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:
- Foreign Income Account (FIA);
- Maltese Taxed Account (MTA);
- Final Tax Account (FTA);
- Immovable Property Account (IPA); and
- Untaxed Account (UA).
Malta 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.
The six-sevenths tax refund
A person in receipt of a dividend paid to him or her by a company registered in Malta from profits allocated to its Foreign Income Account (FIA) or Maltese Taxed Account (MTA) may claim a refund of six-sevenths of the Advance Company Income Tax (ACIT) paid by the distributing company.
This is subject to two conditions:
- The company is not entitled to claim double tax relief on income allocated to the FIA; and
- The income does not qualify as passive interest or royalties.
The five-sevenths tax refund
Persons receiving distributions of profits derived from passive interest or royalties are entitled to claim a refund of five-sevenths of the Advance Company Income Tax (ACIT). This refund also applies to dividends received from a participating holding in a company that does not satisfy the relevant anti-abuse provisions. The five-sevenths refund does not apply when a dividend is paid out of profits allocated to the FIA if the company has claimed relief for double taxation.
Full refund/Outright exemption (Participation Exemption)
When profits are distributed from the foreign account of a so-called participating holding or from the disposition of such a holding, a claim may be made for a refund of all the Maltese tax paid in respect of those profits. A participating holding is a holding that arises where:
- a company directly holds at least 10% of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 10% of any two of the following:
- right to vote;
- profits available for distribution; and
- assets available for distribution on a winding up; or
- a company is an equity shareholder in a company and the equity shareholder company is entitled, at its option, to call for, and acquire, the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or
- a company is an equity shareholder in a company and the equity shareholder company is entitled to first refusal in the event of the proposed disposition, redemption, or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
- a company is an equity shareholder in a company 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
- a company is an equity shareholder that holds an investment representing a total value, as on the date or dates on which it was acquired, of at least EUR 1,164,000 (or the equivalent sum in a foreign currency) in the company, and that holding in the company is held for an uninterrupted period of not less than 183 days; or
- a company is an equity shareholder in a company, where the holding of such shares is for the furtherance of its own business, and the holding is not held as trading stock for the purpose of a trade.
Legislative amendments have extended the application of the participation exemption to domestic holdings, thus allowing an exemption on gains or profits derived from the transfer of a participating holding in a company resident in Malta. Dividends from companies resident in Malta (whether participating holdings or otherwise) are not subject to any further taxation in Malta as a result of the full imputation system.
When profits are distributed from the foreign account of a participating holding, or from the
disposition of such a holding, a claim may be made for a refund of all the Maltese tax paid in respect of those profits.
The application of the participation exemption to dividends from a participating holding is linked to an anti-abuse provision, such that the exemption applies provided that the persons claiming the participation exemption satisfy any one of the following conditions:
- they are resident or incorporated in a country or territory forming part of the EU;
- they are subject to any foreign tax of at least 15%; or
- not more than 50% of their income is derived from passive interest or royalties.
Where none of these conditions are satisfied, the participation exemption can still apply if both of the following two conditions are fulfilled:
- the equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment, that is, a holding of shares by a company registered in Malta in a company or partnership not resident in Malta and which derives more than 50% of its income from portfolio investments; and
- the body of persons not resident in Malta, or its passive interest and royalties, have been subject to any foreign tax of at least 5%.
The participation exemption regime, first introduced into Malta’s tax laws in 2007, has been extended to permanent establishments situated outside Malta. Thus, subject to certain conditions, any income or gains derived by a company registered in Malta that are attributable to a permanent establishment situated outside Malta or that are attributable to the transfer of such permanent establishment to Malta, are exempt from Malta income tax effective from the year of assessment 2013.
In addition, as a consequence of the change in the definition of “participating holding”, the participation exemption regime now also applies to the transfer of an interest in a partnership en commandite, the capital of which is not divided into shares and constituted under the Companies Act (other than a “property partnership”).
A non-resident person in receipt of a dividend paid to him or her from profits allocated to the Foreign Income Account (FIA) or any profits distributed by an international trading company may claim a refund of two-thirds of the Maltese tax paid by the company in respect of those profits distributed to him or her by way of such dividend.
Author: EMILIO MENEGHELLA