As indicated in the previous article, Maltese income tax lists various sources of income yet does not segregate them on a schedular basis. This factor notwithstanding, the gains, profits, or earnings from each source are computed separately and, with the exception of trade losses, it is not possible to set off losses from one source against income from another. Chargeable income is total income (after allowing any exemptions) less total deductions.
Individuals are generally entitled to the same business deductions given to a corporate taxpayer - these include capital allowances, interest payable, bad debts, etc. The test applied in determining allowable deductions in relation to business income is applied in a slightly more rigid manner in the case of professional income, and even more so in relation to employment income and income from an office (in the latter cases, the rule that the expenses must have been wholly and exclusively incurred in the production of the income is strengthened by the additional requirement that such expenses must have been 'necessarily' so incurred).
Other forms of allowable deductions against specific types of income include: for instance interest payable on capital employed in generating income, ground-rent payable and a maintenance allowance are allowed as deductions from rental income.
No deductions are given for domestic or private expenses. A 1996 amendment to the Act has introduced an exception to this rule - alimony payments made in terms of a Maltese court order to one's estranged spouse are generally deductible.
3. Tax Computation / Tax Rates
The task of computing one's tax has been considerably simplified by the abolition of the various personal allowances and tax rebates previously forming part of the tax computation exercise.
The removal of these allowances and rebates has been compensated for by an adjustment of the tax brackets and rates, so that the net result of the 1996 amendments in so far as individuals were concerned was a reduction in tax payable.
The new tax rates, following the latest spate of amendments, for resident individuals are the following:
MARRIED SINGLE Income Rate Income Rate Lm % Lm % 0 - 4,000 - 0 - 3,000 - 4,001 - 5,500 15 3,001 - 4,000 15 5,501 - 7,000 20 4,001 - 5,000 20 7,001 - 8,500 25 5,001 - 6,500 25 8,501 - 10,000 30 6,501 - 8,000 30 over 10,000 35 over 8,000 35N.B. The 'Single' tax rates are also applicable to married couples opting for a separate tax computation.
The new tax rates for non-resident individuals are the following:
NON RESIDENTS Income Rate Lm % 0 - 300 - 301 - 1,800 20 1,801 - 3,300 25 3,301 - 4,800 30 over 4,800 35It is important that the tax rates above always be viewed in conjunction with a number of other factors which may imply a reduction in such rates. These include:
(i) The introduction of final withholding tax systems (with a relative exemption from the obligation to declare such income) over the last few years providing for taxation of (i) certain forms of investment income, and (ii) income from employment or self-employment on a part-time basis (subject to a number of rules) - at a flat rate of 15%.
(ii) Advantageous tax treatment, such as: (i) reduced tax rates applicable to income derived by officers and/or employees of certain types of companies; (ii) an optional 27.5% flat tax rate applicable to dividends distributed by International Trading companies to non-resident shareholders, to be viewed also in conjunction with the operation of the Tax Refund regime; (iii) special tax regimes, such as those applicable to returned migrants, or to permanent resident permit holders, and so forth; and (iv) preferential tax treatment available to officers and/or employees of offshore companies, licensed investment services companies, qualifying companies under the Industrial Development Act, and so forth.
4. Separate tax computation option
Married couples filling in a joint return may opt for a separate tax computation (thus enjoying the benefits of two portions of tax free income - see 'Tax Rates' above).
The separate tax computation exercise is applicable to the following forms of income derived by the spouse who is not the 'responsible spouse' (as notified to the Commissioner of Inland Revenue), namely: (1) income from trade or business, profession or vocation, (2) income from employment or office, and (3) pension income received in view of past employment.
B. WHAT INCOME IS CHARGEABLE TO TAX?
Reference is made to the table used in the previous article (replicated below) to illustrate the relationship between an individual's tax status and the extent to which the said individual's income will be chargeable to Malta tax.
CATEGORY OF PERSON LIABILITY 1. Domiciled and ordinarily World-wide basis. resident 2. Lacking either ordinary Income arising in Malta, plus residence or domicile remittances of foreign income. Capital gains arising outside Malta are exempt from tax, whether remitted to Malta or not. 3. Temporary resident Malta-source income (if any), plus remittances of foreign income if conditions as to intention and physical presence are satisfied. Capital gains arising outside Malta are exempt from tax, whether remitted to Malta or not. 4. Non-resident Malta-source income only (N.B. special tax regimes). Malta-source interest and royalty income are generally exempt from Malta tax. Capital gains realised on the sale of units in collective investment schemes and of securities in companies which do not have local immovables as their sole or main asset are also exempt from Malta tax. 5. Returned migrant May elect for a special tax regime. 6. Permanent residence permit Income arising in Malta, plus holder remittances of foreign income. Taxed at a reduced rate of tax.Reference is made particularly to the following classes of individual taxpayers:
1. Temporary Residents
A person is considered to be temporarily resident in Malta for tax purposes if:
(i) he is in Malta for a temporary purpose only; and
(ii) he does not intend to establish his residence here; and
(iii) he is not physically present in Malta, in any one fiscal (i.e. calendar, in the case of individuals) year, in excess of a total 6 months.
A temporary resident is only taxable on Malta-source income; his foreign-source income is exempt from Malta tax, even if remitted to Malta.
The persons most likely to be in default of the third above-mentioned condition are foreign nationals working in Malta. Since it is unlikely that the foreign national in question will be regarded as domiciled here, tax will be charged on the said individual's Malta-source income (which may or may not include all or part of his employment income), as well as on any foreign income which he may remit to Malta.
In the case of foreign personnel whose country of origin is one with which Malta has a double taxation agreement, the above principles should be considered in conjunction with the provisions of the relevant treaty referring to dependent personnel services.
2. Returned Migrants
A 'returned migrant' for the purposes of the Income Tax Act, is either:
(i) an individual born in Malta, who after emigrating (having actually resided outside Malta for a total of 20 years in the 25 years preceding his return to Malta) has returned as a resident in Malta after 1988, provided that he annually remits a quantum of foreign-source income chargeable to tax in Malta; or
(ii) an individual who is not a Maltese national and does not satisfy the above-mentioned period of residence outside Malta yet satisfies the conditions for the issue of a residence permit applicable at the time.
A returned migrant may opt for the following preferential tax regime:
(i) Income will be taxed at a flat rate of 15% (with Lm2,500 tax-free in the case of married couples, and with Lm1,800 tax-free for single individuals and married couples opting for a separate tax computation). This rate will be applied to all forms of income subject to Malta tax, with the exclusion of (i) income from trade or business, profession or vocation, and (ii) income from employment or office, which will be taxed separately at standard tax rates starting at the 15% rate of tax.
(ii) Tax will be payable upon: (i) Malta-source income; (ii) foreign-source income remitted to Malta; and (iii) capital gains arising in Malta (capital gains arising outside Malta are exempt from Malta tax, whether remitted to Malta or not).
(iii) Minimum tax liability for any year of assessment in which the option is taken is: Lm1,000, after any double taxation relief has been taken into account.
(iv) Upon the demise of the returned migrant who had opted for this special tax regime, the surviving spouse shall be entitled to continue to be taxed in accordance with the said tax regime.
3. Permanent Residence Permit holders
Reference is made to our article entitled "Permanent Residence Permit Scheme" for information regarding the tax regime applicable to the most recent scheme of this sort introduced into Maltese law.
C. Double taxation
Double taxation is avoided principally through three forms of double taxation relief, namely, through a substantial, and ever-growing, network of double taxation treaties; as well as through the recently introduced forms of double taxation relief (refer to our article "Malta - An International Financial Services Centre").
THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.