Flat-Rate Foreign Tax Credit

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The flat rate foreign tax credit (FRFTC) is another form of unilateral relief that is available only to corporate entities.

FRFTC can be applied, insofar that the following conditions are satisfied:

(i) The company making use of such relief is registered in Malta;

(ii) The company is specifically empowered to receive foreign source income or gains in accordance with its constitutive documents, which fall to be allocated to their foreign income account;

(iii) The company is able to produce the necessary documentary evidence (typically a certificate issued by a certified public accountant and auditor), that such income or gains, fall to be allocated in the foreign income account.

The FRFTC constitutes a credit for notional tax paid at 25% of the overseas income or gain received in Malta and is to be added to such amount. The resultant income less expenses is taxed at 35%. A tax credit equivalent to the amount by which the foreign source income is increased is available for set-off against the tax due on the chargeable income. However, the FRFTC claimed as a credit cannot exceed 85% of the Malta Tax payable on the foreign income.

The methodology for the application of the FRFTC may be illustrated by means of the following examples:

Computation 1 (no deductible expenses)

Foreign source income	1000
FRFTC @ 25%	250
Grossed up income	1250
Less expenses	(0)
Chargeable income	1250
Malta Tax @ 35%	437.50
Less FRFTC	(250)
Tax Payable	187.50

Computation 2 (deductible expenses)

Foreign source	1000
FRFTC @ 25%	250
Grossed up income	1250
Less expenses	(400)
Chargeable income	850
Malta Tax @ 35%	297.50
Less FRFTC	(250)
Tax payable	47.50

Computation 3 (application of 85% limitation)

Foreign source income	1000
FRFTC @ 25%	250
Grossed up income	1250
Less expenses	(1000)
Chargeable income	250
Malta Tax @ 35%	87.5
Less FRFTC	(75)
Tax payable	12.5

No evidence of actual foreign tax is required for FRFTC to apply (the only proof needed is an audit certificate confirming that the income is foreign source income).

This makes the FRFTC particularly suitable in scenarios where the company does not have the required documentary evidence to attest the amount of tax paid abroad and would, therefore, not qualify for other forms of relief which require this proof.

Likewise, the FRFTC may be beneficial when the company, for tax planning purposes, does not wish to indicate the country of origin of the foreign income or the company has not paid any tax abroad on its foreign source income, or further still, the company has paid tax abroad but at a rate that is less than 25% of the net income received.

Any company wishing to avail itself of FRFTC must make a claim within two (2) years from the time when all such assessments, adjustment and other determination have been made, whether in Malta or elsewhere, as are material in determining whether any, and if so what, credit falls to be given.

Tax Structures can legally mitigate one’s tax liabilities. More information can be provided on request. However, it must be noted that since some of the structures may be technically complex, they are ideally discussed at a meeting with Focus Business Services’ Directors. For bespoke tax advice, please click here to contact our tax advisors or send us an email on enquiries@fbsmalta.com