Malta Tax of Dividend Income

Maltese Corporate Income Tax

The Maltese corporate income tax (“CIT”), is regulated by two fundamental bodies of law, the Income Tax Act and the Income Tax Management Act.  In the upcoming sections, the income tax treatment of dividends received or paid out by Malta companies will be explained in detail.

Chargeable Companies

A company shall be considered Maltese under Malta tax laws based on the connecting factors of residence or domicile. Below we shall discuss how the interplay between these factors shall decide on the basis and scope of the Maltese CIT. 

Maltese Domicile

A company is deemed to be domiciled in Malta if it has either been:

• incorporated in Malta OR
• incorporated in a jurisdiction outside Malta, but later elected to move its domicile and continue its existence in Malta.

Maltese Tax Residence

A company is resident in Malta if the company, whether domiciled in Malta or elsewhere, holds its place of effective management (“POEM”) in Malta. 

Malta Resident and Domiciled Companies

Following the above explanation, a company would be considered both domiciled and resident in Malta when:

1. The company was incorporated in Malta, OR
2. The company has opted to move its domicile from a foreign jurisdiction into Malta, AND
3. The company has its POEM in Malta.

Malta Resident but Not Domiciled Companies:

A company would be considered resident but not domiciled in Malta when:

1. The company was not incorporated in Malta AND
2. The company has not moved its domicile from a foreign jurisdiction into Malta, BUT
3. The company has its POEM in Malta. 
    

Basis of Taxation

Worldwide Basis of Taxation  

The chargeable income of a company resident and domiciled in Malta encompasses all worldwide revenues of the company whether or not such revenues are remitted to Malta.

Source and Remittance Basis of Taxation  

In the case of a company which is either only domiciled in Malta or only resident in Malta, its chargeable income is considered to consist only of revenues which arise in Malta or foreign revenues which are remitted to Malta.

Taxation of Dividends Received by a Malta Company

Chargeable income of a Malta company is subject to CIT at a flat rate of 35%. However, Maltese income tax laws allow for a reduction of the tax liability of the said company through certain tax exemptions.  Moreover, by opting for the specific corporate structures explained below, the CIT paid by the company can be refunded, in full or part, depending on the circumstances, to the company’s shareholders.

Under Malta tax laws a chargeable income of a Malta company is determined by adding all income streams of the company and subtracting therefrom permissible deductions.

The ‘Participation Exemption’

Dividends received by a Malta company are considered to form part of its chargeable income. However, a dividend received from a ‘Participating Holding’, may avail of an exemption from Maltese CIT in terms of the participation exemption provisions in the Income Tax Act. 

For the company to opt for the participation exemption, there are two conditions that must be satisfied. These conditions are outlined in Points 4.2.1 and 4.2.2 below. 

The Full Tax Refund 

If a Malta company pays its shareholders dividends from income that could avail of participation exemption, these shareholders can, alternatively to the exemption, claim from the Commissioner for Revenue a full refund of the CIT paid by the company on these profits.

What is a Participating Holding?

A Participating Holding refers to the holding of shares by a Malta company in another entity which holding:

1. represents 5% or more of the equity shares of the other entity; or
2. gives the Malta company the right to call for and acquire the entire balance of the equity shares in the other entity; or
3. gives the Malta company the right of first refusal in the event of the proposed disposal, redemption or cancellation of all the equity shares in the other entity; or
4. entitles the Malta company to sit or appoint a person to sit on the Board of Directors of the foreign entity; or
5. represents an investment of a minimum of €1,164,000 (or an equivalent in another currency) which is held for an uninterrupted period of not less than 183 days; or
6. has been acquired to further the Malta company’s own business and but is not held as trading stock for the purpose of trade.

Anti-Abuse Provisions

Where a Malta company receives dividend income from a Participating Holding, it may at its option elect for such income to be exempt from tax in Malta or alternatively have the Maltese CIT paid refunded in full to the company’s shareholders, provided however that the company in which the Participating Holding investment is held falls within one of the following safe harbours: 

• it is resident or incorporated in the EU;
• it is subject to any foreign tax at a rate of at least 15%; or
• less than 50% of its income is derived from passive interest or royalties.

Interest or royalties are deemed to be passive when they are not derived directly or indirectly from a trade or business and where such interest or royalties have suffered foreign tax at a rate of less than 5%.

Where a PH does not fall within one of the safe harbours above, a company may still opt for such income to be exempt from tax in Malta, if both anti-abuse conditions below are satisfied:

• the equity shares held in the non-resident company do not represent a portfolio investment; and
• the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.

However, if the PH is held in a corporate body resident for tax purposes in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for a minimum period of three months during the year immediately preceding the year of assessment, then the participation exemption shall be available only if the PH meets certain minimum substance criteria.

The 6/7^ths Tax Refund

Where the foreign investment does not satisfy any of the PH criteria, the shareholders of a Malta company would still be eligible to claim, upon receipt of a dividend, a refund of 6/7ths of the Malta tax paid by the Malta company on dividends from such foreign investment and capital gains from disposal of such foreign investment (bringing the effective combined tax rate on such income down to 5%).

The 5/7^ths Refund 

Where a Malta company receives dividends from a foreign investment that qualifies as a PH but does not meet the participation exemption criteria listed above, the shareholders of a Malta company would be able to claim a refund of 5/7ths of the Malta tax paid by the Malta company on such dividend income (resulting on a 10% effective combined Malta tax rate). 

The 2/3^rds Refund 

If the income receivable by the Malta company is subject to taxation outside Malta, a Malta resident company may be able to claim double taxation relief. If double taxation relief is claimed the company’s shareholder will be entitled to a 2/3rds refund of the Maltese CIT paid.

The Full Imputation System

Moreover, the shareholders of a Malta company receiving dividends from such company avail of a full imputation provisions of the Income Tax Act. Full imputation provisions apply to both resident and non-resident shareholders. 

Malta resident shareholders of Malta company should add the dividends on their tax return to their own chargeable income, which is then subject to the rate of tax which they classify (up to 35%). However, under full imputation system shareholders receive a credit which is equivalent to the tax paid by the company at the rate of 35%. This means that there is no double taxation on the same profits of a Malta company. 

In case of non-resident shareholders, the full imputation provisions result effectively in no Malta withholding taxes on outbound dividends.