Double Taxation
Double taxation occurs when tax is levied on the same income in two different points, which may also be in a cross-border context. This happens, for example, when tax is levied in the country from which the income is sourced and the country of residence of the taxpayer. Since double taxation may discourage effective cross-border investment and trade, Malta provides relief through either crediting foreign taxes or exempting income altogether.
One should also note that Malta also has a full imputation corporate tax system: resident companies pay 35%, but dividend recipients receive a tax credit for the tax paid, meaning that profits distributed to shareholders are effectively taxed only once.
Maltese law provides a limited form of domestic relief for foreign taxes even where no treaty exists. One example is the Commonwealth relief. This a credit for income tax paid to certain Commonwealth countries when no double-tax treaty is applicable. However, this relief is narrow: it requires the other country to offer reciprocity and is not often invoked.
The Income Tax Act allows a Maltese resident to credit foreign taxes on foreign-source income against its Malta tax liability, up to the amount of Maltese tax on that income. Therefore, this gives the possibility for foreign tax paid to be deducted from the Malta tax due.
Then, most relief comes from Malta's extensive network of double tax treaties. These bilateral agreements (usually based on the OECD model) allocate taxing rights and eliminate double taxation. Under a treaty, Malta typically uses the credit method, through which a resident who pays tax abroad on foreign-source income may claim a credit against Maltese tax on that income, capped at the Maltese tax liability on the same income. Malta has concluded over 80 income tax treaties with trading partners worldwide, covering income ranging from to business profits, etc.
Maltese law still provides unilateral relief where no such treaty exist. This a foreign tax credit when income is from a foreign source foreign-source income, much like treaty relief but without an agreement. A Maltese resident (individual or company) who pays tax abroad on foreign-source income can offset that foreign tax against Maltese tax on the same income.
Again, the credit cannot exceed the Malta tax payable. To claim unilateral relief, taxpayers must prove actual foreign tax paid. Importantly, the Income Tax Act also provides for an underlying tax credit: if a Maltese company receives a dividend paid out of profits that were taxed abroad, it can claim a credit for the subsidiary's foreign tax. This ensures relief through multi-tier structures. In effect, unilateral relief (often called a domestic foreign tax credit) guarantees that income earned overseas isn't taxed twice – first in the source country and then again in Malta.
The Flat-Rate Foreign Tax Credit ('FRFTC') is a further special domestic relief for Maltese companies. It applies only when treaty and unilateral relief are not available. Under FRFTC, a company receives a notional credit equal to 25% of its foreign-source income or gains. In practice, the company adds back 25% of the foreign net income (after any foreign tax) to its taxable income, effectively giving a fixed credit. FRFTC does not require that any foreign tax was actually paid as it is deemed tax suffered.
To claim FRFTC, the company must supply evidence (such as a CPA certificate) that the income arose overseas. FRFTC is attractive when foreign profits were lightly taxed or exempt abroad: the 25% credit often equals or exceeds any foreign tax, so the income is taxed in Malta on a net basis.
Malta's International Tax Framework
Together, these relief measures allow Malta to prevent double taxation of foreign income. Malta's broad treaty network and generous domestic credits make it tax-efficient for cross-border business to be conducted, showcasing a foreign investment in Malta as structured in such a manner that income is taxed by one country only (or credit is given) Moreover, Malta's EU membership and OECD alignment reinforce stability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
