can be carried forward over 5 tax years. The regulations do not define what falls under unused interest capacity.
Exit Taxation Rules (Rule 5)
As from 1 January 2020, re-domiciliation’s and shift of tax residency to other jurisdictions will trigger exit taxes. The aim is to even out discrepancies in the valuation of assets in the country of origin and the valuation of assets in the country of destination.
The exit rules transposed through rule 5 of L.N. 411, provide for tax on capital gains which are triggered when a taxpayer:
The capital gain will be equivalent to the difference between the market value of the assets at the time of the exit and their value for tax purposes. The capital gain will be subject to the provisions of the Income Tax Act. The income tax on the capital gain becomes payable by not later than the taxpayer’s subsequent tax return date. In case of transfers within the EU or European Economic Area (“EEA”), the taxpayer may request to defer the payment of exit tax by paying in equal installments over 5 years.
Exit taxes do not apply if the assets are set to revert back to Malta within a period of 12 months and the assets relate to the financing of securities, assets posted as collateral or an asset transfer that takes place in order to meet prudential capital requirements or for the purpose of liquidity management.
General Anti-Abuse Rule (Rule 6)
Any arrangements put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law shall be disregarded. Arrangements are considered as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
Article 51 of the Income Tax Act already includes general anti abuse provisions which explicitly states that any series of arrangements which are put up solely for taking benefit of any tax advantage is ignored for tax purposes. The GAAR transposed in regulation 6 of L.N. 411 prescribes that, for the purposes of calculating the corporate tax liability, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series thereof is regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
CFC Rule (Rule 7)
ATAD provides for CFC rules to discourage the attribution of income in a low-taxed jurisdiction. Malta opted to adopt the non -genuine arrangement CFC rule, thus, as from 1 January 2019, Malta will tax the non-distributed income of an entity or PE which qualifies as a CFC.
The income of a CFC will be taxed in Malta if, and to the extent that, the activities of the CFC that generate this income are managed by the Maltese corporate taxpayer as the people functions in relation to the activities of the CFC are performed by the Maltese corporate taxpayer.
An entity or a PE will qualify as a CFC if the following conditions are met:
If an entity or PE is deemed to be a CFC, then the non-distributed income arising from non-genuine arrangements of a CFC which are put in place for the purpose of gaining a tax advantage shall be included in the tax base of the taxpayer and hence will be brought to charge in Malta. The CFC rule applies only if:
Allocation rules and methods to avoid double taxation
The income of the CFC to be included in the tax base of the Maltese taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling Maltese corporate taxpayer. The attribution of CFC income shall be calculated in accordance with the arm’s length principle. The income to be included in the tax base shall be computed in proportion to the taxpayer’s participation in the CFC and is included in the tax period of the Maltese taxpayer in which the tax year of the CFC ends. Any tax paid by the CFC is allowed as a tax credit to the taxpayer in accordance with the provisions of articles 77 and 82 of the Act. Whilst the legislation provides for general guidelines as to how the income to be brought to charge will be calculated, in practice, various issues may arise which may require further clarifications from the tax department.
Following the launch of the BEPS recommendations by the OECD and the G20 in 2015, Malta has now implemented the EU directive to address tax avoidance schemes though ATAD. This follows the implementation of the MLI and the end of the single malt structures.
Most measures introduced through ATAD are new concepts to the Maltese tax framework. For the first time, Malta has interest deduction limitations, CFC rules and within two years, exit taxes. Being a new tax framework, various clarifications will be necessary to ensure that the rules are properly adhered to. It is indeed unfortunate that these rules have been released only a few days before these enter into effect as this gives very little time to taxpayers to assess the impact of these rules on current structures and assess whether changes are needed to mitigate the impact of these rules.
During the Budget speech for 2019 presented on 22 October 2018, it was announced that Malta, like other EU Member States, will be implementing the EU Directive on Anti-Tax Avoidance, more commonly known as ATAD1.
Although no detailed provisions are available yet, the following is a brief summary of the expected changes which will be introduced with effect from 1 January 2019 as a result of ATAD1.
When interest and similar borrowing costs of a company exceed interest receivable, the maximum tax deduction that can be claimed in a tax period in respect of the excess costs will be 30% of EBITDA (that is, earnings before interest, tax, depreciation and amortisation). Unutilised costs may be carried forward (subject to any further limitations that may be applicable under the normal provisions of the Income Tax Act). The new restrictions will not apply in cases where the exceeding borrowing costs do not exceed €3,000,000 (three million Euros).
In line with the EU Directive, the regulations envisage the possibility of this limitation being calculated and applied at group level.
The limitation will not apply to financial undertakings. Nor will it apply to costs on loans used to fund long-term public infrastructure EU projects or loans concluded before 17 June 2016.
A change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event. In such a case, the company will become subject to tax in the same manner as if it has disposed of its assets. The accrued gains will be calculated by reference to the market value of the asset at the time of the exit. Where the country of the new residence of the taxpayer or of the new location of the assets is another EU Member State, the payment of the tax can be deferred.
No exit tax will be chargeable in the case of a temporary movement of assets that is linked to certain financial transactions as long as the assets are returned within 12 (twelve) months.
Controlled Foreign Company (CFC) Rules
An entity will be considered a CFC where it is subject to more than 50% (fifty per cent) control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in Malta.
The measure will not apply:
The parent company will be entitled to double taxation relief for the tax paid by the CFC on the included income. The regulations should also provide for the avoidance of double taxation that could arise if the CFC subsequently distributes its profits or the parent company disposes of its interest in the CFC.
General Anti-Abuse Rule (GAAR)
The Income Tax Act already contains a general anti-abuse provision (article 51) that empowers the Commissioner for Revenue to ignore tax avoidance schemes. The new regulations will add to this rule by applying the definition of tax avoidance schemes as used in the Directive. The measure will accordingly apply to arrangements which are not genuine, meaning that they are not put into place for valid commercial reasons that reflect economic reality, and which have been put in place with a main purpose of obtaining a tax advantage that defeats the object or purpose of tax law.
EU Dispute Resolution Mechanism (DRM)
The EU Directive on ERM will be implemented by the end of June 2019 and it will be instrumental in providing Maltese taxpayers with access to a new dispute resolution framework in relation to disputes with other EU tax authorities that may come about given the changes that are being implemented in the international tax arena.
EU Mandatory Disclosure Directive (DAC 6)
Regulations for the transposition of DAC 6 are being prepared and will meet the implementation deadlines set out in the Directive but no further details are available yet.
ATAD 2 effective as of 1 January 2020 and 1 January 2022
Apart from ATAD1, Malta will also have to implement the provisions of ATAD2 although these will take place on 1 January 2020 and 1 January 2022.
ATAD 2 will replace the original anti-hybrid provisions of ATAD 1 by extending them to include mismatches involving third countries and expanding the definition of hybrid mismatches to include hybrid permanent establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. It is still premature to make any further comments on ATAD2.
Patent Box Regime
Malta will introduce a new patent box regime that complies with the EU Code of Conduct (Business Taxation) and the OECD proposals on preferential intellectual property regimes (the so-called Modified Nexus approach). Once again, no further details are available at this stage.
ATAD will introduce new concepts into the Maltese tax legislation such as exit taxes and CFC rules. However, the changes should not have a dramatic effect to the tax system especially the principles of the full imputation system and the tax refunds which shareholders may claim upon a distribution of certain taxed profits. We expect no changes to the participation exemption regime and we’ll have to see whether the step-up provisions already contained in our tax legislation will be affected. If not, the step-up provisions and the participation exemption should continue to provide interesting opportunities.
It will be interesting to see how the interest limitation provisions will ‘interact’ with the newly introduced rules on Notional Interest Deduction which had an extremely positive effect on a number of Maltese companies
Very limited amendments are expected for the implementation of GAAR as required by the Directive since it is very similar to that already included in the Maltese Income Tax Act.
Malta has been an EU Member State since 1 May 2004 and the adoption of EU Directives coupled with a unique full imputation system of taxation as well as tax refunds has developed the country into an international financial centre. Malta is the country of choice for foreign investments into the EU. However, several companies in a multitude of sectors have set up in Malta for several reasons. Although the country and the local market are small, companies have no restrictions in accessing the EU market and beyond. Malta has developed an advanced IT infrastructure, very good telecommunications and connections, an extensive treaty network, a professional and business friendly atmosphere amongst professionals and regulators, and a can-do attitude all of which have contributed to Malta’s success beyond its relative size.
Maltese registered companies are subject to income tax on chargeable income at a standard rate of 35%. Companies incorporated in Malta are subject to tax on their worldwide income but companies incorporated outside Malta but are tax resident in Malta by virtue of their effective management and control are subject to tax on income arising in Malta and income remitted to Malta. One may also claim that companies are not effectively subject to tax because of the full imputation system of taxation whereby the tax paid by the company is credited in full to the shareholder/s following a distribution of profits. This ensures that there is no double taxation as often happens under the classical system. Moreover, a system of tax refunds which shareholders may claim depending on the source of income leads to an effective tax rate which may be well below the 35% tax rate applicable to companies.
Every Maltese company is required to allocate its profits to five tax accounts. The allocation of profits to the tax accounts is a very important aspect of the Maltese tax system as it determines the tax treatment applicable to shareholders and the tax refunds which may be claimed upon a distribution of profits. The following is an overview of the five tax accounts, the type of income or gains allocated to each tax account and the tax refunds which may be claimed by shareholders:
|1||Foreign Income Account (FIA)||Foreign source passive income such as dividends, interest, royalties, rent etc. and all capital gains from foreign sources (unless exempt).||5/7ths in the case of passive interest and royalties. 2/3rds where company claims double taxation relief including FRFTC. 100% in the case of income from a Participating Holding.|
|2||Maltese Taxed Account (MTA)||Profits from trading activities and profits which are not allocated to the FIA, IPA or FTA.||6/7ths in the case of trading income. 5/7ths in the case of passive interest and royalties.|
|3||Immovable Property Account (IPA)||Profits resulting from the use of immovable property situated in Malta and which have not suffered the final withholding tax, as well as profits from rent, accommodation and activities related to immovable property situated in Malta.||None. No tax refunds|
|4||Final Tax Account (FTA)||Profits subject to a final withholding tax and income exempt from tax (e.g. participation exemption).||None. No tax refunds.|
|5||Untaxed Account (UA)||The difference between the company’s accounting profits or losses and the total of the amounts allocated to the other four tax accounts.||None or a FWT.|
A comparative study shows that Malta has one of the best participation exemption regimes. A Maltese company in receipt of dividend income or capital gains from a participating holding may claim the participation exemption. Alternatively, the company may elect to be subject and pay tax and this would enable the shareholder to claim a full refund.
A participating holding must be an equity holding which is defined as a holding of the share capital in a company which is not a property company and entitles the shareholder to at least any two of the following rights:
A participating holding arises when any one of the following criteria is met:
A capital gain derived from a participating holding automatically qualifies for the participation exemption, however, in the case of dividends derived from a participating holding they will be exempt from tax provided that the body of persons in which the participating holding is held satisfies any one of the following three conditions:
Where none of the above three conditions are satisfied, then both of the following conditions must be satisfied:
A portfolio investment is an investment in securities such as shares, bonds and such like instruments, held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company. Also, the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment.
The participation exemption may also apply to a participating holding in certain partnerships, collective investment vehicles and European Economic Interest Groupings.
The mechanics of the full imputation system, the allocation of profits to the various tax accounts and the tax refunds and the overall effect of their interaction may be illustrated in the following examples:
wdt_ID At Company Level Participating Holding (PH) PH + FRFTC No PH and claims FRFTC Passive Interest and Royalties Trading Income 2
Tax @ 35%
Credit for FRFTC claimed
|wdt_ID||At Shareholder Level||Participating Holding (PH)||PH + FRFTC||No PH and claims FRFTC||Passive Interest and Royalties||Trading Income|
|2||Tax @ 35%||350.00||437.50||437.50||350.00||350.00|
|3||Credit for TAS||-350.00||-437.50||-437.50||-350.00||-350.00|
|COMET %||wdt_ID||refund||Participating Holding (PH)||PH + FRFTC||No PH and claims FRFTC||Passive Interest and Royalties||Trading Income|
|COMET %||2||COMET %||0%||0%||6.25%||10%||5%|
PH: Participating Holding
TAS: Tax at Source. The credit of the tax paid by the company given to the shareholder is the effect of the full imputation system.
COMET: Combined Overall Malta Effective Tax. This is the net effect of the tax paid by the company and the tax refund received by the shareholder in Malta.
It is pertinent to point out that a tax refund becomes due to the shareholder by the Inland Revenue Department within 14 days from when the company’s audited financial statements (accounting for the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on the prescribed form, together with the dividend certificate and other documents as requested by the International Tax Unit are submitted by the shareholder or his tax representative.
Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements. The tax refund is also paid in the same currency, thus eliminating any forex risks.
A branch or a permanent establishment (PE) of a foreign company is subject to tax at the standard rate of 35% on the profits attributable thereto. It is interesting to note that the shareholders of the foreign company may still claim tax refunds provided the foreign company distributes profits which have been subject to tax in Malta (at the level of the branch or PE). This may also apply to a foreign company which is tax resident in Malta by virtue of its effective management and control. Such foreign companies registered in Malta are referred to as an ‘oversea company’ because of the same terminology used in The Companies Act.
Maltese legislation provides for Advance Revenue Rulings (ARR) which may be obtained by application from the International Tax Unit of the Inland Revenue Department. ARRs are valid for a period of five years and are renewable. The ARR is still valid even if there is a change in legislation although in this case the ARR expires once two years are over from the legislative change.
The attractiveness of ARRs has somewhat decreased following the EU Directive whereby the Maltese tax authorities provide information related to ARRs to the EU Commission and other EU Member States.
In 2018 Malta introduced the concept of a notional interest deduction (NID). Before the introduction of these rules, debt financed entities could claim a tax deduction equivalent to the interest however no similar deduction was available for equity financed companies. The NID is optional and entitles companies to claim a tax deduction equivalent to the notional interest calculated on its equity thus making equity financing on the same level playing field as debt financing for taxation purposes.
NID is determined by multiplying the reference rate to the invested risk capital. The reference rate is the risk-free rate set by reference to the current yield to maturity on the Malta Government Stocks with a term of approximately 20 years plus a premium of 5%, and the invested risk capital of the undertaking is the share capital, share premium, positive retained earnings, non-interest-bearing loans and any other positive equity components. Any capital directly employed in the production of income which is exempt from tax does not fall part of the invested risk capital.
One of the main advantages of the NID is that the combined overall Malta effective tax (COMET) may be reduced and reduces the need for the shareholder/s to claim tax refunds.
As from year of assessment 2020 (basis year 2019), any person incurring qualifying IP expenditure and from which qualifying IP income is derived, may claim a deduction which may reduce the chargeable income from qualifying IP by 95% thereby drastically reducing the taxable income of the person and may also be applied upon the disposal of the IP. The assets that are considered as qualifying IP are defined in the Rules and include registered patents and assets covered by protection rights, however, exclude brands, trademarks and trade names. The deduction is aimed for assets which are developed by the person rather than for acquired assets. The deduction is however not limited to assets developed in Malta but require that the beneficiary maintains sufficient substance as is commensurate with the type and extent of activity being carried out.
For further details, you may refer to the The Patent Box Regime news item.
Following the publication of the Consolidated Group (Income Tax) Rules by means of Legal Notice 110 of 2019, Malta introduced fiscal unity rules providing for a consolidated tax group. As a result, certain groups of companies may, from the year of assessment 2020 (basis year 2019), opt to be treated as one single taxpayer.
The definition of a group in these rules is different and much wider than the definition contained in the Income Tax Act allowing both Maltese companies as well as foreign entities that fall within the definition of a company to form part of the consolidated group. The foreign entities need not be tax resident in Malta to form part of the fiscal unit, but it is necessary that they are tax registered in Malta.
The Rules lay down the requirements relating to the formation of the Fiscal Unit and also discusses what shall constitute ignored transactions in determining the Group’s chargeable income and tax payable.
The main benefit of the tax consolidation or fiscal unity is the cash flow advantage especially when compared to the current operation of the partial shareholder tax refunds upon a distribution of taxed profits. The new tax consolidation rules reduce the tax due to the combined overall effective tax rate without the need to wait for the income tax refund on distributed taxed profits. However, the tax consolidation may also be useful within a local context since it is wider in scope than the surrendering of tax trading losses. Clearly, in view of the embedded anti-abuse provision, the purpose of these rules is not to provide a tax advantage.
For further details, you may refer to the Tax Consolidation in Malta news item.
The salient features highlighted above are coupled with other benefits including:
Malta, being an EU Member State since 1 May 2004, has established itself as an international financial centre. The legislative framework is in conformity with EU law. The Companies Act is modelled on the UK Companies Act and provides for various types of entities such as SICAVs, INVCOs, foundations, limited partnerships, general partnerships, single member companies, limited liability companies and public companies.
The most commonly used entity is the limited liability company which can be either private or public:
The company incorporation and registration procedure is very efficient and the following three simple steps must be followed:
The following are a summary of the main statutory requirements relevant to companies:
|Share Capital||The minimum authorised and issued share capital for private companies is €1,164.69 with at least 20% of the nominal value paid up, whilst that of a public company is €46,587.47 with at least 25% of the nominal value paid up.|
|Currency||The company’s share capital may be denominated in any currency. The Companies Act requires that financial statements are prepared in the same currency in which the share capital is denominated whilst the Income Tax Act provides that the tax payment and any tax refunds are done in the same currency of the share capital.|
|Registered Address||A company must have a registered address in Malta.|
|Objects and Powers||The Company’s activities must be clearly laid down in the Memorandum of Association. A single member company must restrict its objects. Certain activities may require a license from the regulator, the Malta Financial Services Authority.|
|Shareholders||There are no restrictions with respect to shareholders. Natural persons, corporate entities and trustees may all hold shares in a Maltese company. Malta has adopted the EU Directive on the Register of Beneficial Owners (RBO) and therefore a natural person having an ownership interest or voting rights of more than 25% or exercises control must be disclosed.|
|Board of Directors||The Board may be composed of just one director. Directors may be natural persons or corporate entities and there are no restrictions with respect to nationality or residence. However, for substance requirements and management and control purposes, board meetings must be held in Malta, with the meetings properly minuted and decisions effectively taken in / from Malta.|
|Legal and Judicial Representative||Maltese legislation provides that a company must have a legal representative/s who is empowered to represent the company on agreements, contracts etc. A judicial representative is empowered to represent the company in legal proceedings at the law courts etc. The directors, or any of the directors may occupy these posts.|
|Company Secretary||A company must have a natural person occupying the post of company secretary. There are no restrictions with respect to residence or nationality.|
|General Meetings||An Annual General Meeting (AGM) must be held every year to approve the audited financial statements. Such general meeting need not be held physically in Malta. In terms of the Companies Act, a resolution signed by all the shareholders is tantamount to a physical meeting.|
|Financial Year||A company may opt for a financial year end other than 31 December as long as the period is not less than six months and not more than eighteen months. Approval must be sought from the tax authorities and notification given to the Registry of Companies.|
|Annual Accounts||Companies must keep proper accounting records and have their accounts audited. Audited financial statements must be approved at the company’s AGM within ten months after the financial year end for private companies and within seven months after the financial year end for public companies. Licensed companies are required to submit their audited financial statements to the Malta Financial Services Authority within four months of the financial year end. All audited financial statements must be filed with the Registry of Companies and they are available online.|
|Form of Accounts||Malta adopts International Financial Reporting Standards as adopted by the EU. However, a qualifying company may adopt the General Accounting Principles for Small and Medium-Sized Entities (GAPSME).|
|Annual Return||All companies must submit an annual return to the Registry of Companies upon each anniversary of the company’s registration date. The annual return includes details of the capital, the shareholders, directors and company secretary and changes which took place during the year.|
|Registration Fees||Upon incorporation, companies must pay a registration fee to the Registry of Companies which is calculated on the authorised share capital. The fee varies between €245 for an authorised share capital of up to €1,500 and a maximum of €2,250 for an authorised share capital of over €2.5 million. A registration fee is also payable annually together with the submission of the annual return. The annual registration fee varies between €100 for a company with an authorised share capital of up to €1,500 and a maximum of €1,400 for a company with an authorised share capital of over €2.5 million.|
|Exchange Control||There are no exchange controls in place. As a result, companies may have bank accounts outside Malta.|
|Taxation||Maltese incorporated companies are subject to tax at a standard rate of 35% on their worldwide income. Companies which are incorporated outside Malta but are tax resident in Malta are also subject to tax at a standard rate of 35% but on income arising in Malta and income remitted to Malta. Malta adopts the full imputation system of taxation and therefore the tax paid by companies is credited in full to the shareholders upon a distribution of profits. For more details refer to Corporate Taxation.|
|Redomiciliation||Maltese legislation allows companies to change their domicile by migrating in or out of Malta. This enables companies to move from one jurisdiction to another without the need of going through a liquidation process.|
Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient’s tax residence and status. However, income received from foreign sources may be subject to a withholding tax and therefore Malta offers three main types of double taxation relief to ensure that any double taxation is mitigated or eliminated. Apart from the relief under Malta’s treaty network, Malta also gives relief for any double taxation on a unilateral basis and allows a flat rate foreign tax credit on foreign source income and capital gains.
Any overseas tax suffered may be allowed as a credit against the tax chargeable in Malta which is levied on the gross amount. The credit shall not exceed the total tax liability in Malta on the same income.
Unilateral relief for underlying tax is also available where the taxpayer is a person that holds more than 10% of the voting power of the overseas company paying the dividend.
To claim unilateral relief, the recipient of the income must prove:
A Flat Rate Foreign Tax Credit (FRFTC) may be claimed by a Maltese company which receives income from overseas. A certificate from the auditor stating that the income arose overseas will be 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 allowable expenses. The income together with the FRFTC less allowable expenses will be subject to Malta income tax with relief for the deemed credit (up to a maximum of 85% of the Malta Tax payable). The mechanics of the FRFTC are demonstrated in the following example:
wdt_ID Flat rate foreign tax credit Example Amount 1
Net foreign income (before expenses)
Flat rate foreign tax credit (25%)
Gross foreign income (before expenses)
Foreign income (after expenses)
Malta tax at 35%
Less FRFTC (maximum 85% of Malta tax)
Net Malta tax payable
Even if the company has no deductible expenses, the rate of tax is reduced from 35% to an effective rate of 18.75%. Upon a distribution of taxed profits, refunds will apply and so the net effective tax is reduced to 6.25% or lower. The company may reduce the effective tax rate paid in Malta even further if it has any deductable expenses, or it claims the Notional Interest Deduction (NID) on the invested risk capital.
Malta has an extensive double taxation treaty network with over 70 double taxation agreements most of which are based on the OECD model convention. The reduced withholding tax rates on dividends, interest and royalties paid to residents of Malta are as indicated hereunder. Since Malta is an EU Member State, the Parent Subsidiary Directive and the Interest and Royalties Directive may also apply and the withholding tax rate could be reduced even further.
wdt_ID Country Dividend - minor shareholding Rate Dividend - major shareholding Rate Required % for major shareholding Rate INTEREST Rate ROYALTIES Rate Comments 1
Country Dividend - minor shareholding Rate Dividend - major shareholding Rate Required % for major shareholding Rate INTEREST Rate ROYALTIES Rate Comments
Redomiciliation is the process whereby a company registered in a particular jurisdiction migrates or is continued in another jurisdiction without the need to be wound up or liquidated. As a result, the main advantage of a redomiciliation is that there is continuity of the entity and there is no need to renegotiate agreements, transfer assets etc.
Malta allows both inward and outward redomiciliations and no exit taxes apply. On the other hand, a company migrating from a foreign jurisdiction to Malta may ‘step-up’ the value of the assets without any Maltese tax implications.
A foreign body corporate wishing to migrate to Malta must be similar to a Maltese company.
A company wishing to migrate to Malta should make a request to the Registrar of Companies. The request must be accompanied with the following documentation:
A registration fee must be paid and this varies between €245 for companies with authorised share capital not exceeding €1,500 and €2,250 for companies with authorised share capital of over €2.5 million.
Should the foreign company be a public company or carry out activities which if conducted in or from Malta require licensing or authorisation such as companies providing investment advice, insurance companies, banks and financial institutions, trustees, etc., additional documentation will apply.
The Registrar of Companies shall issue a Provisional Certificate of Continuation upon being satisfied that the documents supporting the request for registration are satisfactory.
The effects of provisional registration are:
Within a period of six months from the date of the issue of the Provisional Certificate of Continuation, the company must submit documentary evidence to the Registrar that it has ceased to be a company registered in the foreign jurisdiction where it was originally incorporated. Upon presentation of such evidence and the surrender of the Provisional Certificate of Registration, the Registrar will issue a Certificate of Continuation confirming that the company has been registered as continuing in Malta.
Subject to treaty provisions, employment income arising in Malta is subject to income tax in Malta at the following progressive rates:
Rates Chargeable Income From Chargeable Income To wdt_ID Rate Subtract Single Rates
The Income Tax Act defines a ‘resident in Malta’ as being any individual who resides in Malta. Although not clearly defined, the Income Tax Act makes distinctions between ordinarily residence, residence and temporary residence. The distinction is primarily based on the intention to stay in Malta as well as the duration of such stay. Chargeability to tax depends on the residence and domicile of the taxpayer. Domicile is not defined in Maltese legislation. The concept of domicile is a legal concept and generally refers to the place where a person was born, lives and establishes his home and intends to live indefinitely. Maltese law adopts the UK approach to domicile whereby a person previously not connected to Malta who establishes residence here will not be easily deemed to have attained a Maltese domicile. Such a Maltese domicile will only be attained if such an expatriate has, and circumstances show, that he has lost his foreign domicile and intends to indefinitely and permanently establish Malta as his home. Married persons may opt for a joint tax computation or a separate tax computation using either parent rates or single tax rates. No deductions are given against the gross employment income which is brought to charge to tax except for specific deductions such as, a deduction in respect of private school fees, alimony payments, childcare fees, homes for elderly fees and sports fees. Different deduction cappings apply as set in the respective subsidiary legislation.