Blanket Exemption on Royalties
The Maltese income tax system has recently extended the remit of the royalties exemption. Article 12(1)(v) of the Income Tax Act now states that royalties, advances and similar income derived from:
· patents in respect of inventions
· copyright
· trademarks
are exempt from tax irrespective of whether they are received in the course of a trade, business, profession or vocation or otherwise, "subject to the satisfaction of such terms and conditions including any limits on the maximum amount of the exempt income and obtaining such determination as may be presrcribed". Trademarks were added by Act No. III of 2013 - The Budget Act.
The distribution of the profits derived from the above-mentioned forms of intellectual property ("IP") by way of a dividend shall also be exempt from tax in the hands of the direct and indirect shareholders - as long as such dividend is paid out of profits which are exempt from tax under this article, i.e. under Article12(1)(v) of the Income Tax Act ("ITA").
The royalty exemption is an optional exemption, therefore the taxpayer may opt to waive this exemption and declare such income in its income tax return. In such case, the shareholder may still claim part of the tax paid by the company paying the dividend in terms of the refundable tax credit system as further explained hereunder.
Deductions in respect of expenditure on IP rights
Whenever the taxpayer opts to waive the royalties exemption and declare such IP income in its income tax return, tax on IP income may be mitigated by special deductions.
Deductions are allowed in respect of expenditure on IP rights. Article 14(1)(m) of the ITA provides that any expenditure of a capital nature on intellectual property rights incurred by a person engaged in a trade, business, profession or vocation and proved to the satisfaction of the Commissioner to have been incurred for the use and benefit of the trade, business, profession or vocation is allowed as a deduction for tax purposes. Expenditure of a capital nature on intellectual property rights is spread equally over the year in which it is incurred and the two succeeding years.
Article 14(1)(h) of the ITA prescribes that a deduction is also allowed in respect of expenditure on scientific research incurred by a person engaged in any trade, business, profession or vocation and proved to the satisfaction of the Commissioner to have been incurred for the use and benefit of the trade, business, profession or vocation. Expenditure on scientific research is spread equally over the year in which it has been incurred and the five succeeding years. Expenditure on scientific research is, at the option of the person, allowed at 150% of the actual amount of the expenditure incurred.
A deduction is allowed in terms of Article 14(1)(i) of the ITA respect of any expenditure on patents or patent rights incurred by a person engaged in a trade, business, profession or vocation and proved to the satisfaction of the Commissioner to have been incurred for the use and benefit of the trade, business, profession or vocation. Expenditure on patent rights is spread over the life of the patent or patent rights in a reasonable manner to the satisfaction of the Commissioner.
Income Tax Implications with respect to income derived from IP
Trading income from IP derived by a company registered in Malta is subject to tax in Malta at the rate of 35%. However, by virtue of the refundable tax credit system, the effective rate of tax of the company paying the dividends and the Russian shareholder/s can be reduced to 5%. This is because the Russian shareholders may claim a refund of part of the tax paid by the company. The refund depends on the nature of the income and whether the company availed itself of any type of relief. In addition, the Russian shareholder/s will not be subject to tax on dividends received by them because, in terms of the imputation system, such tax will have already been paid by the distributing company on behalf of the Russian shareholders.
Where such trading income from IP is not attributed to a permanent establishment situated outside Malta, the income, net of tax, will be allocated to the company’s Maltese Taxed Account. In the case where such trading income is attributed to a permanent establishment situated outside Malta, the net income will be allocated to the Foreign Income Account.
Dividend income distributed from profits allocated to the company's Maltese Taxed Account or its Foreign Income Account not consisting of passive interest or royalties entitle the Russian shareholder/s to claim a refund of 6/7ths of the tax paid by the distributing company pertaining to those profits distributed to the Russian shareholder/s by way of dividend.
Below find below a numerical example:
· Income Tax Implications with respect to passive income from IP
Royalty income which is not derived, directly or indirectly, from a trade or business, where such royalties have not suffered or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than 5% is considered to be passive income as defined in Article 2 of the ITA. The tax paid and refund available in this scenario are illustrated in the numerical example below.
A Non-Domiciled IP Company
A company which is resident in Malta but not domiciled in Malta will be subject to tax in Malta on local source income and taxable capital gains and on foreign source income which is received in Malta, i.e. a non-domiciled IP company will be taxable in Malta on a remittance basis. It will not be taxable on foreign source capital gains, irrespective of whether they are remitted to Malta or otherwise.
Royalty exemptions for Non-Residents
Article 12(1)(c)(i) of the ITA provides that non-residents will be exempt from tax on royalties provided that:
(1) the non-resident does not trade in Malta through a permanent establishment; and
(2) the royalties are not effectively connected with such permanent establishment.
In the case where trading income is received from IP and it is not attributed to a permanent establishment outside Malta, the net income will be allocated to the company’s Maltese Tax Account. If such trading income is attributed to a permanent establishment outside Malta, the net income will be allocated to the Foreign Income Account. The classification in the tax accounts will have an effect on the tax treatment of dividend distributions as mentioned above.
Malta-Russia Double Tax Treaty
Malta has a Double Tax Treaty ("DTT") in place with Russia, which is based on the OECD Model. The term "royalties" is defined as "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience."
In a nutshell, the Malta-Russia DTT states that royalties arising in Russia and paid to a resident of Malta, who is the beneficial owner of such royalties, may be taxed in Malta. However, such royalties may also be taxed in Russia according to the laws of that State, but if the beneficial owner of the royalties is a resident of Malta, the tax so charged shall not exceed 5 per cent
