A 25% rate on retained profits for smaller companies, a VAT reverse charge for construction and higher charges on tourism and foreign labour: the measures announced on 26 October 2026 and what they mean in practice.
Finance Minister Clyde Caruana presented the Budget for 2027 to Parliament on 26 October 2026, the first Budget of the legislature returned at the general election of May 2026. The Minister described it as the most important of his six Budgets. It pairs continued energy subsidies and a sizeable social package with fiscal measures intended, in the Government’s words, to move Malta towards a more productive, higher-value economy that relies less on adding labour.
For businesses and taxpayers there is no increase in income tax rates, VAT or social security contributions. The measures of most consequence are a new 25% rate of tax on profits that smaller companies retain or reinvest, a mandatory domestic reverse charge for VAT on construction-related supplies between businesses, a tightening of the rules on property transactions involving airspace, higher permit costs for employers of third-country nationals, and a sharp increase in the tourism eco-contribution. Households receive the second step of the three-year tax reduction for parents announced last year, a cost-of-living adjustment of €6.41 per week and a tax-free Super Bonus of up to €1,000.
Every measure summarised below is a Budget announcement. None is yet law. By established practice the fiscal measures will be enacted through a Budget Measures Implementation Act, supplemented by legal notices and by guidelines issued by the Malta Tax and Customs Administration (MTCA), and the detailed conditions will be known only when those texts are published. Where this article notes that a point remains open, that is the reason.
The Economic and Fiscal Backdrop
The Budget is set against a strong domestic performance. Real GDP grew by 4.7% in 2025 and by 4.4% in the first half of 2026, against an EU average of 1.2%. The Government forecasts growth of 4.1% for 2026 and 3.8% for 2027, inflation of 2.5% and 2.7% respectively, and unemployment of 3.3% and 3.2%.
The 2025 deficit closed at 2.1% of GDP, well below the 3.3% forecast a year earlier, and Malta left the EU excessive deficit procedure in June 2026. The deficit is projected at 2.6% of GDP in both 2026 and 2027, with debt broadly stable at 46.7% and 46.8% of GDP. Energy and fuel subsidies remain the largest single pressure, at about €392 million in 2026 and around €400 million in 2027 (roughly 1.4 percentage points of GDP), and the Government has committed to keeping electricity, gas and fuel prices stable throughout 2027. Other than the 2025 outturns, these are Government forecasts and estimates presented with the Budget.
The Government has been explicit that it wishes to shift the economic model away from growth driven primarily by additionallabour, and that fiscal policy will be used to that end. The new revenue measures accordingly fall mainly on tourism and on the employment of third-country nationals rather than on resident households; independent commentary on Budget night put their combined yield at around €324 million, close to three times the €121 million social package.
Key Measures at a Glance
Measure
Who is affected
Announced position
Status
25% rate on retained or reinvested profits
Companies with turnover not exceeding €1 million
25% instead of 35% on profits retained or reinvested; distributed profits remain at 35% through a top-up on distribution; conditions and limitations to be set out in rules
Announced; no effective date given; rules awaited
Parent and married tax bands
Families with children
Second step of the three-year reduction: 0% thresholds of €20,000 (married, one child), €16,000 (parent, one child), €30,000 (married, two or more children) and €24,000 (parent, two or more children) for basis year 2027
Announced in Budget 2026 and confirmed; legal basis for the 2027 bands to be verified
Super Bonus
Persons in employment or self-employment in 2025
Tax-free payment of €1,000 where 2025 employment income was €12,000 or more, reducing on a scale to €500
Announced; payment in the first quarter of 2027
VAT reverse charge on construction
Suppliers and business customers of construction-related supplies
Customer accounts for the VAT and deducts it subject to the normal rules
Announced; amendment to the VAT Act awaited; no commencement date given
VAT invoice and fiscal receipt penalties
All persons registered for VAT
Administrative penalties of €100 to €500 per failure within a 24-month period, replacing immediate criminal proceedings
Announced; commencement to be confirmed
VAT exemption on food
Retailers and food service operators
MTCA guidelines on ready-to-eat food sold by supermarkets and convenience shops
Administrative guidance awaited
Airspace transfers
Developers, sellers and buyers of airspace; notaries
Fuller disclosure of total consideration, strengthened valuation and verification, taxation by economic substance
Announced; prospective, after consultation
Third-country national permits
Employers of non-EU workers
Application fee €800 (from €600); new €400 annual infrastructure contribution on new permits and renewals
Announced; expected from 2027
Eco-contribution
Accommodation and short-let operators; cruise and Comino visitors
€8 per night (cap €64) in collective accommodation; €10 per night (cap €80) in short lets; €10 per cruise passenger; €5 for Comino
From 1 January 2027
COLA, minimum wage and pensions
Employers, employees, pensioners
COLA €6.41 per week; minimum wage up €10.41 per week including COLA; pensions up €10 per week; tax-free pension threshold €37,624
From January 2027
Separate tax returns for spouses
Married couples
Individual returns as the general rule, with joint filing available by election
Announced; details awaited
Corporate Taxation: a 25% Rate on Retained or Reinvested Profits
What was announced
The headline business measure is a reduced rate of income tax of 25%, in place of the standard 35%, for companies whose turnover does not exceed €1 million, applicable only to profits that are retained within the company or reinvested in it. Profits distributed to shareholders remain subject to tax at 35%, which the Budget summaries describe as a top-up on distribution. The Minister stated that the framework would operate within Malta’s existing corporate tax system and that the conditions and limitations would be set out in rules. No effective date was announced.
The measure delivers, in reshaped form, a 2022 manifesto pledge that was then described as a 25% rate on the first €250,000 of retained profits. The qualifying test is now turnover rather than profit, and no cap on qualifying profits was mentioned.
How it sits within the existing system
Under the Income Tax Act (Cap. 123) a company is chargeable at 35% on its chargeable income, and the full imputation system then allows shareholders to claim a refund of part of that tax on distribution under Article 48(4) of the Income Tax Management Act (Cap. 372), most commonly six-sevenths of the tax on trading profits. The refund system is built around distribution. It reduces the combined burden on distributed profits, particularly for non-resident shareholders, but it does nothing for profits that stay in the company, which have always borne the full 35%.
Read against that framework, the new measure does something the refund system does not. It lowers the cost of retention, and it does so for the companies for whom the refund system rarely produces an effective rate materially below 35% in any event: owner-managed and locally held businesses whose shareholders are resident and domiciled in Malta and are taxed on the grossed-up dividend at their marginal rates. For such a company, retained profits are taxed at 25% instead of 35%, and the further 10 percentage points become payable only if and when the profits are paid out. For a company owned by non-resident shareholders who rely on the six-sevenths refund, distribution remains the cheaper route, since 25% on retention is still well above the 5% effective rate on distributed trading profits. The measure is therefore aimed squarely at the domestic SME base and does not alter the refund model for internationally held companies.
A worked illustration: a trading company with turnover of €800,000 and chargeable income of €100,000 that retains the full amount would pay €25,000 rather than €35,000, a saving of €10,000 for the year. On the announced description, if those profits are later distributed the additional €10,000 would become payable so that the aggregate charge returns to 35%. The benefit is a genuine reduction while the profits remain in the business and a deferral if they are eventually distributed. The illustration assumes no other deductions, credits or refunds and that the rules are enacted as described.
What the rules will need to settle
The speech left the design of the measure to subsidiary legislation, and the design will determine its real value. The points to watch are the following.
Turnover: How it is defined (revenue in the audited accounts or a tax definition), the period by reference to which it is tested, and whether the turnover of connected companies, or of a fiscal unit formed under the Consolidated Group (Income Tax) Rules, is aggregated. Without an aggregation rule the threshold could be met by fragmenting activities; with one, groups of small companies may fall outside.
The cliff edge: Whether a company whose turnover exceeds €1 million loses the benefit entirely for that year, with the disincentive to growth that a hard threshold creates, or whether a taper or a grace period applies.
Retained and reinvested: Whether retention alone, in the sense of profits left in reserves, qualifies, or whether some form of qualifying expenditure is required, and whether a holding or passive company can qualify at all.
The top-up on distribution: Whether the additional tax is charged on the company at the time of distribution or recovered by adjusting the imputation credit or refund at shareholder level; the order in which profits taxed at 25% and at 35% are treated as distributed; and the treatment on a liquidation, a reduction of capital or a share buy-back.
Tax accounting: How profits taxed at 25% are allocated between the tax accounts (the Maltese Taxed Account, the Final Tax Account and the others) and whether any refund entitlement attaches to them on distribution.
Interaction with existing regimes: The Notional Interest Deduction, Micro Invest and other tax credits, capital allowances, and the elective 15% final tax without imputation introduced by Legal Notice 188 of 2025, which carries its own safeguards (the tax cannot fall below the effective tax under the ordinary rules, and an election binds the company for five years) and which a company will need to compare against the new rate before choosing a route.
Timing: The first basis year to which the rate applies, its effect on provisional tax payments, and the deferred tax consequences for financial statements prepared under IFRS or GAPSME.
Commercial implications
For owner-managed companies below the threshold, dividend policy becomes a tax decision in a way it has not been before. Retaining profits for working capital, premises, equipment or hiring will be cheaper; drawing them out will not. Companies approaching the €1 million turnover mark should model the position on both sides of the line before the year end in which the measure takes effect, and groups should consider whether their structure gives them the benefit at all. Companies that have been distributing routinely to Malta-resident shareholders should revisit whether that remains the right approach once the measure is in force. Any restructuring undertaken to access the rate should be approached with the general anti-avoidance provision in Article 51 of the Income Tax Act in mind.
Personal Taxation and Household Measures
Parent and married computations
The Budget confirms the second of three annual steps in the reduction of income tax for families with children announced in Budget 2026. For basis year 2027 the tax-free thresholds rise to €20,000 for married couples with one child, €16,000 for dual-earner parents with one child, €30,000 for married couples with two or more children and €24,000 for parents with two or more children, with a final step in 2028 to €22,500, €18,000, €37,000 and €30,000 respectively. The 15% and 25% bands are adjusted accordingly, and the 35% rate continues to apply above €60,000 in every computation.
Computation
0% threshold 2026
0% threshold 2027
0% threshold 2028
Maximum saving 2027
Maximum saving 2028
Married, one child
€17,500
€20,000
€22,500
€1,450
€2,175
Parent, one child
€14,500
€16,000
€18,000
€1,150 per parent
€1,800 per parent
Married, two or more children
€22,500
€30,000
€37,000
€4,050
€6,000
Parent, two or more children
€18,500
€24,000
€30,000
€3,250 per parent
€5,000 per parent
Maximum savings as stated in the speech, measured against the parent and married rates in force before 2026.
By way of example, a parent using the two-or-more-children computation with employment income of €42,000 and no other income, deductions or credits would pay €6,800 under the rates in force before 2026, €5,175 for 2026, €3,550 for 2027 and €1,800 for 2028 on the announced bands. The relief is applied through the FSS system, so no election is needed, but employers and payroll providers should confirm that the correct computation is applied to each employee’s declared status from the first payroll of 2027.
Super Bonus
A tax-free Super Bonus will be paid in the first quarter of 2027 to persons who were in employment or self-employment during 2025, by reference to their 2025 employment income. Persons with employment income of €12,000 or more receive €1,000; those with lower income receive a reduced amount on a sliding scale, from €925 for income between €11,000 and €11,999 down to €500 for income between €2,000 and €5,999. Working pensioners and part-time workers are included. Some reports indicate that eligibility is confined to Maltese and EU nationals and long-term residents; that condition does not appear in all summaries and should be confirmed against the legal basis when it is published. The bonus is a Government payment rather than a payroll item, and the Minister indicated that it will be paid by cheque.
Pensions, Cost of Living and Wages
The cost-of-living adjustment for 2027 is €6.41 per week (€333.32 a year). The national minimum wage rises by €10.41 per week including COLA, in the final step of the 2023 agreement with the social partners, and the Low Wage Commission is to be reappointed to negotiate the position from 2028. Persons on the minimum wage continue to pay no income tax. Retirement, invalidity, widows’ and age pensions rise by €10 per week from January 2027, the tax-free pension income threshold increases by €520 to €37,624, and the maximum pensionable income for pensioners born before 1962 rises to €28,000. The retirement age and social security contribution rates are unchanged.
From 2027 social security contributions may be transferred between spouses in specified circumstances so that a spouse without a pension entitlement can qualify, and contribution credits of up to two years will be available for absences from work caused by mental health conditions or domestic violence. An additional COLA mechanism will provide annual payments of between €200 and €1,500 to eligible households, and the Carers Grant and Carer at Home benefit rise to €7,500 and €9,800 a year respectively.
Separate Tax Returns for Spouses
The Government intends to reform the filing framework so that, as a general rule, each spouse files an individual income tax return, with joint filing remaining available by election where the law permits it. As announced this is a change to the return process rather than to the computation of tax, but the detail will matter for couples who rely on the joint or separate computation elections and for jointly held income.
VAT: Construction Reverse Charge, Penalties and the Food Exemption
Domestic Reverse Charge for Construction
A mandatory reverse charge mechanism will apply to construction-related supplies between businesses. The obligation to account for VAT will move from the supplier to the business customer, which will declare the output tax in its own return and may deduct it as input tax subject to the ordinary rules on deductibility. The EU VAT Directive expressly permits Member States to apply a reverse charge to construction work, so the measure can be implemented by amendment to the Value Added Tax Act (Cap. 406) and its schedules without an EU derogation. The Minister presented it as an anti-abuse measure against suppliers charging VAT that is never paid over.
The practical effects are significant. Suppliers, including subcontractors, will invoice without VAT and lose the cash-flow benefit of holding output tax until their return date; those with substantial input tax may move into a repayment position. Business customers must account for the tax themselves, which transfers the compliance risk to them. A developer whose own supplies of immovable property are exempt without credit will self-account for VAT on construction services it cannot recover, so its economic cost is unchanged but the liability now sits in its own return. The definition of construction-related supplies and of business customers (in particular persons registered under Article 11 of the VAT Act and unregistered customers) will determine where the line falls, and transitional rules for contracts straddling commencement will need attention. Systems, invoice templates and contract terms should be adjusted before the measure takes effect.
Penalties for Invoices and Fiscal Receipts
Immediate criminal proceedings for failure to issue correct tax invoices or fiscal receipts are to be replaced by administrative penalties of €100 for a first failure, €200 for a second, €400 for a third and €500 for a fourth and each subsequent failure within a 24-month period. Payment within 30 days will extinguish criminal liability for the failure concerned, and the Minister indicated that recorded failures will feed into MTCA risk assessments that may trigger audits. Court-imposed fines for VAT offences are also to increase. The 24-month escalation makes repeated minor failures expensive, and a penalty history becomes an explicit selection factor for inspection.
Guidance on the VAT Exemption for Food
MTCA is to publish guidelines on the application of the exemption for food, with particular reference to ready-to-eat food sold by supermarkets, minimarkets and convenience shops, to ensure consistent treatment and fair competition with restaurants. Food for human consumption is generally exempt without credit, whereas catering and restaurant supplies are taxable at the standard rate, and the boundary for prepared items sold by retailers has not been applied consistently. This is an administrative interpretation rather than a change in the law, but retailers and food service operators should expect that current treatments may need to change once the guidance is issued.
Property: Airspace Transfers and Renewed Schemes
The Budget announces targeted measures to address property transactions in which the sale of airspace or land is accompanied by a separate works contract, with the result that transfer tax and duty are calculated on only part of the value of the completed property. The measures are intended to require fuller disclosure of the total consideration agreed, to strengthen valuation and verification procedures, and to tax such transactions according to their economic substance. They will also reach arrangements involving intermediaries or developers who are not named in the transfer deed. The new framework is to apply prospectively, following consultation, with the stated aim of giving buyers, developers and professionals clearer guidance and greater legal certainty.
The measure engages the property transfer tax under the Income Tax Act and duty under the Duty on Documents and Transfers Act (Cap. 364), and may have VAT consequences where the works element is recharacterised. Until the legal text is available it is not possible to say how the combined consideration will be determined or who will bear any additional liability, and no conclusion should be drawn on any particular structure. Developers and notaries should nevertheless expect enhanced disclosure requirements and review how current arrangements are documented.
All existing property schemes are to be renewed for 2027, including those relating to the acquisition and renovation of residential property. No new duty or transfer tax reliefs were announced; the reliefs introduced in Budget 2026, including the extension of the 3.5% rate on inherited residential property to the first €400,000 and the permanent first-time buyer scheme, continue to apply.
Employing Third-country Nationals
The cost of employing non-EU workers rises in two ways. The fee for a new work permit application increases from €600 to €800 per person, and a new annual infrastructure contribution of €400 will apply to both new applications and renewals, with minors excluded. Fees for several other permits issued by Identità are also to rise. The Government estimates the revenue at around €80 million. These costs arise at the point of application and are in practice usually borne by the sponsoring employer; businesses that rely on third-country recruitment should factor the increases into 2027 staffing budgets and into any contractual arrangements under which costs are passed on.
Separately, from January 2027 free public transport and the atypical work cheque will be limited to Maltese and Gozitan citizens, resident EU citizens and long-term residents, and new applications for free childcare will be subject to the same criteria, with existing users retaining access until their children are no longer eligible. A monthly administrative fee of €83 will apply to certain Category B and B1 driving licences issued or renewed from 2027, with exemptions for EU and EEA nationals, long-term residents and certain other nationalities. None of these is a tax measure, but together they affect the net position of third-country employees and, indirectly, employers’ retention and remuneration discussions.
From 1 January 2027 the eco-contribution on tourist accommodation rises to €8 per person per night in collective accommodation (hotels, aparthotels, guest houses, hostels and similar establishments), capped at €64 per stay, and to €10 per person per night in short-let apartments, capped at €80. The contribution continues to apply to guests aged 18 and over, and overnight stays at English language schools are exempt. These are substantial increases from the €1.50 per night in force for 2026, and the Government expects them to raise about €182 million. A new €10 contribution applies to cruise passengers who disembark and re-embark on the same ship in Malta, with passengers starting their cruise in Malta excluded, and a €5 contribution to visitors to Comino’s Blue Lagoon. Fast ferry fares for tourists rise by €3 per journey, non-resident Gozo Channel fares increase to €11 for an adult, €7 for a child and €22 for a vehicle with driver, and registration fees rise for vessels of 10 to 24 metres.
Accommodation operators and short-let licensees collect and remit the contribution and will need to update booking systems, rate cards and terms of business before 1 January. The hotel industry has publicly questioned the effect on competitiveness.
Business Incentives and Sector Developments
No new tax credit or allowance was announced for businesses generally. Malta Enterprise will continue its schemes supporting digitalisation, automation and high value-added investment, with further incentives to be offered to attract new niche sectors; the details are expected to follow from the responsible ministries. Existing schemes for renewable energy, electric vehicles, non-governmental organisations and sports organisations are renewed. The Youth-Led Start-Up Support Scheme launched in 2026 continues alongside the new corporate rate.
In financial services the Budget signals continued work on the regulatory framework, naming family offices, crypto-asset businesses, fintech and aircraft leasing as growth areas. Around €75 million will be invested in the electricity distribution network in 2027, the second interconnector with Sicily is due to double import capacity, and a strategic partner is being sought for KM Malta Airlines.
One matter the Budget summaries do not address is the domestic 15% measure for Maltese entities of groups within the scope of the EU Minimum Tax Directive, which the Prime Minister announced in August 2026 as a change to the refund mechanics for the small number of in-scope groups. Malta continues to apply the derogation that defers the Pillar Two charging rules, and the elective 15% final tax remains available. Groups affected should await the legislative text rather than rely on the Budget commentary.
Practical Implications
Companies and their owners: model the 25% rate on retained profits against current dividend practice, and where relevant against the elective 15% final tax, once the rules are published; companies near the €1 million turnover threshold should quantify the position on both sides of the line, and groups should assess whether aggregation or a fiscal unit changes the answer.
Construction and property: prepare systems, invoicing and contracts for the reverse charge, with partially exempt customers reassessing their VAT compliance resourcing; developers using airspace and works-contract structures should review how arrangements are documented ahead of the consultation.
All VAT-registered businesses: review invoicing and fiscal receipt controls now, since the penalty regime escalates over 24 months.
Employers: apply the 2027 COLA, minimum wage and parent and married computations from the first payroll of 2027, and budget for the higher permit and infrastructure costs of third-country recruitment, including any cost-sharing clauses in employment contracts.
Tourism operators: implement the new eco-contribution rates from 1 January 2027.
Individuals: the parent and married reliefs apply automatically through FSS provided the declared status is correct; on the information available the Super Bonus requires no application, subject to confirmation of the eligibility conditions.
Outstanding Details
Beyond the design questions on the 25% rate set out above, the following require legislative or administrative confirmation: the scope and commencement of the construction reverse charge and the treatment of contracts in progress; the commencement of the penalty regime; the content of the MTCA guidelines on food; the scope of the airspace measures and their effect on transfer tax, duty and VAT; the eligibility conditions for the Super Bonus; the legal basis for the 2027 parent and married bands; and whether the 15% measure for in-scope multinational groups is to be legislated together with the Budget measures. CSB Group will publish further updates as the Budget Measures Implementation Act and the related legal notices and guidelines are issued.
Conclusion
Budget 2027 is less generous to business than the headline rate cut suggests and more consequential than a single-year reading implies. The 25% rate on retained profits is a targeted measure for the domestic SME base, built on a deferral of the balance to distribution, and its value will be decided by rules not yet written. The construction reverse charge and the airspace measures are compliance and anti-avoidance reforms with real operational effects for the property sector. The revenue measures on tourism and third-country labour are deliberate signals about the growth model the Government wants, and will be felt most by the sectors that have relied on volume. The sensible response for most businesses is preparatory rather than reactive: identify which measures touch the business, model the alternatives, and be ready to act when the implementing legislation provides the detail. CSB Group’s tax advisory team is available to assist clients in assessing the impact of these measures on their specific circumstances.
CSB Group’s tax advisory team is available to assist clients in assessing the impact of these measures on their specific circumstances.
This article is based on the Budget Speech for 2027 delivered on 26 October 2026 and the accompanying Government documentation published by the Ministry for Finance (finance.gov.mt/budget27), as reported at the date of writing. The measures described are announcements and remain subject to implementing legislation and guidance. The article is intended as general information and does not constitute tax or legal advice; specific advice should be sought before acting on any of the matters discussed.
