Malta companies (or other body of persons) that are incorporated in Malta on or after 1st July 1994 are considered to be residents of Malta (the incorporation test).

Malta companies incorporated before 1st July 1994 are considered Malta resident companies if they are managed and controlled in Malta (the management and control test).

Malta companies registered outside Malta after 1995 are considered Malta resident companies if such bodies are managed and controlled from Malta.

Malta companies may have more than one ordinary residence. A body of persons registered outside Malta after 1995 is considered a resident of Malta if it is managed and controlled in Malta.

Bodies of persons are domiciled in the countries where such bodies of persons are incorporated (the incorporation test).

Bodies of persons organized as companies can change their domicile by a process known as re-domiciliation. However, unlike bodies of persons, which are companies, those who take partnerships may not change their domicile.

A company incorporated in Malta is ordinarily considered a resident and domiciled in Malta for Malta tax purposes. Therefore the Malta Company would be subject to Malta tax on its worldwide income at the standard rate of 35%. On the other hand, a company incorporated outside Malta is considered Malta resident-only insofar as its management and control are exercised in Malta. Accordingly, any overseas tax suffered by a Malta company would generally be eligible for relief as a credit against the Malta tax liability arising on the corresponding source of income.

FULL IMPUTATION SYSTEM OF TAXATION

Malta operates a complete imputation system of taxation concerning dividends. This implies that tax suffered by a Malta company on those profits it distributes as a dividend in favour of its shareholder(s) is credited in full against the Malta tax liability of that shareholder.

Given that the 35% tax rate applicable to companies is equivalent to the maximum progressive rate of tax applicable to individuals, a dividend distribution would typically result in no further tax payable at the shareholder level, thus eliminating any form of double economic taxation.

TAX ACCOUNTING SYSTEM ATTRIBUTABLE TO MALTA COMPANIES

For Malta tax purposes, a company registered in Malta is required to allocate its distributable profits to five separate taxed accounts. The allocation is dependent on the source and nature of the said profits:

Final Tax Account (FTA), to which a company would allocate tax-exempt profits (where the exemption is retained at shareholder level upon distribution) and profits subject to a final tax;

Immovable Property Account (IPA), to which a company would allocate profits subject to Malta tax derived directly or indirectly from immovable property situated in Malta;

Foreign Income Account (FIA), to which a company would allocate income subject to Malta tax, derived by and large from investments situated outside Malta;

Maltese Taxed Account (MTA), to which a company would allocate income subject to tax which is not given to the FTA, the IPA, or the FIA;

Untaxed Account (UA), a company would allocate the difference between total distributable profits/accumulated losses and those allocated to any of the other taxed accounts.

TAX REFUNDS

A shareholder in receipt of a dividend distributed by a Malta company out of profits that have been allocated to its MTA or FIA is entitled to claim a refund of the Malta tax on those profits. To this end, the shareholder should be duly registered for Malta tax purposes. The tax refund to which the registered shareholder is entitled depends on several factors:

• the nature of the underlying profits out of which the Malta Company has distributed the dividend and the Malta tax account allocation of those profits; and
• The application of any double taxation relief by the Malta Company on such profits. Generally the tax refund entitlement of a registered shareholder would be that of 6/7th of the Malta tax suffered by the Malta Company on the profits out of which the dividend is distributed.

The 6/7ths Malta tax refund is nevertheless not applicable when the Company is in receipt of passive Interest or royalties (but not dividends) as defined in Malta tax legislation. Where the profits out of which a dividend is distributed consists of passive interest and royalties, the refund is reduced to 5/7th of the Malta tax suffered on those profits.

The 6/7ths refund is likewise not applicable in those cases where profits are allocated to the FIA, and such gains are subject to a claim of double taxation relief. In such a scenario, a tax refund at the rate of 2/3rd of the Malta tax would apply to dividends distributed out of profits allocated to the FIA in respect of which the distributing Company has claimed double tax relief.

In the case of a Participating Holdings (PH) as defined in Malta tax legislation, a company in receipt of income (dividends) or capital gains which are derived from an investment which qualifies as a participating holding in terms of Malta tax legislation may elect to:

• apply the participation exemption in which case such income/gains would be exempt from Malta tax; or
• include such income/gains as part of the taxable income of the Malta Company which would entitle its shareholder in receipt of a dividend out of those profits to a 100% refund of the Malta tax paid by the Company on that income/gains.

A claim for a refund of tax lodged by a registered shareholder of a Malta company is paid by the Malta tax authorities within fourteen days of a valid application being submitted.

RELIEF FROM DOUBLE TAXATION

The Income Tax Acts provide that a person may apply for double tax treaty relief provided the person meets the requirements outlined hereunder:

• the applicant ought to be a Malta resident of the year immediately preceding the year of assessment;
• tax paid abroad must be comparable to Malta income tax;
• a double tax treaty must be in force with the other state, and the foreign source income must have been taxed in that country of source;
• the applicant must provide evidence of foreign tax paid abroad;
• the income for which relief is being claimed must be taxable in Malta.

The credit for tax paid abroad may not exceed the tax payable in Malta on the income to which the credit refers. Furthermore, no refund may result from the application of double taxation relief.

UNILATERAL RELIEF

Where Malta does not have a double taxation treaty concluded with a particular country, the problem of double taxation is eliminated through another type of Malta double tax relief granted by Malta tax legislation, which is granted notwithstanding there is no treaty. In this case, a credit for tax paid abroad is granted purely unilateral. From a computational point of view unilateral relief is computed in an identical matter to double tax treaty relief. Moreover, the taxpayer must fulfill certain conditions for unilateral relief to be availed of. These conditions are identical to the conditions applicable in case of the application of double tax treaty relief with the exception of the double tax treaty having to be concluded.

Our system of unilateral relief also incorporates a highly beneficial mechanism that indirectly enables the applicant to claim substitute for tax paid on the dividend (also known as a credit for underlying tax). Relief by way of credit is granted for any foreign income remitted to Malta and any underlying tax suffered by the Company paying out the dividend. Whenever foreign companies distribute dividends, the dividend distribution is subject to tax on the premium twice, i.e., at the company level and the shareholder level, given that few countries apply a complete imputation system.

THE FLAT RATE FOREIGN TAX CREDIT

Malta tax legislation incorporates another unique form of unilateral mechanism to eliminate double taxation, namely the flat rate foreign tax credit 'FRFTC'. This relief mechanism is increasingly beneficial because, unlike double tax treaty relief and unilateral relief, which provides a credit for taxes that must actually be paid abroad, this relief mechanism offers comfort at a deemed fixed flat foreign tax rate of 25%.

The income ought to meet several conditions in order to benefit from this relief mechanism, namely:

• it must stand to be allocated to the foreign income account. Therefore, this relief mechanism is only applicable to Malta Companies;
• the recipient must be a Malta registered company in the year of assessment in which the income was earned;
• the Company must be specifically empowered to receive the FRFTC and fall to be allocated to the foreign income;
• The recipient must have documentary evidence that the gain stands to be allocated to the foreign income account.

THE PARTICIPATION EXEMPTION

The Malta participation exemption is an advantageous Malta tax exemption that exempts companies registered in Malta from paying tax on income derived from a “participating holding” (such as dividends) or from the transfer of such a holding. The exemption also applies where the holding is in a company that is resident in Malta. In such a scenario the participation exemption may only be claimed in respect of gains derived from the transfer of such holding. Furthermore, the participation exemption applies exclusively to a 'company registered in Malta' taxpayer. Consequently, it applies solely to those companies registered in Malta.

The Malta tax participation exemption is optional. The taxpayer is entitled to waive the exemption by declaring the income or gain which would have otherwise been exempt from tax, in his/her tax return and pay tax on such income or gain in the usual manner.

A “participating holding” typically arises where:

• a company holds directly at least ten percent of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least ten percent of any two of the following:
  • right to vote;
  • profits available for distribution; and
  • assets available for distribution on a winding-up;
• a company is an equity shareholder who holds an investment representing a total value, as on the date or dates on which it was acquired, of a minimum of €1,164,000 (or the equivalent sum in a foreign currency) in a company and that holding in the Company is held for an uninterrupted period of not less than 183 days;
• other scenarios giving rise to a participating holding may also subsist. For more information in this regard kindly contact us (link to our contact us page).

The application of the participation exemption is subject to pertinent anti-abuse provisions provided in Malta tax legislation.

FURTHER MALTA TAX ADVANTAGES ARISING FROM THE PARTICIPATING HOLDING REGIME

Where a holding is not a holding in the share capital of but is in a body of persons constituted, incorporated or registered outside Malta, which is not resident in Malta, and is of a nature similar to a partnership en commandite, the capital of which is not divided into shares, the said holding shall be deemed to constitute a participating holding if it falls within the remit of any scenario giving rise to a participating holding. Consequently, a holding in a limited partnership incorporated outside of Malta may also qualify as a “participating holding” if its nature is similar enough to a holding in a company that meets one of the conditions outlined above. Moreover, the holding must be of an equity holding nature, as defined in Malta tax legislation.

The Director-General Inland Revenue is also entitled to determine that an equity holding exists, where a holding is not in the share capital of a company or does not consist solely of such a holding of share capital. Still, the shareholder can demonstrate that in substance holds entitlement to at least two of the following equity holding rights:

• a right to vote;
• a right to profits available for distribution to shareholders; and
• a right to assets available for distribution on a winding up of that Company.

Following recent amendments, the participation exemption regime has been improved in that the definition of participating holding has been extended. To this end, the following will be treated as participating holdings:

• a partnership en commandite the capital of which is not divided into shares constituted under the Malta Companies Act, not being a property partnership, or
• a body of persons which is constituted, incorporated or registered outside Malta, not being a property partnership, and is of a nature similar to a partnership en commandite the capital of which is not divided into shares constituted under the Malta Companies Act, or
• a collective investment vehicle constituted, incorporated, or registered outside Malta and which is not resident in Malta, where the liability of investors in such scheme is limited to the amount invested by them, shall be deemed to constitute a participating holding if it satisfies the provisions of any of the scenarios which give rise to a participating holding shall apply mutatis mutandis to such holding.

Furthermore, Malta tax legislation extends the remit of the participation exemption to branch profits. Consequently, the participation exemption will apply to any income or gains derived by a company registered in Malta attributable to a permanent establishment (including a branch) situated outside Malta or to the transfer of such a permanent establishment. This applies to whether such permanent establishment belongs exclusively or in part to the particular Company, including a permanent establishment operated through any entity or relationship other than a company. The specific Company has an interest. For these purposes, the pertinent profits or gains should be calculated as if the permanent establishment is an independent enterprise operating in similar conditions and at arm's length.