Malta currently operates a full imputation system of taxation, which grants full relief from corporate tax on any profits distributed as dividends by a company. The tax paid by the company is available as a credit to its shareholders when distributions are made to them. As a result, shareholders are not subject to any further tax upon dividends, since the highest rate of taxation for individuals is equal to the corporate tax rate in Malta, which currently stands at 35%. Malta’s full imputation system of taxation and the income tax refund provisions contained in the legislation make Maltese companies efficient vehicles for non-resident shareholders. Supporting the tax regime are many attractive and wholly compatible double tax treaties, as well as other methods for relieving double taxation on cross-border transactions.
Dividends are taxed on the gross amount of the dividend at personal rates. On the other hand, the shareholder is credited with the tax paid by the company on his or her share of the dividend. There is also a final withholding tax on certain investment income, such as interest on local bank accounts and Government securities paid to Maltese individuals and companies. Under the final withholding tax system, the payer deducts tax at the rate of 15%, which is remitted to the Commissioner of Inland Revenue without disclosing the recipient’s identity.
Where tax has been deducted at source, Maltese taxpayers have no further tax liability on the income received and individuals are not required to disclose such sums on their tax returns unless they wish to do so, in which case they are taxed at normal rates with a credit for the tax deducted at source. All Maltese taxpayers, however, have the right to elect to have interest paid to them gross, in which case they must disclose such income on their tax return and pay income tax at the normal rates applicable.
Under the Income Tax Act (ITA), any person (whether a legal person or an individual) who is both domiciled and ordinarily resident in Malta is subject to the worldwide basis of taxation. A company that is incorporated in Malta is considered to be both ordinarily resident and domiciled in Malta. A company incorporated outside Malta is considered resident in Malta only if the management and control of such company is exercised in Malta. Companies are required to allocate their distributable profits for each financial period, depending on its source and nature, to one of five tax accounts:
- the Foreign Income Account (FIA);
- the Maltese Taxed Account (MTA);
- the Final Tax Account (FTA);
- the Immovable Property Account (IPA);
- the Untaxed Account (UA).
The taxation of dividends after profits have been taxed at a corporate level amounts to economic double taxation. To avoid this, the Income Tax Act applies a full imputation system to the taxation of most dividends. The imputation system applies when profits are distributed from the IPA, the FIA, and the MTA. The tax paid by the company is available as a credit to the shareholders when distributions are made to them. As a result, shareholders are not subject to any further tax on dividends, since the highest rate of tax for individuals is equal to the corporate tax rate in Malta, as shown below.
|Taxation at the level of the Maltese company €|
|Company Income Tax (CIT) 35%||(35)|
|Income allocated to Maltese Taxed Account or Foreign Income Account||65|
|Taxation at the level of the Maltese shareholder €|
|Net dividend received by shareholder||65|
|Tax at source (CIT)||35|
|Gross dividend received by shareholder||100|
|Tax on dividend received||35|
|Full imputation credit (TAS)||(35)|
|Tax suffered on dividends||0|
In addition to a full imputation system, Malta also operates an attractive refundable tax credit mechanism. Under this mechanism, shareholders of a company registered in Malta are entitled to claim tax refunds upon income distributed from the MTA and FIA.
Author: EMILIO MENEGHELLA