05. Corporate Withholding Taxes on Nonresident Corporations

In view of the fact that Malta operates a full imputation system, it does not withhold any tax on the outbound payment of dividends to nonresidents.

There is, however, a 15 percent withholding tax where a dividend is paid out of an untaxed account to either:

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

Planning Point: It is unclear whether a withholding tax applicable to a nonresident company solely when owned and controlled by, or acting on behalf of, a Maltese domiciled and ordinarily-resident individual may be in breach of the EU law principle of nondiscrimination

Malta does not generally withhold any tax on the outbound payment of interest to nonresidents. Interest received by nonresidents is exempt from tax, subject to certain conditions being satisfied.

Malta does not generally withhold any tax on the outbound payment of royalties to nonresidents. Royalties received by nonresidents are exempt from tax, subject to certain conditions being satisfied.

A withholding tax at the standard corporate tax rate applies to royalties paid to a nonresident that is directly or indirectly owned and controlled by, or acts on behalf of, a person who is ordinarily resident and domiciled in Malta.

Planning Point: It is unclear whether Malta is prevented by the EU Interest and Royalties Directive from levying this withholding tax where the nonresident payee (controlled by a resident of Malta) is a resident of another EU member state.

Payments made to a nonresident company for services of all kinds are subject to a final withholding tax of 35 percent, where the payments are deemed to constitute Maltese-sourced income and are not connected with a Maltese PE of the nonresident company.

Article 73 of the Income Tax Act places the burden of withholding tax on any payor who makes the payment to the nonresident. The amount deducted will constitute a debt by the payor to the Maltese tax authorities and must be remitted to the tax authorities within 30 days from the date of deduction.

It should be noted that Maltese-source income encompasses payments for the provision of services by a nonresident service provider under a contract with a Maltese customer where the extent of the nonresident’s presence in Malta is considered sufficient to justify the allocation of all or part of the income, derived under the contract, to a Maltese source. Considering this concept may create a much lower threshold than the concept of a PE under tax treaties (see Section 2.2.4.2), it has been argued that these provisions may be in breach of EU law.

Furthermore, considering that the withholding tax is charged on the income (and not on profit), it can be argued that the levying of the tax is in violation of the nondiscrimination provision of tax treaties. Article 24(3) of the OECD Model Tax Convention on Income and on Capital provides that a PE that an enterprise of one contracting state has in the other contracting state is not to be taxed less favorably than enterprises of that other state carrying on the same activities as the PE.

Planning Point: Whenever there is doubt on specific transactions, it is possible for the payee to receive confirmation from the tax authorities, which can be presented to the resident payor to avoid the application of these provisions.

In the event that income paid to nonresidents is deemed to be income arising in Malta and thus subject to tax in Malta, the Income Tax Act imposes an obligation on the payor of the income to withhold tax from such payment. The withholding tax rate is 25 percent in the case of payments made to nonresident individuals and 35 percent in the case of nonresident companies.

Malta does not provide for special tax treatment for residents of tax havens.