Individuals in the public eye, such as artists, typically register their personality rights to protect their images and identities. Such intellectual property may be either registered in their own name or through a legal entity, such as a company or trust. Income derived from the licensing of IP rights is considered to be royalties for taxation purposes. Depending on whether the IP is owned personally or through a company, Malta provides for several tax incentives for such professionals to derive royalties in or through Malta.
Tax Exempt Royalties derived from Copyright
As of January 2012, Malta has introduced a tax exemption[1] on royalties and similar income derived from copyrighted intellectual property. The broad exemption is beneficial to artistic individuals and Maltese Intellectual Property companies as it has wide application to royalty income, whether in the course of a trade or business or otherwise.
The below incentives apply to income derived from other forms of intellectual property such as trademarks and trade names.
Royalties derived directly by Non-Resident Individual
Royalties are derived by or accrue to an individual who is not resident in Malta for tax purposes, such royalty income would not be subject to Maltese tax in the hands of the individual. This also extends to the receipt of royalties by a non-resident company, as long as the company is not owned and controlled, whether directly or indirectly, by individuals who are ordinarily resident and domiciled in Malta.[2]
Yet, this exemption only applies provided that during that year, the person does not engage in any trade or business through a permanent establishment (PE) in Malta. A PE is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. (Article 5, OECD Model Tax Convention)
The exemption also fails to apply where the royalties paid are effectively connected to such permanent establishment. Royalties that are effectively connected to a PE are generally understood to be royalties derived from intellectual property that forms part of the business property of a PE. This means that the PE must be the economic owner of the intangible asset.
This exemption would apply in any case where royalties are derived in Malta.
Royalties derived by a Malta Company
On the other hand, the intellectual property may be registered by a Maltese company. Income derived by a Malta company is taxed at the flat corporate income tax rate of 35%. A shareholder in receipt of a distribution from a Maltese company may be eligible to claim a refund of all or part of the Malta tax paid on such income by the company. The amount of refund to which a shareholder is entitled depends on the type and source of the income received by the company. Malta does not subject outbound dividends to withholding tax.
10% tax rate applicable to Passive Royalties
Royalties which are not derived directly or indirectly from a trade or business and which have not suffered tax or have suffered any foreign tax (direct, withholding or otherwise) at a rate of less than 5% are deemed to be passive royalties.[3]
Where a Malta company receives passive royalties, a 35% tax is levied on the income in the hands of the company. Upon dividend distribution from a Maltese company, the shareholder is entitled to claim a tax refund equivalent to 5/7ths of the Malta tax paid by the company. Therefore, shareholders of Malta companies receiving passive royalties benefit from a refund of 25% of Malta tax paid on that income by the company.
5% Tax Rate applicable to non-passive Royalties
Where the royalties are derived from a trade or business or have suffered at least 5% foreign tax, the income would not be deemed to be passive. There is no formal definition as to what would be deemed to constitute a trade. As a rule of thumb the Maltese tax authorities are unlikely to deem a company to be carrying on a trade where it has less than five licensing agreements in place. It is irrelevant whether these five agreements are entered into with group companies or independent parties.
A shareholder in receipt of dividends distributed from income which is not deemed to constitute passive royalties may be entitled to claim a refund of 6/7ths of the Malta tax paid on such royalties by the company. This results in an effective 5% tax rate on royalties in the hands of the shareholder.
Relief for Double Taxation and its Effect on the Tax Refund
A Maltese company which has suffered tax overseas on royalty income derived from abroad may claim relief from double taxation in Malta either under Malta’s extensive network of double taxation treaties or by virtue of the local unilateral relief provisions.
Double tax relief would lower the amount of corporate income tax payable by the company in Malta by the amount of foreign tax suffered on the same income. The credit granted by way of double taxation relief is limited to the amount of Maltese tax that would be payable had the income been subject to tax in Malta.
Where in respect of royalties received, a company has claimed relief from double taxation, the amount of refund which a shareholder in receipt of a dividend from the company may claim is limited to 2/3rds of the tax paid in Malta on such royalties.
The EU Interest and Royalties Directive
Following Malta’s accession to the EU, the Interest and Royalties Directive applies to royalty payments made to Maltese companies from associated companies registered in another EU member state whereby royalty income is not subject to withholding tax in the country of source.
[1] Article 12 (1) (v) of the Income Tax Act.
[2] Article 12 (1) (c) Income Tax Act.
[3] Article 2(1) of the Income Tax Act.
