For this third in our series going more in-depth on Malta, our local Head of Accounting explains the Maltese tax refund system
Malta's tax refund system is one of key factors putting Malta amongst the EU's lowest tax jurisdictions. Operating a full imputation system of taxation which avoids the economic double taxation of corporate profits by imputing onto shareholders the underlying corporate tax attaching to dividends, Malta's system allows the shareholder to claim a full credit for any tax paid by the company on profits distributed as dividends.
Basis of Malta taxation
Corporate income tax in Malta is governed by the Income Tax Act (ITA) and the Income Tax Management Act (ITMA) together with their respective subsidiary legislation.
Tax will arise on the two main concepts of residence and domicile. Malta incorporated companies are both resident and domiciled in Malta and are therefore subject to Maltese tax on its worldwide income at the standard rate of 35%; if the company is domiciled outside Malta but the tax resident is in Malta it is taxed on income arising in Malta and on income remitted to Malta.
A Malta registered company is required to allocate its distributable profits depending on the source and nature of the profits.
- Final Tax Account (FTA): Allocate tax exempt profits (exempt at shareholder level upon distribution) and profits subject to final tax.
- Immovable Property Account (IPA): Allocate income derived directly or indirectly from immovable property situated in Malta.
- Foreign Income Account (FIA): Allocate income derived directly from investments situated outside Malta.
- Maltese Taxed Account (MTA): Allocate any profits which were not allocated to the FTA, IPA or FIA.
- Untaxed Account (UA): Allocate the difference between total distributable profits/accumulated losses and those amounts allocated to any of the other tax accounts.
The shareholders of a Malta company need to be duly registered to reclaim a tax refund which would entitle them to claim a refund of the Malta tax charged on profits allocated to the FIA or MTA. The rate of tax refund depends on the nature of the underlying profits and the application of any double taxation relief by the Malta Company on such profits.
The most common tax refund is 6/7th of the Malta tax suffered resulting in a net effective Malta tax charge of 5%, though it may vary in certain cases.
- Passive interest or royalties: If the underlying profits out of which a dividend is distributed are derived from interest or royalties the refund is reduced to 5/7th of the Malta tax suffered on those profits
- FIA profits subject to a claim of double taxation relief: A tax refund of 2/3rd of the Malta tax would apply to dividends distributed out of profits allocated to the FIA in respect of which the distributing company has claimed a double tax relief.
- Participating Holding: A company in receipt of dividends derived from an investment which qualifies as a participating holding may apply the participation exemption which would exempt such income/gains from Malta tax; refer to our Participating Holding Fact Sheet for more details.
The ITMA stipulates that the registered shareholder can reclaim the tax refund within 14 days of valid application being submitted and processed.
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.