Employment Income

The Income Tax Act brings to charge “gains or profits from any employment or office, including the value of any benefit provided by reason of any employment or office”.  The legislation does not define ‘employment’ or ‘office’ but with the introduction of the Fringe Benefits Rules in 2001 we now have a definition of ‘officer’ which means the holder of an office and includes an individual who is a director of a company, or holds directly or indirectly more than 5% of the ordinary share capital or of the voting rights in a company or is a partner in a partnership.  The said rules also define ‘employee’ and ‘employer’ and therefore one can easily deduce what constitutes employment – the provision of any service under a contract, whether written or not.

Income tax implications for individuals

Subject to treaty provisions, employment income arising in Malta is subject to income tax in Malta at the following progressive rates:

Resident and domiciled individuals

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.

Persons are subject to tax in Malta on the basis of their residence and domicile.  Individuals deemed to be both resident and domiciled in Malta are subject to income tax on a worldwide basis.  Income earned, accrued or derived in Malta or elsewhere is subject to tax in Malta irrespective of whether the foreign source income is remitted to Malta or not.

Due to the strict interpretation of domicile it is very difficult for an expatriate to attain a Maltese domicile and hence such an expatriate will not be taxed on a worldwide basis.

Resident or domiciled individuals

Individuals who are either resident or domiciled in Malta are taxed on a source basis and remittance basis. Source basis refers to income arising in Malta mainly through employment exercised in Malta and capital gains arising in Malta.  Income earned abroad and remitted to Malta is also subject to Maltese income tax. Foreign capital gains are not subject to any tax in Malta irrespective of whether they are remitted or not.

Individuals who are ordinarily residents but non-domiciled, as from year of assessment 2019 or basis year 2018, are subject to a minimum tax of €5,000 per annum before any double taxation relief. The minimum tax is applicable to individuals and married couples whose foreign income exceeds €35,000.

This minimum tax is not applicable to individuals who are tax residents under The Residence Programme, the Global Residence Programme, the Malta Retirement Programme and the Residents Scheme Regulations.  Therefore, the minimum tax of €5,000 introduced with effect from basis year 2018 will apply to EU citizens who are tax resident in Malta and do not enjoy a special tax status under any programme.

Also, long-term residents or permanent residents who have a permanent residence certificate or a permanent residence card in terms of the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order, are not eligible to benefit from the remittance basis of taxation.

Temporary residents

Temporary residents are exempt from paying tax on income arising outside Malta, even if this is remitted to Malta. Temporary residents are classified as such if they do not intend to establish residence in Malta and stay in Malta for an aggregate period of less than six months in one calendar year.  Temporary residents are charged on income arising in Malta at the normal rates.

Individuals who are neither resident nor domiciled

Individuals who are neither resident nor domiciled in Malta are subject to tax only on income arising in Malta.  The applicable rates are different from those applicable to resident persons and are as follows:

The above scenarios may be summerised as follows:

Taxation of employment income

In view of the above rules and subject to Malta’s tax treaty provisions, when the income earning activity is in Malta (source basis income), then the individual is subject to income tax in Malta.  

The issue of residence and domicile is not of any relevance when it comes to the taxation of an individual exercising employment in Malta.   However, these may have tax implications for an individual earning other income (not employment income) during his stay in Malta.

Tax implications for work performed outside Malta

Maltese individuals who are no longer tax resident in Malta will no longer be subject to any income tax in Malta on any income arising outside Malta since they will not be subject to tax on a worldwide basis but only on any income remitted to Malta or income arising in Malta.

Income tax implications for expatriates

An individual falling under any of the following categories is deemed to be an expatriate and therefore subject to income tax in Malta:

• • Employees and other work permit holders for up to one or more years,
  • Individuals working in Malta on short term engagements, that is; holding a work permit for up to six months,
  • Holders of a temporary visa who are either retired or based temporarily in Malta with their family while they are working abroad.

Expatriates are subject to income tax on any income arising in Malta at the progressive resident tax rates. Exemptions from income tax in Malta may be available if a double taxation agreement exists between Malta and the country of residence of the expatriate.  Most double taxation agreements are based on the OECD model which exempts the employment income from any tax in Malta if:

• • The recipient is present in Malta for a period or periods not exceeding in aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned;
  • The remuneration is paid by, or on behalf of, an employer who is not a resident of Malta; and
  • The remuneration is not borne by a permanent establishment or a fixed base which the employer has in Malta.

Special Tax Rates

Special tax rates for overseas employment

Maltese tax resident individuals who take up employment overseas are subject to a standard tax rate of 15% on such employment income.  Employees may only qualify for the standard rate only if:

• • the income is deemed to be employment income, and
  • the contract of employment requires that the performance of work or duties are mainly outside Malta, but excludes any service on a Maltese ship or aircraft or with the Government of Malta, and
  • the emoluments are received in respect of work or duties carried out outside Malta or for a period spent in Malta but which is connected with such work or duties outside Malta.  

The overseas emoluments are to be deemed to be the first part of the individual’s total income in computing the tax liability.  

Special tax rates for non-residents who derive income from entertainment activities

Special provisions apply for non-residents who derive income from entertainment activities exercised in Malta for a period not exceeding fifteen days in a calendar year who are charged tax at a flat rate of 10% on the gross payment receivable in respect of the said activities.  

The non-resident tax rates apply to non-resident individuals who derive income from entertainment activities exercised in Malta for a period which exceeds fifteen days in a calendar year.

Special tax rates for sportsmen

A flat rate of 7.5% applies to income received by full-time or part-time sportsmen that are registered players or athletes, or as a licenced coach.  

Special rates for individuals in certain fields of excellence

A flat rate tax of 15% is applicable on employment income received by an individual who is established in a field of excellence under a qualified contract of employment.  This special rate of tax is applicable to individuals who are not domiciled in Malta however opt to move to Malta and work in manufacturing and research and development sectors.   The fields of excellence are determined by the Malta Enterprise and are limited to employment contracts with annual emoluments of at least €45,000 and with at least three years of comparable experience or the necessary qualifications to perform the necessary duties as per contract of employment.  The special rate applies for a consecutive period of three years with the possibility to extend the special rate for another year at the discretion of the Malta Enterprise Corporation. 

Highly qualified persons rules

As an incentive to attract more foreign experts in certain sectors to work from Malta, a special tax rate of 15% is applicable on employment income received from ‘Eligible office’ with a licenced company.   Income exceeding €5,000,000 is not subject to any tax. The special rate is applicable for a period of 5 years for EEA nationals and 4 years for third country nationals with the possibility to apply for a one-time extension.  

The targeted sectors of the economy are in the finance, aviation and gaming industry.   This scheme has been in operation since 2010 with an expected termination date in 2025.  Various conditions need to be met to enable the employee benefit from the special tax rate:

• • Employee must hold a ‘eligible office’.  A list of ‘eligible office’ is made available by the tax department and include high ranking posts such as Chief Executive Officer, Chief Operational Officer, Portfolio Manager, Actuarial Professional, Aviation Flight Operations Manager and Senior Trader;
  • Employment income must exceed €84,016 for basis year 2018.  This is adjusted annually in line with the Retail Price Index (RPI);
  • The employment income must be subject to tax in Malta and subject to the laws of Malta;
  • The employee proves that he has the necessary professional qualification and at least 5 years’ experience in the field;
  • The employee did not benefit from the deductions available to investment services expatriates;
  • The employee has sufficient resources to maintain himself and his family without recourse to social assistance in Malta.  The employee should thus have an adequate accommodation, in possession of a valid travel document and in possession of a sickness insurance for himself and his family;
  • The employee is not a shareholder of more than 25% in the company employing him;
  • Third party nationals may not stay in Malta for more than four years or acquire rights over immovable property situated in Malta.  

Fringe benefits

Benefits in kind and fringe benefits may be subject to income tax as part of the employment income and the fringe benefit rules apply for Maltese individuals and expatriates alike.  The following is a summary of the main fringe benefits and their tax implications.

Car benefits

The availability of a company car for personal use is taxable on the basis of the car value, the car use value, the maintenance value, the fuel value and the private use value.  The car use value, the maintenance value, the fuel value and the private use value are determined with reference to the car value. The various percentages and values to calculate the fringe benefit are given in the fringe benefits rules.

Use of assets including accommodation

The fringe benefit on the use of assets (including accommodation premises) is determined on the basis of the value of the property being made available to the employee.  In the case of immovable property, the fringe benefit value is deemed to be 5% of the market value or the original cost of the immovable property whichever is the higher.

Other benefits

Other taxable fringe benefits include the transfer of assets at subsidised prices, low interest rate loans, reimbursement of bills of a personal nature and the provision of discounted goods and services.  Share options and share award schemes are also treated as a fringe benefit once exercised and brought to charge at a flat rate of tax of 15%.

Not all amounts paid to an employee form part of the fringe benefit value.  Reimbursement of expenses which are not of a personal nature are not taxable in the hands of the employees.  Similarly, reimbursement to employees of expenses related to business travel, provision of canteen services, provision of health insurance, telephone service, use of computer equipment and recreational or child minding facilities are not taxable.

In some cases, it may be advisable to ask for a tax confirmation that a particular expense does not fall within the definition of a taxable fringe benefit.  Such confirmation is at the discretion of the Commissioner of the Inland Revenue.

Other provisions

Income tax collection is done on a national basis under the Final Settlement System (FSS) which is similar to the Pay As You Earn system (PAYE).  Tax is charged and collected by the Inland Revenue Department. Employers deduct the appropriate tax amount from the employee’s gross wage and remit the amount to the Inland Revenue Department on a monthly basis.  No other local authority is authorised to collect taxes from residents. No municipal taxes apply in Malta.

Final withholding tax provisions

Investment income such as interest paid by a local bank may be subject to a final withholding tax of 15%. The investment income provisions contained in the Income Tax Act are extended to other specific investment income arising in Malta, including any investment income arising from shares quoted on the Maltese stock exchange and Government bonds.  Income subject to the final withholding tax is not taxed any further in Malta and the withholding tax is not refundable to the taxpayer.

Capital gains tax

Capital gains or profits arising from immovable property, securities, business goodwill, and certain intellectual property rights may be subject to capital gains tax in Malta.  Capital gains are considered to form part of the taxpayer’s chargeable income and brought to charge to income tax at the progressive rates.

Transfers of immovable property situated in Malta generally gives rise to a property transfer tax equivalent to 8% of the transfer value unless such property was the ordinary residence of the individual for a period of more than three years in which case any capital gain realised is exempt from capital gains tax.   Other rates of tax apply in cases where the property is held for less than three years or the property is acquired causa mortis or through a donation.

Persons qualifying as non-residents may also opt to be charged on capital gains arising out of immovable property in Malta at the 35% rate on the gain instead of the final property tax of 8% on transfer value.

Payment of tax

Tax on employment income is deducted and remitted by the employer on a monthly basis under the Final Settlement System (FSS).  This system is tailored so that the correct amount of income tax is deducted from the employment income. The amount paid by the employer and remitted to the Inland Revenue Department is credited to the employee.  Malta adopts a self assessment system, however, the computation of the tax due on employment income is the responsibility of the employer paying such income. In most cases the amount of tax paid under the FSS should be equal to the income tax liability under the self assessment system so that no further tax is due to be paid by the tax return date.

Tax compliance issues

The income tax return of individuals under the self assessment system, must be filed within six months of the calendar year (basis year).  Therefore, the tax return for a particular year is due by June of the following year. Every individual is responsible to complete the form correctly and include all income arising during the previous year, whereby the income tax due is computed.  Details as to the amount of days spent in the country and the option as to whether to have income brought to charge at the single, parent or married rates are required in the tax return. Employed persons who have no other sources of income should have no outstanding tax due as this would have been paid through the final settlement system. Individuals who have various sources of income may be liable to pay the settlement tax by the end of June or else be entitled to a tax refund of any excess tax paid.  

In the last few years, the tax department has started a process of simplification for persons whose income is subject to tax at source and thus all sources of income are known to the tax department.  Persons falling within the definition of non-filers receive a tax statement showing their annual income, respective income tax charge and tax payments made. Any shortfall of tax or tax refund is settled based on such statement.  The taxpayer is however still liable to inform the tax department if such statement is incorrect or incomplete and thus required to request a tax return to adjust the tax statement issued by the tax department.

Other compliance matters relating to employment in Malta

Employers seeking to employ a non-EU individual to work in Malta need to apply for an employment permit for such individual before the employment can be actually taken up.  The envisaged period of employment is not relevant in determining the need or otherwise of an employment permit as this is required as from the first day of employment.

Individuals taking up residence in Malta as a result of their employment, are required to apply for an e-residence card and register for income tax purposes in Malta.

Employment in Malta may also expose individuals to the payment of social security contributions in Malta, unless evidence is submitted to the local authorities that social security contribution payments are being done in another EU state. To this effect a form known as the E101 would need to be produced to the local authorities.  Other formalities include the submission of the relative commencement forms to Jobsplus and the registration of the individual for income tax purposes.