Understanding Rental Income Tax in Malta

Rental income taxation in Malta is governed by specific regulations that distinguish between short-term and long-term rentals. Understanding these tax rules is essential for property owners to ensure compliance and make informed financial decisions.

Short-Term vs. Long-Term Rentals

The Maltese tax system differentiates between two types of rental income. Short-term rentals, such as holiday lets, are classified as trading income and taxed under Article 4(1)(a) of the Income Tax Act (ITA). Long-term rentals, typically residential leases exceeding six months, are considered investment income and fall under Article 4(1)(e) ITA. This distinction affects how rental income is reported and taxed.

Options for Rental Income Tax

There are two primary methods for declaring rental income in Malta: the 15% Final Withholding Tax (FWT) and progressive taxation as part of total income.

15% Final Withholding Tax (FWT)

• Under this scheme, taxpayers can opt for a fixed 15% tax on their gross rental income, meaning no deductions are allowed. The tax applies to both residential and commercial properties—residential properties have been eligible since 2014, while commercial properties were included from 2017 onwards.

• To apply, landlords must submit Form TA24, either online or manually, within the required deadline. Once this tax is paid, it is considered final, meaning no refunds or set-offs are available. The FWT option is open to both resident and non-resident landlords, with the condition that all rental income from the year must be declared under this scheme if chosen. Partial declarations under different methods are not permitted within the same tax year.

Taxation as Part of Total Income

• Alternatively, rental income can be included in the taxpayer’s annual tax return and taxed at standard progressive rates based on total earnings. This option allows landlords to claim deductions related to the rental property, reducing taxable income.

• Taxpayers who opt for this method must declare their rental earnings each year, even if payments are received in advance or delayed. The taxable amount is based on actual rent received, ensuring consistency in reporting.

Key Considerations for Choosing a Taxation Method

Landlords must select one taxation method per year and apply it consistently across all rental properties. If the FWT option is chosen, it cannot be combined with standard progressive taxation within the same tax year. Furthermore, once rental income is submitted under the FWT scheme, it should not be included in the annual tax return, and adjustments after submission may not be possible.

Deductions for Rental Income Declared in a Tax Return

Landlords who declare rental income under Article 4(1)(e) ITA can claim specific deductions under the Deductions (Expenses in Respect of Immovable Property) Rules, 1978. These include expenses directly related to maintaining the property and generating rental income.

Eligible deductions include:

• Interest on loans taken for acquiring or improving the rental property.
• Ground rent or lease fees paid.
• License fees applicable under the Guest Houses and Holiday Furnished Premises Act.
• A 20% maintenance allowance, calculated on net rental income after deducting ground rent and license fees.

The total deductions for a property cannot exceed its rental income for the year. If expenses surpass rental earnings, they cannot be carried forward or offset against other sources of income.

Special Tax Rules for Non-Resident Landlords

Non-residents earning rental income from Maltese property are still subject to local tax regulations. They may opt for the 15% FWT, in which case no deductions apply, or declare rental income in their annual tax return, allowing for deductions under L.N. 100 of 1993. However, certain restrictions apply, such as the exclusion of the 20% maintenance deduction for emphasis income.

Capital Gains Tax and Rental Properties

Property owners should also consider capital gains tax implications when selling rental properties. In some cases, properties that were previously leased at ‘Affordable Rents’ may qualify for a capital gains tax exemption. Additionally, properties leased to the Housing Authority benefit from special tax provisions, including reduced tax rates and exemptions.

Tax Treatment for Companies

Companies earning rental income and opting for the 15% FWT must report it in their Final Tax Account (FTA). No further tax is due when profits are distributed, and deductions are not allowed. However, the 15% FWT is not applicable to rental income from related parties, defined as entities where one holds more than 25% ownership or control over another under Article 16 ITA.

Provisional Tax and Record-Keeping

Rental income is subject to provisional tax payments, requiring landlords to prepay estimated taxes throughout the year. In addition, landlords must maintain detailed trading records for at least 10 years for tax compliance purposes. Each rental property must be accounted for separately, meaning income and expenses cannot be pooled across multiple properties. If deductions exceed the rental income for a specific property, taxable income for that unit is zero, but losses cannot be offset against other properties.

Reduced Tax Rates for Certain Rental Properties

Some rental properties benefit from reduced tax rates under specific conditions. A 5% final withholding tax applies to:

• Properties rented to individuals receiving rent subsidies (Article 31B ITA).
• Rental income from restored properties (Article 31C ITA).
• Properties registered with the Housing Authority (S.L. 123.201).

These incentives encourage property owners to provide affordable housing or invest in property restoration.

VAT and Eco-Contribution for Tourist Accommodations

Long-term residential rentals are generally exempt from VAT, but some exceptions apply to short-term tourist accommodations, which may be subject to VAT. Additionally, for tourist accommodations, an eco-contribution of €0.50 per person per night is required, ensuring compliance with environmental regulations.

Declaring Rental Income in the Tax Return

When filing a tax return, landlords must accurately declare rental income. Investment rental income tax should be reported in Box 11a, which includes total rent, premiums, key money, and other receipts. Income from ground rents should be declared in Box 11b. Deductions should be entered under Section 16, with ground rent deductions in Box 16a and the 20% maintenance allowance in Box 16b.

The total deductions for a property must not exceed the rental income declared for that unit. If income is insufficient to cover deductions, they cannot be transferred to other properties or carried forward.

Key Takeaways for Landlords

Understanding Malta’s rental income tax is vital for property owners seeking compliance and tax efficiency. Whether opting for the 15% Final Withholding Tax (FWT) or taxation under progressive rates, landlords should evaluate the financial implications of each approach. Non-resident landlords must also consider specific tax obligations and exemptions. Consulting a tax expert ensures compliance with Maltese tax laws while maximizing deductions and tax benefits.

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Further Read

Sources

Income Tax Act (ITA)

Housing Authority Malta

Subsidiary Legalisation 123.26

Taxation on Rental Income – CFR

Taxation for Individuals – CFR