Malta’s efficient tax framework for non-resident UBOs

The Malta tax framework and its applicability to various stakeholders has been discussed in various formats over the past years. However, as a first port of call for many foreign entrepreneurs and investors interested in obtaining a financial services license in Malta, we are often asked about taxation regulations and fiscal policies from the Ultimate Beneficial Owner’s (UBO) point of view. These UBOs are the people who ultimately decide where to locate their businesses, for which multiple relevant choices exist, both within and outside of the European Union.

In this article, we focus on one of the main pillars that bring business to Malta and aim to offer a general understanding and a rule-of-thumb to encourage UBOs and potential investors to take a more detailed look at the jurisdiction of Malta as a potential domicile. In addition, we focus on the taxation of incorporated structures, such as a limited liability company, as opposed to the taxation of individuals. For individuals, Malta has set up a number of special residence schemes which offer a palatable solution to most global citizens.

The Direct or Income Tax framework in Malta is primarily governed by two pieces of legislation: the Income Tax Act (Cap. 123) and the Income Tax Management Act (Cap. 372).  From these Acts, a number of secondary legislations have been enacted which form the foundation under the Malta Tax system.

Companies are taxed at the maximum rate of 35% of the first euro of taxable profit. Noticeable differences exist between accounting profit and taxable profit, for example with regards to ‘Provisions’ (for doubtful debts, impairment, etc.) and Depreciation vs. Capital Allowances.  In practice, the Depreciation amounts tend to be the expected amounts of Capital Allowances, therefore not much difference would exist on this level.

A tax refund mechanism is governed by the Income Tax Management Act (Cap. 372), which allows the shareholder of a Maltese Company to claim back a percentage of the income tax paid by the Maltese Company.  The percentage in question is either:

  1. a full refund or exempting the income from tax (in the case of a Participation Holding);
  2. 6/7th of the tax paid (in the case of a trading company); or,
  3. 5/7th of the tax paid (when the company has income from passive interest and/or royalties, or the company has failed the anti-abuse provisions of the Participation Holding framework).

From our experience, most licensed entities are trading companies therefore qualifying for 6/7th refund which results in an effective income tax rate of 5%. For the purposes of comparison in an EU context, the corporate tax rate of Ireland is 12.5%.

A worked example will help to explain:

A Maltese company makes a profit of €1million at the end of its fiscal year. These profits would be taxed at 35% resulting in €350,000 as a tax charge and liability of the company to the Inland Revenue Department (IRD). This would leave €650,000 to be declared as dividends to the shareholder(s) of the Maltese company.  Once the dividends are declared and the respective tax has been paid to the IRD, the shareholder makes a claim for a refund to the IRD, which when satisfied, will pay 6/7 of the tax paid by the company (€300,000 in this case) to the shareholder(s). The effective tax rate therefore equals €350,000 (initial 35% tax charge) - €300,000 (6/7th refund) = €50,000 equivalent to 5%. It should be noted that the refund system requires the dividends to be paid out as opposed to being retained in the company.

Whilst discussing the general guidelines of the Malta tax framework, we recommend obtaining specialist tax advice in order to establish your specific circumstances and requirements.