• Malta Tax Refund System


    Taxation of Maltese Companies

    Companies which are incorporated in Malta are considered to be tax resident in Malta by virtue of their incorporation and are taxed on their worldwide income.

    Companies which are incorporated outside Malta but their management and control is exercised from Malta are also considered to be tax resident in Malta but are taxed on:

    1. income arising in Malta; and
    2. income arising outside Malta to the extend that such income is remitted to Malta; and
    3. gains realized in Malta (gains realized outside Malta would not be taxable in Malta even if remitted to Malta).

    Under law, a Maltese company needs to have distributable profits in order to distribute dividends. For tax purposes the company needs to allocate its distributable profits to the following 5 tax accounts:

    Final Tax Account (FTA): consists of tax exempt profits.

    Immovable Property Account (IPA): consists of profits derived directly or indirectly from immovable property situated in Malta.

    Foreign Income Account (FIA): consists of income derived principally from investments situated outside Malta.

    Maltese Taxed Account (MTA): consists of income which is not allocated to FTA, IPA or FIA.

    Untaxed Account (UA): consists of the total distributable profits/losses less those amounts allocated to any of the other taxed accounts.

    The Maltese Refund System

    Malta operates a full imputation system whereby both resident and non-resident shareholders are entitled to a refund on tax paid by the company. The corporation tax in Malta is 35% but such a tax refund reduces the effective tax to 0% - 10% as explained below.

    The refund is paid by the Malta fiscal authorities within 14 days of a valid application being submitted.

    There are 4 types of tax refunds:

    6/7ths of the Malta tax

    This is the most common tax refund to which shareholders are entitled upon payment of dividend by a company.

    5/7ths of the Malta tax

    In cases where the distributed profits consist of Passive Interest or Royalties (PIR) then the tax refund is 5/7ths of the Malta tax suffered on those profits.

    2/3rds of the tax payable in Malta

    This tax refund applies when the distribution is made out of the FIA account (i.e. foreign source income) and the profits are subject to a claim of double taxation relief. The tax refund is 2/3rds of the tax payable in Malta.

    Malta legislation provides for 4 types of relief from double taxation of foreign source income:

    Treaty Relief: provided by the double tax treaties concluded by Malta and which ensure that the same income is never taxed twice in different countries. In order to claim a treaty relief in Malta, evidence of tax paid in the foreign country is required.

    Commonwealth relief: granted for taxes paid abroad on income derived from British Commonwealth countries.

    Unilateral Relief: granted when treaty or commonwealth relief is not available. Under this relief, overseas tax suffered is allowed as a credit against the tax chargeable in Malta. Unilateral relief for underlying tax is also available when the Maltese company holds more than 10% of the voting power of the overseas company.

    Flat Rate Foreign Tax Credit (FRFTC): granted on income which is allocated to the company's Foreign Income Account when the other forms of relief are not available and it takes form of a notional tax credit of 25% on the amount of the overseas income or gain received by the company.

    100% refund of the tax payable in Malta

    In cases where the distributed profits consist of income (dividends) or gains derived from investments which qualify as Participating Holdings then the company has 2 options:

    1. apply the participation exemption whereby such income/gains are exempt from Malta tax; or
    2. include such income/gains in its taxable income and entitle the shareholder to a 100% refund upon payment of dividends out of these profits.

    A shareholding in a foreign company qualifies as a foreign participating holding if the Maltese shareholder company:

    • holds at least 10% of the share capital; or
    • is entitled at its option to purchase the shares of the foreign company not already owned; or
is entitled to first refusal; or
    • is entitled to participate in the Board of Directors of the foreign company; or
    • has invested at least €1,164,000 and such investment is held for at least 183 days; or
    • the investment is held for its own business and not held as trading stock for the purpose of trade.

In addition, the foreign company in which the participating holding is held must satisfy any one of the following three conditions:

    • be a resident or incorporated in the EU;
    • be subject to foreign tax of at least 15%;
    • not derive more than 50% of its income from passive interest or royalties.

    Illustration of Malta's tax refund system

    The above tax refund mechanisms are illustrated below:

    Illustration of Malta's Tax Refund System Back to Articles
  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

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