Malta’s tax system is one of the main reasons why businesses and expats are drawn to this Mediterranean gem. While the standard corporate tax rate is 35%, smart mechanisms like tax refunds and participation exemptions can bring it down to as low as 5%. That’s a big win for anyone looking to make their money work harder.
To find out more about this topic, in this article, we break down Malta’s tax system, explaining the key elements that make it a strategic choice for business activity and residency.
Why Should Expats Consider Setting Up a Business in Malta?
- Malta’s Tax Refund System
Malta’s tax refund system plays a critical role in the corporate tax structure by allowing companies to recover a significant portion of the income tax paid. Specifically, companies can receive refunds of up to 6/7ths of the paid tax, subject to meeting specific conditions and providing the necessary financial documentation.
Applications for tax refunds are processed through the Capital Transfer Duty Department in Valletta. Once submitted, companies receive an acknowledgment with a reference file number.
Typically, tax refunds are processed within three months. However, if the Commissioner for Revenue does not issue any overpaid tax refunds within six months from the tax return date, interest at a rate of 0.33% per annum is applicable on the outstanding amount.
- Double Tax Relief and Participation Exemption
Malta’s tax system is especially appealing due to its comprehensive network of double tax agreements aimed at preventing double taxation—the scenario where the same income is taxed by more than one country. Malta has established 76 double tax treaties that provide various forms of relief from this issue, enhancing its attractiveness as a business location.
Forms of Double Tax Relief
The double tax agreements offer several mechanisms for tax relief, including:
- Treaty Relief: This directly applies to the provisions of the specific double tax treaty between Malta and another country.
- Unilateral Relief: For countries with which Malta does not have a treaty, relief is still possible through Malta’s own tax policies.
- British Commonwealth Relief: Applies to countries within the Commonwealth, leveraging shared historical and administrative ties.
- Flat-Rate Foreign Tax Credit: Offers a credit for foreign tax paid at a flat rate, simplifying the tax credit process.
These agreements are particularly beneficial for foreign investors from non-EU countries like the United States, the United Kingdom, and the United Arab Emirates. Notably, Malta imposes no withholding taxes on outbound payments, such as dividends, interest, and royalties, which can significantly enhance foreign entities’ return on investment.
- Participation Exemption Perks
Another significant advantage within Malta’s tax framework is the participation exemption. This benefit exempts the dividend income and capital gains received from qualifying holdings from taxation. For a holding to qualify, it must:
- Hold at least 5% of the equity shares of another company, which affords it voting rights and a right to profits and assets upon dissolution.
- Be based in the EU or incorporated there.
- Be subjected to a tax rate of at least 15%.
- Earn less than 50% of its income passively from interests or royalties.
- Not merely a portfolio investment.
- Be taxed at a minimum rate of 5%.
With these criteria met, businesses can benefit from complete tax relief on dividends and capital gains arising from these qualifying holdings.
Corporate Tax Benefits: 5% Effective Corporate Tax Rate
Malta’s corporate tax rate is nominally set at 35%, but effective mechanisms like the full imputation system and refundable tax credits reduce this rate significantly.
For businesses, the effective tax rate can be as low as 5%. This is made possible through a 30% refund on taxes paid, a setup that makes Malta’s corporate tax structure highly competitive.
Fiscal Units Strategy
In Malta, the creation of fiscal units offers a strategic method to streamline the tax process for groups of companies, facilitating quicker access to the advantageous 5% effective tax rate. This approach is particularly beneficial for bypassing the delays often associated with tax refunds.
How to Form a Fiscal Unit
To establish a fiscal unit in Malta, certain conditions must be met:
- Formation of Entities: A trading company and a holding company must be established.
- Share Ownership: The holding company must own at least 95% of the trading company’s shares.
- Exclusive Membership: A company can only be part of one fiscal unit at a time.
Once these criteria are fulfilled, the fiscal unit allows income and gains from subsidiaries, also known as Transparent Entities, to be consolidated. This income is allocated directly to the parent (holding) company, which then handles the tax obligations on its worldwide income. This consolidation not only speeds up the process of achieving tax efficiency but also simplifies the management of tax affairs for the entire group.
Strategic Tax Planning
For expatriates, the use of schemes like the Qualifying Recognised Overseas Pension Scheme (QROPS) can offer significant tax relief, as pensions under this scheme are not taxed if not remitted to Malta. Additionally, Malta does not impose inheritance, wealth, or annual property taxes, further enhancing its attractiveness for tax-efficient planning.
Investment Opportunities and Tax Incentives
Malta, with support from Malta Enterprise, continues to offer various incentives to encourage investment, particularly in industries like manufacturing, R&D, and information technology. These incentives include tax credits, grants, and even soft loans to support business growth and innovation.
In conclusion, Malta’s tax system offers a comprehensive array of benefits that can significantly enhance the financial operations of businesses and the lives of expatriates residing in the country.
Stamp Duty Exemption
Is your company eligible for a stamp duty exemption granted by the Commissioner for Revenue under Article 47 of the Duty on Documents and Transfers Act (DDT10 exemption)?
The DDT10 exemption not only provides relief from stamp duty but also extends the tax payment deadline from 9 to 18 months after the financial year-end.
To benefit from the DDT10 exemption, your company must submit a new application and meet the following criteria:
a) The company conducts more than 90% of its business interests outside Malta;
b) The company’s turnover is not derived from activities with customers/clients resident in Malta;
c) The company’s turnover is not derived from activities with non-resident customers/clients who operate in Malta through a local branch;
d) The company’s turnover is not derived from any retail, catering, on-land entertainment, manufacturing, transport, agricultural, or fishing activities conducted in Malta;
e) The company’s turnover is not derived from immovable property situated in Malta.
For further details, please contact us and we will be happy to assist you.
Important Considerations for Expats
Malta’s tax advantages aren’t just for businesses. Expatriates in Malta can qualify for a reduced income tax rate of 15% if they possess professional qualifications or are highly skilled in certain sectors. In addition, retiring expatriates under the Permanent Resident Scheme (PRS) pay tax at a flat 15% rate on income sourced from Malta, with foreign income and capital gains being tax-exempt.
Resident expatriates in Malta are taxed on local income and capital gains as well as foreign income that is received in Malta; however, foreign capital gains are excluded from taxation. Moreover, EU nationals, as residents of Malta, can access a reduced tax system for an indefinite period, while non-EU nationals can benefit for four consecutive years.
Before relocating to Malta and diving into the realm of business ownership, expatriates should consider several crucial factors:
Legal and Regulatory Compliance: Familiarise yourself with Malta’s legal framework, including company formation procedures, tax filing requirements, and compliance obligations.
Financial Planning: Seek professional advice to optimise your tax position and ensure compliance with local regulations.
Cultural and Linguistic Diversity: Embrace Malta’s rich cultural tapestry and multilingual environment to foster strong relationships with clients and stakeholders.
Networking Opportunities: Engage with Malta’s vibrant business community to expand your professional network and seize growth opportunities.
Long-Term Strategy: Develop a comprehensive business plan tailored to Malta’s unique market dynamics and your strategic objectives.
Wrapping It Up
With options like tax refunds, participation exemptions, and double tax relief, it’s clear why so many businesses and expats are making the move to Malta.
If you’re ready to explore your options in Malta, take the time to understand how these tax benefits can work for you. Reach out to local experts, make a plan, and see how you can tap into the financial advantages that so many have already discovered. Malta’s doors are open—and so are its opportunities.
If you’re thinking of doing the same, we’re here to support you every step of the way.
Sources
Capital Transfer Duty Department in Valletta
A Guide for International Investors on Malta’s Double Taxation Agreements
English 
Danish 
French 
German