Guide to Taxation
Revision No. 60 - Last Updated : 11-04-2002
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The Income Tax Act and the Income Tax Management Act are the principal laws that regulate taxation in Malta.
Classes of taxpayer
The 3 principal classes of taxpayers recognised by Law are:
1.
Individuals
(i.e. natural
persons);
2.
limited
liability companies*; and
3.
ecclesiastical
entities.
Partnerships
are treated as conduits for tax purposes which means that partnership profits
are taxed in the hands of the individual partners unless they are registered as
partnerships en commandite with capital divided into shares. Joint Ventures are treated as partnerships
for all purposes of tax law.
Tax year
The
tax year for individuals and companies is the calendar year commencing on
January 1. In some cases, companies are
able to change their accounting year subject to the approval of and the
conditions imposed by the Commissioner of Inland Revenue.
Tax liability: basic rules
Individuals
who are both ordinarily resident and domiciled in Malta are
liable to pay personal income tax in Malta on their worldwide income.
Individuals
who are either not ordinarily resident or not domiciled in Malta
are only liable to tax in Malta on income arising in Malta and on foreign
source income remitted to Malta (but not capital gains whether remitted or
not).
A
limited liability company is considered to be resident in Malta if it is
incorporated under the Laws of Malta or if the control and management of its
business is exercised in Malta.
Taxation of individuals
Individuals
are charged to tax at progressive rates that reach a maximum of 35% on their
gross income less allowable deductions*. The system is that of filing a tax return to
give the authorities information leading to a comprehensive assessment. Returns should be completed and filed within
a period determined by the Commissioner of Inland Revenue which may not be less
than 30 days. In practice, however, a
reasonable period for compliance is usually allowed.
The
rates applicable as from 1 January 2000 are as follows:
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SINGLE RATE BANDS |
Income (Lm) |
Tax rate |
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0 – 3,000 |
0 |
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3,001 – 4,000 |
15% |
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4,001 – 6,000 |
25% |
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6,001 and over |
35% |
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MARRIED RATE BANDS |
Income (Lm) |
Tax rate |
|
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0 – 4,000 |
0 |
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4,001 – 5,500 |
15% |
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5,501 – 7,500 |
25% |
|
|
7,501 and over |
35% |
Spouses may elect to file a joint tax return or, alternatively, be taxed separately.
Foreign personnel working in Malta in possession of a work permit are taxable only on their income arising in Malta. The rules that apply to local residents apply also to foreign personnel.
Returned migrants are offered a special tax regime and, accordingly, subject to certain conditions, they may elect to pay income tax at a flat rate of 15% on local income subject to a minimum tax liability of one thousand Malta liri (Lm1,000) per annum (approximately US$2,500).
Holders of Permanent Residence Permits are likewise liable to tax at the flat-rate of 15% on foreign source income remitted to or received in Malta less allowable deductions subject to a minimum tax liability of one thousand Malta liri (Lm1,000) per annum.
Expatriates in the employment of manufacturing companies duly approved by the Malta Development Corporation and exporting, at least, 95% of their products are liable to a maximum rate of income tax of 30% on their income arising in Malta subject to a minimum tax liability of one thousand Malta liri (Lm1,000) per annum.
Expatriates who are employees of, or provide services to, an investment services company (i.e. a company licensed under the Investment Services Act, 1994 (ISA)) are liable to personal income tax at the normal rates but their tax liability may be considerably mitigated as a good number of reimbursement of expenses, allowances and benefits in kind are not liable to tax.
Non-residents, provided they are not owned or controlled by, or acting on behalf of, a resident of Malta and provided they are not otherwise operating in Malta through a permanent establishment (defined as a fixed place of business in which the business of the enterprise is wholly or partly carried on) are exempt from Malta tax on the following:
· interest and royalties arising in Malta;
· the disposal of shares or securities in Maltese companies the assets of which do not consist wholly or principally of immovable property situated in Malta;
· the disposal of shares or units in a CIS; and
· the surrender or maturity of linked long term policies of insurance.
Taxation of limited liability companies
General
The company rate of tax is a flat-rate 35% on gross income less allowable deductions.
Malta operates the ‘full imputation’ system of taxation so that any tax paid by the company is imputed to the shareholder in the event of a dividend distribution. The tax withheld by the company from the dividend it distributes is, therefore, no more than a payment on account of the shareholder’s own liability.
A company is required to file a tax return of its income for the accounting period which is a printed form issued by the tax authorities. This return contains a breakdown of the sources of income; a computation of the company’s income liable to tax; a list of shareholders; details relative to dividends distributed and of the movement of reserves; a breakdown of the taxed profits available for distribution; a list of directors and the remuneration, fees etc. paid to them; and a reconciliation of the amount of wages and salaries shown on the accounts with the amounts declared to the tax authorities.
The time limit for the filing of tax returns supported by audited accounts is June 30 of the year of assessment. When the accounting date precedes December 31, the return should be filed within 6 months after the accounting date.
Heavy fiscal penalties are imposed in case of non-compliance. These penalties are enforceable through administrative action by the tax authorities without the need of court intervention.
Incentives to attract foreign investment to Malta
Non-resident shareholders of International Trading Companies (ITC) are, upon a distribution of dividends and through a system of refunds, taxed at 4.17%.
Non-resident shareholders of International Holding Companies (IHC) are taxed at approximately 12% or, alternatively, 0% if the profits derive from a ‘participating holding’ (defined as a holding of 10% or more of the equity of an overseas company).
Collective Investment Schemes (CISs) may choose to be totally exempt from income tax in Malta but then cannot avail themselves of Malta’s vast network of Double Taxation Treaties (DTTs). Alternatively, CISs set up as open-ended investment companies in the form of a variable share capital company or SICAV may elect to be taxed at the preferential rate of 25% and thereby benefit from the DTTs.
Investment services companies licensed under the ISA are liable to tax at 35% but may claim a number of additional tax deductions over and above the deductions normally allowed for income tax purposes that considerably mitigate their ultimate Malta tax liability.
Companies licensed under the Malta Freeports Act may receive tax holidays of 10 years or more whereas ‘qualifying’ companies under the Business Promotion Act are taxed at preferential rates.
Shipping companies are, in most cases, exempt from tax in Malta.
Allowable deductions
These are numerous and include the following:
Business expenses.
They must be incurred during the year preceding the year of assessment and must be wholly and exclusively incurred in the production of income. Any amounts in excess of normal commercial rates are disallowed in an assessment. Business expenses incurred outside Malta that are allowed as a deduction include reasonable head office and management expenses.
Rental costs.
Rental costs are normally fully tax deductible.
Depreciation.
The amounts charged by a company in its accounts are not immediately allowable as a deduction. They must be replaced, in most cases, by the statutory allowances at the prescribed rates. Depreciation is limited to plant and machinery and industrial buildings and structures (always excluding the cost of land). 3 kinds of allowances are available: (i) the initial allowance is fixed at 20% for plant and machinery and 10% for industrial buildings and structures; (ii) wear-and-tear allowance which is calculated by the reducing-balance method except in the case of certain categories of ships where the straight-line method may be used. When assets are transferred from one owner to another the reduced-balance value in the former owner’s hands is carried forward; and (iii) balancing allowance which comes into operation when an asset that has been given an initial allowance and a wear-and-tear allowance over its working life is finally sold, transferred, destroyed or, otherwise, put out of use. In this case a computation is necessary to determine whether the value upon disposal (if any) is equivalent to the book written-down value. If the disposal value is less, the deficiency is made good by the grant of a further allowance in the same year. If the disposal value is higher, the balance is brought back to charge also in the same year.
Employees’ wages.
The employer must furnish the tax authorities annually with the prescribed details regarding the amounts of emoluments paid (whether to foreign or to Maltese employees) for the deduction to be granted.
Insurance premiums.
These are generally allowed as a deduction in computing taxable income.
Intercompany charges.
These are, in general, deductible provided the charge is made at arm’s length for both the services rendered and the benefits received.
Social security contributions.
The social security payments that a company makes on behalf of its employees are fully deductible.
Interest.
Any sum payable by way of interest on any borrowed money is an allowable deduction if the authorities are satisfied that the interest is payable on capital employed in acquiring income. Court interpretation has widened the meaning to include cases where the interest is due on the unpaid purchase price of commodities (e.g. in hire-purchase cases).
Royalties and service fees.
Although these are an allowable deduction, payments to foreign affiliates that are higher than open-market payments may not be allowed. When the royalty payments are of a capital nature, the expenditure is not wholly allowable in the year in which incurred but is spread over a reasonable number of years according to its expected life-span. Whenever a royalty has been allowed as a deduction (irrespective of whether the deduction was of a capital or revenue nature), any sums receivable from the sale of any of the related patents or patents rights are taxable in the year in which received.
Service fees payable to non-residents must result from genuine business contracts and be of benefit to the local enterprise. Payment may be subject to deduction at source but, in such cases, the recipient usually asks for a proper assessment of tax due, claiming a deduction for expenses and the benefit of the lower rates of tax. Excessive claims for service fees are disallowed.
Bad debts.
Bad debts for which an allowance is due must have actually become bad during the accounting period in question. In the case of significant bad debts, documentation regarding irrecoverability must be made available.
Repairs and alterations.
In the case of assets qualifying for depreciation, (i.e. industrial buildings or structures; plant and machinery) an allowance is available for repairs. These must be of a recurrent and not a capital nature.
Travel and entertainment.
Expenses in this category are closely scrutinised and must usually be itemised and documented.
Charitable contributions.
The deductibility of charitable and philanthropic contributions is very restricted and a donation will qualify as a deduction only if the authorities are satisfied that the expenditure has a promotional value.
Research and development.
A deduction is available for any expenditure on scientific research. If the expenditure relates to items that qualify for depreciation in the normal way, the rules relating to wear and tear apply. Other expenses that do not so qualify are written off over 6 years.
Legal and accountancy fees.
These fees paid in the normal course of the trade or business are fully deductible. Fees may not be deductible if they are connected with the setting up of or structural changes in the company, the purchase of capital items (in this case, however, it may be possible to capitalise the expense) or the preparation and defence of tax cases and appeals.
Losses.
Any loss incurred may be set off against all other gains or profits made in the same year. Any unabsorbed balance is carried forward indefinitely until absorbed or until the company is dissolved in which case it is lost. No deduction is allowed for any loss incurred outside Malta that, had it been a profit and had it been retained outside Malta, it would not have been subject to Malta tax.
No depletion allowances are permissible. In fact, the Companies Act, 1995, specifically prohibits loss, diminution, exhaustion or withdrawal of capital. Furthermore, no allowance is made for any sort of reserve or provision for future expenses.
Group Taxation
A company is deemed to be a subsidiary of another company (and, therefore, in the same group of companies) if the parent company owns more than 50% of the ordinary share capital and voting rights of the subsidiary and is entitled to more than 50% of the profits available for distribution.
Malta’s tax legislation allows a company to surrender tax losses that may be set off against the tax profits of another company in the same group for the corresponding year of assessment. A company that has claimed losses from a group company may carry the losses forward and utilize them for set-off against future profits.
Taxation of branches of foreign companies
A branch of a foreign company is taxable only on its local income at the normal corporate tax rate of 35%. The computation of the income follows that adopted for domestic companies. The branch is allowed to deduct a fair proportion of head office management charges but no deduction is allowed for any foreign losses that, had they been profits, would not have been liable to tax in Malta.
Administrative offices maintained in Malta by overseas companies in connection with transactions in third countries would not normally be subject to tax unless the tax authorities are of the opinion that such an office has itself become involved in the trade, in which case, it would be deemed to constitute a branch office.
Maltese branches of overseas companies have the same rights and obligations as resident companies.
Taxation of interest and royalties
Non-residents :
Interest and royalties paid to non-residents is exempt from tax in Malta provided the non-resident is not engaged in any trade or business in Malta through a permanent establishment and the royalties or interest are not, effectively, connected with such permanent establishment.
Maltese residents and Maltese companies :
Maltese individuals and limited liability companies in receipt of interest from Maltese banks, the Government and Maltese public corporations may elect to pay a final withholding tax of 15% deducted at source and, in that way, avoid declaring the interest in the annual tax return. Alternatively, an individual or company may choose to receive the interest in full but, in that case, it would have to be declared in the tax return and charged to tax. Interest received from overseas deposit accounts is taxable at the normal rates of tax.
Social Security contributions
Employers and employees must each pay social security contributions equivalent to 10% each of the employee’s gross annual emoluments*. The employer deducts the social security contribution along with the income tax. The self-employed also make such contributions.
Foreign workers not ordinarily resident in Malta are not liable to pay contributions under the social security scheme if their employer is already or has opted to pay contributions in respect thereof under a scheme of social insurance in another jurisdiction.
Stamp duty
Stamp duty is levied on various transactions in Malta, the most important being:
· share transfers at 2% of the consideration (or 5% if the assets of the company in question comprise mainly or entirely immovable property situated in Malta); and
· transfers of immovable property: 5% for both Maltese residents and non-residents.
The transfer of marketable securities by or issued by CISs, investment services companies, ITCs and other companies which are majority owned by non-residents and whose assets and business interests are principally outside Malta is, however, exempt from stamp duty in Malta.
Unstamped documents do not constitute valid proof at law.
Capital gains tax
A tax on capital gains applies to gains or profits arising from:
· the transfer of the ownership or usufruct of immovable property or the assignment of real rights over immovable property;
· the transfer of shares in limited liability companies; and
· the transfer of certain intellectual property including goodwill, copyrights, patents etc..
Capital gains realised by non-residents on the disposal of shares held in both Maltese and overseas companies are not subject to tax in Malta as long as the transfer does not relate to shares in a company whose assets consist mainly or entirely of immovable property situated in Malta.
Value Added Tax (VAT)
VAT was reintroduced as from 1st January, 1999, at a rate of 15% with a rate of 5% applicable to tourist accommodation. Certain goods are VAT exempt.
Motor vehicle taxes
Motor vehicles are taxed upon the first registration and yearly thereafter by means of an annual license. The rates vary with the category of vehicle and its engine power.
Licensing fees
Annual licensing fees are imposed on a wide variety of activities such as licenses to keep firearms. Most of the charges levied are minor.
Other taxes
Individuals are not subject to a net assets tax or to a wealth tax. There are no local taxes of any kind. There are no inheritance and gift taxes in Malta but an element of taxation on the transmission of property at death or by donation is in place through stamp duty.
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