Spotlight on Malta
By Lowtax Editorial
01 February, 2016
According to the International Monetary Fund, Malta has one of the fastest growing economies and most stable financial sectors in the Eurozone. With its favourable company and personal tax regimes continuing to attract strong numbers of foreign investors, Malta is the subject of this month's special feature.
Little more than two or three hours flying time from most places in Europe, Malta has an average of 300 days of sunshine each year, temperatures of between 14°C in winter and 32°C in summer and a typically laid-back Mediterranean lifestyle. Little wonder then that this island is one of the most popular bolt-holes for expats Britons and other Europeans.
Malta is in fact a collection of islands situated in the Mediterranean Sea, about 100 km from Sicily and 290 km from North Africa. The inhabited islands comprise Malta (390 sq km), Gozo (65 sq km) and Comino (2.5 sq km). Malta is the largest of the islands, and is home to the country's capital, Valletta. The total population of the islands is approximately 400,000.
With its strategic position in the Mediterranean, Malta has become an important cultural and commercial centre. The islands' architecture, language and culture are an intriguing and unique blend of Mediterranean and Arabic influences, although after almost 150 years as a British colony, British influences abound and English stands alongside Maltese as the official language. Italian is also widely spoken.
Malta is a politically stable parliamentary democracy and has been a member of the European Union (EU) since May, 2004, adopting the euro in 2008. Unlike Cyprus, another location favoured by European "and particularly British" expats, Malta has survived the financial crisis and the Eurozone troubles relatively unscathed. Having exited the EU's excessive deficit procedure programme in December 2012, Malta has been able to cut taxes recently, in contrast with many of its neighbours in the region.
In terms of infrastructure, the islands are reasonably well equipped given their somewhat isolated location. Malta's economic policy encourages information technology operations, and the territory has invested heavily in state-of-the-art telecommunications. There are already a number of Internet Service Providers in Malta, with clear interest being shown in offshore e-commerce development. The most active e-commerce sector in Malta has been betting and gaming; there are said to be more than 360 betting and gaming e-commerce operations in total on the island.
Corporate Tax And Holding Companies
Malta has been obliged to dismantle its old "offshore" companies regime as a trade-off for joining the European Union. EU membership has, however, brought about certain benefits for Maltese companies trading across borders, and, coupled with investment-friendly government policies and some interesting tax planning opportunities, Malta remains one of the most favourable places in the EU in which to locate an international holding company (see below).
The Maltese Income Tax Act as amended governs company taxation. The rate of income tax is 35 percent on chargeable income (certain types of company benefit from lower rates). 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, but 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.
Although low-tax offshore company forms are now no longer available to foreign investors in Malta, there remain a number of tax and other benefits to locating a holding company in the islands. These include a fairly comprehensive network of double taxation agreements with almost 70 countries, a flat income tax rate of 15 percent on remittances by permanent residents and no municipal taxes. There are also opportunities under the Maltese tax system to substantially reduce corporate tax liability.
Shareholders of Malta holding companies qualify for a full refund of the Maltese tax paid by the company on profits and gains arising from "participating holdings" when such profits are distributed. From January 1, 2008, Malta holding companies also qualify for a participation exemption subject to anti-abuse provisions introduced from the same date. For a Maltese resident company to hold a "participating holding" in a company incorporated abroad, it must hold at least 10 percent of the equity shares in the non-resident company. To qualify for the participation exemption, the foreign subsidiary must satisfy one of three criteria: be resident in the EU; be subject to foreign tax of at least 15 percent; and not derive more than 50 percent of its income from passive income.
By virtue of Malta's tax imputation system, when dividends are paid by trading companies to the shareholders, these shareholders are entitled to claim refunds of 6/7ths of the Malta tax paid by the company, resulting in an effective Maltese tax rate of 5 percent. Distributions made from profits derived from passive income such as interest and royalties, entitle the shareholder to claim 5/7ths of the tax paid by the company.
Furthermore, as from 2012, royalty income derived from copyright-protected books, film scripts, music and art is exempt from tax.
Personal Income Tax
It is necessary to consider both domicile and residence to establish the exact tax situation of individuals in Malta.
Maltese domicile is established on the basis of UK case law principles. Broadly speaking, an individual's domicile of origin (where he was born) can be changed if he establishes a permanent home elsewhere. He can only have one domicile.
Residence is defined as habitual presence in the country; ordinary residence means that an individual is present in Malta in the ordinary or regular course of his life.
Individuals who are domiciled and ordinarily resident in Malta pay income tax on their world-wide income.
Individuals who are domiciled elsewhere, and who are resident but not ordinarily resident in Malta pay tax on their income arising in Malta, or remitted there (but not capital gains, whether remitted or not). The six-month test is likely to be definitive in establishing residence.
Non-resident individuals pay tax on their Malta-source income only; but local interest and royalty income are exempt from tax, as are capital gains on holdings in collective investment schemes or on securities as long as the underlying asset is not Maltese immovable property.
Rates of income tax as of 2016 are as follows for residents:
0 - 11,900
11,901 - 21,200
0 - 8,500
8,501 - 14,500
N.B. the 2016 Budget includes proposals to increase the 0 percent tax bracket for married couples from EUR11,900 to EUR12,700 and increase the 0 percent tax bracket for other individuals from EUR8,500 to EUR9,100.
For individuals non-resident during the year immediately preceding the year of assessment, the tax rates as from 2008 are as follows:
0 - 700
701 - 3,100
3,101 - 7,800
However, highly qualified expatriate employees may qualify for one of Malta's concessionary tax schemes (see below).
Malta has double tax treaties in force with 70 countries, including France, Germany, Ireland, Italy, the Netherlands, Russia, the United Kingdom and the United States.
Malta has adopted all standards and requirements applying in the EU relating to exchange of information such as those required under the Savings Tax Directive and the EU Administrative Cooperation Directive. Malta is also a party to the Multilateral Convention on Mutual Assistance in Tax Matters.
Malta signed an intergovernmental agreement (IGA) with the United States on the implementation of the Foreign Account Tax Compliance Act (FATCA) on December 16, 2013. The IGA requires financial institutions in both Malta and the US to submit certain information about their clients to their own tax authorities, which in turn will automatically share such information with the other tax authority.
Expat Tax Schemes
The Global Residence Programme
The Global Residence Programme is a programme designed to attract individuals who are not nationals of the EU, EEA or Switzerland and who are not long-term residents. Individuals benefitting from this Programme are not precluded from working in Malta, provided they satisfy the requisite conditions for obtaining a work permit.
Persons seeking a permanent residency visa under this program have to purchase high-value property and make a minimum tax contribution each year to Maltese coffers. Applicants must purchase immovable property worth at least EUR275,000 in Malta other than the south of the island; EUR220 in the south of Malta; and EUR250,000 in Gozo. Alternatively, the individual may rent property for no less than EUR9,600 in Malta (equating to a monthly rent of EUR800 per month), or EUR8,750 in south Malta or Gozo (equal to EUR730 per month).
Beneficiaries of the Global Residence Program are subject to tax at 15 percent. To avail of the new scheme, expats must make an annual upfront tax contribution of no less than EUR15,000, regardless of where they live in the islands.
Malta Highly Qualified Person Scheme
The Maltese Government also runs a scheme designed to lure highly-skilled and highly-valued employees to the islands. The Highly Qualified Persons Rules, 2011, brought into force tax incentives and served to create a scheme to attract highly qualified persons to occupy an 'eligible office' with companies licensed and/or recognized by the Malta Financial Services Authority. The rules apply to individuals not domiciled in Malta. In essence, "not domiciled" in Malta means not having born there.
Under the scheme, individual income from a qualifying contract of employment in an "eligible office" is subject to tax at a flat rate of 15 percent provided that the income amounts to an annual minimum which is adjusted each year in line with the Retail Price Index; this amounted to EUR81,457 in 2015. The 15 percent flat rate is imposed up to a maximum income of EUR5m; the excess is exempt from tax.
The 15 percent tax rate applies for a consecutive period of five years for EEA and Swiss nationals and for a consecutive period of four years for third country nationals. EEA and Swiss nationals may apply for a one-time extension to the scheme.
An individual may benefit from the 15 percent tax rate if he or she derives employment income subject to income tax in Malta. The employment contract must also be subject to the laws of Malta and should be drawn up for exercising genuine and effective work in Malta. Other stipulations include that:
- The individual must show that he or she is in receipt of stable and regular resources sufficient to maintain themselves and their family in Malta without recourse to Malta's social security system;
- The individual resides in accommodation regarded as "normal" for a comparable family in Malta; and
- The individual is in possession of sickness insurance in respect of all risks normally covered for Maltese nationals for themselves and the members of their family.
An application for a formal determination relating to eligibility under the Highly Qualified Persons Rules must be made to the Chairman, Malta Financial Services Authority on the appropriate form, found on the tax authority website.
Individual Investor Program
The Individual Investor Program was introduced in 2014 and allows for the granting of citizenship by a certificate of naturalization to individuals and their families who contribute to the economic and social development of Malta. Subject to a stringent vetting and diligence process, including thorough background checks, the applicants and their dependents are granted citizenship in exchange for such contribution.
To qualify for citizenship, the main applicant must be at least 18 years of age, provide proof of having been a resident of Malta for a period of 12 months preceding the issuing of a certificate of naturalization and meet the following investment requirements:
- The acquisition of real estate with a minimum value of EUR350,000 to be held for at least 5 years; or
- Lease a residential immovable property in Malta for a period of 5 years, at an annual rent of at least EUR16,000; and
- Make a contribution to the National Development and Social Fund
- Invest in stocks, bonds or special purpose vehicles to be identified by Identity Malta, for a minimum value of EUR150,000 to be held for a minimum period of 5 years.
Applicants must have global health insurance coverage for at least EUR50,000 for the main applicant and each of the dependents and must give proof that they can maintain the same for an indefinite period.
Principal Applicants can include in their IIP application:
- Spouse - in a monogamous marriage or in another relationship having the same or similar status to marriage.
- Dependents of 18 years of age and under.
- Dependents between the age of 18 and 26 years of age, who are not married and who are wholly supported by the main applicant and form part of the household.
- Dependents over the age of 55 years (e.g. parents), who are wholly supported by and who form part of the household of the main applicant.
The following contributions and fees are required as a minimum to qualify for citizenship under the IIP:
- Principal applicant - EUR650,000
- Spouse - EUR25,000
- Each Dependent child aged 0-17 - EUR25,000
- Each Dependent child aged 18-26 - EUR50,000
- Each Dependent aged 55 or above - EUR50,000
There are also due diligence fees as follows:
- Principal applicant - EUR7,500
- Spouse - EUR5,000
- Each Dependent child aged 13-17 - EUR3,000
- Each Dependent child aged 18-26 - EUR5,000
- Each Dependent aged 55 or above - EUR5,000
There is also a passport fee of EUR500 per person, and bank charges of EUR200 per person.
Applications must be accompanied by supporting identification and verification documents authenticated in English, as set out in the Checklist and Guidelines, together with:
- Police conduct certificates
- Proof that the main applicant has been a resident of Malta for a period of 12 months preceding naturalization
- Medical certificates stating that the applicant and his dependents are not suffering from contagious diseases and are in good health
- An affidavit of support for each dependent who is over 18 years of age.
According to figures announced by Henley & Partners, which runs the scheme on behalf of the Maltese Government, the IIP had attracted over 400 applicants from more than 40 countries by January 2015. In a statement, the company explained that letters of citizenship approval in-principle have been issued to the first applicants and that certificates of naturalization will follow soon after contribution, investment, and residency requirements have been fulfilled.
Malta's Prime Minister, Joseph Muscat, has said that the program will enhance the island's competitiveness by increasing its talent pool and global network.
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