Maltese companies are subject to a corporate tax rate of 35% on profits. This is then subject to two concurrent applicable systems – namely the Full Imputation System and the Refund System.
Full Imputation System– any income tax paid by a company is credited in full to the shareholder upon a distribution of profits so as to avoid any economic double taxation of corporate profits. The full imputation system ensures that both resident and non-resident shareholders are entitled for a refund of any tax paid by the company which is in excess of the shareholder’s income tax liability.
A shareholder who has been registered for tax refund purposes may, upon the receipt of a dividend distributed by a company from its taxed profits (not being profits derived directly/indirectly from immovable property situated in Malta), claim a refund of 6/7ths (30%) of the tax paid by the company such that effective tax paid is reduced to 5% at the level of the shareholder.
The refund is reduced to 2/3rds of the Malta tax if double taxation relief is claimed on the said income and to 5/7ths (25%) where dividend is paid out of profits consisting of passive interest and royalties
A full refund (100%) applies where the dividends are distributed out of profits consisting of dividends derived by a company from a participating holding or from the disposal of such holding. This applies to the extent that the company chooses to be taxed on the profits out of which the dividend has been paid since the company has the option to apply the participation exemption and not tax such profits by not including the income as part of its chargeable income in its tax return.
Such refunds are payable within 14 days from the end of the month in which it falls due.
Income tax is charged for each year of assessment upon the chargeable income of any person for the year immediately preceding the year of assessment, which is known as the basis year.
Liability to Tax
Malta’s right to tax a person’s income is determined on the basis of source or residence. Therefore persons who are ordinarily resident and domiciled in Malta are taxable on their world-wide income; individuals who are either not domiciled or not ordinarily resident in Malta are liable to tax on a remittance basis i.e. on income arising in Malta and on foreign sourced income (excluding capital gains) remitted to Malta; non-residents are only taxable on income arising in Malta subject to some exceptions amongst which are royalties and interest paid to a non-resident which are not taxable provided certain conditions are met.
Income tax is payable on gains or profits from any trade, business, profession or vocation; gains or profits from any employment or office; dividends, premiums, interest and discounts; any pension, charge, annuity or annual payment; rents, royalties, premiums or any other profit arising from property; capital gains and other gains or profits not falling under the above categories.
The Law also provides for certain deductions and personal deductions against income. There is also a system of tax credits and rebates applicable depending on the particular status of the taxpayer.
Malta adopts the full imputation system whereby tax paid at the level of the company is imputed in full to the shareholder.
Distributed corporate profits are only taxed at the personal rate applicable to the particular shareholder. This is because in distributing dividends,
(a) a Maltese company is to deduct therefrom the amount of tax that is paid on the profits being distributed;
(b) the dividends are grossed up in the shareholder’s hands
(c) full credit is however then given against the shareholder’s personal tax liability for the tax at source deducted by the company and
(d) a shareholder can obtain a refund of the tax or part of the tax deducted at source if his marginal rate of tax is less than the company’s rate of tax (35%). Since the maximum personal rate of tax is also 35%, the receipt of a dividend from a Maltese company out of its taxed profits will not normally involve the shareholder in the payment of any further tax.
The Self-Assessment System
The Income Tax Acts incorporate a mandatory self-assessment system. The taxpayer calculates his own tax liability and assesses himself. A self-assessment computation must be filed with every return.
All individuals who are liable to income tax must submit a return of their income by the 30th June of the year of assessment.
Assessments received must be settled unless a formal objection is lodged within 30 days from receipt of the assessment. The 30 day deadline may be extended for good and sufficient cause.
Any person who, is aggrieved by an assessment made upon him and has failed to agree with the Commissioner of Inland Revenue on a revision of the said assessment, may lodge an appeal with the Administrative Tribunal (within 30 days from receipt of the notice of refusal – this time limit may not be extended). A valid appeal may be entered into only if the tax, which is not in dispute, is settled.
The taxpayer has a further right of appeal to the Court of Appeal on a point of law only, if they are dissatisfied with a decision of the Tribunal.
Income tax on employment income is normally collected by deductions from salaries and wages under the Final Settlement System (FSS) system. Self-employed individuals are required to make provisional tax payments in April, August and December of each year.
Social Security Contributions
Both employers and employees must make social security contributions.
The current rate of contribution by both employers and employees is 10% of the basic weekly salary (that is, excluding bonuses, allowances and fringe benefits) subject to a minimum weekly contribution (2013:€16.22). Social security contributions are capped such that the amount payable by both employers and employees does not continue to increase when weekly salaries exceed a ceiling (2013:€40.32)
Self-employed persons make contributions equivalent to 15% of their earnings. For the purposes of social security contributions the income of a self-employed person comprises his total income from all sources excluding capital gains, less expenses directly related to the production of the said income. Once again contributions are subject to a minimum weekly contribution and are capped.
Expatriate employees of companies registered under the Malta Financial Services Centre Act may elect to be exempted from the payment of social security contributions.
PCM Legal provides services in the following areas:
- International Tax Planning
- National and cross-border fiscal structures and organization.
- Advice on Double Taxation Treaties.
- Tax Advisory Services
- Personal Taxation Services
- Tax Compliance