Revision No. 16 - Last Updated : 09-10-2002
|
Quick Reference: (Click on any link in the table to go straight to the relevant paragraph) |
||
|
|
||
Broadly speaking, 3 types of double taxation relief are available to Maltese residents (including Maltese companies) wishing to offset the tax suffered abroad, namely:
1. Double Taxation Treaty relief (DTT relief);
2. Unilateral Relief (UR); and
3. the Flat-Rate Foreign Tax Credit (FRFTC).
Under Malta’s tax system, a company is considered resident if it is incorporated in Malta or, in the case of a company incorporated abroad, if its control and management are exercised in Malta.
Tax accounting for companies
The 1994 amendments to Malta’s tax legislation introduced the requirement that a Maltese company’s taxed income is divided into the ‘Foreign Income Account’ (FIA) and the ‘Maltese Taxed Account’ (MTA). The FIA comprises profits that originate from foreign source income such as profits arising from royalties, dividends, capital gains, interest, rent and other income derived from investments situated outside Malta. The MTA contains the balance of the taxed income that has not been allocated to the FIA.
It is only income allocated to the FIA which benefits from the FRFTC detailed later.
Interaction of reliefs
A Maltese resident wishing to offset the tax suffered abroad must:
1. apply DTT relief; or
2. if this is not available, apply UR; or
3. if both DTT relief and UR are not available, apply the FRFTC.
Double taxation Treaties
Malta, currently, has 32 DTTs in force and another 11 which are not yet in force. Most are based on the O.E.C.D. Model. These are:
In force not yet in force
Albania# Russia
Australia Egypt
Austria Kuwait
Belgium Lebanon
Bulgaria Malaysia
Canada
Singapore
China Syria
Cyprus Thailand
Croatia Tunisia
Czech
Republic Turkey
Denmark Ukraine
Finland
France
Germany
Hungary
India
Italy
Republic
of Korea
Latvia
Libya
Luxembourg
Netherlands
Norway
Pakistan
Poland
Romania
Slovakia
South
Africa
Sweden
Switzerland
UK*
USA*
[For a detailed
list of withholding tax rates kindly refer to Appendix 1]
DTT Relief
In those cases where Malta is bound to grant DTT relief, the Maltese resident receiving income from abroad on which tax shall already have been levied abroad may claim a credit for such foreign tax provided that the credit cannot exceed the Maltese tax.
Example 1: the foreign tax is higher than the Malta tax
Foreign income 100
(taxed outside
Malta @ 40%)
Other income 300
Total taxable income in Malta
400
Corporate Tax @ 35% 140
Credit for foreign tax (35%
of 100) 35
Net tax
payable in Malta 105
Example 2: the foreign tax is lower than the Malta tax
Foreign income 100 (taxed outside Malta @ 10%)
Other income 300
Total taxable income in Malta 400
Corporate Tax @ 35% 140
Credit for foreign tax (10%
of 100) 10
Net tax
payable in Malta 130
Unilateral Relief (UR)
UR provisions grant a measure of relief from double taxation even in the absence of a Double Taxation Treaty. UR applies where foreign income is subject to a foreign tax of a similar nature to that imposed in Malta (e.g. withholding tax on dividends) in which case the amount of the foreign taxes will be allowed as a credit against the Malta tax chargeable on the gross amount.
In order to claim UR, the recipient of the foreign income must prove the following to the satisfaction of the Inland Revenue Authorities:
· that the income arose from overseas;
· that the income suffered overseas tax; and
· the amount of such tax.
In addition, UR for underlying tax (i.e. foreign corporate tax) suffered abroad is also available where the taxpayer is a Maltese limited liability company that holds more than 10% of the voting power of the overseas company paying the dividend.
This method of relief is also available, under certain circumstances, in the case of a country with which Malta has a DTT.
Suppose that a Maltese company receives foreign income of US$5,000 from a treaty partner which suffered 34% corporate tax (US$1,700) and 5% withholding tax on the dividend (5% of 3,300 = US$165). Therefore, the net dividend received by the Maltese company would be US$3,135.
Maltese corporate shareholder’s point of view
Net dividend 3,135
Dividend grossed up (i.e.
3,135 + 1,865) 5,000
Company Tax @ 35% 1,750
Credit for foreign
underlying tax 1,700
Credit for foreign
withholding tax 165
Tax due in Malta 0
Distributable
profit after tax 3,135
Flat-Rate Foreign Tax Credit (FRFTC)
The FRFTC is yet another form of relief available to Maltese resident companies that are liable to tax in Malta on income which has already suffered tax abroad. This relief is only available in respect of income allocated to the Foreign Income Account (FIA) of a Maltese resident company. Since, International Trading Companies are not allowed to allocate any of their profits to the FIA, they, consequently, cannot avail themselves of the FRFTC.
The FRFTC is a credit of tax of 25% which is deemed to have been paid outside Malta and is calculated on the net foreign income received by the Maltese company and allocated to its FIA. The amount of the credit that may be claimed by way of FRFTC is restricted by law to 85% of the Maltese tax payable on the relevant foreign source income.
The mechanisms of this form of relief are best demonstrated by the following examples:
Example 1: no deductible expenses incurred in the production of income
Maltese company’s point of view
Net foreign income 1,000
ADD FRFTC @ 25% 250
Chargeable gross income 1,250
Maltese company tax @
35% 437.50
LESS FRFTC 250
Total tax
payable in Malta 187.50
Rate of tax on gross income 15%
Rate of tax of
net income 18.75%
Since the FRFTC is reduced from the gross chargeable income, the higher the expenses incurred by the company in the production of income which are an allowable deduction, the lower the effective tax payable in Malta.
Example 2: deductible expenses incurred in the production of income
Maltese company’s point of view
Net foreign income 1,000
ADD FRFTC @ 25% 250
Deemed gross income 1,250
Deductible expenses incurred
in production of income 100
Chargeable gross income 1,150
Maltese company tax @
35% 402.50
LESS FRFTC 250
Total tax
payable in Malta 152.50
Rate of tax on gross income 12.2%
Rate of tax of
net income 15.3%
Example 3: operation of 85% limit
Maltese company’s point of view
Net foreign income: Royalties 600
Interest 400
(1,000)
ADD FRFTC @ 25% 250
Deemed gross income 1,250
Less deductible expenses 700
Chargeable gross income 550
Maltese company tax @
35% 192
LESS FRFTC (not to exceed
85% of 192) 163
Total tax
payable in Malta 29
Although the FRFTC is available only if both DTT relief and UR are not available, in practice, since these methods require proof of the tax suffered abroad, the choice of whether to opt for the FRFTC ultimately depends on the taxpayer. In fact, for the FRFTC to apply, it is not necessary to prove that the income in question has actually suffered foreign tax – the only proof needed is an audit certificate confirming that the income is foreign source income.
The FRFTC is, therefore, particularly suitable in those cases where:
· the company does not have the required evidence of the amount of tax paid abroad and would, therefore, not qualify for other forms of relief which require this proof; or
· the company, for tax planning purposes, does not wish to indicate the country of origin of the foreign income; or
· the company has not paid any tax abroad on its foreign source income; or
· the company has paid tax abroad but at a rate that is less than 25% of the net income received.
Downloads:
· This Document in PDF Format.