This publications provides a brief overview of the Malta taxation of royalties. Maltese law allows for the efficient routing of royalties through Malta Intellectual Property Holding Companies (IP Holding Companies). A Malta IP Holding Company is generally formed with the objective of channeling royalties and other income from intellectual property in a tax-efficient manner.
The tax treatment of royalty income depends on its classification as active or passive income.
Malta Taxation of Active Royalties
Active royalties are royalties which are derived, whether directly or indirectly, from a trade or business. Royalty income is also deemed to be active where it is not deemed to be passive income by virtue of having suffered at least 5% foreign tax, irrespective of whether the tax was levied directly or indirectly, or through withholding or otherwise.
Where a Malta IP Holding Company receives royalties as part of its business of licensing patents, for example, the income is deemed to be part of its business income and taxed in Malta at the rate of 35%.
Upon the subsequent distribution of the income as dividend, Maltese law provides for a refund of 6/7ths of the Malta tax, paid by the company, in the hands of the shareholder, thus effectively reducing taxation in Malta to 5%.
Malta Taxation of Passive Royalties
Passive royalties are royalties which are not derived, whether directly or indirectly, from a trade or business and which have suffered less than 5% foreign tax whether directly, by way of withholding, or otherwise.
Therefore, a Malta IP Holding Company which owns and licenses intellectual property, yet derives royalties which have not been subject to at least 5% foreign tax, is deemed to receive passive royalties. Passive royalties are taxed in Malta as part of the company’s income at the rate of 35%. However, upon the subsequent distribution of income as dividend, the shareholder may claim a refund of 5/7ths of the Malta tax paid by the company, thus reducing the effective tax paid in Malta to 10%. This may be further reduced by virtue of the Flat-Rate Foreign Tax Credit to 6.25%.
In any of the above cases, where double taxation relief has already been claimed in respect of the royalty income, a refund of 2/3rds of the Malta tax paid by the company may apply instead.
Malta Tax Exemption on Qualifying Royalties
As of January 2010, royalties, and similar income such as advances, derived from patents in respect of inventions and copyrights, even where derived in the course of a trade or business, are exempt from income tax. The interpretation of qualifying intellectual property is very broad and relates to a patent wherever registered irrespective of whether its development was carried out in Malta or otherwise.
The distribution of dividends from the exempt profits of the company is also exempt from tax in the hands of the shareholders. This applies to subsequent distributions to higher-tier shareholders for as long as the exempt profits are distributed by way of dividends. Further, if received from another Malta company, the royalties would not be subject to withholding tax.
Tax rulings from the Maltese tax authorities are available in respect of this tax exemption on royalties income.
No Malta Withholding Taxes on Royalties
Malta does not levy any withholding tax on outbound royalty payments and dividends.
In addition, Malta has concluded approximately 70 double tax treaties which provide for a reduced rate of withholding tax on royalties paid to a Maltese company. Typically, Malta’s tax treaties impose a maximum (not higher than 10%) or zero withholding tax rate on royalties paid to a Maltese company.
Following Malta’s accession to the EU, the Interest and Royalties Directive applies to royalty payments made to Maltese companies. Royalty payments from associated companies resident in EU Member States are not subject to withholding tax in the country of source provided that the relevant conditions imposed by the particular Member State are fulfilled.
