Partly
in response to the European Commission's
attack on its low-tax corporate forms
earlier in the year (see Forms
of Company), the Maltese government
prepared some changes in taxation in May,
2006.
The
Tax Reform Commission is said to have
drawn up a number of proposals dealing
with company and personal taxation, and
has suggested that the 35% corporate tax
rate should be lowered and the tax system
modified in line with international trends.
The
review of the Maltese tax system is part
of a five-year strategy announced by Dr
Gonzi at the launch of a Pre-Budget Document
last year, designed to improve Malta's
overall economic competitiveness.
According
to this Document, the government is hoping
to change the taxation system so that:
tax policy stimulates economic growth;
the system is re-engineered from direct
taxation to environment-related taxation;
the regime promotes the uptake of the
household rental market through tax incentives;
and reporting requirements are further
simplified to lower administrative costs.
Malta Scope of Income
Tax
The Maltese Income Tax Act as amended
governs company taxation. Malta imposes
income tax on the world-wide income of
companies resident in the country; this
includes all companies incorporated or
registered under any Maltese law if they
are ordinarily resident, and any foreign
company which is managed and controlled
from Malta. The definition of income includes
capital gains; there is no separate capital
gains tax as such. However, capital losses
can only be relieved against capital gains,
so the distinction is preserved within
the tax computation. Local-source income
and foreign-source income are also treated
separately within the computation; Maltese
companies with foreign income maintain
a Foreign Income Account for this purpose
(see below).
Non-resident
Maltese companies pay income tax on locally-sourced
income including capital gains, and on
income remitted to Malta (excluding capital
gains).
Non-resident
foreign companies pay income tax on locally-sourced
income only (not including capital gains).
Local interest and royalty income would
normally be exempt.
The
Income Tax Act lists a number of sources
of taxable income:
- Trade
or business;
- Profession
or vocation;
- Employment
or office;
- Dividends;
- Interest
and discounts;
- Pensions,
charges, annuities and other annual
payments;
- Rents
and other profits arising from immovables
or real rights thereon;
- Royalties;
- Other
gains or profits.
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Malta Rates of Income
Tax
The rate of income tax in Malta is 35%
on chargeable income. Note that certain
types of company benefit from lower rates:
for Offshore Companies (now defunct),
International Trading Companies and International
Holding Companies, see Offshore
Legal and Tax Regimes; also, companies
licensed under the Malta
Freeports Act and 'qualifying' companies
under the Business
Promotion Act may receive tax holidays
of 10 years or more.
Malta Branch or Subsidiary?
Branches of foreign companies are taxed
at the same rate of income tax as domestic
companies. No additional taxes are withheld
on profits transferred back to head office.
Malta Calculation of
Taxable Base
Allowable expenditure needs to be incurred
'wholly and exclusively' for the business;
however, mixed private/company expenses
can often be apportioned. Expenses can
only be offset against the income in whose
production they were incurred; they can
be apportioned between types of income
(losses, however, are transferable between
income types). Among others, the following
expenses are allowable:
-
Repairs and the cost of maintaining
the equipment used;
-
Interest on capital employed in acquiring
income;
-
Bad debts and provisions for them;
-
Capital allowances: first year 20%,
but only 10% for hotels and industrial
buildings; wear and tear allowances
in future years.
Some
types of expense are non-deductible, including:
- expenses
incurred prior to production of the
income, eg company formation, equity
issuance or installation costs;
- charitable
contributions (and other spending away
of net income);
- capital
items.
Unrelieved losses can normally be carried
forward indefinitely to offset future
profits from whatever source (but only
within the overall category of 'foreign-source'
or 'local-source' - losses cannot cross
that boundary line). Unabsorbed capital
allowances however can only be applied
to income from the same source.
Foreign-source
income is protected against double taxation
through 'Commonwealth Relief' which is
now hardly ever used, Double Taxation
Treaty relief, Unilateral Relief (often
applies when Double Taxation relief is
not available), and finally a 25% Foreign
Tax Credit if all else fails. Only one
of these four reliefs is available, and
they apply in the order stated. (See also
Offshore Legal
and Tax Regimes and see below under
Withholding Taxes.)
Group relief is available both for income
and capital, but with limitations.
NB:
This brief summary of some of the more
important aspects of Maltese income tax
law is given for general information only;
it should not be relied upon in actual
situations, for which professional tax
advice is necessary.
Malta Filing Requirements
and Payment of Tax
The tax year is the calendar year, ending
31st December. Tax is assessed on the
basis of the preceding calendar year,
on the financial year of the company that
ended in the previous calendar year.
Companies
make three equal payments of tax in the
year of assessment, in April, August and
December.
A
tax return must be submitted within six
months of the end of a calendar year,
or if the company's financial year ended
before 31st December, within one month
of receipt of the official return form,
if this is later. If there is a balance
due according to the company's return,
it must be paid by 30th June in the year
of assessment.
Tax
due on foreign-source profits is payable
18 months after the balance sheet date,
or 18 months after the payment of a dividend,
it that is earlier.
Malta
Withholding Tax
As regards dividends, Malta operates a
full imputation system, but the situation
is made quite complicated by the interaction
of varying regimes for different types
of income. Companies need to maintain
three distinct income streams:
- Foreign
Income;
- Taxed
Local Income; and
- Untaxed
Local Income.
Untaxed
local income is that received from fiscally-privileged
companies of various types, who are allowed
to pay untaxed dividends etc, and it can
be passed on subject to a withholding
tax of 15% or in some cases without any
deduction; taxed local income will have
borne corporate income tax at 35% and
dividends are not subject to withholding
tax; foreign income will have been relieved
of all or almost all of any tax it has
suffered (see above) and will then have
borne 35% local income tax - no withholding
tax, therefore.
Resident
(tax-paying) shareholders have a full
35% tax credit in respect of taxed local
or foreign income dividends. Non-resident
shareholders can take the tax credit,
or they can opt for refunds of either
two-thirds or all of the domestic tax
paid depending on whether the foreign
income came through a 10% participation
or not.
NB:
This is a highly simplified description
of the Maltese withholding tax regime;
specialist professional advice is necessary
before any action is taken.
Malta's
November 2000 budget introduced witholding
tax on Collective Investment Schemes.
With regard to foreign funds (with
a primary or secondary listing on the
Malta Stock Exchange), the fund manager
or representative must register with the
Inland Revenue Department which means
that income to the investors in the fund
will be subject to a 15% final witholding
tax.
Income
that goes to local residents from Investment
Collective Schemes (either traded on the
primary or secondary listings on the exchange)
will be subject to tax. This includes
distributing funds and accumulator funds.
Further
changes made by the budget include tax
levied on all government stock bought
directly by an investor. However, tax
is not levied if the investor invests
in an accumulator fund which then reinvests
in government stock.
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Malta The Business
Promotion Act
The Business Promotion Act provides
an incentives package aimed at establishing
and strengthening certain business sectors
within the Maltese economy:
