Malta: Taxation

Taxation in Malta:

Advantages of Malta Taxation?

✅ Effective 5% Tax Rate.

✅ Remittance Basis for “Non-Doms.”

✅ Tax Exemption on Capital Gains.

✅ No Wealth or Inheritance Tax.

✅ No Social Charges on Second Employment.

(Please note: Zugimpex does not provide services to US citizens and to US residents)

Malta – Tax benefits:

Tax Benefits for Companies

When creating a new taxation system, Malta was assisted by a global tax consultant, whose expertise and general information allowed to create an EU-compatible, but yet pro-business environment. The main legislation is the Maltese Income Tax Act (Chapter 123 Laws of Malta), the Income Tax Management Act (Chapter 372) and the Value Added Tax Act (Chapter 406).

To ensure taxation compliance, an audit is mandatory for the annual accounts of companies. Accountants, auditors, and tax practitioners have access to various e-services.

5% effective corporate profit tax, if companies are owned by non-residents or by residents without domicile in Malta. The unique structure complies with “subject to tax” regulations of double tax treaties: companies pay a profit tax of 35% and the recipient of dividends receive 30% or 6/7, if it is a corporation whose beneficial owners are not both resident and domiciled in Malta. In case of royalties and interest rates, there is sometimes a 5/7 refund, so the final tax rate is 10%.

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How does the 6/7 tax refund work in practice? The subsidiary prepares the audited financial statements and submits them together with the tax declaration and the refund claim. The authority checks the refund claim, often asks for different documents and then approves it. After the refund claim is approved, the subsidiary pays the tax, and the refund is paid by the authority to the account mentioned on the refund claim later. Because of the time needed by the authority to check the refund claim, we advise to submit the documents shortly after the end of the business year, then the approval should come before the due date of tax payment.

At the prevailing system in Malta, companies pay tax, and the transfer from corporate to private level is tax free. There is just a difference between those that are eligible for the refund and other ones who are not. This system allows people to create a holding company in Malta, move to Malta, receive dividends tax- free from the subsidiary in the holding and then receive dividends from the holding tax-free. If, however, the shareholder resides in another country, the dividends from the holding company may be taxable income at the residence country.

Fiscal Unit:

Consolidated group income tax rules were introduced with legal notice 110 2019. Subject to some conditions, companies can form a group where they are considered to be a single taxpayer, submit a single tax declaration and pay only the 5%. A fiscal unit can be formed by a mother company (principal taxpayer) and one or more subsidiaries which are treated then as transparent.

All companies must be represented by the same tax representative, have the same fiscal year and fulfil two of the following 3 criteria at the end of the preceding fiscal year: the holding must have at least 95% of voting rights, right to profits, right to the assets available in a liquidation.

The CfR has defined a certain registration process. This includes steps where the mother company is an entity outside Malta. It needs to appoint a local tax representative and register in Malta with the CfR.

Maltese tax law allows to deduct IP rights in full in the year in which the expenditure is incurred or in the year in which the IP rights are first used or employed in producing the income.

There is also a Patent Box Regime that is in line with the OECD approach, however with a number of conditions. The so called ‘Qualifying IP’ includes patents and utility models, software, and IP assets relating to medical products. A large part of the expenses must incur at the taxable entity. Then the holder of qualifying IP or of an exclusive licence of it can benefit.

Consolidated group income tax rules were introduced with legal notice 110 2019. Subject to some conditions, companies can form a group, submit a single tax declaration and pay only the 5%.

For legal entities, the local tax system in Malta defines 5 separate “accounts”, some of them have tax advantages: Final Taxed Account, Immovable Property Account, Foreign Income Account, Maltese Taxed Account and Untaxed Account. Revenues and expenses must be allocated within the proper account.

Internationally, there are different options to eliminate double taxation: a double taxation relief based on a treaty, unilateral relief, Commonwealth relief and the FRFTC which is a flat rate foreign tax credit applicable in the Foreign Income Account subject to specific conditions (a 25% credit for foreign tax deemed to have been suffered).

In order to extend the tax settlement date to 18 months after the end of the financial year, to avoid provisional tax payments and to benefit from the exemption of provisional tax in case of a share transfer, a company that has mainly activities outside Malta can file an application DDT10 (Duty on Documents on Transfer Act) with the Commissioner for Revenue (CfR). Periodically, an application for renewal is required.

Steps and Conditions for Company Formation in Malta – Click here !

In the menu “Advisory” we offer clients to benefit from our know-how in.

International Tax Planning and Substance.

Structures shall follow the business activities, so please look at our guidelines for.

Company Structures.

Is processed correct and rather quick by local authorities, so short after your company formations in Malta, the company establishment is finished, and the business can start.

For the registration for VAT, usually a certificate of registration is required. The Commissioner for Revenue asks for the main activity plus for the planned amounts of sales and purchases, national, within the EU and with countries outside the EU. Sometimes the director is invited for a personal visit or for a video interview.

In most cases, VAT returns are due every 3 months, usually 6 weeks after the end of the VAT period. The VAT periods are defined by the authorities and may be different than the calendar quarter. Sometimes it is possible at the beginning to ask for a change to the calendar quarter which makes it easier to coordinate with the financial statements.

According to which dividends from a subsidiary company can be received tax-free in the parent company, even across borders, if some conditions are met. Also, the refund from dividend tax remains tax free in the holding. If the mother company is situated in a country that has rather unpredictable tax authorities, a corporate structure with an operative company, with a dividend feeder holding in Malta and with beneficial owners outside of Malta is an option. The holding might also be a limited partnership if it can receive dividends tax free from the Maltese subsidiary. Then it is sometimes possible private owners can legally and tax free take out the money from the structure, and such owners can reside in many countries. However, it is important to make sure that the holding has real activities by itself, so foreign tax authorities cannot qualify it as transparent.

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Tax Benefits for Individuals

The concept of “Residence without Domicile” offers tax advantages:

In current practice, foreigners generally are deemed to have residence but not domicile in Malta (there are 3 concepts of domicile: domicile of origin, if someone is born as a Maltese, domicile of dependence, if a foreign woman marries a Maltese, and domicile of choice that requires an active declaration). Residents without domicile are subject to a minimum tax of 5000 € per year if income outside Malta exceeds 35000 €. To avoid a domicile of choice, a special declaration at a notary can be signed.

Residents without domicile are only taxable on:

Income arising in Malta, income arising outside Malta and remitted to Malta, and profits from real estate in Malta. There is no tax on capital and residents without domicile can receive capital gains arising outside Malta and remit them to Malta (therefore separate bank accounts for income and for capital are recommended). Income created outside Malta that remains outside Malta is not subject to tax (if you use your foreign income to buy an apartment from a Maltese seller, ask him to open a bank account abroad, then it is him who remits the money to Malta and not you). However, capital gains arising in Malta are subject to tax for natural persons residing in Malta.

A resident without domicile can run a Maltese company with a foreign holding (recommended in a country where there is no tax on receiving dividends and no tax on distributing dividends). The Maltese company pays income tax, the holding receives the refund, and the full imputation system is applicable: dividends can be remitted to Malta tax free, because they are distributed from the holding to individuals out of originally taxed profits. Also, the 5000 € minimum tax may be reduced by a credit for taxes already paid in Malta.

According to Maltese tax law, a corporation also can have the status of “Resident without Domicile” and therefore be subject to tax only on income earned in Malta or remitted to Malta. This is the case, for example, if a company is registered in Cyprus and has management and control in Malta. Such a structure is favourable for passive income (interest or royalties), which are tax free if not remitted to Malta, because they are deemed to arise where the payer is located.

Company in Malta for residents in Portugal under NHR scheme: 

In most cases, Portugal’s Non-Habitual Resident (NHR) tax regime exempts dividends from a Maltese company based on the existing double taxation agreement (DTA). The Maltese company should have substance and relevant management decisions should not happen in Portugal.

Structures for individuals who administrate their assets

Professional trading activities that are regular and business like can quickly qualify as taxable self-employment income, even if the funds are outside Malta.

A possible solution is a company outside Malta that holds the assets and a company in Malta that consults this company, gets a small fee and pays with this fee the salary of the director. If there is no obvious misuse, it is accepted.

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Partnership in Malta

Generally, a partnership is a formal arrangement by at least two parties to manage and operate a business and share its profits. It is not a separate legal person.

For tax purposes, the partnership can opt to be taxed like a company (intransparent) and benefit from the specific advantages. Alternatively, it can opt to be taxed only at the level of the partners (transparent). As a result, transparent partnerships are not recognized as separate taxpayers, even though they may have a separate legal entity for corporate law purposes.

The scheme of residents without domicile also applies for partnerships. Consequently, it is possible to create a Maltese partnership with partners residing outside Malta. This partnership can then opt for transparent taxation.

Transparent Partnership for residents in low tax countries.

Residents of a tax-free country (e.g. UAE, Monaco) or of a country where they also benefit from the status “residents without domicile” (including the golden visa scheme in Portugal) sometimes want to receive passive income (dividends, interests, or royalties) from a country that has no double tax treaty with their country of residency. If this is done directly, there is a withholding tax in the source country.

In some cases, however, it is possible on top of a structure, to form a partnership in Malta. If substance is required, the Maltese partnership needs to have sufficient proprietary activities. Then, according to art. 7 double tax treaty, only Malta has the right to tax.

For a partnership, Malta assumes that active income arises where the business is done, while passive income arises at the place from where it is paid. Therefore, the Maltese entity can create passive income outside the country tax free and forward it to the shareholders.

This is a loan that does not pay fixed interest but allows the lender to share the profits. Some countries allow to deduct the costs of participating loans up to a certain threshold.

The lenders can form a Maltese partnership that grants a participating loan. The borrower has to share the profits but can deduct the costs. From a Maltese point of view, the revenue qualifies as passive income. For the partnership, the passive income is deemed to arise where it is paid, and if the payment is not received and not remitted to Malta, it remains tax free.

Therefore, a partnership in Malta is a practical instrument for residents of low tax countries to finance their investments.

If the country with higher taxation has a double tax treaty with Malta that defines the exemption method in art. 23, it may offer a tool to transfer profits tax free from corporate to private level.

First, a holding outside Malta is formed that fulfils all requirements of the parent- subsidiary directive. If possible, the subsidiary can pay dividends tax free to the holding and it should remain tax free there.

Second, a partnership in Malta is established as shareholder of the holding. This partnership belongs to residents outside Malta, opens a bank account outside Malta and opts to be taxed transparent. In addition, the partnership needs sufficient substance and create its own revenue. Then, article 7 of the double tax treaty allows only Malta to levy tax, and Malta does not tax passive income arising and remaining outside the country.

If the shareholders live in Malta and qualify as residents without domicile, they can benefit from the full imputation principle, as described above. The subsidiary pays tax, the foreign holding receives the refund (or there is a consolidated group taxation), and the shareholders can receive the dividends from the foreign holding tax free in Malta. However, this is only the case for dividends from profits that had before been taxed in Malta.

The Maltese Civil Code provides for civil partnerships.

A Civil Partnership does not need to be registered with the Malta Business Registry (MBR). In accordance with the rules set out in the Civil Code, civil partners are responsible for all their property, present and future, to the creditors with whom they have entered into an agreement.

Foreign residents or residents without domicile can form a civil partnership in Malta and create some substance there. If this entity has active income outside Malta, for example from consulting projects, there are instances where such income can remain completely tax free. However, the Commissioner for Revenue requires a tax declaration, and if the foreign income (not remitted to Malta) exceeds 35.000 €, then the minimum tax of 5000 € shall be paid.

In this legal form, the silent partner is just a business investor and therefore his liability is limited to his contribution. Sometimes there is an immediate contribution plus an additional amount he obliges to invest later. The benefits of a silent partner are the ability to generate investment income with limited participation and to have limited liability for any financial obligations of the partnership. Benefits can be based on total profits or on profit centre results.

There is a high level of confidentiality because the silent partner is not shown in public registers. In some countries, a silent partner can invest into a project that initially creates losses and offset other income with them.

In most countries, two different types of Silent partnerships are known:

Typical Silent Partnership: the silent partner joins a company in a pure financing role based on a civil law contract that defines his contribution and his share of profits. He is not involved in running the business and does not have the authority to act on behalf of the business.

For tax purposes, his share of profits can qualify (depending on circumstances) as interest expenses in the source country and will be taxed in the residence country of the silent partner.

This structure may be useful if the source country has higher taxation than the country of residence and if the investment object has little movable income or movable costs.

A possible application can be a registered Maltese company with an additional typical non-resident silent partner financing real estate in another country and receiving the funds outside Malta.

Atypical Silent Partnership: the silent partner joins a company in an active role based on a civil law contract that defines his contribution, his participation, and his share of profits. He is involved in running the business and usually has some authority to act on behalf of the business.

For tax purposes, his share of profits can qualify (depending on circumstances) as business expenses in the source country. Based on art. 7 double tax treaty, the silent partnership creates a permanent establishment in the source country. This means that the silent partner has transparent business profits which are taxed in the source country (where the business is done). Depending on the double tax treaty (usually art. 23), in the residence country the credit method or the exemption method (with progression clause) will apply.

This structure may be useful if the source country has lower or zero taxation while the silent partner resides in a high tax country. If in addition the exemption method applies, then business profits can be earned in the source country (low taxation) and remain tax-free in the residence country. Obstacles to consider are substance in the source country, transfer prices, as well as social security and tax progression in the residence country.

A typical application could be a resident without domicile in Malta who participates as silent partner in a company in the UAE.

Another option is a Maltese LLC plus a silent partner if they declare a non-registered partnership which opts to be taxed transparent. Then income outside Malta may remain tax-free for the silent partner at all.

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Shipping Companies

The attractive shipping legislation in Malta (approved by the EU) allows shipping companies that own, charter or operate a qualifying ship to benefit from a tonnage tax system. This means Malta does not impose tax on income derived from shipping activities (including carriage of goods or passengers, chartering, ancillary services, but also sale/transfer of ownership, or the disposal of any rights connected with a tonnage tax ship.). There are tax benefits for ship financing, and income derived by a ship manager from ship management activities is treated as income derived from shipping activities and are exempt from tax.

In addition, there are VAT exemptions depending on the size and the use of the ship. Leasing of pleasure boats in Malta is subject to 18% Maltese VAT. However, the lessor can meet certain conditions, so the VAT is charged only for the actual time that the yacht spends within EU territorial waters.

For short-term hiring of pleasure boats, the reduced VAT rate of 12% applies.

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Residency

According to The Residence Programme Rules for citizens of the EU and Switzerland and according to the Global Residence Programme for non-EU citizens can transfer their residence to Malta and benefit from tax incentives, if they buy real estate for at least 275000 € (or 220000 € in designated areas in the south of Malta or in Gozo) or if they rent real estate for at least 9600 € per year (or 8750 € in designated areas in the south of Malta or in Gozo). In addition, a fit and proper test is required. Then the tax on income earned outside Malta and remitted to Malta is 15%, and there is a minimum tax of 15000 € per year. There is also a program for high qualified individuals who then pay only 15% on their income earned in Malta.

Easy relocation of residence: Malta is a member of the EU; therefore, EU citizens are entitled for a residence permit. Also, within the EU exit tax is sometimes not effective and after resident registration, a tax residence certificate is issued quickly. However, there must be a separate application for every year. It is important to know the requirements and to prepare in advance the documents required to receive a tax residence certificate:

    • Covering letter with the reason and the authority for which it is needed.
    • Lease agreement or purchase contract of the real estate.
    • Employment contract plus FS3 or relevant documents in case of different reasons to stay.
    • 12 months bank statements for year/s of residence requested (to keep some privacy, we therefore recommend to use a separate bank account and card to make and show local purchases).
    • 12 months Water and electricity bills or proper confirmation plus documentation of the landlord for each year.
    • 12 months of Copies of internet / TV / Mobile phone bills, if any.
    • Copy of the Maltese Residence Card and driving licence.

Redomiciliation Rules: according to Maltese legislation, it is possible to apply the concept of residence without domicile to legal entities. If a foreign company (e.g. offshore) re domiciles to Malta, this offers additional tax advantages, because such an entity has limited tax liability in Malta and income arising outside Malta is not taxable in Malta. In addition, this structure creates credibility and opens the door to the EU, EU- directives and double tax treaties.

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EU subsidies and Tax Credits

EU subsidies and Tax Credits as investment incentive: under certain conditions, a percentage of the total investment (including the costs for employees) can be received as a tax credit. However, while local companies who pay 35% tax have a reasonable advantage, the tax credit also has an effect on the refund, so the final amount is marginal.

Blockchain

For Block-chain technology, Malta introduces 2018 a new comprehensive regulation, similar to the one in the gaming industry. A Digital Ledger Technology (DLT) package should generate high demand for blockchain applications, crypto currencies and ICOs. As a result, however, the responsible authorities acted very restrictively and only a few licenses were granted.

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