Tax Incentives

A member of the EU since 2004, Malta’s regulatory framework and company law is based entirely on EU law and directives. Malta endeavors to maintain its reputation as a serious financial centre and has distanced itself from the previous offshore regime thanks to a series of legislative changes enacted in 1994 and more recently in 2007. The offshore trading and non-trading company was replaced in 1994 by the international holding company and the international trading company which effectively guaranteed tax refunds to non-residents and restricted trading activities within Malta.

As from January 1st 2007, such international holding companies and international trading companies can no longer be registered in Malta. Nevertheless, Malta continues to develop an attractive and competitive environment for international business investment and the endorsement of the new tax reforms by the European Commission ensures a secure future for financial services in Malta which sanctions and preserves intact its competitive imputation system.

Companies resident in Malta are all subject to income tax at a rate of 35% of profits with no separate system of corporation tax. A full imputation system is applicable which means that dividends paid by a company resident in Malta carry a tax credit equivalent to the tax paid by the company on its profits out of which the dividends are distributed.  This ensures that a shareholder in receipt of a dividend from a Malta company can never suffer any further tax on such dividend in Malta.  On the contrary, individual shareholders of companies are entitled to tax refunds when their marginal tax on the dividend is less than the tax paid by the distributing company.

Shareholder Tax refunds

A shareholder of a Malta company may also claim tax refunds of up to 6/7ths of the Malta company tax paid on distributed profits depending on the source of the income.  Refunds are not permissible when distributed profits are derived, directly or indirectly from immovable property as well as the use of certain infrastructure situated in Malta.  Since the non-resident shareholder is not taxed in Malta, such shareholders of a Malta company set up for trading purposes could effectively be taxed at the rate of 5%, one of the lowest net tax costs in the EU. It is worth noting that there is no withholding tax levied on outbound dividends, interest and royalties and combined with low operating costs and a skilled workforce, Malta is both a cost-effective as well as a tax-efficient jurisdiction within the EU.

Hence to sum up, the amount a shareholder may request to be refunded is set at:

  • 6/7ths of the tax paid by the company on income distributed from the Foreign Income Account and the Maltese Taxed Account.  This normally includes virtually all forms of trading income. (the effective rate of tax in Malta paid on the company’s profits would be reduced to 5%).
  • The above refund is reduced to 5/7ths if the income from which the dividend has been distributed was derived from passive interest and royalties, and from dividends or capital gains derived from a shareholding in a foreign company that does not satisfy the participation exemption criteria (the effective rate of tax in Malta paid on the company’s profits would be reduced to 10%).
  • In the event that the company had claimed double taxation relief on foreign source income, a refund of 2/3rds of the tax paid by the company would be available.

Illustrative examples of how such tax refund mechanism works is available for your perusal together with examples of how the different tax refunds above can be applied to different sources of income.

Participation exemption

Maltese companies also benefit from a participation exemption regime in which dividends or capital gains derived from a qualifying shareholding in a foreign company (whether located in the EU or not – subject to certain conditions) may either opt to be taxed at 35% and on distribution of a dividend the shareholder may apply for a full refund of the Malta tax paid, or alternatively the company receiving the said dividends or gains may opt to exempt such income altogether with a nil liability of Maltese tax.  To attain participation exemption, the foreign company or body of persons must satisfy any one of the following three conditions:

a)   It is resident or incorporated in a country or territory which forms part of the EU; or

b)   It is subject to any foreign tax of at least 15%; or

c)   It does not have more than 50% of its income derived from passive interest or royalties.

Where none of the above three conditions are satisfied, then both of the following two conditions must be satisfied, namely;

d)   The equity holding by the company registered in Malta in the body of persons not resident in Malta is not a portfolio investment and for this purpose the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than 50% of its income from portfolio investments shall be deemed to be a portfolio investment; and

e)   The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.

Royalties Tax exemption from Patents

A notice entitled Exemption on Royalties Derived from Patents Rules, 2010 has recently been issued under the Income Tax Act. This incentive is administered by Malta Enterprise in conjunction with the Inland Revenue Department and is now available to all persons, whether individuals or enterprises that own the rights to patented intellectual property and are receiving income in the form of royalties (or other similar income there from).

Patents granted in Malta as well as those granted overseas are considered as eligible as long as the invention is considered patentable under Maltese Law or is the result of fundamental or industrial research or experimental development which are defined as follows:

  • ‘Fundamental Research’means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct practical application or use in view;
  • ‘Industrial Research’means planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It comprises the creation of components of complex systems, which is necessary for the industrial research, notably for generic technology validation, to the exclusion of prototypes as covered by ‘experimental development’ (see below);
  • ‘Experimental Development’ means acquiring, combining, shaping and using of existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services.

Any person, whether an individual or an enterprise, receiving royalty payment or similar income, for granting, through a licensing agreement or similar agreement, the exploitation of knowledge protected under a qualifying patent in terms of the Regulations, may opt to have any such income exempt from tax as long as all the following conditions are adhered to:

  • In the case where the owner of the patent is an individual; the individual must have been engaged in carrying out, solely or together with another persons, the research, planning, processing, experimenting, testing, devising, designing, developing or other similar activity leading to the invention which is the subject of the qualifying patent.
  • In any case the licence must be granted to an enterprise for using the patent in a productive economic activity, such as manufacturing, software development and data processing.

The licensing of patented knowledge linked to enterprises is allowable as long as:

  • The royalty paid does not exceed an amount that would have been paid at arm’s length, that is the amount that would have been paid if the enterprises were not related.
  • The linked enterprise acquiring the licence must be directly involved in a productive economic activity, such as manufacturing, software development and data processing.

Royalties Tax exemption from Copyright

The Income Tax Act has in May 2012 been amended to now also exempt royalties, advances and similar income derived from copyright, whether in the course of a trade, business, profession or vocation or otherwise.  Copyrightable material shall include

  • artistic works
  • audiovisual works
  • databases
  • literary works
  • musical works

The Copyright Act further defines artistic work as including, irrespective of the artistic quality, any of the following:

  • Paintings, drawings, etchings, lithographs, woodcuts, engravings and prints
  • Maps, plans, diagrams and three-dimensional works relative to geography, science or topography, but excluding semiconductor product topographies
  • Works of sculpture
  • Photographs not comprised in any audiovisual work
  • Works of architecture in the form of buildings or modles
  • Works of artistic craftsmanship, including pictorial woven tissues and articles of applied handicraft and industrial art.

It is expected that a Legal Notice will be published shortly to set out the conditions that need to be met in order to benefit from the Income Tax exemption, but the exemption appears to be considerably wide.

Incentives for Targeted Industries

Local companies within certain target sectors, such as amongst others, manufacturing operations, back office operations and e-business services, may qualify for a number of tax and other incentives including investment tax credits, investment allowances, grants, soft loans and subsidies as well as factory space at competitive prices.  Malta Enterprise is the competent authority that manages these targeted industry incentives.

We shall be glad to furnish you with additional information upon request.