The Maltese Tax Refund System

In response to the EU Commission’s request to abolish the ‘International Trading Company’ regime, various provisions of the Income Tax Act and the Income Tax Management Act have been amended in 2007.

The full imputation system for dividend taxation has been retained. The new amendments have introduced a new tax refund system applicable to companies registered in Malta on or after 1st January 2007. The new provisions aim to continue establishing Malta as the leading Financial Centre in southern Europe and the Mediterranean.

A company registered in Malta includes both:

• A company resident in Malta

• A Maltese branches of overseas companies carrying on an activity in Malta

Tax Accounting

Malta operates a system of tax accounting whereby profits derived by every company are allocated to one of the following 5 tax accounts:

• Foreign Income Account

• Maltese Taxed Account

• Untaxed Account

• Immovable Property Account

• Final Taxed Account

Dividend Taxation

Dividends from the Foreign Income Account (FTA) and Maltese Taxed Account (MTA)

Malta operates a full imputation system for dividends paid from a company’s Maltese Taxed Account and the Foreign Income Account. Dividends are subject to tax in the hands of the shareholder who will receive a full imputation credit for the tax paid by the company. Since the highest tax rate for individuals is equal to the corporate tax rate in Malta, the full imputation ensures that the shareholder is never subjected to further tax on dividends distributed from the Maltese Taxed Account and the Foreign Income Account.

Full Imputation System (Worked Example):

 

Euro

Income

100

CIT @ 35%

(35)

Income Allocated to the MTA or FTA

65

 

Taxation at the Level of the Shareholder

Net dividend received by the shareholder

65

Tax at Source (CIT)

35

Gross dividend received by the shareholder

100

Tax on dividends received

35

Full Imputation credit

(35)

Tax suffered on dividends

0

 

Dividends from the Untaxed Account

Profits which are exempted from tax are allocated to the Untaxed Account. Dividends from the untaxed account paid to resident shareholders are subject to a 15% withholding tax. No withholding tax is levied when dividends from the Untaxed Account are distributed to non-resident shareholders or another company.

Dividends from the Final Taxed Account and the Immovable Property Account

Certain types of income which have suffered a tax at source are not subject to corporate income tax. These types of income are allocated to the Final Taxed Account or the Immovable Property Account. Dividends paid from the Final Taxed Account or the Immovable Property Account are not subject to further tax at the level of the shareholder.

Tax Refund

A shareholder of a company registered in Malta is entitled to claim certain types of refunds. Tax Refunds may be claimed on income allocated to the Maltese Taxed Account and Foreign Income Account

No refunds may be claimed on income allocated to the Final Taxed Account and Immovable Property Account

Refunds may be claimed both by resident and non-resident shareholders. The tax refund receivable by the shareholder will depend on the personal tax rate of such shareholder. A non-resident shareholder is taxable at 5% on income received from dividends distributed by a Malta tax resident company. This means that with his tax credit of 35% he will be entitled to 30% tax refund.

The only other conditions applicable are:

• Company is not entitled to claim double tax relief

• Income is not qualified as ‘ passive interest or royalties’

Worked Example:  Company

 

EURO

Company profits before tax

100

Tax @ 35%

(35)

Profits after Tax

65

Shareholder:

Net Dividend

65

Tax @ Source

35

Gross Dividend

100

Tax on Gross Dividends

35

Full Imputation Credit

(35)

6/7 Refund

(30)

 

5/7 Tax Refund

Shareholders who do not qualify for the 30t% tax refund may be entitled to the 5/7 refund. The conditions attached to this are:

• Company is not entitled to claim double tax relief

• Income is qualified ‘passive interest or royalties.

Worked Example

 

Euro

Company Income

100

Tax @ 35%

(35)

Profits after Tax

65

 

Shareholder:

Net Dividends

65

Tax @ Source

35

Gross Dividend

100

Tax on Gross Dividend

35

Full Imputation Credit

(35)

5/7 Refund

(25)

2/3rds Tax Refund

Maltese income tax provisions provide for a third type of refund, i.e of 2/3 of the company tax paid. The conditions attached to this refund are:

• Company may claim double tax relief

• Company may claim a Flat Rate Foreign Tax Credit on income arising outside Malta

• No limitations on the classification income of income allocated to the FTA (or MTA)

Worked Example

 

Euro

Company Net Foreign Income

100

Flat Rate Foreign Tax Credit @ 25%

25

Chargeable Income

125

Tax @ 35%

43.75

Flat Rate Foreign Tax Credit (FRFTC)

(25)

Malta Tax Due

18.75

Shareholder:

Malta Tax

18.75

2/3 Refund

(12.50)

 

Full Refund

The last and final tax refund incentive is 100% tax refund. The conditions attached to this refund are:

• Applicable to income derived from a participating holding’

• Anti – abuse provisions may apply

Worked Example

 

Euro

Company Dividends from Participating Holding

100

Tax @ 35%

(35)

Profits after Tax

65

Shareholder:

Net Dividends

65

Tax @ Source

(35)

Gross Dividend

100

Tax on Dividend

35

Full Imputation Credit

(35)

100% Refund

(35)

 

Date of Refund

Under the more efficient tax return review procedures introduced in 2010, the tax return of a company is reviewed together with any tax refund claim filed. Once both applications are found to be in order, the Commission of Income Tax will advise the tax payer ( or his advisers) that the tax return and refund claim have been approved and that the tax due may be paid. Once the Tax Office receives the tax, it will trigger the refund process which is normally in the taxpayer’s bank account within a maximum of 5 days.

Disclaimer

The above information is being provided as a general guide only and should not be considered as a substitute for professional advice.

George Farrugia is the founding partner of MGI Malta. He can be reached at [email protected]

 

This entry was posted in Publications. Bookmark the permalink.

Comments are closed.