Malta offers a highly efficient fiscal regime which adopts double taxation on a taxed company profits distributed as dividends. Malta companies are taxed at a rate of 35%. However, a full imputation system applies to the taxation of dividends whereby the tax paid by the company is imputed as a credit to the shareholder receiving the dividend to as low as 5% (or full refund in the case of participating holding).
As a general rule, Malta Hedge Funds are exempt from Maltese income and capital gains tax as long as fall within the bracket of non-prescribed. Under Maltese Law, a prescribed fund is a scheme, or arrangement, that:
- Holds, at least, 85% of the total assets in Malta,
- Is classified as a prescribed fund by the Commissioner of Inland Revenue (“CIR”)
Any Malta-licensed fund which does not satisfy the above criteria is classified as a non-prescribed fund and, thus, is exempt from Malta tax as outlined below:
- No Tax on the Net Asset Value of the scheme
- No withholding tax on dividends paid to non-residents
- No tax on capital gains on the sale of units by non-residents
- No taxation on capital gains on the sale of shares or units by residents provided these are listed on the Malta Stock Exchange
A non-prescribed fund may still receive income which has been taxed – such as dividends from investments in local equities – and such tax is not available for credit or refund at the level of the fund. Such tax at source should be available as a credit or refund in the hands of the investors should the non-prescribed fund distribute its profits. Moreover, since a non-prescribed fund may be subject to foreign tax on its income, such tax should not be available as a credit or refund neither at the level of the fund nor at the level of the investor. This means that at the level of the non-prescribed fund, no further tax is incurred.
Taxation of Prescribed Investment Funds
Investment income (other than investment income paid by another investment fund) received by a prescribed fund is subject to withholding tax (“WHT”). Therefore, for prescribed funds, a WHT tax is imposed on:
- Interest paid by an institution governed by the Banking Act licensed in Malta on any bank deposits;
- Interest, premium or discounts paid:
- By the Government of Malta,
- By a corporation or authority established by law,
- Through a public issue by a company or other legal entity wherever constituted,
- Through a private issue by a company or other legal entity resident in Malta to a CIS,
- Foreign bank interest paid through an authorised financial intermediary;
- Foreign investment income
Collective Investment Schemes are required to inform payers of investment income of their status as classified by the CIR. This will allow the payer of the investment income to determine whether any WHT is to be deducted. Should such notification not be made, the payer must assume that the payment is subject to WHT and deduct such tax accordingly.
Is it further noted that any income arising from Immovable property situated in Malta is subject to the normal corporate tax rate. Such treatment is applicable for both prescribed and non-prescribed funds.
Changes in Classification from a Prescribed to a Non-Prescribed Investment Fund
What happens if the assets of the fund fluctuate in a manner that the ratio of Malta-declared assets to total assets of the fund go below, or reaches, the 85% threshold? Should this be the case, subject to certain conditions determined by the CIR, the fund may change its status accordingly, i.e. from prescribed to non-prescribed (or vice versa). Such conditions would require:
- A daily average of the value of Malta-assets and value of total assets is to be recorded,
- The daily average is calculated on a rolling period of 90 days
It is important that the valuation of assets must be made using the same valuation criteria for reports submitted to the MFSA. The ultimate classification would then be communicated by the CIR. It is therefore suggested that Malta resident funds whose assets include both Malta and foreign are required to monitor values on a daily basis.
Taxation at the Level of the Investors
In order to analyse the taxation of investors, the below need to be established:
- Is the shareholding in a prescribed or non-prescribed fund?
- What type of income is being received?
- Is the shareholder a Maltese or non-Maltese resident?
- Is the shareholder an individual or a body-corporate?
Malta Resident Investor
Any capital gains arising on the redemption, liquidation, or cancellation of units in a non-prescribed fund by Maltese shareholders may attract 15% final WHT as per the investment income provisions. Such income is not to be declared in the individual’s tax return as the 15% WHT incurred is a final tax. Should the investor wish to declare such income, then such Maltese resident may opt to receive the income in gross and thus would declare the capital gain made in the tax return.
Non-Malta Resident Investor
Non-resident unit holders are exempt from tax on gains or profits arising on the disposal of units in both prescribed and non-prescribed funds. Such exemption applies on the basis that the unit older is not resident in Malta for tax purposes and subject that such non-resident is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual/s ordinarily resident and domiciled in Malta. Such exemption for non-residents:
- Does not require a listing for the fund listed on the Malta Stock Exchange,
- The disposal can be a redemption but also a transfer
- The gain may be both a capital gain and also a trading gain