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%.
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 have to 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 benefit from the exemption of provisional tax in case of a share transfer, a company that has mainly activities outside Malta has to file an application DDT10 with the Commissioner for Revenue (CfR). Periodically, an application for renewal is required
In the menu “Advisory” we offer clients to benefit from our know-how in international tax planning and international tax law.
Structures shall follow the business activities, so please look at our guidelines for Company Structures.
If there is a proper setup, it is important to avoid legal issues. So please consult our guidelines about Real Implementation
VAT registration 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
Application of the Parent-Subsidiary Directive of the EU,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 (k.s.) in Slovakia, which can receive dividends tax free from the Maltese subsidiary. Then 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.
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.
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.
- Transparent Partnership and participating loans
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.
- Transparent Partnership for residents in high tax countries
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 fulfills all requirements of the parent- subsidiary directive. If possible, the subsidiary can pay dividends tax free to the holding and it should remains 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.
- Civil Partnerships for foreign active and passive income
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 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.
- Silent partnerships – Typical and Atypical
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 center 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 taxfree 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 nonregistered partnership which opts to be taxed transparent. Then income outside Malta may remain tax-free for the silent partner at all.
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.
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 if they rent real estate for at least 9600 € per year. 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 not effective and after resident registration, a tax residence certificate is issued quickly.
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.
EU subsidies and Tax Credits as Investment incentive: under certain conditions, a percentage of the total amount that is invested in the first 3 years can be received as a tax credit.
For Block-chain technology, Malta introduces 2018 a new comprehensive regulation, similar to the one in the gaming industry. The Digital Innovation Authority certifies DLT platforms. According to the Technology Arrangements and Services Bill, there are certified Technology Service providers and Technology arrangements. This system works through administrators and auditors. Finally, a Virtual Financial Assets Bill deals with regulatory requirements of ICOs and blockchain applications (e.g. utility tokens, crypto currencies, exchanges).
Legal Documents and some Double Tax Treaties: Downloads & Links
(updated July 2021)