Company in Malta

Malta is an EU Member State with
an Exceptionally Advantageous Tax Regime

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Malta Company Tax Treatment

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Malta Company Tax Treatment – Applicability and Tax Refunds

The tax treatment of a company is undoubtedly one of the most pivotal considerations which an investor should consider when making up a decision of whether to incorporate a company in a particular jurisdiction. The Maltese company has proven to be a very tax effective tool, often resulting in a tax leakage of just 5% – or even less. This is undoubtedly the most tax efficient structure within the EU – achieved by means of an onshore jurisdiction, with full access to EU directives and access to double tax treaty provisions.

The Maltese system is a credit imputation (or tax refund) system, and has been long entrenched in the Maltese tax system for over fifty years. The corporate tax rate of a Maltese company is always set at 35% of taxable income (turnover less deductible expenses). However, upon a final distribution of dividends, the immediate shareholders of the company are entitled to a number of tax refunds on the distributable profits, the default tax refund being 6/7ths of the 35% – effectively leaving a tax leakage of just 5%.

The 6/7ths refund is effectively, the default tax refund, which shall apply, unless it is shown that the applicable tax rate (dependent on the income source) is such that a different tax rate should apply. To illustrate how the 6/7ths refund works, the following is a concise illustration.

The column of the right is also extremely important, since effectively foreign tax suffered by the Maltese company is also taken into account for the purposes of the refund calculation – albeit the tax refund grossed up to the foreign tax rate cannot exceed the Maltese tax paid. In other words, it is not possible to claim a tax credit by claiming back the refund on the foreign tax suffered. However, it is possible to take the foreign tax rate into account, to actual level the ultimate tax leakage to less than 5% – in the illustration below to 0%.

Maltese Company No Foreign Tax With Foreign Tax
Net Foreign Income 20000 20000
Grossing up with Foreign Tax 0 1050
Chargeable Income 20000 21050
Tax at 35% 7000 7370
Credit- Double Tax Relief 0 1050
Malta Tax Payable
(tax at 35% less tax credit)
7000 6320
Shareholder of Maltese Company
Refund on distribution
(6/7 of Malta Tax Payable)
6000 6320
Effective Tax Paid in Malta 1000 0
Effective Tax leakage in Malta on Net Income 5% 0%

Having established the workings and the fact that the 6/7ths refund is the default tax refund, what about the other forms of tax refunds available?

Having established the workings and the fact that the 6/7ths refund is the default tax refund, what about the other forms of tax refunds available? There in effect a total of four (4) possible tax refund. Discounting the 6/7ths refund set forth above, the other tax refunds are the following:

5/7ths tax refund;

2/3rd tax refund; and

100% tax refund

5/7ths refund

The pivotal concept to keep in mind when applying the 6/7th refund mechanism is the fact that it is based on ‘active trading income’. The 5/7ths refund is based on ‘passive interest’ or royalties, which are derived by the company not as a result of its trade or business.

However, there is an additional safeguard in place. Even if the income derived by the company is of a passive nature, if the foreign tax suffered is in excess of 5% – then automatically, the 6/7ths refund shall apply. The rationale is once again to ensure that the most tax beneficial result to the shareholders of the company.

As set forth in the example above, the foreign tax suffered, may once again be aggregated in the final tax calculations, set forth below:

Maltese Company No Foreign Tax With Foreign Tax
Net Foreign Income 20000 20000
Grossing up with Foreign Tax 0 750
Chargeable Income 20000 20750
Tax at 35% 7000 7260
Credit-Double Tax Relief 0 750
Malta Tax Payable
(tax at 35% less tax credit)
7000 6510
Shareholder of Maltese Company
Refund on distribution
(5/7 of Malta Tax Payable)
5000 5190
Effective Tax Paid in Malta 2000 1320
Effective Tax leakage in Malta on Net Income 10% 6.6%

2/3rd refund

Another important factor to consider for the investor is the access to double tax treaty agreements, which may apply to the country of incorporation of the company. Malta has, over the years, in a constant diplomatic effort, effectively undertaken a wide network of double tax treaties. These treaties are relevant to the 2/3rd tax treaty mechanism, since this form of tax refund shall apply on foreign passive income on which the Malta Double Tax Relief is claimed.

This form of refund is typically availed of by financial and credit institutions carrying out business outside of Malta or by foreign passive institutions on which double taxation relief is claimed.

As with the case of all forms of tax refund, the tax refund may once again be included with the taxable income, to effectively provide scenarios where the tax leakage is effectively zero. A concise illustration better explains the underlying mechanics of such tax refund

Maltese Company With Foreign Tax With Foreign Tax
Net Foreign Income 20000 20000
Grossing up with Foreign Tax 1500 2650
Chargeable Income 21500 22650
Tax at 35% 7530 7930
Credit- Double Tax Relief 1500 2650
Malta Tax Payable
(tax at 35% less tax credit)
6030 5280
Shareholder of Maltese Company
Refund on distribution
(2/3 of Malta Tax Payable)
5020 5280
Effective Tax Paid in Malta 1010 0
Effective Tax leakage in Malta on Net Income 5.05% 0%

100% tax refund

Lastly and very importantly is the 100% tax refund – which applies out of profits derived by a Maltese company from its equity exemption in a subsidiary are received or disposed of (capital gains exemption). Effectively, this features a scenario whereby a Maltese holding company holds shares in a subsidiary and receives dividend income from such subsidiary. Likewise, it envisages a scenario whereby a Maltese company holds equity in a subsidiary and decides to sell off that equity (disposal). In this case, income arising from such disposal, would typically be subject to capital gains tax. However, by availing oneself of such refund, it is possible to obtain a 100% tax refund.

In order to qualify for such tax refund, it is necessary for the Maltese company to qualify to a series of criteria called ‘participating holding’. There are six criteria which may be availed of to qualify for such ‘participating holding’ exemption, which criteria are non-cumulative. Effectively, only one criterion needs to be satisfied. The criteria that the Maltese holding must satisfy are the following:

  1. To hold at least ten percent (10%) shares in a subsidiary or any entity whose capital is divided into shares, insofar that those shares are entitled to any of the following rights (i) right to vote; (ii) participating rights (to dividend income); and (iii) receive assets upon an eventual winding up of the subsidiary; or
  2. The monetary investment of the holding is of EUR 1,164,000 or equivalent value in any currency, and that holding is held for an uninterrupted period of at least 183 days; or
  3. It is entitled to call for and acquire the entire balance of the shares not held by itself to the extent permitted by the law of the country in which the equity shares are held; or
  4. It has the right of first refusal in the event of a proposed disposal, redemption or cancellation of all the equity shares of that company not held by that equity shareholder company; or
  5. It is entitled to either sit on the board of directors or appoint a person to sit on the board of directors of that company as a director; or
  6. It is the equity shareholder in a company and the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.

Effectively, the main reliance is often made on grounds (a) and (b) since they are objective in nature, and may be easily determined without recourse to any interpretation of legal interpretation. The copies of the Memorandum and Articles of association or register of members will in most cases suffice to establish the fact that the Maltese holding has 10% of the equity in a foreign company, and this equity allows it to exercise voting and participating rights. Likewise, in the case of ground (b) above – the monetary value of such holding may be established by management or audited financial statements and the duration of the holding established by bank movements, register of members and share certificates. The other grounds (c) to (f) are more subjective – but may nevertheless be availed of, to take full advantage of this tax refund. As discussed, it is merely sufficient to prove one (1) ground out of the six (6).

The participating holding applies to (i) dividend income; and (ii) capital gains upon a disposal of the participating holding. However, limitedly with regard to dividend income, there are additional conditions to be satisfied to claim the tax refund, limitedly that the participation must be held in a company which:

  1. Is resident or incorporated in the EU; or
  2. It is subject to a foreign tax of 15% or more; or
  3. It does not derive more than fifty percent (50%) of its come from passive interest or royalties.

Only one of the aforesaid criteria need to be satisfied. Effectively, these are relatively easy to achieve. However, if they were not achievable, there would still be a possibility to claim the refund, if any two (2) of the following three (3) conditions are satisfied, these being:

  1. The shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income form portfolio investment (this being defined as securities held as na investment and with no intention of influencing the management of the underlying company; and
  2. The non-resident company or its passive interest of royalties have been subject to a tax at rate which is not less than 5%

Interestingly, there is also a participation exemption regime. This applies under the same identical rules to the ones set forth above (satisfaction of any of the aforesaid six (6) principles and rules on dividend income) but instead of paying the 35% tax rate and receiving the 100% refund, the participation exemption allows the Maltese company not to pay tax at all. This is an election which is submitted in the tax return of the company, and dispenses any tax payment outright.

Underlying Principles and Considerations

  • The aforesaid refunds will apply not such to participating holding held in companies but also to corporate entities whose capital is divided into shares. This will therefore allow similar refund also to forms of partnerships whose capital is divisible into shares;
  • Likewise a Maltese branch of a foreign company has the exact tax refund mechanism applicable to a company;
  • The said tax refund is applicable to all shareholders – irrespective of their tax residence; and
  • The tax refund will also apply to companies carrying out activities in Malta. This ensures that there is no artificial segregation of the common market.

The tax refund mechanism is therefore a very effective tax planning tool. Tried and tested for over fifty (50) years it is indeed the cornerstone of the Maltese tax system, and puts the Maltese company as a considerable advantage over all its EU counterparts, and indeed not too far off, for offshore jurisdictions, whilst preserving important precepts of access to double tax treaty provisions and full compliance.

Given that most investors are more common with a flat rate forms of taxation, it is indeed a common question, posed by several of our clients, as to rationale behind the tax refund mechanism. If the tax leakage can be of just 5%, then why go through the mechanics of having the company pay 35%, with the shareholder receiving the 6/7ths refund shortly after? And is this tax refund safe / guaranteed? How long does it take to access the tax refund? All of this questions are legitimate ones, and certainly merit a thorough examination.

What is the rationale behind the tax refund?

A very important notion that has to be carved out at the first stages of discussion is that whilst the corporate tax rate is paid by the company, the tax refund is claimable not by the company, but by the immediate shareholders of the company. There is therefore a distinction between the corporate income tax, and the corporate residence of the recipient – the immediate shareholder.

The tax refund system has been part of the Maltese fiscal heritage for over fifty (50) years and has endured the test of time. However, there was a short period, when the tax refund mechanism was abandoned in favour, or what it was perceived, a simplified flat rate taxation system.

The results of this change however were very poor and backfired spectacularly. Jurisdictions which had signed double tax treaty provisions threatened to retract or renegotiate the terms of the tax treaties, since the flat rate tax rendered many provisions of the treaties unworkable. Furthermore, this was deemed incompatible with CFC rules of many of Malta’s trading partners. After a few short years, the flat tax rate was quietly shelved, and the tax refund mechanism swiftly reinstalled, without injury to the island’s reputation, cementing its position as a fully regulated onshore jurisdiction.

Is the tax refund mechanism safe?

The short answer is – very. The tax refund is in itself guaranteed by law, and is issued directly by the Maltese Income Tax Unit by means of a bank wire or bank draft. The tax refund is in itself not further taxable. There are no withholding taxes payable upon the remittance of the tax refund upstream to the immediate shareholders.

Furthermore, the tax refund mechanism was probed severely by the EU Commission as a condition precedent to Malta’s accession to the EU. The tax refund mechanism has been approved and sanctioned by the EU Commission – and this is the ultimate seal of approval which may be bestowed on any fiscal system.

Previous to EU membership, the tax refund mechanism was applicable, conditional to the understanding that the tax refund be applicable solely to International Trading Companies (ITCs) – which were precluded from undertaking any strictly local trading. This distinction, which would have provided an unnatural fragmentation to the EU common market was abandoned by means of sunset provisions, which had to be implemented in 2007, and the tax refund mechanism now places no distinction between the recipient and the source of the tax refund (with the sole exception being that income arising out of immovable property in Malta is outside the scope of the tax refund).

The tax refund mechanism has truly endured the test of time. It is not only sanctioned by the Maltese government but has also been approved by the EU Commission and has endured, the first ten (10) years (as of 2014) of EU membership, with no foreseeable plan to amend this mechanism, nor to substitute it outright. Investors can therefore rest assured that the aforesaid rules, shall still be applicable for several years.

Who is eligible for the tax refund?

The recipient of the tax refund is the immediate shareholder of the company, without any distinction in the form (physical or legal entities) can apply for the tax refund, and without any distinction based on the grounds of residence.

The tax refund is preceded by an application which is submitted to the Commissioner or Inland Revenue (international tax unit). The shareholder of the company, and the percentage of equity is submitted in this form.

Once the shareholder has been registered with the Maltese tax man, the corporate tax rate is paid, and the request for a refund must be accompanied by means of all supporting documentation (typically a dividend warrant) signed off the directors – endorsing the distribution of the dividend, and the percentage of dividend payment to each shareholder – regard being had to the percentage of equity held by each shareholder.

How fast is the tax refund mechanism processed?

A common misconception is that the tax refund may take long to process, and is dependent on bureaucratic whims. The reality is entirely different. The tax refund is paid regularly and swiftly. It is in effect payable not later than fourteen (14) days after the end of the month in which it becomes due. In other words, if the corporate tax rate is paid in September, the tax refund is payable by the 14th October. This ensures that the shareholders can manage their cash flow efficiently, without putting unnecessary strain to their finances. The tax refund is payable directly by bank wire or by bank draft and is due in the same currency in which the relevant profits were charged (this being the currency of denomination of the share capital).

Can fiduciary shareholders be used to obtain the tax refund?

Yes – the tax refund is applicable to the immediate shareholder and this includes fiduciary shareholders who hold shares for and on behalf of the beneficiaries of the Company. Fiduciary shareholders are used for confidentiality purposes, for beneficiaries who do not wish to appear on the company statutes (the Memorandum and Articles of Association effectively being public documents and accessible to any interested party).

Can Trusts and Foundations be used a shareholders in a Maltese company?

Yes – trust and foundations can hold shares in a Maltese company. In the case of a foreign trust, a ‘qualified person’ is rendered necessary which must be pre-approved by the Maltese regulatory authorities. A qualified person is a licensed fiduciary company, which acts as a point of liaison between the foreign trust and the regulator, and ensures that all compliance matters are fully adhered to. FBS Trust can act in such function, being licensed to such an effect by the regulator – the Malta Financial Services Authority.

Do the beneficiaries have to declare their tax refund in their country of tax residence?

Yes – this is the hallmark of the tax refund mechanism. The company pays tax, yet the shareholder receives the tax refund. Once company income exits the corporate sphere (dividends) it no longer belongs to the company, but effectively is the property of the shareholder. Likewise, the tax refund mechanism which is attributable solely to the immediate shareholder of the Company. Being personal income, the shareholder should, if owning the shares in a personal capacity, declare the dividend and tax refund in accordance to the tax rules of his country of tax residence.

It is however possible to use a second holding company, as an effective tax deferral tool. The effect of a holding company is to be the tax recipient of the dividend and tax refund, thereby receiving all the proceeds from the company. Since the holding company is imbued with a separate legal personality, any proceeds received, are effectively the property of the holding company, thereby allowing the beneficiary thereof to better manage his tax obligation in accordance to the rules of his country of residence. This means that he can decide in which proportion he wishes to remit the dividends to his country of tax residence, thereby being in a better position to determine the applicable tax brackets of such a remittance.

Alternatively he may decide to distribute such tax refund, upon establishment of his tax residence in a more favourable jurisdiction – thereby ensuring an effective and important tax saving.

Or simply, the holding company may retain possession of the tax refund and tax dividends, indefinitely, without distributing the dividends upstream to the beneficiary, and instead acquiring assets, such as immovable property, equity, bonds etc; in its own name.

Can the company elect not to distribute dividends?

Yes – the decision to distribute dividends is entirely dependant on the Company’s economic performance. If the company has not registered any profit, there logically is not dividend to distribute to the shareholders.

The distribution of dividends is, barring any matter set forth in the Memorandum and Articles of Association to the contrary, determined by the board of directors. The directors are entrusted with the day-to-day management of the company and therefore better versed to determine whether it is apt to distribute dividends to the shareholders and in which proportions.

The tax refund however, is only applicable on the amount of dividends distributed to the shareholders. If the directors distribute only part of those dividends, then the tax refund shall be payable only on the amount of dividend distributed.

In reality, the Maltese system gives a marked incentive towards the full distribution of dividends, to ensure that the tax refund mechanism is exploited to its full benefit. This however, does not mean that the full distribution of dividend, runs contrary to correct corporate governance, and is a disincentive towards the creation and maintenance of company reserves.

Rather, the advice is that the full dividends are distributed to the immediate shareholders, who can then, once in receipt of the tax refund and dividends, plough back the proceeds into the company by way of shareholders’ loan (interest payment is tax deductible) or by way or capitalization. The directors may allocate such reinvestment as company reserves.

Is the tax refund payable on interim dividends?

No – the final tax refund is only payable on a final distribution of dividends and not interim ones. The rationality for this is clear. Interim dividends follow no clear and fast rule. The frequency of interim dividends is an entirely internal matter and decided by the board of directors. It is therefore, simply not possible for the Maltese Commissioner of Inland Revenue to undertake the payments of interim dividend payments by each company.

Furthermore, interim dividends are of their very nature revocable. If for any reason, the directors believe that the company is in a precarious financial position, they can, and should recommend that the shareholders reinvest in the company, which reinvestment may include the reversal of interim dividend payments received. Naturally, if tax refund were to be paid to interim dividend payments, which would then be reversed, this would unleash a whole sequence of events, to ensure that that tax refund would also be reversed to the Maltese Commissioner of Inland Revenue. This is not a sustainable model.

For this reason, the tax refund is given only upon a final distribution of dividends, after the corporate tax has been paid, and the final tax return, filed with the Commissioner of Inland Revenue. Once the precise figures are unequivocally known, then the tax refund mechanism is executed swiftly and seamlessly.

Of course this does not mean that the shareholders of a Maltese company cannot request interim dividend payment. They are free to do so, however, in recommending such interim dividend payment, the directors are minded, that, in the interest of correct corporate governance and to avoid unnecessary reversal of tax refunds, interim management accounts be drawn up to give an exact and precise figure to the Company’s finances and a decision is undertaken based on the figures presented to the general meeting. The directors, are, in any case, minded, that even if the financial figures are favourable, to always allow a contingency for final tax payment. Therefore, if the company shows distributable income, the directors should recommend that all times the company retains a minimum of 35% tax contingency for final tax payment. Finally, there should be a commitment from the shareholders that the interim dividend income be revocable if the conditions of the company deteriorate and the directors recommend such capital injection. Naturally, the shareholders are naturally inclined towards ensuring the long term viability of their investment (the company) and should follow the recommendations of the board of directors.

What if a new shareholder is introduced after tax payment?

The underlying principle is that in order for any shareholder to be eligible for the tax refund, this details must first be communicated formally in the claim for tax refund form. Therefore, only after this procedural matter has been expedited would the new shareholder be eligible for a tax refund. If the new shareholder has taken possession of equity within the company after the closing of the financial year end of the company and the claim for the tax refund, it is strongly advisable that the existing shareholders resolve internally and contractually, whether the new shareholder shall be entitled to any dividends and tax refund, emanating from a period which precedes his equity participation.

It is not infrequent for this right to be excluded in a share transfer agreement or a shareholders’ agreement, but this are contractual obligations that are negotiated within the internal parameters of the company. It is strongly advisable, that this aspect of the company be clearly spelt out.

This is also relevant in other scenarios such as the insertion of tag-along and drag-along rights with the company statutes. The insertion of these clauses are included in the case of a potential acquisition of the Company. In this case in order to avoid fragmentation of the company, the acquirer of shares would have an option to buy out the existing shareholders within the company. Existing shareholders are therefore minded to agree contractually, whether the triggering of such clauses would include the rights to dividend rights accrued, or whether this would be outside the scope of the share transfer.

Other situations may include the death of the shareholder. In this case it is possible for the rightful heirs of the deceased shareholder to undertake the dividend income which would have accrued to the shareholder, either individually, as a collective estate (‘estate of the deceased’) or if the heir is a minor, interdicted or otherwise precluded from receiving dividend income, through an appointed curator or administrator of the rightful heir.

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

Note: Our Directors are continuously travelling to a number of countries meeting existing and potential clients and associates.

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