1. Do I classify as a ‘Recipient’?
The Malta tax treatment of dividends received by members of funds resident in Malta hinges on the distinction which Maltese law makes between ‘Recipients’ and ‘Non-Recipients’.
A ‘Recipient’ is defined as:
- a person – with the exclusion of companies – who is resident in Malta in the year when the dividend is received, either by the Recipient in person or by another person on behalf of the Recipient;
OR
2. a person and/or company not resident in Malta who however is owned and controlled (whether directly or indirectly) by, or who acts on behalf of an individual who is ordinarily resident and domiciled in Malta;
OR
3. a trustee of a trust whose beneficiaries classify under either of the former two points.[i]
For the purposes of this document, persons who do not classify under any of the above are referred to as ‘Non-Recipients’.
2. ‘Recipients’ of dividends from untaxed profits of a resident fund
2.1. Tax at the CIS’s level
A Collective Investment Scheme[ii] (hereafter referred to as ‘CIS’) resident in Malta which distributes an untaxed dividend[iii] to a ‘Recipient’ (as defined hereunder) should withhold a tax of 15% from the sum distributed.[iv]
The tax which a CIS is obliged to withhold from the distributed dividend is considered to be a debt of the CIS in favour of the Commissioner for Revenue.[v] The sum withheld as tax should be remitted to the Commissioner within 14 days from the end of the month in which the dividend was paid.[vi]
Further, a Recipient who has received a dividend from a CIS enjoys the presumption that the CIS has in fact deducted tax in accordance to above from the declared dividend.[vii]
2.2. Tax at the Recipient’s level
A Recipient may choose between:-
i. declaring the dividend from his Malta tax return, or
ii. omitting the dividend from his Malta tax return.[viii]
If a Recipient opts for the first option the amount of the dividend would be added to his other taxable income and charged to tax according to the relative personal tax band.[ix] In this case the 15% tax withheld would be credited against the Recipient’s tax liability.[x] A refund may become due in the Recipient’s favour in respect of that tax for the relevant year of assessment.[xi]
Where a Recipient opts for the latter option, he enjoys a legal presumption that no further tax is due on that dividend.[xii]
3. ‘Non-recipients’ of dividends from untaxed profits of a resident fund
Conversely, if a dividend from the untaxed account of a CIS is declared to a Non-Recipient, no tax is charged on the amount distributed; neither in the hands of the Non-Recipient nor at the level of the CIS.[xiii]
A Non-Recipient not resident in Malta need not declare the dividend in the Malta tax return.[xiv] On the other hand, a Non-Recipient resident in Malta (namely a Malta resident company) should declare the dividend which they have received.
4. Dividends from taxed profits of a resident fund
4.1. Taxed dividends of a resident fund from the ‘Immovable Property Account’, the ‘Maltese Taxed Account’ or the ‘Foreign Income Account’
If a CIS distributes a dividend from profits any of the above mentioned taxed accounts to a person resident in Malta,[xv] the CIS should only deduct tax if at the time of the declaration the tax suffered on the profits distributed was less than the corporate income tax rate.[xvi] If so the CIS should deduct the difference between the corporate tax rate applicable at the time of distribution and the tax rate actually suffered on the profits distributed to the resident investors of the CIS.[xvii] Tax deducted by the CIS is deemed to be final; no further tax is due on the profits from which the dividend is declared.[xviii]
The tax which a CIS is obliged to withhold from the declared dividend is considered to be a debt of the CIS in favour of the Commissioner for Revenue.[xix] The sum withheld as tax should be remitted to the Commissioner within 14 days from the end of the month in which the dividend was paid.[xx]
If there is no discrepancy between the corporate tax rate applicable at the time of distribution and the tax rate actually suffered as mentioned above, no further tax is due on the dividend received by the investors.[xxi]
4.2. Taxed dividends of a resident fund from the ‘Final Tax Account’
If a resident CIS pays a dividend to its investors (whether or not the investors are resident in Malta) out of profits allocated to the Final Tax Account, no further tax is charged on the profits from which the dividend has been paid.[xxii]
Such dividend is not considered as forming part of the chargeable income of the investor receiving it, notwithstanding that it may be declared in the investors’ income tax return.[xxiii]
4.3. Taxed dividends of a resident fund from the Foreign Income Account and/or the Maltese Taxed Account
A person (other than a Malta resident company) in receipt of a dividend from a resident CIS not constituted as a company from profits which would have been allocated to any of the above accounts had the collective investment scheme been constituted as a company is not obliged to disclose the dividend in his income tax return.[xxiv] Tax is not due on these dividends in the hands of the members.[xxv]
5. Dividends from a non-resident fund
Dividends distributed by a non-resident CIS to a Malta resident investor are taxable in the hands of the investor. The investor should disclose the income in his tax return and will be subject to tax at the normal rates.
6. Gains on the transfer of units by a non-Malta-resident member
Capitals gains accruing to a non-resident on the disposal of units in a resident CIS are exempt from tax in Malta. However, this is contingent on the non-resident investor being the beneficial owner of the units disposed and provided that the non-resident member is not being owned and controlled (directly or indirectly) by an individual who is ordinarily resident and domiciled in Malta nor acts on behalf of an individual who is ordinarily resident and domiciled in Malta.[xxvi]
7. Gains from the transfer of units by a Malta resident member
Capital gains derived by a person from the transfer of a capital asset are chargeable to tax in Malta.[xxvii] In general the gain arising in favour of resident investors from a transfer of units in a CIS (whether prescribed or non-prescribed) is subject to tax at the standard rates in the hands of the investor. The gain should be declared in the members’ tax return, and the members’ income tax rate would apply.
7.1. Units listed on a recognised stock exchange
However, the capital gain is not subject to tax in the case of profits relating to the transfer of securities listed on a stock exchange recognised under the Financial Markets Act[xxviii] being securities in a prescribed fund.[xxix]
7.2. Investment Income of prescribed or non-prescribed funds
However, the gain made by the member would be considered ‘Investment Income’ if the gain is derived from a redemption, liquidation or cancellation of units in the non-prescribed fund.[xxx]
On condition that certain conditions are satisfied,[xxxi] where a gain received by a member of a prescribed or non-prescribed fund classifies as ‘Investment Income’ the member is entitled to opt for tax to be withheld at a rate of 15% at source as a final withholding tax.[xxxii]
7.3. Investment Income of UCITS
A resident investor receiving gains on the redemption, liquidation or cancellation of units in a foreign UCITS may also opt to have tax deducted at source at the rate of 15%.[xxxiii]
The investor could also opt not to have such tax deducted by an AFI and would consequently be required to declare the gain in his income tax return and be subject to tax at the normal rates.[xxxiv]
[i]S.61(a)(i–iii), Income Tax Act, Chapter 123 of the laws of Malta, hereafter referred to as the 'ITA'.
[ii] ‘Collective Investment Scheme’ is defined in S.2(1)(a–d), of the Investment Services Act, Chapter 370 of the laws of Malta. Malta has transposed Council Directive (20th December 1985) on the coordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferrable securities (UCITS) (85/611/EEC) and consequently for the purposes of this paper, CISs is intended to also include UCITS.
[iii]S.61(b), ITA – "untaxed dividend" means a dividend paid by a company resident in Malta to the extent that it is paid out of distributable profits allocated to its untaxed account.
[iv] S.62(1), ITA. The CIS in question would not be required to withhold tax in this manner if the Recipient enjoys an exemption from paying tax.
[v] S.62(2), ITA.
[vi] Ibid.
[vii]S.62(2), S.63, ITA.
[viii]S.64(a), ITA.
[ix] Malta applies progressive tax rates which apply according to the annual amount earned by the individual in question.
[x] S.65, ITA.
[xi]Ibid.
[xii] S.64(b), ITA.
[xiii] S.66, ITA
[xiv]Ibid.
[xv]S.67(4), ITA – resident person includes a non-resident person (including a non-resident company) who is owned and controlled by, directly or indirectly or who acts on behalf of, an individual who is ordinarily resident and domiciled in Malta.
[xvi] S.67(1), ITA. The corporate income tax rate refer to the tax rate applicable in terms of S.56(6), ITA.
[xvii]S.67(1), ITA. A CIS would not be required to deduct tax in the manner indicated if the person receiving the dividend is exempt from tax.
[xviii]S.68(b), ITA.
[xix] S.67(2), ITA.
[xx] Ibid.
[xxi] S.67(1), ITA.
[xxii] S.68(1)(c), ITA.
[xxiii] S.68(1)(c), ITA. In this case it would not be possible for the person receiving the dividend to claim a credit or refund in respect of any tax directly or indirectly paid on such profits.
[xxiv]S.68(1),(2)(a), ITA.
[xxv] S.68(2)(b), ITA.
[xxvi]S.12(1)(c)(ii), ITA.
[xxvii] S.4(1)(g), ITA. A gain is ascertained in the manner specified in S.5, ITA. S.5(1)(a)(ii), ITA, a capital gain is considered to have been received on the transfer of ownership, usufruct, the assignment, or cession of any rights over any securities, business, goodwill, business permits, copyright, patents, trademarks and trade-names.
[xxviii] Chapter 345 of the laws of Malta.
[xxix]S.5(6)(c), ITA. ‘Prescribed Fund’ is defined in S.41A(b), ITA.
[xxx]S.41(a)(v)(1)(i-ii), ITA.
[xxxi] Namely that (i) the disposal has been made through the services of an AFI and (ii) the disposal does not involve a direct transfer (rather than a redemption, liquidation or cancellation) to a third party.
