Maltese Taxation

The Participation Exemption: What is it?

Maltese income tax exempts from tax income / capital gains derived from a participating holding and from the disposal of such holding.
For a company to hold a participating holding it must fall within the remits of the definition of “equity holding” defined as:
“a holding of the share capital in a company which is not a property company, when the shareholding entitles the shareholder to at least any two of the following rights (hereinafter referred to as the equity holding rights:
1. A right to vote
2. A right to profits available for distribution
3. A right to assets available for distribution on a winding up

The definition of “equity” excludes shares in a property company hence any company owning immovable property in Malta or any rights over such property cannot benefit from such an exemption.
Once an equity holding is established a company can qualify as a participating holding if it meets any one of the following 6 criteria:

1. Holds 5% or more of the equity shares of the other company
2. Is entitled at its option to call for and acquire the entire balance if the equity shares not held by that equity shareholder company to the extent permissible by law of the country in which the equity shares are held.
3. Is entitled to first refusal in the event of the proposed disposal redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company
4. Is entitled to sit on the board or appoint a person to sit on the board of that company as director
5. Holds an investment representing a total value of Euro 1,164,000 in a company and that holding in the company is held for an uninterrupted period of not less than 183 days
6. Holds equity shares in a company for the furtherance of its own business and the holding is not held as trading stock for the purpose of trade.
Once the above is established a company can apply for the participation exemption if it so wishes, capital gains are exempt from tax without further formalities if the company qualifies for the participation exemption; however in the case of dividends further anti abuse provisions need to be satisfied in order for such income to be tax exempted:

1. be resident or incorporated in an EU country or territory; OR
2. be subject to any foreign tax of at least 15%; OR
3. not have more than 50% of its income derived from passive interest or royalties;Where none of the above 3 conditions are satisfied a company may still benefit from the participation exemption on dividend income if it satisfies both the following conditions:

1. the equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment and for this purpose the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment; AND

2. The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

Rental Income:

As from year of assessment 2017 basis year 2016 the restriction of claiming the beneficial tax rate of 15% on commercial property has been removed.
Therefore as from 01st January 2016 an individual who is either a Maltese resident as well as a non resident in Malta, can choose to be taxed at the rate of 15% on rental income derived from both residential and commercial property.
However certain restrictions are in place which disallow the election of the 15% tax treatment in cases where rental income is derived from related parties.
Although the 15% tax treatment may seem to be more favorable than having rental income taxed at the progressive tax rates, this may not always be the case.
Computing the tax charge on the progressive rates may sometimes lead to a lower tax charge being paid by an individual since this method allows for certain deductions that are not allowable under the 15% tax treatment.
Therefore it is sometimes easier to seek professional advice in order to adopt the tax treatment that is most suited to the tax payer and which will minimise his tax liability.

Tax refunds available to non resident shareholders:

Maltese income tax provides various tax incentives to non resident individuals who have a Maltese registered company in Malta.

In a nutshell profits derived from trading activities from a Maltese company owned by non resident individuals will be taxable at the rate of 35% at the level of the company.
However non resident shareholders can claim back up to 100% of the tax payment suffered by the company on dividends distributed by the same company to its non resident shareholders as follows:
Passive interest or royalties – a 5/7ths refund of the Malta tax suffered will apply where the profits out of which the dividend is distributed consist of passive interest or royalties;
Trading profits – a 6/7ths refund of the Malta tax suffered will apply where the profits out of which the dividend is distributed consist of the company’s trading profits;
FIA profits subject to a claim of double taxation relief – a 2/3rd refund of the Malta tax suffered will apply where profits out of which the dividend is distributed has been subject to double taxation relief and allocated to the FIA;
Participating Holdings – a full exemption on income (dividends) or gains derived from an investment which qualifies as a participating holding in terms of the Income Tax Act.
An income tax refund falls due to the shareholder when the company’s audited financial statements and a complete income tax return are submitted to the tax authorities; the tax liability is paid in full; and an application for refund on a prescribed form together with the dividend certificate is submitted by the shareholder or his/her representative.

Exemptions:

Maltese income tax lists various tax exemptions which are applicable both to residents and non resident individuals / Companies:.

Article 12 of the Income tax act provides a list of such exemptions some of which include:

Any interest, discount, premium or royalties accruing to or derived by any person not resident in Malta. This exemption is not applicable if the income is derived from an establishment situated in Malta and that is connected to the non resident individual. Furthermore such person must not be owned and controlled by, directly or indirectly , nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.
Any gains or profits accruing to or derived by any person not resident in Malta on a transfer of any units in a collective investment scheme, of any units and such like instruments relating to linked long term business of insurance, of any interest in a partnership which is not a property partnership and of any shares or securities in a company which is not a property company.
Any income or gains derived by a company registered in Malta which are attributable to a permanent establishment (including a branch) situated outside Malta, or to the transfer of such permanent establishment, whetehr such permanent establishment belongs exclusively or in part to the particular company.
Royalties, advances and similar income derived from:

Patents in respect of inventions
Copyright
Trademarks.

Direct Taxation

Schemes:

Global residence programme: The GRP rules are applicable to third country nationals who seek to take up residence in Malta.

Individuals who are granted GRP status are taxed at the rate of 15% on receipt of foreign source income in Malta and also have the possibility of claiming double tax relief on such income.

To apply under the GRP rules an individual must primarily be a "third country national" being a person who is not an EU, EEA or Swiss national. Such person must also not be a long term resident of Malta.

Certain criteria need to be satisfied in order for an individual to apply under this scheme and a minimum tax liability is to be paid by not later than 30th April of the year in which the income is received in Malta.

Residence programme: The RP programme enjoys similar benefits to the GRP programme and is applicable to Eu / EEA and Swiss nationals.

Malta retirement programme: Applicants under the MRP rules enjoy the benefit of being taxed at the rate of 15% on all income arising outside of Malta which is received in Malta by the beneficiary or dependent with the possibility of claiming double tax relief on such income. To be eligible under this rule and individual must:

Be primarily a pensioner.
Not be domiciled in Malta and must not have the intention of establishing his/her domicile in Malta within 5 years from the date of the application for his special tax status.
Be an Eu / EEA / Swiss national.
Be in receipt of pension income, supported by documentary evidence.

Additional criteria need to be satisfied for an individual to be eligible under this scheme some of which include:

All pension income must be received in Malta and constitutes at least 75% of the beneficiary's chargeable income.
Hold a qualifying property in Malta or rents a qualifying property.

Highly qualified persons: Refers to qualifying expatriates employed in the financial services, i-gaming industry, or aviation industries. These individuals may opt to be taxed at the rate of 15% for a maximum consecutive period of 5 years (Eu/EAA/Swiss nationals) or four years (Non-EU/non-EAA/non Swiss nationals) on employment income derived under a qualifying contract, subject to satisfying certain criteria.

Income from employment exercised abroad: Article 56 (17) ITA provides for a favorable tax treatment of employment income exercised outside Malta. The said regime consists in the right to pay tax on income arising from employment exercised abroad at the rate of 15%. The scheme is available to any individual. Specific conditions apply for eligibility under the scheme.

Payments to non-resident entertainers: Article 56(18A) of the ITA provides for special rules applicable in the case of non-resident entertainers deriving income from the provision of entertainment activities in Malta.Where the entertainment activities are carried out in Malta do not exceed 15 days the income received is chargeable to tax at the special rate of 10%.

In case the entertainment activities exceed 15 days chargeable income will be taxed in terms of Article 56(1)(c) of the ITA