malta - pkf international · • malta operates the “remittance basis” of taxation. taxpayers...

2016/17

Malta

PKF Worldwide Tax Guide 2016/17 1

FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2016/17 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 30 April 2016, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory;

Financial Planning / Wealth Management;

Corporate Finance;

Management Consultancy;

IT Consultancy;

Insolvency - Corporate and Personal;

Taxation;

Forensic Accounting; and,

Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at www.pkf.com

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IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited (PKFI) administers a family of legally independent firms. Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. PKF INTERNATIONAL LIMITED JUNE 2016 © PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION

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STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE

COMPANY TAX CAPITAL GAINS TAX VALUE ADDED TAX (VAT) OIL BUNKERING TAX STAMP DUTY WEALTH AND CAPITAL TAXES GAMING TAX SOCIAL INSURANCE CONTRIBUTIONS COMPANY ADMINISTRATION AND COMPLIANCE

B. DETERMINATION OF TAXABLE INCOME

CAPITAL ALLOWANCES TAXATION OF DIVIDENDS: PARTICIPATION EXEMPTION INTEREST DEDUCTIONS CAPITAL AND TRADING LOSSES BRANCH PROFITS TAX TAX ON TRANSFER OF IMMOVABLE PROPERTY TAX ON RENTAL INCOME SUPPORT MEASURES – MICRO INVEST SCHEME ADVANCE REVENUE RULINGS SPECIAL TYPES OF ENTITY

C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. RELATED PARTY TRANSACTIONS F. WITHHOLDING TAXES G. EXCHANGE CONTROLS H. PERSONAL TAX I. TREATY AND NON-TREATY WITHHOLDING TAX RATES

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MEMBER FIRM For further advice or information please contact: City Name Contact information Birkirkara George M Mangion +356 21 484373

[email protected] BASIC FACTS Full name: Republic of Malta Capital: Valletta Main language: Maltese, English Population: 425,945 (2016 estimate) Major religion: Christianity Monetary unit: Euro (EUR) Internet domain: .mt Int. dialling code: +356 KEY TAX POINTS • Malta operates the full imputation system where dividends paid by a Maltese company carry a tax

credit equivalent to the tax paid by the company on the distributed profits. • Shareholders are taxed on the gross dividend but are entitled to tax credits of the tax paid by the

company on the profits so distributed. • Malta does not have CFC Rules, Thin Capitalisation or transfer pricing rules. • Malta does not have net wealth tax and inheritance tax. • Tax payers (both individuals and companies) who are ordinarily resident and domiciled in Malta

are subject to income tax in Malta on their worldwide income and certain capital gains. • Malta operates the “remittance basis” of taxation. Taxpayers who are either not ordinarily resident

or are not domiciled in Malta are subject to tax on income arising in Malta and on foreign income only if that is received in Malta. In such case, foreign capital gains are not taxable in Malta even if received in Malta.

• Malta does not impose withholding tax on payment of dividends, interest or royalties, although there are some exceptions.

A. TAXES PAYABLE COMPANY TAX A company incorporated in Malta is deemed to be both domiciled and resident in Malta from the date of incorporation. A company not incorporated in Malta is considered resident in Malta if the management and control of its business is exercised in Malta. Companies which are resident and domiciled in Malta are subject to income tax on their worldwide income at a flat rate of 35%. In certain circumstances, depending upon the business activity from which the profit has been generated, recipients of dividend income may become entitled to refunds of company tax paid. In certain circumstances, these refunds reduce the effective tax burden on distributed profits to between 0% and 10%. Companies that are either resident or domiciled are taxable in Malta on the remittance basis. Therefore, income and taxable chargeable gains arising in Malta and on foreign income received in Malta. Foreign capital gains are not taxable, regardless of whether received in Malta. Companies that are neither not resident nor domiciled (i.e. incorporated) in Malta are only chargeable to tax in Malta in respect of income and gains arising in Malta. The refundable tax system applies both to profits allocated to Maltese Taxed Account as well as to

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profits allocated to its foreign income account. Refunds are available both to residents and non-residents. A registered shareholder in receipt of dividend from a company that is registered in Malta may claim a refund six-sevenths of the tax paid by the company on that income. The rate of refund is reduced to a refund of five-sevenths when profits on which the dividend is distributed consists of passive interest and royalties. CAPITAL GAINS TAX Capital gains are subject to tax if they are derived from the transfer (including any alienation under any title) of: • Immovable property; • Securities, defined as shares and stock and such like instruments that participate in any way in

the profits of the company and whose return is not limited to a fixed rate of return, units in a collective investment scheme and units and such like instruments relating to linked long term business of insurance;

• Business, goodwill, business permits, copyright, patents, trademarks and trade-names; • Beneficial interest in a trust; • Interest in a partnership; and, • Market value of shares through a change in the issued share capital or voting rights of a

company.

No tax is payable by non-residents on capital gains arising on transfers of company shares or securities except where such gains are derived from the transfer of shares or securities in companies whose assets consist wholly or principally of immovable property situated in Malta. VALUE ADDED TAX (VAT) VAT is imposed on importation of goods into Malta, on every intra-Community acquisition into Malta and on every supply of goods and services made in Malta for a consideration in the course of business. The standard VAT rate in Malta is 18%. A reduced rate of 7% VAT applies to the supply of hotel accommodation and 5% on certain supplies including electricity, confectionery, medical accessories and printed matters, items for the exclusive use of disabled and works of arts, collectors’ items and antiques. Also, certain supplies are zero-rated (known as exempt with credit supplies). These include exports and export-related services, the transfer of goods placed or while they are placed under a customs duty suspension regime, international transport of person, the supply and repair of commercial aircraft and vessels, food (excluding confectionery and food supplied in the course of catering), pharmaceuticals and intra-Community supplies of goods to persons registered for VAT purposes in another EU state. Other exemptions are termed exemptions without credit. When the activity of the business consists of or includes exempt without credit supplies, the input tax relating to those supplies is not recoverable. Exempt without credit supplies include: the transfer and the letting of immovable property (excluding inter alia commercial letting and hotel accommodation), insurance services, credit, banking and certain investment services, lotto and lotteries including remote gaming, health and welfare, cultural services and education. As of 2016, a reduced rate of VAT (7%) (replacing former 18% rate) was introduced on all sport facilities including gym memberships, fitness centres, football nurseries and other activities in a drive to promote sport and a healthy lifestyle. VAT on Intra-Community acquisitions When a taxable person makes an intra-Community acquisition in Malta, i.e. he receives a supply of goods from a person who is registered in another EU State where such goods are transported from one EU State to another, he will be liable for the payment of VAT in Malta on that transaction, unless the goods are exempt from VAT. Acquisition VAT is also imposed on any other person (other than a private individual) who makes an intra-Community acquisition of goods with a value exceeding EUR 10,000. Such persons may also opt to account for and pay such VAT if their intra-Community acquisitions do not exceed this amount.

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VAT on imports VAT is imposed at the rate of 18% (and at 5%/7% in respect of the goods subject to a reduced rate of VAT mentioned in the preceding paragraph) of the taxable value of the goods that are not in free circulation in the EU and that are imported into Malta. It is collected by the Comptroller of Customs on behalf of the Commissioner of VAT at the time of the release of the goods together with any duties payable on the imports. A number of importations are exempt from VAT. Place of Supply of telecommunications, broadcasting and electronically supplied services As of 1st January 2015, the place of supply of telecommunications, broadcasting and electronically supplied services is the place of the customer meaning that Maltese operators are obliged to account for and charge the tax of the Member States of the European Union where their customers are founded which could be a compliance burden if the supplier as customers established in different Member States of the European Union. Therefore, operators have two options for complying with this legal obligation- register and comply with the VAT rules of all the Member States of The European Union where their customers are located; or register under the MINI One Stop Shop (MOSS) which is a simplification measure which the EU Commission proposed to ease compliance. VAT Treatment of Yacht Leasing Since 2005 Malta has offered a Yacht Leasing option that begets significant reductions in effective VAT payable. This is done through a ‘deemed usage’ of the vessel within European waters, arrived at as a result of an applied formula that takes into consideration the length of the boat and its means of propulsion (power or sailing). Consequently, whilst the monthly lease charges by the lessor to the lessee are subject to VAT at the standard Malta VAT rate of 18%, effectively VAT is chargeable only in respect of the portion that the yacht is deemed to be within EU territorial waters during the lease period. The VAT benefit is directly proportional to the size of the vessel in question, so that a larger vessel enjoys a higher reduction of VAT payable. The most advantageous rate is enjoyed by sailing boats or motor boats over 24 meters in length. These pay VAT on just 30% of the vessel’s total consideration, enjoying an effective VAT rate of around 6.1%. For smaller vessels different progressive rates apply. VAT Treatment of Aircraft Leasing Aviation is a fast-growing sector of the Maltese economy. Malta is presently expanding our modest yet sturdy 500 strong aircraft register and increasing AOC registrations, currently circling around the 24 figure. To further boost this sector, it is envisaged that a VAT scheme similar to the one for yachting will be launched during 2016 for aircrafts. Similarly it is envisaged that the VAT reduction will be calculated on a deemed usage of the aircraft outside the EU, with the aircraft range being directly proportionate to the benefit of VAT reduction enjoyed. VAT will also be refunded in the following scenarios: • Eligible expenses incurred by private schools for the construction of new buildings; • On the acquisition of new cars provided they satisfy certain criteria relating to size and

emissions; • On the acquisition of a new bicycle (capped at €150); and, • On the cost of sports equipment acquired by sports associations recognized by the Malta Sports

Council. OIL BUNKERING TAX A flat rate of tax per metric ton is charged on the bunkering of certain fuel oils used for ships and their machinery and supplied free from customs and other duties. The payment of the tax is due immediately upon the release of the fuel from the bonded installation, marine terminal or marine facility on the quantity of fuel measured or calculated by Customs as having been released. STAMP DUTY A duty is levied on documents relating particularly to transfers of property, marketable securities (including shares), insurance policies, and auction sales. Duty on transfers of immovable property is at the rate of 5% of which 1% provisional tax is paid upon the entering of a promise of sale agreement. The rate of duty of the transfer of shares in Property Company is 5%, and, otherwise

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reduced to 2% on market value. There are a number of limitations and exemptions apply, including an exemption from duty on transfers of immovable property between companies forming part of the same group, transfers of shares upon certain restructuring of holdings within a group of companies, a reduced rate of duty on the acquisition of property to be used as one’s ordinary residence as well as division of immovable property between co-owners. Also, as from 1st July 2015, an exemption is being afforded to first time property buyers till 31st December 2016 whereby no duty is charged on the first Euro 150,000 where the buyer did not previously own or hold immovable property in Malta directly or indirectly. Preservation of Historical Premises Heritage During 2016 there shall be introduced a reduction of stamp duty on purchase of property in Urban Conservation Areas so that the stamp duty payable on the purchase of property within Urban Conservations Areas will be reduced from 5% to 2.5%. 2016 will also see the reduction of the property sales tax from 8% cent to 5% for owners selling refurbished property. This measure will apply only during 2016. WEALTH AND CAPITAL TAXES No taxes are levied on net wealth as such. In the case of corporations, no tax is levied on the basis of the capital of the business, but an annual registration fee, which may reach a maximum of Euro1,400 (paper submission) or Euro1,200 (electronic submission), is charged by reference to the company’s authorised share capital. GAMING TAX Winnings are not subject to tax, but a gaming tax is chargeable on licensed gaming entities. The amount and calculation of the tax depends on the type of licence held and where this is calculated by reference to the entity’s betting results, it is capped at Euro 466,000. Betting and lotteries are strictly regulated. In an initiative supporting the already booming the i-gaming industry, as of 2016, entrepreneurs investing in premises intended for use as office space will be able to benefit from existing legislation which offers the possibility of claiming depreciation on capital expenditure and which currently applies only to industrial buildings, hotels and car parks. SOCIAL INSURANCE CONTRIBUTIONS Social insurance contributions in respect of an employed person are payable both by the employer and by the employee. The rate is, in each case, is equivalent to 10% of the basic wage payable by each of the employee and employer. However, this is subject to a maximum and minimum rate. Currently the minimum weekly contribution stands at € 16.63 (or 10% of basic weekly wage if this is lower but the employer continues to pay the said minimum). The maximum weekly contribution varies depending on the age of the employee. In respect of an employee born before 1/1/1962, the maximum weekly contribution stands at € 34.49 whereas in the case of an employee born on or after 1/1/1962, the maximum weekly contribution stands at € 42.57. The Maternity Fund Employers’ Contribution has come into force on July 6, 2015 by means of Legal Notice 257 of 2015 (Trust and Trustees Act CAP. 331) and Legal Notice 258 of 2015 (Social Security Act CAP. 318). The Maternity Fund is earmarked for employers in the private sector entitled to a reimbursement of the salary of 14 weeks maternity leave paid to their employees. These contributions are payable monthly to the Inland Revenue Department on the new FS5. The Maternity Fund Contribution is to be declared annually on the new FS3 and FS7. COMPANY ADMINISTRATION AND COMPLIANCE Tax Year The default tax year for a company is 31 December, that is a calendar year. A company may apply to the Commissioner of Inland Revenue to adopt a financial year other than 31 December.

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Filing of Tax Returns and Payment The directors of every company are required to furnish the shareholders annually at a general meeting with a set of financial statements. Financial statements submitted to shareholders may be in accordance with IFRSs as adopted by the EU, Notice 289 of 2015 introduced the General Accounting Principles for Small and Medium-Sized Entities (GAPSME) which replaced GAPSE. GAPSME is effective for financial reporting periods commencing on or after 1st January 2016. The annual financial statements, together with the director’s report and auditors’ report must be approved by the Board with the Registrar of Companies within ten months from the end of the financial year. The financial statements must be approved by at least two directors for companies. Companies are bound to make three provisional tax payments computed by reference to the amount of tax chargeable in previous year. The provisional tax is payable in three instalments: 20% by 30 April, 30% by 31 August and 50% by 21 December. Provisional tax payments are on account of the final tax liability. A tax return must be filed within nine months from the year end or 31 March of the following year, whichever is later. Penalties are imposed for failure to file a return on time or submitting an incorrect tax return. A final tax payment is due by the date the tax return is submitted. Interest is payable at the rate of 0.75% per month or part thereof on any unpaid balances and outstanding refunds. Exemptions In certain circumstances, a company may qualify for an exemption from paying provisional tax payments and final tax payment is due within 18 months after the year end. B. DETERMINATION OF TAXABLE INCOME The audited financial statements of the company will normally form the basis of the tax computation, but adjustments will be necessary in order to arrive at the company’s income chargeable to tax. The general rule is that tax deductions are allowed only with respect to expenses incurred wholly and exclusively in the production of the income but the law contains special rules on various items. Adjustments would typically include the write-back of depreciation and a deduction for statutory capital allowances, the write-back of provisions and of expenses that do not satisfy the tax deduction rules, and the application of other special income tax rules such as those relative to the determination of income from the letting of immovable property and of capital gains. CAPITAL ALLOWANCES A taxpayer is not allowed to claim accounting depreciation as a deduction but may claim the statutory capital allowances on fixed assets used in the production of his income. The assets that qualify for capital allowances are: • Plant and machinery, including machinery, equipment, fixtures, motor vehicles and similar fixed

assets; and, • Industrial buildings and structures, including hotel buildings but excluding the cost of land.

The rules specify the minimum number of years over which the cost of the industrial buildings and various categories of plant and machinery may be written off. In the case of industrial buildings an initial deduction of 10% and 2% annual deduction of the cost of the acquisition of the asset is available. All wear and tear allowances are computed on the straight line method. Capital allowances may only be deducted from income derived from the activity in which the respective assets are used. The rules allow for proportional deduction where the asset is used partly in the production of income and partly for other purposes. When an asset that qualified for capital allowances is sold, transferred, destroyed, or otherwise put out of use, a balancing statement is to be prepared. If the tax written down value is higher than the value on disposal, the difference is allowed as a further capital allowance (balancing allowance). If the tax written down value is lower, the difference represents a balancing charge, but the charge cannot exceed the total capital allowances granted on that asset. The balancing charge is either added to the taxpayer’s chargeable income or, at the option of the taxpayer and subject to specific conditions, deducted for capital allowances purposes from the cost of acquisition of any fixed asset replacing the asset that has been disposed of.

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TAXATION OF DIVIDENDS: PARTICIPATION EXEMPTION With effect from 1 January 2007, income and gains derived by a company registered in Malta from a participating holding or from the transfer of such holding are 100% exempt from tax. A participating holding is found where a company resident in Malta holds equity shares in another entity and the former: (a) Holds directly at least 10% of the equity shares of the company invested in, which holding

confers an entitlement to at least any two of the following rights: (i) Right to vote; (ii) Right to profits available for distribution; (iii) Right to assets available for distribution on a winding up; or,

(b) Is an equity holder which holds an investment of a minimum sum of EUR 1,164,000 (or the equivalent sum in another currency)and the investment is held for an uninterrupted period of not less than 183 days; or,

(c) Is an equity shareholder and is entitled to purchase the balance of the equity shares or has the right of first refusal to purchase such shares or is entitled to sit as, or appoint, a director on the Board; or,

(d) Holds the shares or units for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Malta’s participation exemption is also extended to holdings in other entities, such as a Maltese limited partnership (the capital of which is not divided into shares), a non-resident body of persons (with similar characteristics to the Maltese limited partnership) or a collective investment vehicle that provides for limited liability of investors, provided the above conditions for the application of the participation exemption are satisfied. The PE is also available to branch profits, and the following income is exempt from tax: • Income attributable to a permanent establishment (including a branch) of a Maltese company

where the PE is situated outside Malta; and, • Gains derived from the transfer of such permanent establishment. With respect to dividends, the participation exemption is applicable if the entity in which the participating holding is held: a) Is resident or incorporated in a country or territory which forms part of the European Union; or, b) Is subject to tax at a rate of at least 15%; or, c) Has 50% or less of its income derived from passive interest or royalties; or, d) Is not a portfolio investment and it has been subject to tax at a rate of at least 5%.

The conditions for the application of the participation exemption with respect to dividends do not apply in the case of gains derived from the alienation of a participating holding. Such gains are therefore exempt with no further conditions. Where the participating holding relates to a non-resident company, an alternative to the participation exemption is the full (100%) refund. The relative dividends and capital gains will be taxed in Malta (subject to double tax relief), however, upon a dividend distribution, the shareholders are entitled to a full refund (100%) of the tax paid by the distributing company. Following changes to the Parent Subsidiary Directive in October 2015, the Participation Exemption shall only apply to the extent that such profits are not deductible by the relevant subsidiary in the EU Member State. INTEREST DEDUCTIONS There is no interest ceiling limitations or debt to equity ratio. Sums payable by such person by way of interest upon any money borrowed by the tax payer, where the Commissioner is satisfied that the interest was payable on capital employed in acquiring the income is deductible. CAPITAL AND TRADING LOSSES Trading and Capital Losses incurred in a trade or business may be carried forward indefinitely. The carry back of losses is not allowed.

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BRANCH PROFITS TAX A branch of an oversea company (the business of which is managed and controlled outside Malta) would be taxable in Malta only on income arising in Malta and on income arising outside Malta but received in Malta. The income of the branch would be taxed at the same rate as that of a Maltese company. Non-resident shareholders of overseas companies may qualify for refunds of tax, provided that the relevant conditions are satisfied. Malta does not impose branch remittance tax. TAX ON TRANSFER OF IMMOVABLE PROPERTY With effect from 1st January 2015, a taxpayer may no longer opt to be taxed at 35% on the capital gain. A final withholding tax of 8% (previously 12%) of the property’s value will apply on all transfers of immovable property subject to two exceptions and a transitional measure as follows: • A final withholding tax of 10% of the property’s value will be applicable on transfers of property

which was acquired prior to 1st January 2004; • A final withholding tax of 5% of the property’s value will be applicable on transfers of property

which is transferred not later than five years from the date of acquisition where the transferor is an individual who does not habitually trade in property;

As a transition measure, the current system will continue to apply to any transfers of property which occur following the entry into force of this new system where the Commissioner for Revenue was notified of the prospective transfer by 17th November 2014 by way of registration of the promise of sale or notification of the transfer. TAX ON RENTAL INCOME In 2014 the Government introduced the option to landlords to be taxed at the rate of 15% on the gross income from rented property. This is being introduced as an incentive to regularise the local rent market. SUPPORT MEASURES – MICRO INVEST SCHEME Investment aid primarily takes the form of tax credits. Eligible enterprises will benefit from tax credits calculated as a percentage of the value of the investment project and wages costs. A tax credit equivalent to 45% of the costs incurred may be approved for enterprises operating from Malta and a further 20% additional bonus is applicable to those operating from Gozo. The maximum eligible tax credit may not exceed €30,000 for Maltese based and €50,000 for Gozo based enterprises respectively over any period exceeding three consecutive years. Each year there are various incentives and schemes proposed in the Budget measures to target different areas. The scheme is still open and the new deadline for submission of applications for investment carried out in 2015 is 30th March 2016. ADVANCE REVENUE RULINGS Maltese tax law allows a tax payer to apply for an advance revenue ruling. The ruling binds the tax position for five years and renewable for a further five-year period unless there is a change in the law. If the law on the particular subject is changed during the operation of a ruling, that ruling remains binding either until the end of the relative five-year period or for two years following the amendment, whichever is the shorter. The advance rulings are available in a number of situations including whether a transaction constitutes tax avoidance, whether a holding qualifies as a participating holding and determining the tax treatment of a transaction that constitutes international business. Revenue rulings on matters not specified in the law are not legally binding. SPECIAL TYPES OF ENTITY Maltese law provides for a favourable fiscal framework for the provision of financial services, and

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endeavours to establish Malta as an attractive, regulated international business centre. (i) Collective Investment Schemes

A fundamental concept which was introduced under the Collective Investment Scheme rules is the classification between prescribed and non-prescribed funds. Such classification determines the tax treatment of the Collective Investment Scheme and its investors. A prescribed fund is a resident fund that has declared that the value of its assets situated in Malta at a particular date equals at least 85% of the value of its total assets. Withholding tax on such funds varies between 10% and 15% depending on the type of income. Tax at 15% will be withheld on any capital gains realized by resident investors on disposal of non-prescribed funds (i.e. funds whose assets are non-Maltese). Dividends paid by a non-resident non-prescribed fund to a resident investor carry a final 15% withholding tax. Dividends paid to non-resident investors are exempt from withholding tax.

(ii) Funds and Fund Managers

Fund Managers are taxed at 35%, as are Investment Services companies, but are entitled to claim an exhaustive list of reliefs such as a double deduction of salaries paid to Maltese personnel in the first ten years of commencement. Fund Managers may opt to be regulated by the Highly Qualified Persons Rules (see H. Personal Taxes below for more details). Funds themselves which, if set up as a separate vehicle, may also be set up as a SICAV or unit trust, are exempt from income tax in Malta but may not benefit under any of the tax treaties. It is proposed that the VAT exemption relating to fund management is extended to supplies of services consisting of the management of collective investment schemes licensed under the Investment Services Act.

(iii) Captive Insurance Companies

Captive insurance companies (also known as affiliated insurance companies under Maltese law) are taxed as a normal company. With effect from July 2004, it has also been possible to set up a protected cell company. Both captives and protected cell companies are taxed as ordinary companies in Malta and are, therefore, entitled to the refunds stipulated above. Insurance contracts entered into by licensed entities are not subject to VAT while insurance contracts covering risks that are located outside of Malta are not subject to Stamp Duty.

(iv) Trusts A trust is an obligation which binds a person or persons (called the ‘trustees’) to deal with property over which they have control (called ‘the trust property’) for the benefit of persons (called the beneficiaries) or for a charitable purpose in accordance with the terms of the trust. The setting up of trusts in Malta is regulated by the Trusts and Trustees Act. In certain cases, trusts are considered to be transparent for tax purposes, in the sense that income attributable to a trust is not charged to tax in the hands of the trustee if it is distributed to a beneficiary. Also, when all the beneficiaries of a trust are not ordinary resident and domiciled in Malta and when all the income attributable to a trust does not arise in Malta, there is no tax impact under Maltese tax law. Beneficiaries are charged to tax on income distributed by the trustees. Income attributable to a trust that is not so distributed to beneficiaries is charged to tax in the hands of the trustee at the rate of 35%. As the trust itself merely consists of property and/or other assets, there is no economic activity carried on and, therefore, it is outside the scope of VAT. Since the trustee’s services essentially consist of management and administration of assets, it is considered that any sums that the trustee is entitled to appropriate from the trust assets by way of remuneration do not constitute a consideration for services rendered. Therefore, no economic activity is deemed to be carried out, where such remuneration is specified under the terms of the deed of the trust. However, if the trustee exploits the property of the trust for a consideration, this exploitation is considered as an economic activity and, if such activity is taxable under Maltese VAT legislation, the trustee has to register for VAT in Malta.

(v) Foundations

Under Maltese law foundations may be treated as companies for tax purposes and are subject to the normal corporate tax rate. Foundations may also opt to be taxed in the same manner as a

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trust. In such cases the relevant provisions governing taxation of trusts will apply. (vi) Shipping Activities

Income derived by licensed shipping companies from shipping activities is exempt from income tax in Malta, provided that (i) all registration fees and tonnage taxes have been duly paid and (ii) separate accounts have been kept clearly distinguishing the payments and receipts related to shipping activities from payments and receipts in respect of any other business. Any income derived by a ship manager from ship management activities is also exempt. Furthermore, any gains /income derived from the transfer of a tonnage ship, and/or shares in the said tonnage ship, which is owned, chartered, managed, administered or operated by the shipping organisation, are also exempt from tax. Non-resident officers and employees of the shipping organisation are exempt from paying social security contributions in Malta. Furthermore, there is no duty chargeable in respect of instruments involving the registration or transfer of general matters concerning shipping organisations.

(vii) Aviation Companies

The Parliament has enacted a new Aircraft Registration Act, 2010 to encourage the aviation industry in Malta which regulates the registration of aircraft and aircraft mortgages. Highlights of the aviation tax package include: • Any income which is derived from the ownership, leasing or operation of aircraft or aircraft

engines which is used for or employed in the international transport of passengers or goods is exempt from tax in Malta, since such income is deemed to arise outside Malta for Maltese income tax purposes.

• Competitive capital allowances of the aircraft and other related objects for wear and tear spans, for instance a minimum of 6 years for an aircraft airframe.

• No withholding taxes on lease and royalty payments made by Maltese lessees to non-residents in respect of aircraft operated in the international transport of passengers or goods.

• No withholding taxes on interest payments made by Maltese lessees to non-resident financial lessors.

• Fringe benefit exemption: fringe benefits arising from the private use of aircraft by non-residents individuals who are shareholders, employees or officers of companies involved in the international transport of goods or passengers are not taxable.

• Malta is presently working to adopt the Cape Town Convention, in order to facilitate aircraft procurement and finance. Although the European Union is an ASU Participant, it is so in its capacity of a supranational body and therefore not representing its individual Member States. For this reason, there is still a process in order for Malta to be acknowledged in its own name. The impact of this ratification is that the relevant provisions of this protocol are intended to level the playing field for aircraft manufacturers, aircraft purchasers (including airlines and aircraft lessees) and governments by prescribing a set of uniform terms for aircraft-related financing transactions that are supported by a Participant’s Export Credit Agency (ECA), and by closing the pricing gap between the export credit agency and commercial financing markets. Members are called ‘ASU Participants’, therefore qualifying to its advantages. Two of these advantages are what are referred to as the Minimum Premium Rate (MPR) and the Cape Town Convention Discount (CTC discount).

C. FOREIGN TAX RELIEF Malta provides for four types of relief from international double taxation, namely: • Treaty relief

Treaty relief is available by way of credit for foreign tax paid on income from a territory with which Malta has concluded a double tax treaty. Treaty relief is generally provided in the form of an ordinary credit, limited to the amount agreed between Malta and the relevant foreign territory. The tax suffered in a relevant foreign territory applies on the basis of the ordinary credit method (based on a source-by-source and country-by-country basis). Malta has an extensive tax treaty network, with most treaties following the OECD Model.

• Unilateral relief Relief from double taxation is also possible on a unilateral basis where tax is suffered outside

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Malta on income received from a country with which Malta has not concluded a treaty Any tax suffered outside Malta, would, limitedly to the Malta tax charge on the income, be allowed as a credit against tax chargeable in Malta.

• Relief in respect of Commonwealth income tax

Commonwealth Tax Relief is available in respect of income tax or tax of a similar nature charged under any law in any country of the Commonwealth, if the law of such Commonwealth country has provided for relief in respect of tax charged on income both in that Country and in Malt.

• Flat-rate foreign tax credit (FRFTC)

FRFTC takes the form of a notional tax credit of 25% for deemed foreign taxes incurred on qualifying income. This type of relief is only available to companies and on income allocated to the foreign income account and does not require evidence of the foreign tax actually paid.

D. CORPORATE GROUPS Two companies resident in Malta neither of which is resident for tax purposes in any other country shall be deemed to be members of a group of companies if one is the 51% subsidiary of the other or both are 51% subsidiaries of a third company resident in Malta. For the purposes of the group relief provisions, a company shall be deemed to be a 51% subsidiary of another company if: • More than 50% of its ordinary share capital and voting rights are owned directly or indirectly by

the parent company; and, • The parent company is beneficially entitled either directly or indirectly to more than 50% of any

profits available for distribution to the ordinary shareholders of the subsidiary company; and, • The parent company would be beneficially entitled either directly or indirectly to more than 50%

of any assets of the subsidiary company available for distribution to its ordinary shareholders on a winding up.

Companies which are resident for tax purposes in Malta but also in another tax jurisdiction will not benefit from Group Relief Provisions. E. RELATED PARTY TRANSACTIONS There is no specific transfer pricing legislation. Malta has a general anti-avoidance provision which gives the Commissioner of Inland Revenue (CIR) the right to disregard any artificial or fictitious scheme that reduces the amount of tax payable by the taxpayer. Additionally, where the sole or main purpose of the taxpayer is to obtain any advantage which has the effect of avoiding, reducing or postponing liability to tax, the CIR may determine the liability to tax. F. WITHHOLDING TAX Malta does not impose withholding tax on dividends, interest and royalties except for a 15% withholding tax when untaxed profits are paid to a resident individual. G. EXCHANGE CONTROLS Malta does not have any exchange controls. H. PERSONAL TAX Personal income tax is paid on all income tax accruing in or derived from Malta and on income accruing in or delivered from abroad by persons domiciled and ordinarily resident in Malta. Income arising outside Malta to a person who is not ordinarily resident in Malta or not domiciled in Malta will be taxed only if it is received in Malta. Expatriate employees are not considered to be ordinarily resident in Malta if they do not work or reside in Malta for more than 183 days in any one-year. The term income involves gains and profits from any trade, business, profession or vocation; gains or

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profits from any employment or office; dividends and interest; pensions, annuities or other annual payments; and rents, royalties or other profits derived from ownership of property. Personal Income Tax Rates for the Year 2016 The highest personal income tax rate of 35% applicable to individuals who earn less than €60,000 is further reduced to 25% under single, married and parent computations. Income over €60,000 will remain taxable at 35%. The tax rate applicable to an individual earning income from dividends remains as was applicable prior to the changes to the tax brackets in 2013. The tax free bracket has been kept at €8,500, however persons earning only the minimum wage are not subject to tax on the whole amount (refer to table below). This also applies to pensioners whose pension does not exceed the minimum wage. The married rates of tax shall also be applicable to those persons joined under a civil union.

Rates Single

Computation Tax Bands

Married Computation

Tax Bands

Parent Computation Tax Bands

0% up to €9,100 up to €12,700 up to €10,500

15% €9,101 - €14,500 €12,701- €21,200 €10,501 - €15,800

25%1 €14,501- € 60,000 €21,201- €60,000 €15,801- €60,000

35% Over €60,001 Over €60,001 Over €60,001

1 Not applicable to dividend income which remains taxable at 35%. Fringe Benefits Certain benefits such as use of cars for private purposes, rent, school fees, free meals as well as share options are added to the salaries of employees and taxed accordingly. All cash allowances paid to employees with the exception of cash allowances paid in respect of the use of employee-owned cars for business purposes are equally fully taxable. Employees are responsible for the disclosure of fringe benefits provided by third parties over which the employer has no control. Incentive for Investment Services Expatriates Qualifying Expatriates who are employed in an Investment Services Company may opt for a 10-year exemption on certain fringe benefits, including accommodation expenses, use of a car, a subvention of €600 a month and school fees for their children. Highly Qualified Persons Rules From 1 January 2010, subject to terms and conditions, an individual who is not an ordinary resident in Malta, and who derives income subject to tax in Malta, under a qualifying contract of employment, received in respect of work or duties carried out in Malta, may elect for this income to be charged at a flat rate of 15%. The minimum employment income for basis year 2015 must be €81,457, while any employment income over €5,000,000 is not subject to tax. Eligible employment includes certain classes of employment with licensed companies under the terms of the Financial Institutions Act, licensed gaming companies as well as with aviation companies. Legal Notice 225 of 2015 heralded a five year extension for beneficiaries bringing the maximum benefit to ten years of assessment under the beneficial 15% tax rate. A new provision called ‘time limit of benefit’ puts a ceiling on eligible applicants being qualified as beneficiaries up until 31st December 2020. Any benefit accrued after such date becomes necessarily limited to those instances whereby the employment in question starts by the 31st December 2021 and terminates by the 31st December 2025. The Global Residence Programme Rules (GRS) These rules were introduced by L.N. 167 of 2013 and were revamped by L.N. 267 of 2014. Beneficiaries are those third-country nationals who have been granted special tax status in terms of these rules. Subject to satisfying the applicable rules in a continuous manner, the beneficiaries under this program benefits from a minimum amount of tax payable in respect of the income arising outside

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Malta of the fifteen thousand euro (€15,000) for any year of assessment. Such minimum amount is payable in full in both the year when the special tax status was granted and in the year when the individual ceases to possess the said special tax status. The Residence Programme Rules (RPR) These rules were introduced by L.N. 270 of 2014. Beneficiaries are those EU, EEA or Swiss nationals but who are not Maltese nationals and who have been granted special tax status in terms of these rules. Subject to satisfying the applicable rules in a continuous manner, the beneficiaries under this program benefits from a minimum amount of tax payable in terms of these rules in respect of the income arising outside Malta of the fifteen thousand euro (€15,000) for any year of assessment. Such minimum amount is payable in full in both the year when the special tax status was granted and in the year when the individual ceases to possess the said special tax status. Under both GRS and RPR: • All income other than that qualifying for the 15% rate is taxed at the standard full rates. • An applicant is required to hold qualifying immovable property in Malta or Gozo as per the

stipulated requirements • A beneficiary must also declare on an annual basis that he has not spent more than 183 days in

any one jurisdiction outside of Malta. Tax Status a. Flat rate of Malta income tax of 15% on income remitted to Malta (as opposed to progressive

personal tax rates of up to 35%) of main applicant and certain dependents and can claim double taxation relief;

b. Minimum tax payment of €15,000 per annum (no additional minimum tax payment in respect of dependents;

c. Any other realised income including realised capital gains arising in Malta on the transfer of a capital asset (other than immovable property situated in Malta) chargeable to Malta income tax at 35%.

As from 1 January 2015, the final tax on transfers of immovable property acquired after 1 January 2004 will be reduced from 12% to 8% of the transfer value while the rate in respect of transfers of immovable property acquired before 1 January 2004 will be of 10%. It will no longer be possible to opt out of the final tax system and therefore to be taxed on the profit. Furthermore, no deduction of expenses will be allowed in arriving at the transfer value. The tax is payable on the date of the contract of sale Individuals who do not trade in immovable property and who transfer such property within 5 years from the date of acquisition will be taxed at 5% (instead of 8%) on the transfer value. Any realised capital gain arising outside of Malta falls outside the scope of Malta income tax in view of non-Malta domicile of individual and irrespective of whether remitted to Malta or not. Malta Individual Investor Programme (MIIP) This program, by virtue of which qualifying applicants become naturalized as Maltese citizens has successfully been running for the last two years. The MIIP operates on a citizenship by investment type model that combines a contribution to the Maltese Government in the amount of €650,000 together with identified investment requirements made in qualifying immovable property in Malta that can be owned or leased and Maltese government bonds (in the amount of €150,000), both which must be held for a minimum five year period. An applicant may also join a spouse and/or dependents into his application. While separate fees are due for every added member, the bulk contribution and investment requirements only need to be satisfied by the Main Applicant. The model case is a twelve month process during which the applicant must establish and sustain satisfactory links with the Republic of Malta in the eyes of the authorities. Since the Contribution is classified as such it carries no fiscal burden and is therefore non-taxable. Tax implications may arise given the Applicants choice of taking up residence in Malta during the application process, as well as after obtaining citizenship. The considerations here vary on a case by case basis and must accordingly be treated as such. PKF Malta is fully equipped with the necessary license, expertise, skill and resources to provide our clients with a tailored advice in this regard.

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I. TREATY AND NON-TREATY WITHHOLDING TAX RATES Malta has concluded various treaty agreements with over 70 countries so as to mitigate international double taxation. The following table illustrates of the treaty withholding tax when dividends, interest and royalties respectively are paid to Maltese residents. For detailed information, it is highly advisable to consult the relevant tax treaty. Note that there is no withholding tax on dividends and on interest and royalties (if not effectively connected with a permanent establishment in Malta) paid to non-residents. Therefore, in most cases, the applicable withholding tax rate will actually be 0%. Where there is no rate mentioned (denoted by a -), there is no specified treaty rate (in other words, the domestic rate applies).

Country

Dividends Minor Share-holding

Dividends Major Share-holding

% Share to Qualify

Interest Royalties

Albania 15 5 25 5 5

Australia 15 15 15 10

Austria 15 15 5 0/101

Bahrain 0 0 0 0

Barbados 15 5 5 5 0/52

Belgium 15 15 0/103 0/104

Bulgaria 0 0 - 10

Canada 15 15 15 0/105

China 10 5 25 10 106

Croatia 5 5 0 0

Cyprus 15 15 10 10

Czech Republic 5 5 0 5

Denmark 15 0 257 0 0

Egypt 10 10 10 12

Estonia 15 5 25 10 10

Finland 15 5 10 0 0

France 15 0 10 5 0/108

Georgia 0 0 0 0

Germany 15 5 10 0 0

Greece 10 5 25 8 8

Guernsey 0 0 0 0

Hong Kong 0 0 0 3

Hungary 15 5 25 10 10

Iceland 15 5 10 0 5

India 10 10 10 10

Ireland 15 5 10 0 5

Isle of Man 0 0 0 0

Israel 15 0 10 0/59 0

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Country



% Share to Qualify

Interest Royalties

Italy 15 15 10 0/1010

Jersey 0 0 0 0

Jordan 10 10 10 10

Korea 15 5 25 0/1011 0

Kuwait 0 0 0 10

Latvia 10 5 25 10 10

Lebanon 5 5 0 5

Libya 15 5 10 5 5

Liechtenstein 0 0 0 0

Lithuania 15 5 25 10 10

Luxembourg 15 5 25 0 10

Malaysia 0 0 0/1512 15

Mauritius 0 0 0 0

Mexico 0 0 0/5/1013 10

Moldova 5 5 5 5

Montenegro 10 5 25 10 5/1014

Morocco 10 6.5 25 10 10

Netherlands 15 5 25 10 0/1015

Norway 15 0 1016 0 0

Pakistan - 15 20 10 0/1017

Poland 10 0 1018 5 5

Portugal 15 10 2519 10 10

Qatar 0 0 0 5

Romania 5 5 5 5

Russia 10 5 25 5 5

San Marino 10 5 25 0 0

Saudi Arabia 5 5 0 5/720

Serbia 10 5 25 10 5/1021

Singapore - - 7/1022 10

Slovakia 5 5 0 5

Slovenia 15 5 25 5 5

South Africa 10 5 10 0/1023 10

Spain 5 0 25 0 0

Sweden 15 0 10 0 0

Switzerland 15 0 1024 0/1025 0

Syria - - 10 18

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Country



% Share to Qualify

Interest Royalties

Turkey 15 10 25 10 10

Tunisia 10 10 12 12

UAE 0 0 0 0

UK - - 10 10

Uruguay 15 526 2527 10 5/1028

USA 15 5 10 10/1529 10 Notes: 1. 0% is applicable in view of either the direct use of or the right to use copyright of literary, artistic

or scientific work. 2. 0% is applicable in view of either the direct use of or the right to use copyright of literary, artistic

or scientific work. 3. 0% is applicable in view of interest on commercial debt claims. 4. 0% is applicable in view of either the direct use of or the right to use copyright of literary, artistic

or scientific work. 5. 0% is applicable in view of the production or reproduction of literary, educational, dramatic,

musical or artistic work. 6. Tax on royalties derived as a consideration for the use of, or right to use, industrial, commercial,

or scientific equipment shall not exceed 10% on an amount corresponding to 70% of the gross amount of the royalties.

7. Held for a twelve month period prior to the date the dividends are declared. 8. 0% is applicable in view of either the direct use of or the right to use copyright of literary, artistic

or scientific work. 9. 0% is applied in view of interest paid by Government of the Contracting State, a political

subdivision, a local authority or the Central Bank thereof and interest paid to a resident of the other Contracting State on corporate bonds traded on a Stock Exchange in the first-mentioned State.

10. 0% is applied in view of the direct use or the right to use any copyright of literary, artistic or scientific work, cinematographic films or tapes for television or broadcasting.

11. 0% is applied in view of interest paid in connection with the sale on credit of any industrial, commercial or scientific equipment paid in connection with the sale on credit of any merchandise by one enterprise to another.

12. The 0% in applied in view of interest paid on loans as per the definition provided in the Malaysian Income Tax Act.

13. 0% is applied in view of four given scenarios, 5% is applied in view of interest from loans granted by certain banks, while 10% is applicable in all other cases.

14. 5% is applied in view of the use of or the right to use copyright of literary, artistic or scientific work including cinematographic films or films or tapes used for radio or television broadcasting.

15. 0% is applicable in view of either the direct use of or the right to use copyright of literary, artistic or scientific work.

16. Held for an uninterrupted period of 24 months. This period can also be met after the payment of dividends is made.

17. 0% is applied in view of the direct use or the right to use any copyright of literary, artistic or scientific work, cinematographic films or tapes for television or broadcasting.

18. Held for an uninterrupted period of 24 months. This period can also be met after the payment of dividends is made.

19. Held for a twelve month period prior to the date the dividends are declared. 20. 5% applies to royalties paid for the use of or the right to use industrial, commercial or scientific

equipment. 21. 5% is applied in view of the use of or the right to use copyright of literary, artistic or scientific work

including cinematographic films or films or tapes used for radio or television broadcasting.

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22. 7% applies if the interest is received by a bank, 10th is applied in all other cases. 23. 0% is applied in view of interest paid by Government of the Contracting State, a political

subdivision, a local authority or the Central Bank thereof and interest paid to a resident of the other Contracting State on corporate bonds traded on a Stock Exchange in the first-mentioned State.

24. Held for at least 12 months and provided both companies: (a) suffer tax and are not exempt from the same, (b) are not tax resident in a third state under any double taxation agreement and (c ) are constituted as a limited liability company.

25. 0% is applied in view of interest paid between associated companies and to interest paid in connection with the sale on credit of any industrial, commercial or scientific equipment; in connection with the sale of any merchandise by one enterprise to another enterprise, or on any loan of whatever kind granted by a bank.

26. 5% is applied in view of royalties paid for the use of or the right to use industrial, commercial or scientific equipment.

27. Lower rate of 5% also applies if the beneficial owner is a Collective Investment Scheme. 28. 5% is applied in view of the use or the right to use any industrial, commercial or scientific

equipment and copyright of literary, artistic or scientific work. 29. 15% is applied in view of interest that does not qualify as portfolio interest. Malta is continually in the process of enhancing its double taxation network, the link below provides the latest signing and ratifications with contracting states as they occur and is continuously updated: http://www.mfsa.com.mt/pages/viewcontent.aspx?id=196

malta - pkf international · • malta operates the “remittance basis” of taxation. taxpayers...

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