Malta - Company Tax
Malta substantially revised its corporate law so as to remove the distinction between offshore and onshore companies and thereby hopes to guarantee that all Maltese companies will obtain favourable treatment tax treaties.
Credit & Refunds Systems
While the Maltese international company is an onshore company, it is distinguished from other onshore Maltese companies by the privileged tax treatment of its non-resident shareholders. Therefore at shareholder level, the tax advantages of the Maltese international company come into play through a system of credit and refunds. These significantly reduce the ultimate tax paid by the non-Malta-resident shareholder or beneficiary. Onshore status is thus translated into tax efficiency.
This preferential tax treatment results from the application of the normal tax rules applicable in Malta: the tax imputation and refunds mechanisms.
The Tax Imputation System
In terms of the imputation system, the company deducts tax at source as an advance payment of the shareholder’s tax liability. Therefore, where the tax deducted at source exceeds the shareholder’s liability, the shareholder is entitled to a refund.
The tax imputation system is applicable to Maltese-residents and non-residents alike. The dividend distribution received by the shareholder is grossed up and treated as chargeable income in the hands of the shareholder. Tax is imposed on this pre-tax dividend at the rates applicable to the given taxpayer: 27.5% in the case of the non-resident shareholder of an international company. The shareholder then qualifies for a tax credit for all tax incurred at corporate level (35%). Therefore at assessment stage, the shareholder immediately qualifies for a refund of 7.5% of tax paid at source.
The Refund System
In the spirit of avoiding any incidence of double or even triple taxation in Malta on foreign income, on the distribution of company profits, the shareholder or beneficiary becomes entitled to claim the following refunds:
- A full refund where profit distribution is made out of income and capital gains derived from foreign overseas assets qualifying as a participating holding e.g. dividends, as well as capital gains arising on the disposal of a participating holding.
- A refund equivalent to two-thirds (2/3rds) of the Maltese tax paid by the company in respect of profit distributions of other foreign sourced income.
Refunds to shareholders are by law payable not later than the fourteenth day from the end of the month in which they become due. Furthermore, tax so refunded is exempt from Maltese taxation in the hands of the shareholder of the Malta company.
No Withholding Taxes, Exit Charges
Domestic tax legislation does not impose withholding taxes in Malta. In this way, there is no exit charge from Malta on all types of income outflows and this domestic law provision overrides any withholding tax rates stipulated in Malta’s double taxation treaties.
ITC's and IHC's pay tax on their world wide income at a rate of 35% but there is a system of credit and refunds available to the shareholders which, in simple terms, reduces the net rate of tax to 4.2% in the case of ITC's and between 0 and 6.5% in the case of IHC's. This is an attractive system of taxation because the 35% rate is actually paid at the corporate level and it is thought that tax treaty benefits will thereby be assured.
While ITC's are subject to the normal corporate tax rate applicable to all onshore companies, the extensive network of double taxation agreements, together with the full imputation system of taxation and provisions for tax refunds contained in the legislation make Malta a very tax efficient jurisdiction for non-resident shareholders.
An ITC is taxed at the normal company rate of tax which is currently 35%. However, upon a receipt of a dividend from an ITC, non-resident shareholders are:
- Taxed at a flat rate of 27.5% on the gross amount of the dividend and are credited with the amount of tax paid by the company on the profits out of which the dividend was paid.
- Entitled to a refund of two-thirds of the Malta tax paid by the company on the same profits. This refund is payable not later than the fourteenth day following the end of the month in which the refund becomes due.
Tax computation
The following example illustrates the tax workings relating to ITC's:
| Tax Computation for Non-resident shareholders (or Malta company wholly owned by non-residents) | US$ | US$ |
|---|---|---|
| ITC’s Chargeable income | 100.00 | |
| Less: Tax paid by ITC (@ 35%) | (35.00) | |
| Net dividend received from ITC | 65.00 | |
| Tax Liability(27.5% of ITC’s pre-tax profits) | (27.500) | |
| Tax Credit (Tax paid by ITC) | + 35 | |
| Refund of 2/3 of tax paid by ITC | + 23.33 | |
| Net Refund | +30.83 | |
| Net Dividend after Tax | 95.83 | |
| Effective Tax Liability | 4.17% |
Procedure for Refund
On the distribution of dividends to non-resident shareholders or to Malta companies which are 100% owned by non-residents, a refund equivalent to 2/3 of the tax paid by the ITC becomes due. These refunds are paid by the Inland Revenue Department to the non-resident shareholders within 14 days from the date of the request made to the Department.
Advance Revenue Rulings
International trading and holding companies may request an advance ruling on their taxable status. Such a ruling guarantees the tax position of the company for a minimum period of five years and may be renewed for a further period of five years. Any changes in the tax legislation during these periods will not become operative before the lapse of two years from the coming into force of the new law.
Other taxes
No withholding taxes, stamp duties or exchange control restrictions apply on distribution of the profits or dividends to the shareholders and there are no taxes or restrictions on the exportation of the dividends from ITC. This means that funds finding their way to Malta may be remitted anywhere around the world.