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 being sued.

It is also possible to establish civil partnerships under the Maltese Civil Code (Chapter 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 the election 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.

• Single rates:
1. up to EUR9,100: 0% (subtract nothing);
2. EUR9,101 to EUR14,500: 15% (subtract EUR1,365);
3. EUR14,501 to EUR19,500: 25% (subtract EUR2,815);
4. EUR19,501 to EUR60,000: 25% (subtract EUR2,725); and
5. EUR60,001 and over: 35% (subtract EUR8,725).
• Married rates:
1. up to EUR12,700: 0% (subtract nothing);
2. EUR12,701 to EUR21,200: 15% (subtract EUR1,905);
3. EUR21,201 to EUR28,700: 25% (subtract EUR4,025);
4. EUR28,701 to EUR60,000: 25% (subtract EUR3,905); and
5. EUR60,001 and over: 35% (subtract EUR9,905).
• Parent rates:
1. up to EUR10,500: 0% (subtract nothing);
2. EUR10,501 to EUR15,800: 15% (subtract EUR1,575);
3. EUR15,801 to EUR21,200: 25% (subtract EUR3,155);
4. EUR21,201 to EUR60,000: 25% (subtract EUR3,050); and
5. EUR60,001 and over: 35% (subtract EUR9,050).

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).

Conversely, 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, in principle, not allowed as deductible for income tax purposes. That being said, the ITA does present a number of specific instances where it explicitly departs from the general principle that only expenditure of a revenue nature is allowable as a deduction against chargeable income, as is evident from the permissible deductions for certain capital allowances in terms of wear and tear of specific categories of fixed assets. Expenses or amounts that have not actually been incurred, such as unrealised exchange differences or provisions, are not deductible for Maltese income tax purposes.

The Maltese legislature has introduced certain 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.

The following regulations are of particular note.

• The Research and Development Activities Regulations, 2024, assist industrial research and experimental development activities (R&D) addressing specific scientific or technological uncertainties, leading to the development of innovative products and solutions. The support measure is provided in the form of a tax credit or a cash grant or a combination thereof, and cannot exceed 80% of the eligible costs.
• The Patent Box Deduction Rules, 2019, establish a fiscal regime for income arising from patents, similar intellectual property rights and copyrighted software. The Rules additionally provide that small companies may utilise the patent box rules on income from any intellectual property based on an invention that could be patented. A taxpayer qualifying for the patent box deduction will be entitled to deduct a percentage of its income from taxable income. This deduction will be adjusted depending on the percentage resulting from dividing the qualifying IP expenditure by the total expenditure related to the particular IP.
• The Exploring Research Grant Regulations, 2024, assist companies carrying out feasibility studies to determine technical and commercial challenges and activities that that will enable businesses to make informed decisions on the development of intended research and development projects; the Regulations allow for a cash grant to support the carrying out of a feasibility study, of up to EUR100,000.
• The Start-Up Finance (2024), Regulations, 2024, which afford financial aid in the form of a repayable advance, to start-ups or similar organisations providing services or products or utilising processes that are new or substantially improved compared to complementary products on the market, for instance in relation to certain eligible activities including software development and activities relating to health, biotechnology, pharmaceuticals and life sciences.
• The Invest (2024) Regulations, 2024, which support small and medium enterprises with a cash grant of up to EUR250,000, in carrying out projects leading to product, process and organisational innovation through collaboration with research and knowledge-dissemination organisations or through innovation advisory services through funding for the secondment of highly qualified personnel, and access to innovation advisory and support services.

Malta Enterprise has developed various incentives for the promotion and expansion of industry and the development of innovative enterprises, including:

• investment aid tax credits;
• financial assistance to start-ups;
• cash grants and/or tax credits available to companies requiring industrial space to carry out their business activities; and
• support to small and medium-sized enterprises and large undertakings to provide training to their workforce.

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 should be noted 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, and which are exclusively resident in Malta.

The ITA allows the deduction of interest from the income of a local company, if it can be shown to the Commissioner for Tax and Customs 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.

The Anti-Tax Avoidance Directive (ATAD) has also introduced interest limitation rules that limit the deductibility of borrowing costs detailed in 7.1 Overarching Anti-avoidance Provisions.

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 used 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 must retain 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.

The ITA imposes tax on capital gains in respect of transfers of those assets 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 the transfer of 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.

• When the holding constitutes a direct holding of 5% or more of the equity shares or partnership capital; this participating holding entitles the company holding the shares to two out of the following three equity rights:
1. voting rights;
2. rights to profits available for distribution; or
3. rights to assets available for distribution in the case of a winding up of the company in which the shares are held.
• When 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.
• When 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 disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company.
• When the amount invested in the holding is at least EUR 1,164,000 (or the equivalent sum in a foreign currency) and is held for an uninterrupted period of at least 183 days.
• When the shareholder in question is entitled to sit or be represented on the board of directors of the company in which the equity holding is held.
• When the equity shares are held for the furtherance of the business and the holding is not held as trading stock for the purpose of a trade.

Malta entities may be subject to the following additional taxes when undertaking a transaction.

Malta charges a tax, commonly known as “stamp duty” on certain legal documents, such as policies of insurance and notarial deeds, and also on transfers on certain transactions (including deemed transfers), such as transfers of immovable property situated in Malta, certain marketable securities 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%, 7% or 12%.

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.

Dividends

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, which 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 nature of the underlying profits (allocated to one of the five tax accounts – namely the Maltese taxed account, the foreign income account, the FTA, the immovable property account and the untaxed account) out of which dividends will be distributed by the Maltese company, including whether the income is of an active or passive nature; and
• the application of any double taxation relief by the Malta company on such profits.

The possible refunds and the resulting effective tax rates are as follows.

• 6/7 refund – in most cases, the tax refund entitlement of a registered shareholder would be of 6/7ths of the Malta tax suffered on the profits out of which the dividend is distributed, particularly in the case of profits derived from trading activities. The effective tax rate would equate to 5% in such cases.
• 5/7 refund – this refund would apply where the profit out of which a dividend is distributed consists of passive interest or royalties. It also applies to Maltese companies holding shares in an underlying company that does not qualify as a “participating holding” and is therefore not eligible for a participation exemption. The 5/7 refund results in an ultimate tax leakage of 10%.
• 2/3 refund – this applies to dividends distributed out of profits in respect of which the Malta distributing company would have claimed double tax relief (including double tax treaty relief). The effective tax rate in this case would be between 2.49% and 6.25%.
• 100% refund – this applies where the company is entitled to claim the participation exemption but chooses not to. This is an exemption in respect of income derived from a participating holding or gains that it derives from the transfer of such a holding, as long as certain conditions are met (as detailed in 2.7 Capital Gains Taxation).

As a general rule, Malta does not charge any type of withholding tax on inbound or outbound dividends, except where a distribution of a dividend is made from the “untaxed account” of a Maltese company to certain persons, including any Maltese resident individuals and any non-resident persons who are owned and controlled by, or act on behalf of, an individual ordinarily resident and domiciled in Malta. As the payor of the dividend, the Maltese company would need to withhold tax at the rate of 15% upon any such dividend distribution.

The participation exemption detailed in 2.7 Capital Gains Taxation can also be applied to dividend income; however, this is subject to the satisfaction of certain anti-abuse provisions as detailed in 6.3 Taxation on Dividends From Foreign Subsidiaries.

Capital Gains

Malta tax resident persons are subject to income tax on capital gains derived from the transfer 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 or domiciled but not resident 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 securities listed, or in consequence of a listing, on a stock exchange recognised by the Commissioner for Tax and Customs (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 generally subject to any withholding tax. However, a 15% withholding tax may apply, where profits are distributed to a resident person of the payer company’s “untaxed account” and on certain investment income, as detailed in 3.4 Dividends.

Moreover, payments of any income chargeable to tax under the provisions of the ITA, to non-residents or to persons resident in Malta on behalf of such non-resident persons, shall be subject to a withholding tax at the rate of 25%.

Malta has concluded bilateral double taxation treaties with more than 70 jurisdictions, both within and outside the European Union. The majority of these double tax treaties are based on the OECD Model Tax Convention and have also been modified as a result of the implementation of the Multilateral Instrument in Malta.

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.

Principal Purpose Test

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 has been the 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, for example) 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.

Following updates to the ITA in 2021 authorising the Minister for Finance to make rules in connection with transfer pricing in general, Malta introduced formal transfer pricing rules in November 2022 through Legal Notice 284 of 2022. The rules, which apply for basis years commencing on or after 1 January 2023, are largely based on the draft rules that were published alongside the public consultation carried out by the Commissioner for Tax and Customs in December 2021. The rules apply in relation to any arrangement entered into on or after 1 January 2024, and for those arrangements entered into before that date, application of the rules is limited to those arrangements that are materially altered on or after that date. The transfer pricing regulations have been revised in 2024 to clarify that the said rules shall apply, in the case of arrangements entered into before 1 January 2024 and which were not materially altered on or after that date, for basis years commencing on or after 1 January 2027.

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.

Malta has now published formal transfer pricing rules (see 4.4 Transfer Pricing Issues) together with accompanying guidelines on the application of such rules. As is set out in the guidelines, the OECD Transfer Pricing Guidelines constitute an important source of reference in the application of the rules.

Parties involved in a transfer pricing dispute may have recourse to the EU Arbitration Convention, on the elimination of double taxation in connection with the adjustments of profits of associated enterprises, to which Malta is a party. Another potential avenue for dispute resolution has been created through the European Union Tax Dispute Resolution Mechanisms Directive Implementation Regulations, which provide for mechanisms to resolve disputes between Malta and other EU member states that may arise from conflicting interpretations of agreements and conventions that provide for the elimination of double taxation of income.

Local authorities are also proactive in assisting taxpayers in solving cross-border issues through the mutual agreement procedure (MAP) and follow OECD guidelines in this regard.

Malta’s transfer pricing regime is relatively new and therefore there is not much practical experience insofar as transfer pricing claims are concerned.

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 vis-à-vis 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.

Insofar as a bona fide commercial transaction is concerned, these value-shifting provisions apply primarily to Maltese companies that own, directly or indirectly, immovable property situated in Malta.

IFRS are 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 tax-related anti-abuse measures based on ATAD that have been introduced in Malta include an interest limitation rule, which limits the deductibility of borrowing costs to a certain level. 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 were 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 anti-abuse conditions:

• it is resident or incorporated in the EU;
• it is subject to foreign tax of a minimum of 15%; or
• it does not derive more than 50% of its income from passive interest and royalties.

Alternatively, it must satisfy both of the following two conditions:

• the shares in a body of persons not resident in Malta must not be held as a portfolio investment; and
• the body of persons not resident in Malta, or its passive interest or royalties, have been subject to tax at a rate that is not less than 5%.

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 Tax and Customs 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 ATAD have been introduced into Maltese legislation, including a controlled foreign corporation (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, to the extent that said income derives from non-genuine arrangements, which have been put in place for the essential purpose of obtaining a tax advantage.

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 Tax and Customs 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.

The following tax-related anti-abuse measures based on ATAD have been introduced.

• Interest limitation rules that limit the deductibility of borrowing costs to a certain level. 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.
• An exit tax rule that applies when a company either changes its place of residence or decides to transfer its assets/business to a different tax jurisdiction. In such cases, the taxpayer is liable to be taxed at an amount equal to the market value of the transferred asset.
• An extension to the current general anti-avoidance provision already contemplated by Maltese tax legislation aiming to further target artificial arrangements put in place for the main purpose of obtaining a tax advantage in conflict with the spirit of the law.
• 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.
• New rules to counteract a broader range of arrangements relying on hybrid mismatches that exploit differences between the tax treatment of an entity or instrument under the laws of two or more jurisdictions with a view to achieving double non-taxation.

No regular routine audit cycle is specifically in place. The Commissioner for Tax and Customs generally has the power to initiate a tax audit in respect of any Maltese tax resident person at any time.

While Malta is not a member of the OECD, Malta can nevertheless be deemed to have implemented a number of the OECD’s Base Erosion and Profit Shifting (BEPS) Project’s action points within its tax framework through the transposition of various EU Directives, which in themselves take on board specific BEPS recommendations.

As detailed under 9.1 Recommended Changes, as an EU member state, Malta 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 EU Administrative Co-operation Directive, which also includes country-by-country reporting;
• the EU Anti-Tax Avoidance Directive, which includes various recommendations derived from the BEPS initiative;
• the anti-abuse rules in the Parent-Subsidiary Directive; and
• the sixth and seventh iterations of the Directive on Administrative Co-operation or “DAC 6”and “DAC 7”, respectively, which in line with Action 12 of BEPS, introduce mandatory disclosure rules enhancing information transparency between tax authorities;

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.

Malta is one of 137 members from the Inclusive Framework that agreed to the “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” by the OECD in October 2021. On 15 December 2022, following a unanimous agreement, the EU member states, including Malta, adopted the EU Minimum Tax Directive (Pillar Two).

During the Budget Speech for 2024 held on 30 October 2023, the Minister of Finance confirmed that Malta will be exercising its right to apply the derogation allowed by the EU Minimum Tax Directive, as a consequence of which, Malta will be deferring the introduction of the 15% minimum top-up tax under Pillar 2, past 2024. Accordingly, the three main components of the Pillar 2 rules, namely the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and the Qualified Domestic Minimum Top-Up Tax (QDMTT), will not be transposed into Maltese law in 2024. As further announced during the budget speech, there are also plans for new forms of statutory grants and tax credits (referred to as Qualified Refundable Tax Credits (QRTCs)) to be introduced, as part of the Maltese government’s commitment to ensure compatibility with rules imposed by both the EU and the OECD.

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:

• the Minimum Standard, which includes provisions dealing with the purpose of covered tax agreements, the prevention of treaty abuse and the mutual agreement procedure and corresponding adjustments;
• provisions of the MLI in connection with capital gains from alienation of shares or interests of entities deriving their value principally from immovable property; and
• provisions dealing with arbitration procedures subject to certain reservations.     

The Maltese government and authorities continue to confirm 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 transposition of the ATAD directives and other multinational initiatives resulting from the BEPS Project, such as the adoption of the two-pillar solution to address the tax challenges arising from the digitalisation of the economy should see Malta continuing in this direction.

As a member of the European Union, the Maltese government is prohibited from supporting companies in a way that would grant them a distorted advantage over their competitors. These State aid rules, which emanate from Article 107 TFEU include intervention in the form of grants, interest and tax reliefs and guarantees.

European law provides that State aid may, exceptionally, be justified, as in the case of Malta’s Tonnage Tax System.

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 Tax and Customs 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 ITA. 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 ITA 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 ITA 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 introduced tax-related anti-abuse measures based on ATAD is an interest limitation rule that limits the deductibility of borrowing costs to a certain level. 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.

The consequences of CFC rules on investment and financial services-oriented countries must be carefully monitored at this point.

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 introduction of formal transfer pricing rules, (see 4.4 Transfer Pricing Issues, has undoubtedly brought about certain changes within Malta’s tax regime, with effect from 1 January 2024.

Profits from intellectual property are generally not a source of controversy in the Maltese tax jurisdiction (other than the old patent box regime, which has now been replaced by a new regime).

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 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 Tax and Customs 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.

In December 2022, EU member states reached an agreement to implement at EU level, the minimum tax component (Pillar Two) of the OECD’s global international tax reform initiative. Malta will, however, be deferring the introduction of the 15% minimum top-up tax under Pillar 2, past 2024, as permitted under the EU Minimum Tax Directive. For the time being, therefore, there do not seem to be any concrete plans to alter Malta’s current corporate tax system, and accordingly, the full imputation system of taxation (see 3.4 Sales of Shares by Individuals in Closely Held Corporations) and the tax refund system will continue to apply. 

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.