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.

 

Unilateral Relief

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:

  • that the income arose from overseas;
  • that the income suffered overseas tax; and
  • the amount of that tax.

 

Flat Rate Foreign Tax Credit

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) 1,000.00
2 Flat rate foreign tax credit (25%) 250.00
3 Gross foreign income (before expenses) 1,250.00
4 Allowable expenses -150.00
5 Foreign income (after expenses) 1,100.00
6 Malta tax at 35% 385.00
7 Less FRFTC (maximum 85% of Malta tax) -250.00
8 Net Malta tax payable 135.00

wdt_ID Effective Tax in % Amount
9 Effective tax rate on gross income 13.50
10 Effective tax rate on net income after expenses 15.90

 

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.

 

Tax Treaties

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 Albania 15.00 5.00 25.00 5.00 5.00
2 Andorra 0.00 0.00 0.00 0.00 0.00
3 Australia 15.00 15.00 15.00 10.00
4 Austria 15.00 15.00 5.00 10.00
5 Azerbaijan 8.00 8.00 8.00 8.00
6 Bahrain 0.00 0.00 0.00 0.00
7 Barbados 15.00 5.00 5.00 5.00 5.00
8 Belgium 15.00 15.00 10.00 10.00
9 Bulgaria 0.00 0.00 0.00 10.00
10 Canada 15.00 15.00 15.00 10.00
Country Dividend - minor shareholding Rate Dividend - major shareholding Rate Required % for major shareholding Rate INTEREST Rate ROYALTIES Rate Comments