Bloomberg Tax Country Guides provide overviews of the tax regimes of more than 200 jurisdictions. The Country Guides are continuously updated to reflect developments as they happen. Written by local experts, each jurisdiction profile covers corporate taxation, personal taxation and social security, transfer pricing and anti-avoidance rules, important miscellaneous taxes, and any special tax regimes applicable to the oil, gas, mining, and banking sectors. To learn more or request a demo, visit pro.bloombergtax.com/international-tax-resources

2.1 Residence, Taxable Status, Entity Characterization

2.1.1. Residence

A company becomes tax resident in Malta, and subject to tax on its worldwide income, by virtue of its incorporation/registration. On the other hand, a non-Maltese company, although not registered in Malta, can be tax resident in Malta if its business is managed and controlled from Malta.

Corporate Domicile

Although the concept of domicile is typically reserved for individual taxpayers (see Section 6.1), Malta is one of a handful of countries that applies the concept of domicile also to corporate entities. In a corporate scenario, the concept of domicile is essentially analogous to incorporation or registration of the company for company law purposes.

Therefore, a company that is incorporated in Malta is treated as both resident and domiciled in Malta. A company incorporated outside Malta but with its management and control in Malta is treated as resident but not domiciled in Malta. A company’s domicile is relevant to determine the type of income that is subject to tax in Malta (see Section 2.2.1).

Management and control

The Income Tax Act does not define the concept of management and control within the context of the Maltese tax system. This concept is directly inherited from English cases defining residence of companies and, therefore, it is common to refer to English case law in the interpretation of the term.

The notion of management and control is a factual notion, and all facts and circumstances have to be reviewed to establish whether a company or a body of persons is being managed and controlled in Malta. There are various factors which should indicate whether management and control is being exercised in Malta. If the majority of the members of the board of directors are resident in Malta, if the head office of the company is located in Malta, if the minutes of board meetings indicate that the most important decisions are being taken in Malta, if management decisions are being taken in Malta, if the company operates a Maltese bank account and if the financial statements are audited by a Maltese auditor are all indicators which point towards Malta as the place of tax residence of a non-Maltese company.

2.1.2. Taxable Status

Corporate entities are subject to income tax at the rate set out in Section 3.1.1.

With respect to partnerships, Maltese tax law, as a default, adopts the look through approach and the profits of the partnership are taxed at the level of the individual partners. It is, however, possible for a partnership to opt to be taxed as a company (i.e., as opaque), subject to certain conditions being met.

Specific rules apply to other entities such as clubs, trusts and foundations. For more information on non-corporate business entities, see Section 2.2.3.

2.1.3. Legal Classification of Nonresident Entities

When classifying nonresident entities for Maltese tax purposes, Malta uses the analogous principle whereby nonresident entities are compared to the definition for certain entities under the Companies Act.

Nonresident entities will be classified for tax purposes based on whether they are similar to one of the following:

  • a limited liability company constituted under the Companies Act or under the Commercial Partnerships Ordinance;
  • any other company constituted as such under any other law in force in Malta; or
  • any partnership en nom collectif and any partnership en commandite constituted under the Companies Act or under the Commercial Partnerships Ordinance; any partnership regulated by the applicable provisions of the Civil Code; and any European Economic Interest Grouping (EEIG) which has elected to be treated as a company.

2.2 Corporate Tax Base

2.2.1. Resident Corporations

Companies that are both incorporated/registered and tax resident in Malta are taxed on their worldwide income.

On the other hand, companies that are registered overseas, but are resident for tax purposes in Malta (so-called nondomiciled companies) are subject to tax in Malta on a source and remittance basis. This means that tax is charged on income and gains arising in Malta, as well as on income arising outside Malta that is remitted to Malta. Capital gains arising from assets situated outside Malta are not subject to tax in Malta irrespective of remittance (for more information on capital gains, see Section 4.1).

The concept of remittance is not defined in Maltese law and the authorities have issued limited guidance on its interpretation (which follows the definition of the concept as adopted by English courts, with minor differences). The guidelines are published on the website of the Commissioner for Revenue. For a link, see Section 1.4.

Planning Point: Maltese tax treaties typically include special provisions limiting the application of treaty benefits with respect to nondomiciled companies. Furthermore, it is often the case that the use of a nondomiciled company triggers anti-avoidance provisions in the source countries involved. Professional advice is therefore strongly recommended.

2.2.2. Nonresident Corporations

Companies that are neither resident nor domiciled in Malta are subject to tax in Malta on income arising in Malta and income from certain Maltese assets. Income and capital gains of a nonresident company arising outside Malta are not taxed irrespective of remittance.

The term “arising in Malta” is normally deemed to include profits from permanent establishments (PEs) as may be defined in Maltese tax treaties and, in the absence of a tax treaty, as defined in the OECD Model Tax Convention on Income and on Capital (see Section 2.2.4.2).

The Maltese Income Tax Act puts an obligation on any person making a payment to a nonresident to withhold tax at specific rates, when the payment to the nonresident is deemed to be income arising in Malta. This obligation is not limited to any specific category of income and assumes that the payor is able to determine whether or not such a payment is subject to tax in Malta in the hands of the nonresident. Although this provision is not heavily enforced in practice, nonresidents trading with Malta should be aware of this provision in their dealings with resident persons. This provision is discussed in more detail in Section 5.5.

2.2.3. Non-Corporate Business Entities

2.2.3.1. Recognition

The most common forms of non-corporate business entities are partnerships, trusts, collective investment schemes and foundations. In Malta, it is possible to set up any fellowship, society or other association of persons, whether corporate or unincorporated, and whether vested with legal personality or not.

2.2.3.2. Tax Status

The general tax rules applicable to companies usually apply to other bodies of persons, with certain exceptions.

Partnerships

Partnerships en nom collectif and any partnership en commandite whose capital is not divided into shares can choose to be treated as a company for tax purposes. If no election is made and for all other partnerships, they will be treated as transparent for tax purposes. Under this model, the chargeable income of the partnership is divided amongst the partners according to their profit-sharing ratios and taxed in the hands of the partners at their respective tax rates.

Trusts

Unlike companies or foundations, a trust does not have a separate legal personality. The chargeable income in relation to the income attributable to a trust is computed as if the trust is a person ordinarily resident and domiciled in Malta, but excludes amounts of income attributable to a trust which is allocated to beneficiaries.

The general rule is that income attributable to a trust is taxable in the hands of the trustee as owner of the trust assets. However, there are various exceptions. There are circumstances where, for tax purposes, the trust relationship is to be disregarded and income attributable to a trust is treated as directly assessable in the hands of the beneficiaries (the transparency model).

Collective investment schemes

A collective investment scheme under Maltese law generally comprises a vehicle that affords potential investors the opportunity to entrust their funds to a vehicle performing activities of a collective investment nature. The advantages pertinent to investing in a collective investment scheme involve risk spreading and the prospect of partaking in investment opportunities that would otherwise not have been accessible to a sole investor. By and large, a collective investment scheme established under Maltese law is set up as a separate legal entity in its own right, endowed with the possibility of operating locally within the remit of the Investment Services Act, or as of year of assessment 2017, notified under the Investment Services Act Regulations (List of Notified AIFs).

Collective investment schemes generally have to be licensed by the Malta Financial Services Authority. However, there is no licensing requirement for a collective investment scheme which complies with the conditions of a private collective investment scheme (PCIS) under the Investment Services Act (Recognition of Private Collective Investment Schemes) Regulations. Instead, a PCIS is subject to a simpler recognition by the authorities. Amongst other requirements, the PCIS is limited to a total of 15 persons and the participants must be close friends or relatives of the promoters.

A number of rules in the Income Tax Act and the Collective Investment Schemes (Investment Income) Regulations provide for a special tax regime pertaining to collective investment schemes that afford significant tax mitigation opportunities. These rules often exclude PCISs. Nevertheless, by and large, collective investment schemes set up as companies should, at least from a theoretical standpoint, constitute fiscally opaque entities. However, it is possible to set up a collective investment scheme in the legal form of a limited partnership, which can be tax transparent for Maltese tax law purposes.

The analysis pertinent to the tax implications of collective investment schemes can be examined from a two-tiered standpoint, i.e., the taxation at the level of the fund itself and the taxation at the level of the investor. One ought to consider that different implications surface depending on whether the fund is a prescribed fund or a nonprescribed fund for tax purposes (see Section 2.6.4).

Foundations

One of the main differences between a foundation and a trust is that a foundation is a separate legal entity with a legal personality, whereas a trust is not. Accordingly, as a general rule, a foundation is taxed in the same manner as a company that is ordinarily resident and domiciled in Malta. It is, however, possible to irrevocably elect for the foundation to be taxed under the same tax provisions as trusts.

When a foundation is taxed as a company, it is taxed on a worldwide basis at the standard rate of corporate tax (as to which see Section 3.1.1). The general deductions and exemptions applicable to companies also apply to a foundation, including the participation exemption rules (see Section 2.5). As a result, beneficiaries are able to utilize the imputation system and may be eligible to claim a tax refund on the distributions of the profits of the foundation in line with the Maltese tax refund system applicable to companies.

If a foundation opts to be taxed in the same manner as a trust, the relevant provisions governing the taxation of trusts will apply and it may, if certain conditions are met, elect to be considered as tax transparent for Maltese tax purposes. Generally speaking, this election can only be made if the foundation’s income is all foreign-sourced and the beneficiaries are not domiciled in Malta.

Although a foundation may be considered tax transparent from a Maltese tax law perspective, the legal owner of the income remains the foundation. The state of residence of the beneficiaries may well not attribute the income to the beneficiaries, therefore creating a mismatch in the tax treatment of the foundation. Foundations within multinational structures need to be analyzed very carefully in light of the new anti-hybrid rules introduced in many countries as a result of BEPS and ATAD.

Irrespective of whether a foundation elects to be treated as transparent or not, the foundation remains eligible to claim the tax refund on distributions made by Maltese subsidiaries.

Protected cell companies (PCC)

A PCC has all the features of a limited liability company, except that it may be divided into segregated cells and is capable of allocating assets and liabilities to different cells. Although the PCC is a single legal person, the assets and liabilities in each cell within the PCC are segregated and protected from those in other cells. This means that even though one cell may default and go bankrupt, it will have no effect on assets held through separate cells and to the PCC generally.

The use of PCCs is limited to certain activities, namely:

  • insurance business;
  • securitization;
  • shipping; and
  • aviation.

The possibility to benefit from a cellular PCC requires the fulfillment of certain requirements.

2.2.4. Permanent Establishments

2.2.4.1. Domestic Law Definition

Although Maltese tax law often refers to a permanent establishment (PE) of a nonresident company, the term is not defined in Maltese law.

The taxing provision for a PE is found in Article 5 of the Income Tax Management Act (ITMA). Nonresident persons are assessable to tax in Malta in respect of any income arising in Malta through any attorney, factor, receiver, agency, branch or manager.

The term “branch” is not defined in Maltese tax law and although it is a term derived from the Maltese Companies Act, it is typically interpreted to have the same meaning as a fixed place PE, as referred to in Article 5(1) of the OECD Model Tax Convention on Income and on Capital.

The term “agency” is somewhat more defined and there are several provisions which attempt to restrict the definition of an agency in specific circumstances. It is worth noting the exclusion of an agent where such agent is not an authorized person carrying on the regular agency of the nonresident person, i.e., an independent agent. This exclusion of independent agents is considered to be in line with the equivalent provision in Article 5(6) of the OECD Model Tax Convention on Income and on Capital.

There are no specific provisions relating to building sites, construction or installation projects and, therefore, in the absence of a treaty, domestic law may consider a PE to exist from the first day. In practice, the position of the tax authorities is different.

In terms of consultancy or technical services, Malta follows the OECD guidance on the matter and does not consider services to create a PE, unless a fixed place of business or an agency is created in Malta.

When assessing the profits that are chargeable to tax, the ITMA brings to tax only those gains or profits which might reasonably be expected to have been earned by an independent merchant. Furthermore, in the case where the profits of a nonresident person are chargeable to tax in Malta and it is not possible to ascertain the amount of the gains or profits arising in Malta, the taxable amount should be a “fair and reasonable percentage of the turnover of the business done by the nonresident person” through the resident agent, while “having regard to the nature of the business.”

In practice, these provisions are typically considered to be in line with the OECD rules on the attributions of profits to a PE and the tax authorities normally rely heavily on the OECD rules on attribution of profits to a PE.

Malta has not adopted the Authorized OECD Approach (AOA) when attributing profits to a PE.

Planning Point: It is important to note that the provisions relating to PEs under Maltese law are drafted as anti-avoidance provisions. Unless a nonresident taxpayer registers as a taxpayer in Malta, the tax is due and payable by the resident taxpayer. This could potentially cause significant cross-border issues especially when the nonresident taxpayer is entitled to foreign tax credits in its country of residence.

It is therefore strongly recommended that in cases where there is doubt, a clarification is requested from the tax authorities early in the operations.

2.2.4.2. Treaty Definition

In its policy, Malta follows the OECD Model Tax Convention on Income and on Capital definition of PE. Although Malta is not a member of the OECD, Maltese tax treaties typically follow the text of the OECD Model Tax Convention, and consequently OECD commentaries on the model tax convention.

It is still nonetheless possible to find older treaties that followed the old UN Model Tax Convention, although these are gradually being renegotiated.

In certain treaties, there are additional specific provisions in the definition of PE relating to the provisions of services. For example, the treaties with India, Russia, Lebanon, Kuwait and others include a provision relating to so-called services PE.

There is no consistency between various treaties in terms of the period relevant for a building site, construction or installation project to constitute a PE. Different treaties have different lengths varying from six to 18 months.

In practice, there are generally no conflicts between the definition of a PE under a treaty and domestic law.

2.2.4.3. Creation via Performance of Services

Under domestic law, the performance of services should not generally in itself create a PE.

The stronger the link of the service provider to Malta, the greater the likelihood that other criteria for creating a PE will be met: i.e., that the nonresident will either have a fixed place of business in Malta through a branch or management, or that the company’s business in Malta will be deemed to be carried out through a local agent.

2.2.4.4. Creation via Customer Downloads or Website Access

There is no specific guidance in Malta on nonresident companies providing customers with access to Malta-based websites or customer downloads located on a server situated in Malta. In these cases, Malta typically follows the guidance issued by the OECD. The OECD commentary does not explicitly consider local customers and their access of websites, information downloads and other uses of the internet as a PE. However, it does provide that a local server can constitute a treaty PE where additional core services are provided.

2.2.4.5. Creation via Cloud Services

There is no specific guidance in Malta on the provision of cloud services located in Malta. In these cases, Malta typically follows the guidance issued by the OECD. The commentary to the OECD Model Tax Convention on Income and on Capital states that a distinction needs to be made between computer equipment which may be set up at a location so as to constitute a PE under certain circumstances, and the data and software which is used by, or sorted on, that equipment.

For example, an internet website should not in itself constitute a PE since it is not a tangible property. However, a server may constitute a PE for the enterprise that operates such server. Where the enterprise enters into an arrangement with an Internet Service Provider (ISP) to host its business on the server owned by the ISP, this should not constitute a PE for the enterprise. However, if the enterprise carrying on its business through a web site, owns the server, that may constitute a PE for the enterprise.

2.3 Taxable Year

2.3.1 Default Taxable Year

The income tax year for companies is usually a calendar year, however, a different year end can be adopted subject to prior approval being granted by the Maltese tax authorities. Subsequent changes to a company’s accounting year end will be granted, subject to certain conditions which may be imposed by the tax authorities.

A company’s financial period cannot be less than six months long and cannot exceed 18 months. The determination of the accounting period is very important since it also determines the tax return date; that is, the date by which the income tax return is to be submitted to the tax authorities (for which, see Section 2.8.1).

2.3.2 Reference Year for Computation of Tax

Annual income tax returns are submitted in a year of assessment covering the previous basis year. In year of assessment 2023, for example, the tax return would cover the basis year ended December 31, 2022. The tax return will therefore only report the taxable income generated during the basis year ended December 31, 2022.

2.4 Computing Taxable Income

2.4.1 General

All companies in Malta need to prepare and submit financial statements in line with International Financial Reporting Standards (IFRS), with the option, for qualifying entities, of applying the Maltese General Accounting Principles for Small and Medium-sized Enterprises (GAPSME). The principal difference between the two are the reporting requirements on the financial statements. A company’s tax position is the same in both cases.

Corporate taxable income is determined by the company’s profit and loss statement after making the necessary adjustments for deducting allowable expenses and after excluding any exempt income which is prescribed under the Income Tax Act.

Where the income is regarded to be of a passive nature, rather than income derived from an active trading activity, the general principle is that one should generally opt to recognize such income on a realization basis rather than following the accounting treatment, i.e., the accruals basis.

Deductions for expenses are only allowed for Maltese income tax purposes if they are of an income nature (not capital) and are wholly and exclusively incurred in the production of the income.7 In practice, the tax authorities would allow reasonable apportionments, if an expense has been partly incurred in the production of the income. Personal expenses and other expenses which are not properly documented cannot be allowed as deductions.

The Income Tax Act also provides for a deduction of capital allowances in respect of tangible and intangible fixed assets used in a trade or business such as:

  • wear and tear allowances in respect of plant and machinery and industrial buildings (see Section 2.4.4);
  • amortization of expenditure incurred on scientific research, patents or patent rights (see Section 2.4.6); and
  • expenses incurred on intellectual property rights (see Section 2.4.6).

Resident undertakings are allowed a deduction for notional interest on capital employed (see Section 2.4.6). These provisions were introduced in 2018 with the aim of equalizing the benefits of debt as opposed to capital financing, by granting a deduction (and a corresponding deemed income at shareholder level) on capital financing.

Losses incurred in a trade, business, profession or vocation are allowable as a deduction against income and capital gains. For more information on the treatment of losses, see Section 4.5.

2.4.2. Exempt Income

Overview

The most pertinent exempt income, in an international context include:

  • dividends and capital gains derived from qualifying participating holdings (see Section 2.5);
  • interest, discounts, premiums and royalty income derived by nonresidents, subject to conditions (see below);
  • royalties, advances and similar income derived from patents in respect of inventions, copyright and trademarks, in the course of a trade, business, profession, vocation or otherwise, subject to conditions;
  • capital gains derived by nonresidents on disposal of shares in Maltese companies (see below);and
  • profits attributable to a PE situated outside Malta and gains arising from the transfer of such PE, subject to certain anti-abuse provisions.

Exemption on interest, discounts, premiums and royalty income derived by nonresidents

Maltese tax law exempts from tax any interest, discounts, premiums or royalty income that is paid to a nonresident, provided that the recipient of the income does not carry on a trade or business in Malta through a PE situated therein and the royalties or the debt claim in respect of which the interest, discount or premium is paid are not effectively connected with such PE.

Exemption on capital gains derived by nonresidents on the disposal of shares in Maltese companies

Any capital gains derived by a nonresident on the transfer of shares in a Maltese registered company are exempt from tax in Malta, provided that the following conditions are met:

  • the beneficial owner of the gain is a person not resident in Malta and such person is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta; and
  • the company in which the shares are transferred is not a property company. A property company is defined under Maltese tax law as “a company which owns immovable property situated in Malta or any real rights thereon or a company which holds, directly or indirectly, shares or other interests in any entity or person, which owns immovable property situated in Malta or any real rights thereon where 5 percent or more of the total value of the said shares or other interests so held is attributable to such immovable property or rights.”

2.4.3. Inventory Valuation and Inventory Flow

Inventory is valued at the lower of cost or net realizable value. The first in first out (FIFO) method or the weighted average method is applied to record units moving into and out of the inventory. The last in first out (LIFO) method is not accepted for taxation purposes. Obsolescence is accepted where proven, but there are no provisions to take into account the effects of monetary inflation on the inventory valuation.

2.4.4. Depreciation or Capital Allowances

Overview

Taxpayers are entitled to the following allowances in respect of capital expenditure:

  • an initial allowance in respect of new industrial buildings/structures and plant and machinery; and
  • an annual allowance for wear-and-tear of any industrial buildings/structures and plant and machinery.

Initial allowance

An initial allowance is available in respect of capital expenditure first used and employed in the year of acquisition, at a rate of 10 percent of the capital expenditure incurred on industrial buildings or structures.

Wear and tear allowance

The annual allowance for wear and tear of industrial buildings and structures (including hotels, offices and car parks) cannot exceed 2 percent of the cost (excluding the cost of the land on which the building or structure is erected) using the straight-line method. Other buildings may not be depreciated.

The annual allowance for wear and tear of plant and machinery is calculated using the straight-line method over a minimum number of years, as follows:

  • computers and electronic equipment — 4 years;
  • cable infrastructure — 20 years;
  • computer software — 4 years;
  • pipeline infrastructure — 20 years;
  • motor vehicles — 5 years;
  • communication and broadcasting equipment — 6 years;
  • furniture, fixtures, fittings and soft furnishings — 10 years;
  • medical equipment — 6 years;
  • equipment used for construction of buildings and excavation — 6 years;
  • lifts and escalators — 10 years;
  • catering equipment — 6 years;
  • air conditioners — 6 years;
  • aircraft airframe, aircraft engines, aircraft engine or airframe overhaul, aircraft interiors and other parts — 4 years;
  • equipment mainly designed for or used in the production of water or electricity — 6 years; ships and vessels — 10 years;
  • electrical and plumbing installations and sanitary fittings — 15 years;
  • other machinery — 5 years; and
  • other plant — 10 years.

Balancing charge/allowance

Capital allowances are generally subject to recapture on the sale of an asset to the extent that the sale proceeds exceed the net tax value of the asset after depreciation. Any amounts recaptured, referred to as a balancing charge, are either added to the taxable income for the year of sale or are set off against the cost of a replacement asset, used for the same purpose. To the extent that the asset’s net book value after capital allowances exceeds the sales proceeds on disposal, an additional allowance referred to as a balancing allowance is granted. Capital allowances on assets for which investment allowances have been granted are not recaptured, resulting in no balancing charge or balancing allowance being taken into account.

When an asset that qualified for capital allowances is sold, transferred, destroyed or put out of use, a balancing statement must be prepared which is then submitted to the Commissioner for Revenue at the same time as filing the tax return (see Section 2.8.1)

Further information

Special allowances are available in respect of certain capital expenditure, such as intellectual property and scientific research. For more information, see Section 2.4.6.

2.4.5. Reserves

Reserves and provisions are not allowed as deductions for tax purposes.

Debts are only allowable as a deduction for tax purposes when they actually become bad, subject to a number of conditions as stipulated in a detailed guidance note titled “Bad Debts” issued by the Maltese tax authorities being satisfied. The guidance note is published on the website of the Commissioner for Revenue. For a link, see Section 1.4.

No deduction is allowed for bad debts incurred in activities other than a trade, business, profession or vocation. Any bad debt that is later recovered is deemed as income for the year in which it is received.

Although there may be different conditions that may apply in specific scenarios, the authorities list these conditions for deductions of bad debts:

  • a debt must be created in favor of the claiming company;
  • the debt must have arisen in a trade, business, profession or vocation;
    the debt must become bad;
  • the debt must have become bad during the year in respect of which the deduction is claimed;
  • the factors must be proved to the satisfaction of the Commissioner for Revenue; and
  • the debt must have been brought to account as assessable income in the previous year.

2.4.6. Special Allowances

Capital expenditure

Although capital expenditures are typically capitalized and amortized over the useful life of the asset (see Section 2.4.4), Maltese tax law provides for special deductions in relation to certain capital expenditure as follows:

  • expenditure incurred on scientific research by a person engaged in any trade, business, profession or vocation, provided that they have been incurred for the use in such trade, business, profession or vocation;
  • expenditure incurred on qualifying intellectual property by a person engaged in any trade, business, profession or vocation, subject to the satisfaction of certain conditions and to obtaining prior authorization from the commissioner;
  • expenditure incurred by a person engaged in a trade, business, profession or vocation for the purpose of promoting that trade, business, profession, or vocation including any expenditure on market research and obtaining market information, advertising or other means of soliciting business, providing samples, and participating in fairs and exhibitions; and
  • expenditure of a capital nature on intellectual property or any intellectual property rights incurred by a person and which have been used or employed in the production of that person’s income, provided that the expenditure is spread evenly over a period of at least three consecutive years, the first year being that in which the expenditure was incurred or in which the intellectual property or intellectual property rights were first used or employed in producing the income.

Start-up expenses

In general, pre-trading expenses are not allowed as a deduction for the purposes of computing taxable income. However, certain pre-trading expenses (i.e., staff training, wages and salaries and advertising) are also allowed as a deduction, provided that the following requirements are met:

  • the expenditure is incurred not more than 18 months before the commencement of the trade or business; and
  • the expenditure would have been deductible had it been incurred after the commencement of the trade or business.

Rollover relief

Rollover relief is granted with respect to capital assets used in a business for a period of at least three years and which are transferred and replaced within one year by an asset used solely for similar business purposes (i.e., no tax will be charged on the capital gain derived on the sale of the first asset). In such instances, the cost of acquisition of the new asset is reduced by the gain (which would otherwise be subject to tax) derived on the transfer of the first asset. Tax is claimed back if the second asset is then sold without replacement.

Notional interest deductions

Resident companies (as well as nonresident companies that derive income through a PE in Malta) may opt to claim a deduction (the notional interest deduction) for sums deemed to be payable by way of interest on risk capital or such part thereof as may be determined by the undertaking for the particular year.

The deductible amount is calculated through multiplying the “reference rate” (i.e., the risk-free rate set by reference to the yield to maturity on Malta government stocks with a remaining term of approximately 20 years plus a premium of 5 percent) by the risk capital of the undertaking for the accounting period ending in the year preceding the year of assessment, less any risk capital directly employed in the form of securities, interest in a partnership, contributions and any other loans or debts not bearing interest that the undertaking holds in, or provides to, any other person, whether resident in Malta or otherwise, to the extent that such invested risk capital is:

  • not employed by the undertaking in producing any income in the year preceding the year of assessment in a situation where, had any such income been produced, it could have been exempt from tax; or
  • employed in producing income in the year preceding the year of assessment which is exempt from tax in terms of the Income Tax Act.

The notional interest deduction is limited to 90 percent of the company’s chargeable income for the year (ignoring any flat-rate foreign tax credit), but any excess can be carried forward to the following year. If an undertaking is a nonresident company, the calculation is performed by reference to that part of the undertaking’s risk capital that is attributable to its PE in Malta. The deduction is claimable in the tax return at the option of the undertaking, but only if it is demonstrated that all of the shareholders approved the claim.

Where the deduction is claimed in respect of a year of assessment, shareholders are deemed to have received in that year an amount of income equal to the deduction claimed, apportioned between them in accordance with the proportion of the nominal value of the risk capital that each shareholder holds in the undertaking in the year preceding the year of assessment. That income is treated as interest for the purposes of the Income Tax Act and, subject to certain specified exceptions, is subject to all provisions relating to the taxation of interest.

2.4.7. Special Provisions or Limits Applicable to Foreign Companies

Apart from limitations mentioned in other sections of this guide, Malta has no special provisions or limits applicable to foreign companies.

2.5 Intercompany Dividends

Overview

Dividend income is subject to tax in Malta, although in most cases it is exempt under one of the exemptions (mainly, the participation exemption rules, for which see below).

No tax is withheld on the payment of dividends from one resident company to another resident company.

However, dividends paid to certain individuals and certain nonresident persons are subject to withholding tax. For more information, see Section 2.9.1.

Full imputation system

Under the full imputation system of taxation, dividends received by a shareholder from a Maltese company are taxed in the hands of the shareholder, but credit is granted for the tax paid by the distributing company on that same profit. The result is that no additional tax is due in the hands of the shareholder.

The system may also result in an individual shareholder being entitled to a refund in cases where the company has paid more tax than that which would otherwise have been due by the individual.

Tax Refund System

In Malta, a company’s distributable profits are allocated to a number of “tax accounts”, depending on the source and nature of the profits.

With the main purpose of eliminating international economic double taxation, qualifying shareholders receiving dividends from Malta-registered companies may claim tax refunds of a portion of the Maltese tax paid by the distributing company, as follows:

  • a refund of six-seventh of the tax in respect of profits allocated to the company’s Maltese taxed account or foreign income account (with some exclusions) – typically resulting in an effective tax rate in Malta of 5 percent;
  • a refund of five-seventh of the tax in respect of profits derived from “passive interest and royalties” – resulting in an effective tax rate in Malta of 10 percent; and
  • a refund of two-thirds of the tax in respect of profits allocated to the company’s foreign income account on which double taxation relief has been claimed.

Passive interest and royalties mean interest and royalty income which:

  • is not derived, directly or indirectly, from a trade or business; and
  • has not suffered any foreign tax, directly, by way of withholding or otherwise, at a rate of less than 5 percent.

The refund must be claimed within four years from the date on which the amount of tax is eligible for the refund.To qualify for the refund shareholders must be duly registered with the tax authorities.

In certain specific cases, it is possible to apply the consolidated tax group rules to allow for the refund to be offset against the tax payment, thus resulting in the payment only of the effective tax amount.. For information on group treatment, see Section 4.6.

The refund tax system also extends to shareholders of foreign companies that have a PE in Malta. Tax paid in Malta by the foreign company in respect of the profits attributable to activities performed by the PE in Malta will grant the shareholder the right for a refund (in the same manner as set out above, according to each set of circumstances) when such profits are distributed.

Participation exemption rules

Dividend income and/or capital gains derived by a company registered in Malta from a qualifying participating holding or from the disposal of such a holding is exempt from tax.

A participating holding is deemed to exist if the Maltese company satisfies any one of the following conditions:

  • it holds directly at least five percent of the equity shares of a company whose capital is wholly or partly divided into shares, and that holding confers an entitlement to at least five percent of any two of (i) the right to vote, (ii) the profits available for distribution, and (iii) the assets available for distribution on a winding up;
  • it is an equity shareholder in a company and is entitled to call for and acquire the entire balance of the equity shares to the extent permitted by the law of the country in which the equity shares are held;
  • it is an equity shareholder in a company and is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares not held by that equity shareholder;
  • it is an equity shareholder in a company and is entitled to either sit on the board or appoint a person to sit on the board of that company as a director;
  • it is an equity shareholder which invests a minimum sum of 1.164 million euros in a company and that investment in the company is held for an uninterrupted period of not less than 183 days; or
  • it is an equity shareholder in a company and the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Provided that one of the above conditions is satisfied, holdings of a company in the following entities will also be regarded as participating holdings:

  • (i) a partnership en commandite and a partnership en nom collectif constituted under the Companies Act or the Commercial Partnerships Ordinance, (ii) a partnership regulated by the applicable provisions of the Civil Code and registered in accordance with the relevant provisions of that Code, or (iii) a European Economic Interest Grouping (EEIG) formed under the provisions of the Companies Act (European Economic Interest Grouping) Regulations, not being a property partnership, and which has not elected to be treated as a company for the purposes of the Income Tax Acts;
  • a body of persons constituted, incorporated or registered outside Malta and of a similar nature to any partnership referred to above, not being a property partnership, and which has not elected to be treated as a company for the purposes of the Income Tax Acts; or
  • a collective investment vehicle constituted, incorporated or registered outside Malta and which is not resident in Malta, where the liability of the investors is limited to the amount invested.

The participation exemption applies to income or gains derived by a company registered in Malta which are attributable to a permanent establishment (including a branch) situated outside Malta or on the transfer of such a PE.

A number of anti-abuse provisions have been introduced limiting the application of the participation exemption. Dividends received will be exempt from Maltese income tax if the entity in which the participating holding is held:

  • is resident or incorporated in an EU member;
  • is subject to foreign tax at a rate of at least 15 percent; or
  • has 50 percent or less of its income derived from passive interest or royalties.

Where none of these conditions is satisfied, it is still possible to avail of the participation exemption if both of the following conditions are satisfied:

  • the equity holding of the Malta-registered company in the nonresident entity is not a portfolio investment; and
  • the nonresident entity, or its passive interest or royalties, has been subject to foreign tax at a rate of at least 5 percent.

For the purposes of the restriction on portfolio investments, the holding of shares by a Maltese company in a nonresident company or partnership which derives more than 50 percent of its income from portfolio investments is deemed to be a portfolio investment.

With respect to qualifying participating holding in companies and partnerships en commandite, the capital of which is not divided into shares, which are resident of Malta, the anti-abuse provisions apply to gains or profits derived from the transfer of such holdings.

In the case of dividends received from a participating holding established in another EU Member State, the exemption is applicable only if the dividends are not deductible for income tax purposes at the level of the EU subsidiary.

The exemption does not apply to dividends derived from a participating holding resident for tax purposes in a jurisdiction included in the EU list of non-cooperative jurisdictions for at least three months during the year immediately preceding the year of assessment, unless it can be sufficiently proven to the commissioner that said participating holding maintains sufficient significant people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom. Where the three months are consecutive and fall in two subsequent consecutive basis years, the exemption does not apply in respect of any such dividend derived in any one of the two years.

2.6 Special Tax Regimes

2.6.1 Economic Zones

There are no economic zones in Malta.

2.6.2 International Finance or Holding Companies

There are no special tax regimes for international finance or holding companies.

2.6.3 Research and Development Companies and Activities

Deduction on certain intellectual property(IP) income and gains

A deduction may be claimed on income or gain derived from a qualifying intellectual property under the Maltese patent box regime. For more information, see Section 2.6.4.

Research and development tax credits

Experimental development and industrial research

The Research and Development Activities Regulations 2017 provide tax credits on eligible expenditure incurred in running industrial research and experimental development projects. The projects supported must be completed within three consecutive years from the date of approval. The eligible expenditure on which claims can be made includes personnel costs, equipment, materials and supplies and costs of contractual research.

Under the regulations, tax credits are also available for SMEs that require assistance for the loan of highly qualified personnel from large entities or research organizations. In addition, cash grants are available for pre-approved feasibility studies in preparation for industrial research or experimental development. Any unused credit that has been awarded can be carried forward.

Applications can no longer be made for assistance under the 2017 Regulations, but their provisions remain applicable to assistance awarded before the Research and Development Regulations 2020 came into force (for which, see below).

Employment of persons with doctoral degrees

Under the Tax Credits for Research and Development and Innovation Regulations 2017, tax credits may be available for undertakings that employ a person holding or reading for a doctoral degree in a specified area.

Research and development projects

The Research and Development Regulations 2020 provide, with effect from March 1, 2020, that undertakings requiring assistance to carry out research and development (R&D) projects may, on application to Malta Enterprise (Malta’s economic development agency), receive such assistance in the form of a tax credit or a cash grant calculated as a percentage of eligible costs.

For the purposes of the regulations, an “R&D project” means the carrying out of an activity having a specific objective of developing or improving services, products or processes through experimental development and/or industrial research. “Eligible costs” comprise the following:

  • personnel costs;
  • the costs of instruments and equipment;
  • the costs of contractual research, technical knowledge and patents; and
  • other operating expenses, including the costs of materials, supplies and similar products, incurred directly as a result of the project.

Shipping costs, as well as costs related to the repair and maintenance of plant, equipment and buildings, are excluded.

The intensity of aid varies, depending on whether an undertaking is classified as small, medium or large as defined in specified EU state aid legislation. The maximum assistance levels are as follows:

  • small undertakings — 45 percent of eligible costs;
  • medium undertakings — 35 percent of eligible costs;
  • large undertakings — 25 percent of eligible costs

Cash grants must be approved before the commencement of the project.

Additional assistance of up to 15 percent of eligible costs may be provided if the undertaking carries out a collaborative R&D project involving effective collaboration with at least one independent undertaking and/or at least one research and knowledge dissemination organization (i.e., an entity, irrespective of its legal status or way of financing, whose primary goal is to conduct independently fundamental research, industrial research or experimental development or to disseminate widely the results of such activities by way of teaching, publication or knowledge transfer).

Guidelines published under the regulations establish conditions for a project to be considered to involve effective collaboration between independent undertakings or between an undertaking and a research and knowledge dissemination organization. The Guidelines are available on the website of Malta Enterprise. For a link, see Section 1.4.

An undertaking benefiting from tax credits under the regulations is entitled to deduct an amount equivalent to the credits from the amount of income tax due on its chargeable income derived from trade or business in the years of assessment following the award of the benefit. Unutilized credits can be carried forward for the following years of assessment and so on for subsequent years.

Where an undertaking has benefited from a tax credit under the regulations, the credit is deemed to have relieved from tax so much of that undertaking’s chargeable income which, when multiplied by the tax rates chargeable that year, is equal to the credit. Any dividend distributed by a company from income so deemed to have been relieved from tax is exempt from income tax in the hands of the recipients. If such a recipient is itself a company which then distributes the dividend to its members, the dividend is likewise exempt from tax in the hands of those recipients. This rule applies for any further distributions of the dividend by a recipient that is a company.

No aid under the 2020 regulations can be granted after December 31, 2023.

2.6.4. Other Special Regimes

Aviation

Income from the ownership, leasing or operation of an aircraft or aircraft engine engaged in the international transport of passengers or goods is deemed to arise outside Malta. Income is attributed to this foreign source nature regardless of the country of registration of the aircraft and of whether the aircraft has called at or is operated from a Maltese airport.

Further incentives applicable under the Maltese tax regime pertinent to the aviation industry include no withholding taxes on lease payments made by Maltese lessees to nonresidents in respect of aircraft operated in the international transport of passengers or goods, as well as no withholding taxes on interest payments made by Maltese lessees to nonresident financial lessors.

Moreover, the regime provides for competitive depreciation allowances for aircraft and engines, tax credits available to target activities, tax refunds to shareholders upon distribution of profits and an extensive double tax treaty network.

Collective Investment Schemes

Collective investment schemes are classified as either prescribed or nonprescribed funds. In general, a prescribed fund is defined as a fund resident in Malta, which has declared that the value of its assets situated in Malta amount to at least 85 percent of the value of the total assets of the fund. Other Maltese resident funds which do not have such an exposure to Maltese assets, and all nonresident funds, are treated as being nonprescribed. Once a fund is licensed by the Malta Financial Services Authority (MFSA), it is granted a tax exemption (subject to the rules on prescribed funds below) irrespective of the legal form of the fund; i.e., whether it is a company (private or public), trust or partnership. This in itself gives Malta a significant advantage over jurisdictions which limit tax exemptions to particular corporate structures only.

Prescribed funds

Prescribed funds are exempt from Maltese income tax on any income and capital gains except for a 15 percent final withholding tax on bank interest payable by banks licensed under the Maltese Banking Act, 1994 and a 10 percent final withholding tax on interest, discounts or premiums received from (a) the Government of Malta; (b) corporations or authorities established by law; (c) companies or other legal entities, whether resident in Malta or otherwise, in respect of public issues; and (d) companies or other legal entities resident in Malta in respect of private issues.

Nonprescribed funds

Nonprescribed funds are exempt from Maltese income tax on any income and capital gains, except for income and capital gains derived from immovable property situated in Malta.

Immovable property

For both prescribed and nonprescribed funds, income from immovable property situated in Malta is taxed at the standard income tax rate (see Section 3.1.1).  For property transfer tax payable on the transfer of immovable property situated in Malta, see Section 9.3.1.

Taxation of fund investors

Capital gains realized by investors who are not resident in Malta are not subject to tax in Malta. The situation of resident investors is as follows:

  • with respect to a prescribed fund, gains are exempt from tax in Malta for as long as the shares are listed on a stock exchange recognized by the Commissioner and the fund remains classified as a prescribed fund (see Section 4.1);and
  • with respect to a nonprescribed fund, the resident investor may opt to be subject to a 15 percent final withholding tax that is deducted at source by the fund on any realized capital gains. Alternatively, investors may opt to receive capital gains without deduction of tax in which case they are required to declare such capital gains in their personal income tax return and are subject to tax at the standard progressive rates of tax applicable to them.                  The tax treatment of dividends distributed by the fund, whether these are reinvested or otherwise, depends on the income tax status of the particular investor and on the fund’s income tax accounts out of which the dividends are distributed, as set out hereunder:
  • the distribution of profits derived by a prescribed fund from interest, discounts or premiums, which were subject to 10 percent or 15 percent withholding tax, will not attract any further tax in the hands of investors;
  • the distribution of profits by a fund from dividends received by that fund out of the Maltese Taxed Account or the Foreign Income Account of other Maltese companies do not attract any further tax in the hands of investors; and
  • all other income will be allocated to the Untaxed Account of the fund. Distributions from the Fund’s Untaxed Account to Maltese resident individuals are subject to a 15 percent withholding tax. The distribution of profits to nonresidents and to companies resident in Malta is not subject to withholding tax.

Inbound Investment

The Malta Enterprise Act and other related legislation provide for a comprehensive package of incentives for inbound investment. These incentives are reserved for enterprises carrying on certain activities in Malta, mainly manufacturing activities. The focus is on the creation of new employment opportunities and the creation of high value-added activities. Approval of the project’s eligibility for benefits by Malta Enterprise may be required. The main tax incentives include the following:

  • Enterprises carrying out qualifying activities, which mainly include manufacturing activities, qualify for investment tax credits, whereby a percentage of up to 35 percent (25 percent in the case of medium-sized enterprises and 15 percent in the case of large-sized enterprises and hotels) of qualifying expenditures are set off against the tax charge (and not against taxable income). Any unused credits are carried forward and added to the tax credits for subsequent years. The amount carried forward is increased by a percentage rate that is based on EU parameters as updated from time to time. The tax credits are 30 percent, 20 percent, and 10 percent for small-, medium-and large-sized projects. The scheme covers investment projects commencing from January 1, 2021 through December 31, 2023.
  • Certain tax credits and special incentives may be available, subject to certain conditions. These tax credits are calculated on the basis of specific expenditures incurred by a company, while the special incentives grant tax exemptions on all or part of the chargeable income in specified circumstances.
  • No further tax is charged on distributions from profits that have been previously charged to tax at a reduced rate. The benefit is also extended to amounts that were not subject to tax on account of the investment allowance, investment tax credits and other specific tax credits and other special incentives.
  • The combination of certain tax treaties and Maltese domestic tax law lowers the Maltese income corporate tax rate on certain Maltese companies receiving industrial incentives and assistance to 15 percent.
  • In the case of certain qualifying companies, an investment allowance of 50 percent on plant and machinery and of 20 percent on industrial buildings and structures may be available (subject to certain capping rules), bringing the total allowances granted during the lifetime of the assets up to 150 percent and 120 percent, respectively. Apart from the investment allowances, normal allowances for wear and tear are also available on such assets.

Step-up Costs

An option exists for a step-up in the cost of acquisition of assets situated outside Malta (including companies) effecting a change in domicile or residence or becoming Maltese companies as a result of cross-border mergers. As to mergers, see Section 4.4.1.

In the case of a subsequent sale, the tax cost base (i.e., the deemed acquisition cost) is equivalent to the market value of the asset on the date of entry into Malta.

Tax Credit for Micro-enterprises, Self-employed Individuals, Female-owned Businesses and Family Businesses

Under the Micro Invest Scheme, a tax credit equivalent to 45 percent of eligible expenses (65 percent for undertakings operating from Gozo) may be available to undertakings that carry out a trade or business requiring assistance to expand, innovate or invest in its business in Malta.

Under the Micro Investment Regulations, the undertaking must employ no more than 50 full-time employees and generate a turnover not exceeding 10 million euros. The credit is in the form of a deduction from tax payable on the undertaking’s chargeable income derived from its trade or business for that year of assessment.

From year of assessment 2018, the credit is capped at 50,000 euros over any period of three consecutive years. The cap is increased to 70,000 euros for undertakings established in Gozo, family businesses and female-owned undertakings.

Eligible expenses include:

  • costs subcontracted to third parties in relation to furbishing, refurbishing and upgrading of business premises, including extensions or modifications to premises in line with duly issued permits;
  • the costs of various specified investments; and
  • an increase in wage costs exceeding 3 percent of the highest annual wage cost incurred in the preceding two fiscal years.

Malta Enteprise has issued Incentive Guidelines: Micro Invest 2021 providing detailed guidance on the Micro Invest scheme. The Guidelines are published on the website of Malta Enterprise. For a link, see Section 1.4.

Patent Box Regime

Under Article 14(1)(p) of the Income Tax Act and the Patent Box Regime (Deduction) Rules, a 95 percent deduction may be claimed on qualifying intellectual property (“qualifying IP”) income.

Qualifying IP

The definition of qualifying IP specifically excludes any marketing-related intellectual property assets, but includes:

  • a patent or patents, whether issued or applied for, or where the issue of the patent is still pending and extensions of patent protection, so, however, that in the case of a patent which has been applied for and is pending, but where the application is eventually rejected, such patent shall cease to constitute qualifying IP ab initio;
  • assets in respect of which protection rights are granted in terms of national, European or international legislation, including those relating to plants and genetic material and plant or crop protection products and orphan drug designations;
  • utility models;
  • software protected by copyright under national or international legislation; or
  • in respect of a small entity, other intellectual property assets as are non-obvious, useful, novel and having features similar to those of patents, to the satisfaction of the Maltese Authorities, which shall determine this through a transparent certification process in terms of guidelines issued by the authorities.

Eligibility for deduction

A person is only eligible for the deduction if all of the following conditions are met:

  • the activities leading to creation, development, improvement or protection of the qualifying IP are carried out wholly or in part by the beneficiary;
  • the beneficiary is the owner/co-owner or holder of an exclusive license of qualifying IP;
  • legal protection has been granted to qualifying IP in at least one jurisdiction;
  • the beneficiary has sufficient substance in that jurisdiction;
  • the beneficiary (in case of company) is empowered to receive such income; and
  • the request for deduction is included in the beneficiary’s tax return.

Calculation of the deduction

The patent box regime deduction is 95 percent of the following sum: Qualifying IP expenditure divided by Total IP expenditure multiplied by income/gains derived from qualifying IP.

Where:

  • qualifying IP expenditure consists of:

(a) expenditure incurred by the beneficiary for activities related to the creation, development, improvement or protection of the qualifying IP either directly or subcontracted to unrelated persons; or

(b) in the case of expenditure incurred not falling within (a), an amount equivalent to the lower of (i) the costs actually incurred in the acquisition, creation, development, improvement or protection of the qualifying IP, excluding expenditure falling within (a), and (ii) 30 percent of the total amounts referred to in (a);

  • total IP expenditure comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP, being the sum of all expenditure actually incurred by the beneficiary and constituting qualifying IP expenditure, including expenditure outsourced to unrelated parties and acquisition costs and expenditure for outsourcing activities made to related parties; and
  • income or gains derived from qualifying IP include the total income or gains which are derived from the use, enjoyment and employment of qualifying IP.

2.7 Double Taxation Protection

2.7.1 Mechanics

Maltese double tax treaties are largely based on the OECD model. Moreover, dividends, interest and royalties may also benefit from the EU Parent/Subsidiary Directive or the Interest and Royalties Directive. Malta adopts the credit system of double taxation relief.

On June 7, 2017, Malta signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument). Malta deposited its instrument of ratification of the Multilateral Instrument, so the convention entered into force for Malta as from April 1, 2019.

Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient’s tax residence and status. However, income received from foreign sources may be subject to a withholding tax abroad and suffer other foreign taxes. Consequently, Malta’s fiscal legislation offers various types of double taxation relief to ensure that double taxation is avoided.

Apart from treaty relief, domestic Maltese rules also allow unilateral relief and a flat-rate foreign tax credit. Unilateral relief provides relief from double taxation on a unilateral basis where the overseas tax is charged in a country with which Malta does not have a tax treaty. Such overseas tax is allowed as a credit against the tax chargeable in Malta on the gross amount up to the extent that the credit does not exceed the total tax liability in Malta.

In multi-tier structures involving Maltese and nonresident companies, double taxation relief for underlying tax suffered on the profits out of which a dividend is distributed has been extended to tax suffered in Malta. Structures involving a Maltese holding company having a foreign subsidiary or sub-subsidiary which suffers tax in Malta are now entitled to relief granted on Maltese tax suffered by the foreign direct or indirect subsidiary.

The flat-rate foreign tax credit allows relief for deemed foreign tax paid even if no actual foreign tax has been charged. A Maltese company which receives income from overseas may claim a flat-rate foreign tax credit. A certificate from the auditor stating that the income arose overseas will be sufficient for this purpose.

The flat-rate foreign tax credit is calculated at 25 percent of the amount of the overseas income or gain received by the company, before allowable expenses. The income plus the credit less allowable expenses will be subject to full Malta income tax with relief for the deemed credit (up to a maximum of 85 percent of the Malta tax payable).

The mechanics of the flat-rate foreign tax credit are demonstrated in the following example:

  • net foreign income (before expenses) — 1,000 euros;
  • grossing-up with flat-rate foreign tax credit (25 percent) — 250 euros;
  • gross foreign income (before expenses) — 1,250 euros;
  • allowable expenses — (150 euros);
  • foreign income (after expenses) — 1,100 euros;
  • Malta tax at 35 percent — 385 euros;
  • less FRFTC (maximum 85 percent of Malta tax) — (250 euros);
  • net Malta tax payable — 135 euros;
  • effective tax rate on net foreign income — 13.5 percent; and
  • effective tax rate on net income after expenses — 12.2 percent.

If the company does not have any deductible expenses, the rate of tax is reduced from 35 percent to an effective rate of 18.75 percent. On a distribution of profits to nonresident shareholders, the refund system described above may further reduce the net effective tax to 6.25 percent or lower (depending on allowable expenses).

2.7.2. Treaty or Statutory Priority

Article 76 of the Income Tax Act provides that whenever there is an inconsistency between domestic legislation and a double tax treaty, the rules prescribed under the treaty should prevail.

The applicable tax implications are those prescribed under the pertinent double tax treaty. Malta’s double tax treaties allocate the taxing rights between the source country and the residence country.

For treaty information, including the number of agreements signed or in force, original treaty texts, translations, consolidations and any modifications made by the Multilateral Instrument, if applicable, see the International Tax Treaties Collection.

2.7.3. Source of Interpretation

Malta’s double tax treaties are generally based on the Organization for Economic Cooperation and Development (OECD) Model.

For purposes of interpretation, Malta refers to the OECD commentary to the OECD Model Tax Convention on Income and on Capital.

2.8 Returns and Filing Dates

2.8.1 Filing Deadline

Corporate tax return filing deadlines vary depending on the financial year-end of the company. In general companies with a financial year-end falling between January 31 and June 30 are due to file their tax return by March 30 of the following year. Companies with a financial year-end falling between July 31 and December 31 must generally file their corporate tax return within nine months of their year-end.

2.8.2 Filing Method

Companies can file their tax returns electronically or on paper.

Corporate tax returns can only be submitted by registered tax practitioners or directors which are entrusted with the representation of the company. Electronic tax returns may be filed using the Commissioner for Revenue eServices portal, For a link to the portal, see Section 1.4.

2.8.3 Extensions

There’s been a practice for some years for the authority to grant annually an extension for electronic filing.

Extensions are usually announced early in the year and published on the website of the Commissioner for Revenue. For a link, see Section 1.4.

These extensions apply only to the electronic filing of tax returns, and not to tax payments.

2.8.4 Penalties

Failure to submit a tax return triggers additional tax payable as follows:

  • within six months — 50 euros;
  • later than six, but within 12 months — 200 euros;
  • later than 12, but within 18 months — 400 euros;
  • later than 18, but within 24 months — 600 euros;
  • later than 24, but within 36 months — 800 euros;
  • later than 36, but within 48 months — 1,000 euros;
  • later than 48, but within 60 months — 1,200 euros; and
  • later than 60 months — 1,500 euros.

Omitting to declare taxable income in the annual income tax return results in additional tax imposed as a penalty equal to 1.5 percent per month of the endangered tax. If, however, before that person is notified that an enquiry will be conducted the taxpayer declares the omitted income by means of a voluntary adjustment form , the penalty is reduced to 0.1 percent per month of the endangered tax. No penalty applies in cases where the taxpayer submits an adjustment form within 12 months from the tax return date.

The maximum amount of additional tax on omission is 60 times the applicable rate in terms of the respective item.

No interest is due on any additional tax charged.

2.9 Payment Mechanics

2.9.1 Internal Withholding on Resident Companies

Malta does not generally withhold any tax on the payment of interest, dividends and royalties to another company, even when these are paid to nonresidents.

There is however a 15 percent withholding tax when a dividend is paid from the untaxed account to a resident individual or if the dividend is paid to either

  • a nonresident person that is directly or indirectly owned and controlled by, or acts on behalf of, a Maltese domiciled and ordinarily-resident individual; or
  • an EU/EEA individual who has declared that at least 90 percent of worldwide income is derived from Malta.

2.9.2. Schedule for Tax Payments or Deposits

Every company is required to make payments of provisional tax during each financial year on account of its liability to tax for that respective financial year. The provisional tax, which is based on the tax shown as payable in the last corporate tax return filed by the company, is paid in three installments, due on April 30, August 31 and December 21. Of these, the first payment is taken to be the one which falls due on the date that comes first during the relevant basis period. Payments are made in the following percentages:

  • first payment — at least 20 percent of the tax shown as payable in the last tax return;
  • second payment — at least a further 30 percent of the tax shown as payable in the last tax return; and
  • third payment — at least a further 50 percent of the tax shown as payable in the last tax return.

Any outstanding tax liability for the financial year is payable on filing the tax return for that year.

There are, however, some exceptions to the general rule, with the most relevant exemption applying to foreign investors who are eligible to claim a refund on the tax due. Subject to certain additional conditions, companies that operate principally outside Malta and who are eligible to the stamp duty exemption, under Article 47(3)(e) of the Duty and Documents and Transfers Act, are exempt from provisional tax payment on income allocated to the foreign income account. In such cases, tax is due within 14 days from the distributions of any profits or 18 months from the end of the accounting period, whichever occurs first.

2.9.3. Electronic Payments

All companies have the option to effect tax payments in an electronic manner, irrespective of their size and turnover.

2.9.4. Interest and Penalties

nterest on any tax/tax balance which is not paid by the scheduled/due settlement date is calculated at the rate of 0.6 percent per month in respect of any tax payable on or after August 31, 2022, and the total interest shall not exceed the amount of tax owing.

On or after June 1, 2022, additional tax due on the late payment of provisional tax is charged at the rate of 1 percent of the unpaid provisional tax for each calendar month, or part thereof, during the period in which the provisional tax remains unpaid.

Penalties are applied in cases mentioned in Section 2.8.4.

2.10 Statute of Limitations

Generally, an assessment or additional assessment for a year of assessment must be made by no later than five years from the end of the year in which a return of income or a further return for that year was furnished.

Except as otherwise provided, any action for the payment of tax, additional tax, interest or any penalty may be taken during any time from the date on which it becomes due and payable up to eight years from that date or from the date on which a prospective assessment carried out in respect thereof becomes final and conclusive. The running of this eight-year period is interrupted by a demand note served through registered post by the Director General or by any judicial act filed by the Director General before the expiration of such period demanding the payment of the amount claimed.

Lack of full disclosure in a return or tax avoidance extends the period of assessment indefinitely. The Income Tax Act provides that where a person has furnished the Director General with a return or returns and has not made a full disclosure in those returns of all material facts relevant to the determination of his/her income and allowable deductions; or for the purpose of avoiding tax or through gross or willful neglect has furnished the Director General with a return which is incorrect or misleading in any material respect, an assessment or an additional assessment may be made at any time after the time laid down for the submission of the return of income for that year.

About Bloomberg Tax & Accounting

Bloomberg Tax & Accounting provides comprehensive global research, news, and technology services enabling tax professionals to get the timely, accurate, and in-depth information they need to plan and comply with confidence. Our flagship Bloomberg Tax platform combines the proven expertise and perspectives of leading tax practitioners in our renowned Tax Management Portfolios with integrated news from the industry, leading Daily Tax Report®, authoritative analysis and insights, primary sources, and timesaving practice tools. Bloomberg Tax Technology solutions on our proprietary Advantage platform help practitioners simplify complex processes to better control risk and maximize profitability.

For more information, visit pro.bloombergtax.com

Subscribe to Newsletter

Javascript must be enabled in order to complete this form
First name Last name Email Address