THE MALTESE COMPANY

All companies resident in Malta are subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system. 

 

Full imputation Tax system 

 

Malta adopts a full imputation tax system wherein tax paid by a company in Malta is, on the distribution of dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company. 

 

Applicability 

 

The system of tax refunds applies to:  

• Companies incorporated in Malta; 

• Companies carrying out activities in Malta; 

• Companies operating through branches in Malta. 

 

General Rules relating to Tax Refunds  

 

The tax refund is:  

 

• not itself taxable; 

• to be paid by the Commissioner of Inland Revenue on production of appropriate support documentation (e.g. dividend warrant); 

• to be paid not later than fourteen days after the end of the month in which it becomes due; 

• to be paid in the same currency in which the relevant profits were charged to tax (which is also the share capital and accounting reporting currency). 

 

Refunds 

 

The applicable refunds available on the distribution of dividends to shareholders are as follows : 

 

6/7 refund  

 

The 6/7 refund is the normal refund applicable to companies in respect of trading activities. It usually applies to(amongst others) Group Finance Structures; Captive Insurers Companies; Gaming Companies; and International buying and selling Companies. Foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid – this in effect means that there may be situations where there will be no Maltese tax leakage.  

 

5/7 refund  

 

This refund applies to passive interest or royalties that are not derived, directly or indirectly from a trade or business and where any foreign tax suffered thereon is less than 5%. This refund also applies where Maltese companies holding shares in a non-resident company do not qualify for a ‘participating holding’. Effectively the ultimate tax leakage can be as low as 10%. 

 

2/3 refund  

 

This refund applies to activities being conducted by banks, financial institutions on business outside of Malta or most foreign passive institutions on which double taxation relief is claimed. The law does not allow the possibility of claiming 6/7 or 5/7 refunds on most foreign income (mostly passive) on which double taxation is claimed – in such situation the 2/3 refund applies. Foreign tax paid can be taken into account for purposes of the refund, subject to maximum refund not exceeding Malta tax paid – this in effect means that even with this kind of refund there may be in effect situations where there will be no Maltese tax leakage.  

 

100% refund/ Participation Exemption  

 

This refund or participation exemption is applicable when the profits out of which the relevant dividend is distributed are derived (dividends and/or capital gains) by the Maltese company from a participating holding.  

 

Participating Holdings 

 

Shares held by a Maltese company in a non-resident company may qualify as a “participating holding”. This would result in a tax-efficient regime for the Maltese company, in that: 

 

• The shareholders of the Maltese company would be able to claim a full refund on any tax paid upon any income or gains derived by the Maltese company from a participating holding or from the disposal of such holding and distributed to such shareholders. 

 

• Alternatively, a Maltese company which qualifies for a participating holding can also claim a participation exemption, thus avoiding the need to pay any tax whatsoever on any income or gains derived by it from the participating holding or from the disposal of such holding. 

 

The definition of participating holding as included under Article 2 of the Income Tax Act provides six alternative situations in which a holding would be treated as a Participating Holding, the most common being where a company holds directly at least ten (10) per cent of the equity shares of a company not resident in Malta whose capital is wholly or partly divided into shares, or 

1.  

where a company is an equity shareholder in a company not resident in Malta and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or 

where a company is an equity shareholder which invests a minimum sum of one million, one hundred and sixty four thousand euro (1,164,000) (or the equivalent sum in a foreign currency) in a company not resident in Malta and that investment in the company not resident in Malta is held for an uninterrupted period of not less than 183 days; or 

 

 

Apart from satisfying the conditions of the Participating Holding, in the case of dividend income only, a participating holding acquired on or after 1 January 2007, must satisfy any of the following conditions: 

 

I. it is resident or incorporated in the EU; or 

 

II. it is subject to foreign tax of a minimum of fifteen (15) percent; or 

 

III. it does not derive more than fifty (50) percent of its income from passive interest and royalties.  

 

Alternatively, if none of the abovementioned three conditions are satisfied, the satisfaction of both two ancillary conditions would need to be satisfied. These two additional criteria are that- 

 

I. the shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income from portfolio investment. In this respect, a ‘portfolio investment’ is an investment in securities held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company; and 

 

II. the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%. 

 

The above conditions will apply equally to a holding in a body of persons constituted, incorporated or registered outside of Malta, which is not resident in Malta, and is of a nature similar to a partnership en commandite, the capital of which is not divided into shares constituted under the Companies Act.