Malta’s Tax System: 10 opportunities and advantages

With a potential internal market of 450 million consumers, the European Union is one of the biggest markets in the world. Thanks to the Single Market, Maltese companies, whatever their size, are part of this dynamic EU trade area, which fuels economic growth, creates jobs and makes doing business easier.

By incorporating a strong supervisory framework as well as a competitive, transparent regulatory and tax regime approved by both the EU and the OECD, Malta is fully aligned with European and global standards and offers unique benefits to both multinational enterprises and start-ups.

Financial services, fintech, science and technology, high value manufacturing, health, tourism, education, iGaming, maritime services, aviation and creative industries are dominant features of Malta’s economic landscape. In particular, Malta’s EU and Eurozone membership has helped it to strengthen its services sector, and the export of services across the EU member states is today a prime driver of economic growth.

In this article, we examine 10 aspects of Malta’s tax system that make it such a compelling proposition for prospective investors:

1. Full Imputation Tax System

   All companies resident in Malta are subject to income tax at a rate of 35%. However, the full imputation system 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 system applies to both resident and non-resident shareholders. The purpose of this imputation system is to eliminate any double taxation that might arise on the distribution of such dividends so that company profits are only subject to tax at corporate level.

2. Tax Refund System

   The amount of the tax refund is set at 6/7ths of the tax paid by the company, resulting in a maximum effective tax rate of 5% after-tax refunds, and 5/7ths in the case of passive interest and royalties.

   Passive interest and royalty income is income that has not been derived directly or indirectly from a trade or business and which has been subject to at least 5% foreign tax, whether directly or indirectly. The refund is reduced to 2/3rds where the distributing company claims double taxation relief under a tax treaty.

3. Corporate Residence

   Generally, an entity will be treated as a tax resident of Malta if it is incorporated in Malta. An entity incorporated outside Malta is considered resident in Malta only if the management and control of the entity is exercised in Malta.

   Maltese companies are subject to corporate tax at the rate of 35% on their worldwide income and capital gains. Non-resident companies carrying out business activities in Malta are liable to tax on income arising in Malta.

4. Notional Interest Deduction (NID)

   The NID can be claimed by companies and partnerships resident in Malta, including permanent establishments in Malta of foreign entities, against their chargeable income for the year.

   Designed to equalise the treatment of debt and equity financing, it grants an additional deduction for the return on equity financing and is calculated by multiplying the deemed notional interest rate by the balance of risk capital that the undertaking has at year end.

5. Participation Exemption

   Malta’s participation exemption regime relieves 100% of the income tax both on the dividends derived from a participating holding (where a company holds directly at least 5% of the equity shares of a non-resident company or meets certain other criteria) and on capital gains from the transfer of part or all of a participating holding.

   Alternatively, instead of claiming this exemption, a company can choose to pay tax at the normal tax rate and then receive a full refund of the tax paid upon a distribution of dividends. This exemption is particularly beneficial for holding companies, offering a tax-efficient structure for managing international investments.

6. Double Taxation Relief

   Successive Maltese governments have negotiated double tax agreements (DTAs) with key trading partners and emerging countries, to encourage the growth of international trade, including financial services. It now has a network of over 70 treaties worldwide.

   Most of Malta’s DTAs are based on the OECD Model Convention, which provides for the allocation of taxing rights to one or the other treaty countries. When Malta is the country of residence and the other treaty country is to tax at source, the taxpayer can claim a credit for foreign tax paid against tax paid in Malta.

7. Unilateral Double Taxation Relief

   Malta’s tax regime further provides for unilateral double taxation relief to be given even where there is no DTA in place.

   Any foreign tax paid is allowed as a credit against the Maltese tax chargeable on the gross foreign income. This ensures that income arising from overseas is not subject to double taxation.

8. Flat-Rate Foreign Tax Credit (FRFTC)

   The FRFTC is a form of unilateral relief that is only available to Maltese-registered companies and Maltese branches of non-resident companies. The tax credit is deemed as an amount equal to 25% of the foreign-source income received by the Malta company or branch net of foreign tax.

   This is highly beneficial where little or no foreign tax is suffered on foreign source income because a credit for deemed foreign tax will be received and consequently no proof of foreign tax suffered is required.

9. Absence of Withholding Taxes

   Malta does not levy any withholding taxes on outbound dividends, interest and royalties paid to non-residents.

10. Incentive Schemes

    Malta offers a number of incentives for enterprises demonstrating commitment towards growth, an increase in value added and employment. These apply to enterprises engaged in manufacturing, ICT development, call centres, healthcare, pharmaceuticals, biotechnology, aviation and maritime services, education and training, logistics and more.

    These include:

    • Business Start – provides early seed funding for small start-ups that have an economically feasible business concept to further develop their business proposal prior to seeking further funding or third-party equity.
    • EUREKA – supports the development of rapidly marketable innovative products, processes and services that help improve the daily life of everyday people. Participation in Network projects, European Partnership on Innovative SMEs / Eurostars and Innowwide, Clusters amongst other EUREKA instruments raises participants’ international profiles, facilitates access to finance and offers a greater chance of project proposal success.
    • Exploring Research Grant – to support businesses in planning better their R&D initiatives.
    • Innovate – Innovation Aid for SMEs – facilitates access to expertise and the generation of new knowledge towards accelerating innovation, enhancing business performance and driving competitive advantage through engagement of highly qualified personnel, and access to innovation advisory and support services.
    • INVEST – sustaining the regional industrial and economic development of Malta by facilitating initial investments resulting in the setting up of new establishments, the extension of the capacity of existing establishments, diversification of existing businesses, or a fundamental change in an overall process, amongst other activities.
    • Micro Invest – encourages undertakings (including Start-ups, family businesses and self-employed) to invest in their business, so as to innovate, expand and develop their operations. Undertakings benefitting from this measure will be supported through a tax credit calculated as a percentage of eligible expenditure, which also covers increased in wage costs.
    • Patent Box Deduction – a fiscal regime for income arising from patents, similar intellectual property (IP) Rights and copyrighted software. The rules additionally provide that small companies may utilise the patent box rules on income from any intellectual property based on an invention that could be patented.
    • Qualifying Employment in Innovation and Creativity (Personal Tax) – facilitates employment of non-residents in roles which are currently not addressed by the local labour market by temporarily easing the tax expenses incurred by such individuals through a fiscal incentive. Potential beneficiaries may contact Business 1st on 144 for guidance and information about this measure.
    • Repatriation of Persons Established in a Field of Excellence Rules – provide a framework for individuals seeking a determination of eligibility for the option provided by S.L Repatriation of Persons Established in a Field of Excellence Rules, as Subsidiary Legislation to the Income Tax Act (CAP. 123) of the Laws of Malta.
    • Research & Development – incentive to support industry in undertaking Industrial Research and Experimental Development activities to address scientific or technological uncertainties and that lead towards the development of innovative products and solutions.
    • Skills Development Scheme – supports businesses to provide training with the scope of developing and updating the skills and knowledge of their workforce.
    • Start-up Finance – to support Small Start-up Undertakings that demonstrate a viable business concept and show commitment to expand and further develop their economic activity.

Malta’s transparent, fully onshore, but highly competitive tax system is a key factor in attracting investors to Malta. It is in full conformity with EU legislation and is backed up by over 70 DTAs but allows for effective tax rates as low as 5%. This can add great value to any Malta-based operation.

Malta offers an attractive mix of tax efficiency, effective regulation and business-friendly policies, but navigating its intricacies requires careful consideration and planning. Businesses are advised to seek professional advice to understand the specific implications and opportunities that the Maltese tax system presents to their specific circumstances. Sovereign’s team based in Malta is ready to assist.