Taxation of Companies
The Income Tax Act applies an incorporation test and a management and control test in order to establish whether a company is resident in Malta for tax purposes.
Companies which are incorporated in Malta are considered to be both resident and domiciled in Malta and therefore taxable on a worldwide basis i.e. on all their income wherever it arises.
A company which is not incorporated in Malta will be considered to be tax resident in Malta if it is managed and controlled in Malta. Such company would be taxable on a remittance basis and therefore on all income arising in Malta and on all foreign sourced income (excluding capital gains whether or not remitted) which is received in Malta.
Companies are taxed at a flat rate of 35%
Full imputation System
Malta operates the full imputation system for taxation of dividends paid by companies resident in Malta thereby eliminating economic double taxation. The tax paid at the level of the company on the profits out of which the dividend is distributed is credited in full to the shareholder. Effectively the shareholder will not be subject to further tax on dividends received since the corporate tax rate represents the highest rate at which an individual’s income may be taxed.
Distributable profits of a company are to be allocated to 5 tax accounts; namely the:
- Final Tax Account (FTA) to which tax exempt profits which are also exempt in the hands of the shareholder as well as profits subject to final tax are to be allocated
- Immovable Property Account (IPA) to which distributable profits subject to tax that are derived directly or indirectly from immovable property situated in Malta are to be allocated
- Foreign income account (FIA) to which distributable profits subject to tax derived from investments situated outside Malta or attributable to a foreign permanent establishment, branch or agency are to be allocated
- Malta Tax Account to which distributable profits subject to tax which have not been allocated to the FTA, IPA and FIA are to be allocated
- Untaxed Account (UA) to which any remaining distributable profits are to be allocated.
The allocation of distributable profits to the various tax accounts must follow a specific order with distributable profits being first allocated to the FTA followed by the IPA, FIA and MTA.
The Tax Refund System
Shareholders, who are appropriately registered for tax refund purposes, in receipt of a dividend distributed out of the FIA and the MTA, may claim a refund of the Malta tax paid on the profits out of which the dividend was distributed. No refund can be claimed with respect to distributions from the FTA and the IPA.
The following refunds may be claimed:
- 6/7ths refund of Malta tax payable provided no double taxation relief is claimed with respect to income allocated to the FIA and provided the income does not consist of passive interest and royalties
- 5/7ths refund of Malta tax payable where the income consists of passive interest and royalties or dividends from a participating holding (see definition below) which does not satisfy the anti-abuse provisions and provided no double taxation relief is claimed with respect to income allocated to the FIA
- 2/3rds refund of Malta tax paid on profits allocated to the FIA
- A 100% refund of Malta tax paid with respect to income (dividends) and gains (capital gains derived from the disposal of a participating holding) derived from a participating holding where the participation exemption has not been availed of
Malta exempts income and gains derived by a company registered in Malta from a participating holding or from the disposal of such holding.
A participating holding is defined as a holding of equity shares by a company resident in Malta in another entity where such holding satisfies at least one of the following conditions:
- The company holds directly at least 10% of the equity shares in a company, body of persons or collective investment scheme which holding confers an entitlement to at least 10% of any two of the following rights:
- Right to votes
- Right to profits available for distribution
- Right to assets available for distribution on a winding up; or
- The company is an equity shareholder in another entity and is either
- entitled at its option to acquire the remaining balance of equity shares not owned by it; or
- has the right of first refusal in the event of a disposal, redemption or cancellation of all the equity shares not held by it; or
- has the right to sit on the Board or appoint a person to sit on the Board of the other entity as director; or
- the company is an equity shareholder and holds an investment representing a total value at date of acquisition of at least €1,164,000 and this holding has been held for an uninterrupted period of not less than 183 days; or
- the company is an equity shareholder and the holding is held for the furtherance of its own business and not as trading stock for the purposes of a trade
For a holding to qualify as a participating holding it must also meet the definition of equity holding i.e a holding in a company which is not a property company, where the shareholding confers an entitlement to at least any two of the following rights:
- Right to votes
- Right to profits available for distribution
- Right to assets available for distribution on a winding up
The participation exemption does not only apply to equity holdings in other companies but also extends to equity holdings in:
- Partnerships en commandite the capital of which is not divided into shares constituted under the Companies Act
- Non-resident body of persons of a similar nature to the said partnership en commandite
- Non-resident collective investment vehicles where the liability of investors is limited to the amount invested by them.
Where the income derived form a participating holding consists of dividends (as opposed to gains derived from a transfer of a participating holding), the body of persons distributing the said dividends must satisfy any one of the following conditions for the exemption to apply:
- It is resident or incorporated in the EU;
- It is subject to any foreign tax of at least 15%;
- It does not derive more than 50% of its income from passive interest or royalties
In the event that none of the above conditions are satisfied then the following 2 conditions must both be satisfied:
- The equity holding in the non-resident body of persons must not be a portfolio investment; and
- The non-resident body of persons or its passive interest or royalties must have been subject to any foreign tax of at least 5%
Participation exemption extended to foreign branch profits
The participation exemption also applies to income derived by a company registered in Malta which is attributable to a permanent establishment situated outside Malta or to gains derived from the transfer of such permanent establishment.
Exemption applies irrespective of whether the permanent establishment belongs exclusively or in part to the Maltese company and also applies where the permanent establishment is operated through an entity or other relationship other than a company in which the Maltese company has an interest.
Participation exemption vs full refund
The participation exemption is availed of by not including the income qualifying for the exemption as part of the Maltese company’s chargeable income in its tax return.
Alternatively where the equity holding is in a non-resident company, the Maltese company may choose to tax such income and the shareholders may, upon a distribution of such income by way of dividends, claim a 100% refund of the tax paid by the Maltese company on the said income.
Malta exempts royalties and similar income derived from:
- patents in respect of inventions,
Exemption applies both at the level of the company deriving the income as well as at the level of the shareholder in receipt of dividends distributed out of the said exempt profits.