Malta Corporate Tax

Malta Corporate (Shareholder) Tax Refund System 

“Malta is a prime destination for businesses and investors seeking a tax-efficient jurisdiction. Central to this appeal is its unique corporate tax refund system, designed to reduce the effective tax rate on profits distributed to non-resident shareholders. This guide explores the refund process and highlights its benefits for businesses.

How Malta’s Corporate Tax System Works

While Malta’s standard corporate tax rate is 35%, it operates a full imputation system. This ensures that shareholders receive a credit for taxes paid at the corporate level, mitigating double taxation on distributed profits. Non-resident shareholders can apply for partial tax refunds, drastically reducing their tax liability.

Types of Tax Refunds in Malta

The refund percentage depends on the nature of the income taxed and whether any relief mechanisms, such as double taxation agreements, apply. Key refund types include:

1. 6/7 Refund: Applicable to trading income, this refund reduces the effective tax rate to just 5%.
2. 5/7 Refund: Applicable to passive income (e.g., royalties or interest), lowering the effective tax rate to around 10%.
3. 2/3 Refund: For income benefiting from double taxation relief, the refund ensures the effective tax reflects taxes already paid in other jurisdictions.

Eligibility for Tax Refunds

The tax refunds are available to non-resident shareholders of Maltese companies receiving profit distributions. Refunds are disbursed after tax is paid and the company distributes profits to shareholders. Crucially, these refunds do not affect the company itself, ensuring Malta remains competitive for businesses and investors alike.

Steps to Claim a Tax Refund in Malta

1. Company Tax Payment: The company pays corporate tax at the 35% rate.
2. Profit Distribution: Profits are distributed to eligible non-resident shareholders.
3. Refund Application: Shareholders submit a refund claim through the International Tax Unit (ICTU).
4. Refund Disbursement: Upon verification, refunds are issued directly to the shareholders.”

Furthermore, Ultimate beneficial owners often establish a Maltese two-company structure in order to postpone the personal receipt of dividends and related tax refunds. This structure typically consists of a Maltese holding company at the top and a Maltese trading (operating) subsidiary beneath it.

Under this arrangement, dividends and any tax refunds generated from the tax paid by the Maltese trading company are distributed to the Maltese holding company without triggering additional taxation at that level. The shareholders can then decide whether to retain the profits within the holding company, reinvest the funds back into the trading subsidiary, or distribute dividends to the ultimate beneficial owners when required.

Flat rate foreign tax credit mechanism

The Flat-Rate Foreign Tax Credit (FRFTC) is a simplified system for Maltese companies earning foreign-source income. It provides a presumed tax credit of 25% on the gross foreign income, eliminating the need for proof of foreign tax paid. This is particularly beneficial for companies operating in countries without a double taxation agreement with Malta.

Steps for FRFTC Application:

1. Eligibility Confirmation: Companies must derive taxable income from abroad that is remitted to Malta and subject to Maltese corporate tax.
2. Grossing Up Foreign Income: Income is grossed up by the presumed 25% foreign tax credit.
3. Tax Computation and Payment: The FRFTC is deducted from the gross Maltese tax liability.
4. Profit Allocation: After accounting for the FRFTC, the profits are allocated to the company’s tax accounts.

Business Losses

Carrying Forward Losses in Malta

Malta’s tax system allows businesses to carry forward losses incurred in one financial year to offset taxable profits in future years. This mechanism helps reduce tax liability by deducting prior losses from subsequent taxable income. Losses can be carried forward indefinitely, providing flexibility for businesses with fluctuating revenues. However, losses must be allocated to the correct tax accounts based on the source of income. If prior losses are unrelated to the new profits generated, these should not be taken as deductible against this form of income, based on the principles of deduction as defined in Article 14 of the Income Tax Act.

Group Relief for Loss Transfers

Under Maltese tax law, companies within a group, can transfer losses among themselves. This is particularly advantageous when one group company incurs a loss while another generates taxable profits, allowing the offsetting of group profits with losses. Certain conditions are applicable for group relief to be applied which include both companies being tax resident in Malta and losses being deemed to be arising from trading activities. 

Company obligations - Filing and paying corporate tax

Payment of Taxes

In Malta, companies must settle their corporate tax liabilities in stages:

1. Provisional Tax Payments: Throughout the year, businesses make three provisional tax payments based on an estimated annual liability. These are due in April, August, and December.
2. Balance of Tax: Any remaining tax due after the provisional payments must be paid alongside the final tax return submission. For companies with financial year ending 31st December, the payment may be due either:
   1. 9 months after the financial year end; or
   2. If the company has an active DDT10 exemption (stamp duty exemption), the payment deadline is extended to 18 months after the financial year end.

Common Deadlines

The submission of the corporate tax return, along with any outstanding tax payment, is due nine months after the financial year-end. However, when filed electronically, this is often extended by a further approximate 2 months. Therefore, for companies using the calendar year as their financial year, the tax return and balance of tax are typically due by September 30th of the subsequent year or November 28th if being filed electronically.

Consequences of Late Filing or Payment

Late submissions or payments attract penalties, interest, or both. Interest is charged at a statutory rate on overdue tax balances. Penalties increase depending on the timing of the submission relative to the submission due date.

Malta Anti Tax Avoidance Directive 

Malta’s implementation of the Anti-Tax Avoidance Directive (ATAD) ensures compliance with EU tax standards aimed at curbing aggressive tax planning. 

Detailed Overview of ATAD Rules in Malta

Malta’s implementation of the Anti-Tax Avoidance Directive (ATAD) ensures compliance with EU tax standards aimed at curbing aggressive tax planning. Key provisions include:

1. Interest Deductibility Limitations: Under ATAD, Malta restricts the deduction of interest payments to 30% of EBITDA to prevent base erosion through excessive interest expense deductions.
2. Exit Tax: Malta levies a tax on the unrealized capital gains when a company moves its assets or business activities out of the country.
3. Controlled Foreign Company (CFC) Rules: CFC rules target low-tax jurisdictions, taxing income shifted to subsidiaries that are subject to lower tax rates.
4. General Anti-Avoidance Rule (GAAR): This rule denies tax benefits derived from artificial arrangements designed to circumvent tax obligations, ensuring that transactions are commercially justified.
5. Hybrid Mismatches under ATAD in Malta: Malta's adoption of the Hybrid Mismatch Rules seeks to prevent tax avoidance via mismatches between jurisdictions. These rules target arrangements that exploit differences in tax treatment between countries, such as those where a payment is deductible in one jurisdiction but not included in taxable income in another.

These rules support Malta's commitment to maintaining tax transparency and aligning with international tax frameworks, such as the OECD guidelines.

Corporate Tax Service -  Helping Clients Navigate Corporate Tax in Malta. 

Our taxation team at CSB Group may support corporate entities with the preparation and submission of annual tax returns. This would ensure that the tax returns are prepared in a proper and timely manner and the correct tax charge is calculated. Find out how CSB Group can help you with your corporate tax returns.