Benefits and use of Malta Royalty Routing Structures
Due to the low withholding tax rates for royalties provided in most of Malta’s Double Tax Treaties and the use of the EU Directives, establishing a royalty company in Malta can be a very attractive proposition.
Royalties and licensing rights for intellectual property can be owned by or assigned to a Malta Company. Intellectual Property may include computer software, technical knowledge, patents, trademarks, trade secrets & methods, and copyrights.
Royalties and licensing fees for intellectual property can be owned by or assigned to a Malta Company.
The Malta Company can then enter into license or franchise agreements with other companies interested in exploiting these rights. Royalty payments would normally be deductible expense insofar that they are used in the production of the income.
The receipt of passive income from royalties, would entitle the shareholders of the Maltese Company to a tax credit, typically the 5/7ths income, ultimately resulting in a 10% tax leakage in Malta.
The use of the Malta’s Wide Double Tax Treaties Network and EU Directives reduces or eliminates the withholding tax on the collection of the Royalty payment.
Apart from the tax system’s generic features, the DTT Network and the adoption of EU Directives, other important tax system features beneficial to Malta Royalty Companies are the following:
- Absence or reduction (under a Double Tax Treaty or the Interest and Royalty Directive) of withholding tax on royalties paid to Malta Company.
- Low overall tax burden.
- Tax deduction of royalty payments.
- Effective tax depreciation of investments in intellectual property.
- Absence of withholding tax on royalty payments (including to offshore companies) for rights used outside Malta – the usual case.
- Neutral VAT treatment.
- Reasonable level of “margin” required by tax authorities.
- Effective protection of intellectual property rights by Legislation and the participation of Malta in international agreements.
Royalties Derived from Patent Rules
In 2010, by means of Legal Notice 429 of 2010, the Deduction on Royalties derived from Patent Rules (“the Rules”) were enacted.
The Rules provided a tax exemption on royalties and similar income derived from patents and inventions on or after 1 January 2010.
In order to qualify for this tax exemption, the qualifying patent (registered in Malta and in relation to which the research, planning, processing, experimenting, testing, devising, designing and developing was carried out in Malta or elsewhere), an application, together with the supporting documentation must be submitted to Malta Enterprise, a Government agency responsible for the promotion of foreign investment and industrial development in Malta. Upon satisfaction of the aforesaid criteria of eligibility, Malta Enterprise shall issue a determination, which upon filing to the Maltese Commissioner of Inland Revenue, shall entitle the holder of such qualifying patent to the aforesaid tax exemption.
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.