Contributed By Camilleri Preziosi
Persons looking to establish a presence in Malta may choose to adopt one of various different types of available legal forms, depending on the purpose and aims of the stakeholders involved in the conduct of the business or activities in question.
The Companies Act (Chapter 386 of the laws of Malta) contemplates the possibility of setting up commercial partnerships, which can themselves take distinct forms, such as a partnership en nom collectif or general partnership, or a partnership en commandite or limited partnership.
A Maltese commercial partnership has its own separate legal personality distinct from its partners and is capable of owning and holding property under any title at law or be sued.
It is also possible to establish civil partnerships under the Maltese Civil Code (Cap. 16 of the laws of Malta) – these are typically adopted by professionals coming together to exercise their profession (including lawyers, accountants and auditors). These entities are fiscally transparent.
In terms of the Maltese Income Tax Act (Chapter 123 of the laws of Malta) (ITA), all partnerships may be taxed as separate legal entities.
The most common corporate form adopted for the purpose of conducting business in Malta is the limited liability company.
Maltese legislation also contemplates a framework for establishing trusts, foundations and associations. Trusts can either be taxed as separate legal entities or treated as transparent entities, depending on an election for either treatment to be made by the trustee. Foundations and associations are taxed as separate legal entities.
As noted in 1.1 Corporate Structures and Tax Treatment, very few Maltese corporate forms are treated as transparent entities from a Maltese tax perspective. None of these entities are commonly adopted in particular business sectors, other than the civil partnerships.
For the purposes of Maltese tax legislation, bodies of persons such as companies or partnerships – whether corporate or unincorporated – are deemed to be resident in Malta when the control and management thereof are exercised in Malta. Furthermore, companies incorporated in Malta, in terms of the Companies Act, are deemed to be resident in Malta by virtue of their incorporation.
In practice, the place where the control and management of a body of persons is carried out is usually deemed to be the place where the director(s) of such a company are resident and/or the place where the key decisions regarding the company’s strategy and policy are taken (among other factors).
Malta tax resident companies would be subject to Maltese tax on their worldwide income and capital gains, irrespective of where their income or gains arise, and irrespective of remittance of such income or gains to Malta. The chargeable income of a company resident in Malta is subject to tax at a flat rate of 35%. Certain tax refunds may be available, as further set out in 3.4 Sales of Shares by Individuals in Closely Held Corporations.
The tax paid by individuals in respect of income attributable to such individuals through transparent entities depends on their country of residence. Malta resident persons would be subject to the following progressive rates of income tax:
Accounts of a Maltese company are to be drawn up in accordance with the accounting standards set out in the International Financial Reporting Standards (IFRS). Before arriving at the taxable income for a certain year of assessment, a determination of profits made according to the IFRS principles may be subject to adjustments as imposed by the ITA, such as fiscally deductible expenses and elements of the profits deemed to be exempt from income tax by virtue of a specific exemption contemplated by the ITA.
A number of expenses that may reduce the profits of a Maltese company from an accounting perspective may not be allowable or deductible from a tax perspective, and would therefore need to be added back to the profit figure in order to calculate the chargeable income for Maltese tax purposes. This mainly applies in respect of provisions, unrealised expenses and foreign exchange differences, as well as gratuitous payments (such as donations).
On the other hand, Maltese tax law may allow for certain deductions to the taxable profits of a company that are not contemplated by the applicable accounting principles.
One of the more notable adjustments relevant from a tax perspective is that expenses that are incurred in the production of the income of the business are allowable deductions for income tax purposes. On the other hand, expenses that are not business-related, are of a capital nature, are recoverable from any insurance or are of a gratuitous nature are not allowed as deductible for income tax purposes. Expenses or amounts that have not actually been incurred, such as unrealised exchange differences or provisions, are not deductible for Maltese income tax purposes.
No special tax treatment, such as patent boxes, is currently in place for technology investments.
However, the Maltese legislator has introduced a number of incentives to support companies investing in research and development in different areas of science and technology. The aim of these incentives is to encourage the development of innovative, scientific products and solutions.
Malta Enterprise has developed various incentives for the promotion and expansion of industry and the development of innovative enterprises, including:
The ITA provides that trading losses that are incurred by a person or company in a certain year, in any trade, business, profession or vocation, can be set off against other trading activities or income streams and capital gains of that person or company of that year. Trading losses are deductible under the condition that such loss would have been assessable under the ITA if it had been a profit. A loss is computed in the same way as a profit and therefore can be deemed to be a negative profit for the purposes of deductibility.
Where a loss cannot be (wholly) set off against capital gains or income for the said year, it shall – to the extent to which it cannot be set off – be carried forward and set off against the income and capital gains for subsequent years. It is pertinent to note that a capital gain is brought to charge as part of the total chargeable income of a company. However, a capital loss cannot be set off against other income for the year of assessment but must be carried forward and set off against capital gains in respect of subsequent years of assessment until the full loss is absorbed.
Losses cannot be set off against types of company income that stand to be allocated to the Final Tax Account (FTA), such as interest income subject to 15% final withholding tax. Losses that are generated from sources of income that are to be allocated to the FTA are excluded from the scope of this provision and can therefore not be deducted.
The group relief provisions contemplated by the ITA also allow the surrendering of losses between companies that are considered to form part of the same group.
The ITA allows the deduction of interest from the income of a local company, if it can be shown to the Commissioner for Revenue that the interest was payable on capital employed in the production of income by that company. This initial test constitutes the most notable limitation imposed on local companies regarding the deductibility of interest expenses: the underlying loan must be used in the production of income that, under normal circumstances, should give rise to taxability under the ITA.
Legal Notice 110 of 2019 introduced the possibility of income tax consolidation in Malta. From year of assessment 2020, companies that form part of a group may elect to be treated as a single taxpayer if they satisfy certain conditions. Upon successful registration, a parent company is considered the "principal taxpayer" of the fiscal unit, thus becoming the sole chargeable fiscal unit for the entire group.
Transactions taking place between persons forming part of the "fiscal unit" (excluding those involving immovable property in Malta) fall wholly outside the scope of Maltese income tax.
The ITA also contemplates group relief provisions. Companies resident in Malta can form a company group for the purpose of the possibility to set off losses against the profits of other companies forming part of the same group. This way, the deductible trading losses incurred by group companies can be utilised in the most optimal way.
Two companies are deemed to be part of the same company group when such companies are both resident in Malta and are not deemed to be resident for tax purposes in any other jurisdiction. Furthermore, one company must be a 51% subsidiary of the other company, or both companies must be the 51% subsidiary of a third mother company, which also must be resident in Malta.
The 51% holding that the parent company is to keep in the subsidiary should entitle the parent company to more than 50% of the voting rights in the subsidiary, more than 50% of the profits available for distribution to the ordinary shareholders of the subsidiary and more than 50% of any assets of the subsidiary upon liquidation of the subsidiary.
Once the requirements to classify as a group of companies have been met, allowable losses from one company within the group can be surrendered to another company, which can set off the surrendered losses against its profits.
These group relief provisions contain certain anti-abuse provisions, which restrict the surrendering of losses made by companies whose activities are related to immovable property situated in Malta.
Capital gains that are subject to tax in Malta are listed specifically and exhaustively by the ITA. There are specific rules on how to calculate capital gains derived from the disposal of certain assets, contemplating certain adjustments. Once calculated, a capital gain is brought to charge as part of the chargeable income.
Companies that derive capital gains from a “participating holding” may qualify to apply the “participation exemption”, in which case any gains derived from such participating holding would be exempt from tax. Alternatively, the Maltese company may elect to be subject to tax and pay income tax on capital gains arising from a participating holding and then, upon a distribution of profits, the shareholder is entitled to claim a full refund of the tax paid by the company on such capital gains.
A holding of equity will qualify as a participating holding for the purposes of applying this exemption to capital gains in the following circumstances:
Malta entities may be subject to the following additional taxes when undertaking a transaction.
Malta charges stamp duty on documents and transfers on certain transactions, such as transfers of immovable property situated in Malta, certain marketable securities, insurance contracts and certain other transactions.
In addition, Malta imposes value-added tax at a standard rate of 18% on any supply of goods and services that is not exempt or subject to the reduced rate of either 5% or 7%.
Maltese entities may be subject to customs duties, which are levied on certain imports from non-EU countries. Excise duties are levied on particular classes of goods, such as alcohol and tobacco.
The majority of local business is conducted in corporate form. The most common legal form for businesses in Malta would be the private limited liability company.
The income tax rate applicable to companies and the majority of other corporate-form entities is 35%. The highest personal tax rate imposed on Maltese tax resident individuals is also 35%. Accordingly, there is no need for rules to prevent individual professionals from earning income at corporate rates.
In principle, companies established in Malta can accumulate earnings and profits for investment purposes, without any rules constricting or impacting such accumulation of profits. A capital tax or duty is not imposed through the ITA or any other form of fiscal legislation. In this context, no distinction is made between closely held companies or other types of companies.
Malta operates a full imputation system, which means that profits will first be taxed at the level of the company at the flat rate of 35%. However, when distributed to shareholders by way of dividend, the dividend carries an imputation credit of the tax paid by the company on the profits so distributed. The credit results in the elimination of Malta tax that is chargeable at shareholder level on dividends received. As stated earlier, the highest personal tax rate imposed in Malta is 35%. Where a shareholder is not subject to tax or qualifies for a lower rate of tax than the 35% already paid by the company, such shareholder will be entitled to a tax refund equivalent to the “excess percentage” of the tax paid by the company. This system avoids any double taxation of distributed corporate profits.
Shareholders in receipt of dividends distributed out of certain profits of a Maltese company that has the correct structures and compliance in place may be entitled to claim a refund of the tax paid in Malta on those profits. The rate of tax refund to which a shareholder will be entitled depends on a number of factors, including:
The possible refunds and the resulting effective tax rates are as follows:
Malta does not charge any type of withholding tax on inbound or outbound dividends.
The participation exemption detailed in 2.7 Capital Gains Taxation can also be applied to dividend income.
Malta tax resident persons are subject to income tax on capital gains derived from the sale of certain specific assets as contemplated by the ITA at the progressive rates detailed in 1.4 Tax Rates, which go up to 35%.
It may be pertinent to note that persons who are resident but not domiciled in Malta are not subject to tax on foreign source capital gains, regardless of whether or not they are remitted to Malta.
The receipt by individuals of dividends from a publicly traded company is treated from a tax perspective in the same manner as when such dividends are paid by closely held companies (ie, the full imputation system applies). The same applies to capital gains; however, it is pertinent to note that gains or profits derived from the transfer of shares listed, or in consequence of a listing, on the Malta stock exchange (not being securities in a collective scheme) are not subject to tax in Malta.
Subject to any applicable provisions in double tax treaties, distributions of dividends and payments of interest or royalties from a Maltese company to a resident or non-resident person are not subject to any withholding tax.
Malta has concluded bilateral double taxation treaties with more than 70 jurisdictions, in and outside the European Union. The majority of these double tax treaties are based on the OECD Model Tax Convention.
The local tax authorities in Malta do not specifically challenge the use by non-treaty country residents of corporate entities established in countries that have concluded a double tax treaty with Malta. Maltese tax law does not impose any specific rules or requirements on the entitlement of treaty benefits by non-treaty country residents, when such non-treaty country residents have established an entity in a country with which Malta has concluded a treaty.
However, company activities and transactions from and to Malta companies are subject to a corporate general anti-abuse rule contemplated by the ITA. The tax authorities have the power to disregard any structure or scheme that reduces the amount of tax payable, where such a scheme can be deemed to be of an artificial or fictitious nature.
It should be noted that Malta has approved of and adopted (and is in the process of further adopting) a number of the OECD's efforts in the areas of anti-tax avoidance initiatives and research and anti-abuse legislation. One of these initiatives is the future introduction of a principal purpose test to certain existing double tax treaties as a minimum-standard anti-abuse provision.
The principal purpose test is meant to assess whether one of the principal purposes of a certain transaction (the provision of a loan, for example) or a certain structure (the establishment of a subsidiary in a specific jurisdiction) is to obtain a treaty benefit granted by the tax treaties concluded between that jurisdiction and the other contracting state. Both the Maltese and foreign tax authorities might use the indicators set out in this test to challenge the use of entities established in the tax treaty partner of Malta when they believe that the use of such entities is mainly for the purpose of gaining access to certain treaty benefits.
At present, Maltese legislation does not impose any sophisticated transfer pricing regulations specifically aimed at inbound investments in local companies.
The Maltese tax authorities do not impose any specific limitations or restrictions on the use of related-party limited risk distribution. The general anti-abuse rule laid down in the ITA could potentially challenge the use of such arrangements where it is shown that such an arrangement is artificial or fictitious in nature and reduces the amount of tax payable upon a certain income.
At this point, Maltese tax law does not provide for any specific, sophisticated transfer pricing regulations or provisions. When appropriate, reference is made to the research and initiatives of the OECD in the areas of transfer pricing, such as the OECD Transfer Pricing Guidelines.
Maltese tax law does not yet provide specific transfer pricing regulations or provisions. However, local authorities are proactive in assisting taxpayers in solving cross-border issues through the MAP, and follow OECD guidelines in this regard.
At present, Maltese legislation does not impose any related transfer pricing rules.
A Maltese subsidiary (ie, a Maltese company) is subject to tax on a worldwide basis, subject to any credits, relief or refunds that may be applicable on a case-by-case basis. However, branches of non-local corporations would only be subject to tax in Malta on income that is attributable to the branch. The computation of the taxable income follows the same principles adopted in respect of local companies. It would be possible for the branch to deduct a proportion of those expenses that are associated with the head office management if these are related to the Maltese branch. By way of net effect, there should be minor distinction between the taxation of a branch and a locally registered subsidiary.
Any gain or profit derived by any person not resident in Malta on a transfer of shares or securities in a local company is exempt from tax in Malta if the beneficial owner of such gain or profit is a person not resident in Malta and is not owned and controlled by, directly or indirectly, nor acts on behalf of, an individual or individuals who are ordinarily resident and domiciled in Malta.
Maltese tax legislation does provide a type of change of control provision that is applicable to Maltese companies, namely the value shifting provisions. However, these are applicable in limited instances and should not come into effect in a disposal in a foreign indirect holding within the overseas group. Rather, they apply to certain changes to the share capital of certain Maltese companies.
For instance, when the market value of shares held by a person (the transferor) in a company is reduced as a result of a change in the issued share capital of the company or a change in voting rights attached to such shares and this difference in value passes onto other shares in or rights over the company held by another person (the transferee), the transferor shall be deemed to have made a taxable transfer of shares amounting to this value to the transferee. Any gains or profits shall be calculated for the transferor by taking into account the difference between the market value of the shares held immediately before and after said change.
These value shifting provisions apply primarily to Maltese companies that own directly or indirectly immovable property situated in Malta.
IFRS is used to determine the income of local companies from an accounting perspective. This determination is then subject to adjustments imposed by the ITA (deductions, exemptions, corrections for taxable period, etc).
The ITA sets out a list of expenses that may be deductible for tax purposes. All expenses and outgoings incurred by a person or company, including management and administrative expenses, could be deductible to the extent to which such outgoings and expenses were wholly and exclusively incurred in the production of income. This connection between expenses and taxable income is also a requirement for the expenses expressly listed in this provision.
The recently introduced tax-related anti-abuse measures based on the Anti-Tax Avoidance Directive (ATAD) include an interest limitation rule, which limits the deductibility of borrowing costs to a certain level. The ATAD caps the deductibility of interest expenses at 30% of a taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA). The limitation is not applicable where borrowing costs do not exceed EUR3 million, and will also not apply to financial undertakings.
Malta tax resident companies would be subject to Maltese tax on their worldwide income and capital gains, irrespective of where their income or gains arise, and irrespective of remittance of such income or gains to Malta. The chargeable income of a company resident in Malta is subject to tax at a flat rate of 35%. Certain tax refunds and exemptions may be available, as further set out in 2.7 Capital Gains Taxation and 3.4 Sales of Shares by Individuals in Closely Held Corporations.
In addition to the participation exemption (see 2.7 Capital Gains Taxation), the ITA entitles companies registered in Malta to claim an exemption in respect of income that is attributable to a permanent establishment situated outside Malta or gains derived from the transfer of such a permanent establishment. The income attributable to the permanent establishment is calculated as though the permanent establishment is an independent enterprise operating in similar conditions and at arm’s length. This exemption applies regardless of whether such a permanent establishment belongs exclusively or in part to the Maltese company.
Foreign income is, in principle, taxable at the level of local corporations. No limitations on the deductibility of expenses are therefore currently specifically contemplated.
The specific tax treatment of dividends sourced from foreign subsidiaries depends on whether these dividends fall within the scope of the participation exemption or otherwise. If the participation exemption is applicable, such dividends would be exempt from corporate income tax.
Additional conditions to the applicability of the participation exemption are applicable in the case of dividends. The participating holding must satisfy any one of the following additional three conditions:
Alternatively, it must satisfy both of the following two conditions:
Dividends that derive from an equity holding that does not qualify as a participating holding in terms of the participation exemption will be taxable in Malta in the hands of the Maltese corporate shareholder, under the corporate income tax rate of 35%. Tax refunds may be claimed by the shareholder of the Maltese company in certain instances, as well as relief in respect of any double taxation, when these dividends have already been subject to a foreign tax or withholding tax in their country of origin.
In principle, any gains on the transfer of intellectual property or profits from royalties derived from the licensing of intellectual property would be subject to tax at the level of the local company. However, certain deductions may be applicable.
It may be useful to note in this context that Maltese tax law allows as a deduction against royalty income any capital expenditure on the acquisition of intellectual property or intellectual property rights incurred by a company (such as fair market value of the intellectual property or intellectual property rights) when it is proved to the satisfaction of the Commissioner for Revenue that such assets are used or employed in the production of the income of such company. Such deduction will need to be spread equally over a number of years (no less than three years).
A number of tax-related anti-abuse measures based on the ATAD have recently been introduced, including a CFC rule that includes in the tax base of a Maltese-based company diverse types of income not distributed by a foreign-based subsidiary or permanent establishment of this company, bringing these profits to tax in Malta.
No specific regulations or guidance in Maltese legislation apply to the substance of non-local affiliates at this time.
Depending on the circumstances, Maltese companies can apply the participation exemption in respect of gains on the sale of shares in foreign companies or affiliates. If the relative conditions are not satisfied, such gains would form part of the taxable income of the company that is calculable and taxable under the general rules.
The ITA sets out a general anti-avoidance rule, which is applicable to any scheme that reduces the amount of tax payable and is deemed by the Commissioner for Revenue to be artificial or fictitious in nature. In such a case, the Commissioner has the competence to assess the tax payable by that person as if the scheme in question were not present.
More recently, the following tax-related anti-abuse measures based on the ATAD have been introduced:
No regular routine audit cycle is specifically in place. The Commissioner for Revenue generally has the power to initiate a tax audit in respect of any Maltese tax resident person at any time.
No legislation or measures have yet been introduced into the Maltese tax framework specifically as a result of BEPS.
Malta has not yet formally adopted any BEPS recommendations, but as an EU Member State has adopted a number of EU Directives, some of which do appear to have been brought about as a reaction to the BEPS initiative. These include:
The ratification of the Multilateral Instrument (see 9.3 Profile of International Tax) has further shown Malta’s commitment to supporting developments in the areas of BEPS and anti-tax avoidance initiatives.
International tax does have a relatively high public profile in Malta, given recent international pressures. Malta presents a stable business climate for companies forming part of international groups to establish a subsidiary or a company branch.
While fostering competitive tax policies, the Maltese authorities have continued to closely monitor the developments of the OECD and BEPS projects over recent years. A relatively important BEPS-related development has been the ongoing ratification process of the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, commonly referred to as the Multilateral Instrument (MLI). Malta was an early adopter of the MLI, in mid-2017.
At the time of signing the MLI, Malta defined 71 tax treaties as agreements it wishes to be covered by the MLI and opted to apply the following:
ATAD provisions have also now been transposed into Maltese law.
On a number of occasions, the Maltese Government and authorities haves expressed support for certain BEPS principles as well as the ATAD directives, and confirmed Malta’s commitment to countering aggressive tax planning structures. Mechanisms and compliance processes aimed at identifying and countering elements and arrangements indicating harmful tax practices and artificial structures are already in place and are being implemented in Malta. Malta has introduced such measures and safeguards without compromising the fundamental principles on which the Maltese tax system is built. The prospective transposition of the ATAD directives and other multinational initiatives resulting from the BEPS Project should see Malta continuing in this direction.
To date, Malta lacks sophisticated transfer pricing rules. However, a number of tax-related anti-abuse measures based on the ATAD have recently been introduced, as described in 7.1 Overarching Anti-avoidance Provisions.
Malta is fully committed to counteracting abusive tax practices involving hybrid mismatches. For instance, following recommendations from the Code of Conduct Group in 2010, the Maltese tax authorities took action and published guidelines targeting abusive tax practices from hybrid financial instruments giving rise to double non-taxation. The Commissioner for Revenue has issued a guideline that clarifies the position vis-à-vis profit participating loans, which states that interest thereunder is chargeable to tax under the provisions of the Income Tax Act. Interest received from sources situated outside Malta is taxable in Malta and does not benefit from an exemption related to income from participating holdings under the Income Tax Act or under any other law. The guideline clarified that income from a loan – including a loan that has characteristics of both debt and equity – shall be considered to be interest and taxable under the Income Tax Act and is not considered to be income from share capital or from an equity holding for tax purposes that could result in the relative income being exempt from tax in Malta.
Companies registered in Malta are considered to be resident and domiciled in Malta, so are subject to tax on their worldwide income minus permitted deductions in the corporate income tax rate, which currently stands at 35%.
One of the recently introduced tax-related anti-abuse measures based on the ATAD is an interest limitation rule that limits the deductibility of borrowing costs to a certain level. The ATAD caps the deductibility of interest expenses at 30% of a taxpayer’s earnings before EBITDA. The limitation is not applicable where borrowing costs do not exceed EUR3 million, and will also not apply to financial undertakings.
Not enough time has passed since the introduction of these rules to properly assess the consequences of these rules on investment and financial services-oriented countries.
The consequences of the new CFC rules on investment and financial services-oriented countries must be carefully monitored at this point. A sweeper CFC rule may not quite be as sophisticated and well spelt out as would be appropriate for the far-reaching consequences it might have on the respective tax systems of the affected jurisdictions.
It does not appear that the additional anti-abuse legislation implemented in this area, such as a double taxation convention limitation, has had any significant effect on the current level of inbound and outbound investments in Malta.
The current developments in the area of transfer pricing are not expected to radically change Malta’s tax regime. Profits from intellectual property are generally not a source of controversy in the Maltese tax jurisdiction (other than the old patent box regime, which is currently in the process of being reviewed).
Malta supports proposals in the areas of country-by-country reporting and the like, and what they aim to address. The exchange of information between tax authorities and tax subjects can help the Maltese tax authorities to identify and combat abusive structures, which may happen to involve Malta more effectively.
Malta has already adopted the country-by-country reporting regulations and applies these regulations to companies established within the Maltese jurisdiction. A parent company of a multinational entity established in Malta is obliged to file an annual report with the Commissioner for Revenue when the consolidated turnover of the group exceeds EUR750 million worldwide. Such a yearly report is compliant with the requirements of the OECD and covers all the jurisdictions in which the parent company and each subsidiary conduct business activities.
Changes to the Maltese tax rules in this regard are still in the process of being discussed, fuelled in particular by the OECD and the European Commission’s proposals for fairer taxation of the digital economy.
The implementation of any of the proposed BEPS actions should be carefully assessed prior to the introduction of any new measures or laws. Once such measure or laws have been introduced, it might not be possible to undo their relative effects and consequences, and trying to do so may result in great sunk costs for society and businesses.
Malta has not yet introduced provisions dealing with the taxation of offshore intellectual property deployed within its territory.