TAX

Our major areas of our practice include: corporate tax, personal taxation, property tax, employee tax and value added tax.

Personal & Corporate Tax Compliance

We represent individual and commercial clients in matters having tax implications, identifying and addressing domestic and international tax issues, structuring transactions in such a way as to avoid or minimize taxes in each pertinent jurisdiction.

Our in-house Accounting and Tax Unit handles income tax, VAT and other tax returns. We also provide representation with the Inland Revenue and VAT Departments in cases of assessments or other challenges to tax returns. 

International Tax Planning

Tax planning is our main focus, particularly with the use of Maltese companies.  We can combine Maltese components with existing international tax plans as well as work out independent tailored personal and business tax solutions for small owner-managed companies seeking to compete in the international arena.

We understand the importance of ensuring our clients’ unlimited access to and free use of the proceeds of their labour and we keep our structures as simple and easy to use as possible. However, we do not underestimate the importance of long-term planning and the implications of a constantly changing regulatory environment and remain continuously abreast with the daily changes in national and international tax laws.

Taxation of Maltese companies

Companies formed in Malta are deemed to be ordinarily tax resident and domiciled in Malta and are therefore subject to tax on income earned on a world-wide basis.  Companies formed in another jurisdiction, other than Malta, are also considered to be a tax resident in Malta if they are effectively managed and controlled in or from Malta. 

Maltese resident companies are subject to a tax charge of 35% on their taxable profits, however subject to conditions being met enable the shareholders to claim a tax refund, thus reducing the overall tax leakage. 

The local tax legislation which is mainly governed by the Income Tax Act and the Income Tax Management Act however, include various provisions which have resulted in Malta positioning itself as an attractive jurisdiction to foreign investors and companies operating in the international sphere in view of the following core advantages:

 

  • Full imputation system on distribution of dividends;

  • Tax refunds on distributions of profits;

  • Participation holding exemption;

  • Notional Interest deduction;

  • Other exemptions applicable mainly to non-resident persons.   

 

Full imputation system

Dividends distributed by Maltese companies are not subject to any withholding tax and the full imputation system mechanism is applicable.  This system ensures that the profits of companies are not subject to double taxation and are subject to tax only at the company level.   Shareholders receiving a dividend from Maltese companies are credited the full tax, charged at the corporate level. 

 

Tax refund system

The tax legislation provides that, in addition to the application of the full imputation system, shareholders may also claim a tax refund of the tax paid at the corporate level on receipt of a dividend from a Maltese company.

Profits earned by Maltese companies are allocated to the different tax accounts which reflect the different sources of income, as identified in the below list sorted in accordance with order of distributable profits:

Final Tax Account (FTA)
Immovable Property Account (IPA)
Foreign Income Account (FIA) – subject to tax refund 
Malta Tax Account (MTA) – subject to tax refund 
Untaxed Account (UA) 

 

A tax refund can be claimed on profits allocated to the Malta Taxed Account and the Foreign Income Account. The tax refund which can be claimed on the corporate tax paid by the company being distributed by way of a dividend is computed at the following rates, depending on the nature of the activity which has resulted in the profits being distributed: 

  • 6/7ths refund of the corporate tax paid- applicable to distribution of profits by a company resulting from trading activities;

  • 5/7ths refund of the corporate tax paid – applicable to distribution of profits by a company arising from passive income, such as interest income and royalties;

  • 2/3rds refund of the corporate tax paid – this type of refund can be claimed by shareholders in receipt of a dividend out of profits in respect of which a claim for double taxation relief was made by the company and which was allocated to the FIA.

 

Participating holding exemption

In addition to the tax refund mechanism applicable to shareholders on receipt of a dividend from a Maltese company, the legislation provides for a full exemption from tax of any income or gains derived by a company registered in Malta from a participating holding or from the transfer of such holding.

The participating holding exemption is applicable where the holding implies: 

  • a direct holding of at least 5% of the shareholding of a company whose capital is wholly or partly divided into shares.  In order to qualify for this exemption, such holding should confer an entitlement to at 5% of any two of the following: 

  1. right to vote;

  2. profits available for distribution; and

  3. assets available for distribution on a winding up.

  • a holding in a company which gives the right to call for and acquire the entire balance of the equity shares not held by it; or

  • a holding in a company which entitles its holder to the right of first refusal in the event of the proposed disposal/redemption/cancellation of all of the equity shares of that company not held by that equity shareholder company; or

  • a holding in a company which entitles the shareholder company to either sit on the Board or appoint a person to sit on the Board of that company as a director; or

  • a holding representing a total value, as on the date(s) on which it was acquired, of a minimum of €1,164,000, or the equivalent sum in a foreign currency in a company for an uninterrupted period of not less than 183 days; or

  • a holding in a company held for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

In the case of dividend income, certain criteria have to be met for the participating holding exemption to be applicable.


Notional Interest Deduction

 

Legal Notice 37 of 2018 introduces a new concept within our tax framework whereby it introduces a Notional Interest Deduction (NID).  The aim of these Rules is to mitigate the disparity between the tax treatment applicable to capital as opposed to equity.  

In ascertaining the chargeable income, finance costs payable by undertakings are deductible for tax purposes.  In view of this, entities tend to prefer debt as opposed to equity in financing the entity’s operations.  This Legal Notice aims at providing a notional interest deduction on the interest which is deemed to have been incurred on the equity used by entities.    

The application of the deduction in terms of these Rules is at the discretion of the undertakings compiling the return pursuant to Article 10 of the Income Tax Management Act.  However, entities may only claim this deduction if all the shareholders of the entity approve that the undertaking claims the NID.  These Rules came into force as from year of assessment 2018 (i.e. basis year 2017). 

 

Reference rate – the risk free rate set by reference to the current yield on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5% (Reference rate is set at 7.03% for financial periods ended on 31 December 2017).     

Risk Capital –   Share capital, share premium, retained earnings, interest-free borrowings and other reserves resulting from other contributions to the undertaking which are included as part of equity.

 

The interest on risk capital that an entity is entitled to claim in the relevant year of assessment, is calculated as follows:

 

Interest on risk capital (deduction claim) =

Reference rate 

X (multiplied by)

Risk capital for the accounting period ending in the year preceding the year of assessment 

 

Key features of Notional Interest Deduction

  • Interest on risk capital deduction may not exceed 90% of the company’s chargeable income;

  • Unabsorbed NID on risk capital may be carried forward indefinitely;

  • The NID may be claimed by a Permanent Establishment (PE) of a non-Maltese resident undertaking;

  • The NID is deemed as interest income received by the shareholders of the undertaking in proportion to their shareholding in the said undertaking. The application of the investment income provisions is specifically precluded by the Subsidiary Legislation. However, non-resident shareholders may avail themselves of the exemption in terms of Article 12 (1)(c)(i) of the Income Tax Act; 

  • Different basis of allocation of the NID to the individual shareholders is permissible by the Rules; 

  • An amount corresponding to 110% of the amount of profits which are relieved by the NID shall be allocated to the Final Tax Account (FTA). However, any excess of the amount of profits which fall to be allocated to the FTA over the total profit of that particular basis year, are disregarded;

  • S.L. provides for anti-avoidance measures. 

 

Other exemptions

In addition, the Income Tax Act (ITA) – Chap 123 of the Laws of Malta, provides for the following exemptions:

  • Interest, discount,  premium or royalties accruing to a non-resident are not subject to tax in Malta;

  • Gains or profits earned by non-residents on a transfer of units in a Collective Investment Scheme and on the transfer of shares in Maltese companies, upon certain criteria being met, are not subject to tax in Malta;