Malta Taxation of Employment Income
Article 4(1)(b) of the Income Tax Act ("ITA") charges to tax:
“gains or profits from any employment or office, including the value of any benefit (i.e. a fringe benefit) provided by reason of any employment or office”
The ITA does not define the term "employment or office" (only a definition of "officer" is provided in the Fringe Benefits Rules). In order to determine whether an employment or office is subject to tax in Malta, it is important to establish the locality of the source of employment income. If the source of employment income is in Malta, such income is subject to tax in Malta at the progressive tax rates prescribed in Article 56 of the ITA.
"Gains or Profits" include payment for services rendered, wages, salaries and overtime, commissions and bonuses, fees, remuneration, honoraria, other cash allowances, non-cash allowances and benefits. "Gains or profits" do not include gains of a capital nature.
Benefits such as overseas allowances are taxable unless exempted by the Statute. These are taxable even when not formally included in the employment contract of the employee.
Fringe benefits are ruled by Subsidiary Legislation 123.55 - The Fringe Benefits Rules ("FBR"). The FBR mention three categories of fringe benefits, namely:
- Category 1 Benefits - Benefits relating to Motor Vehicles
- Category 2 Benefits - Use of Property
- Category 3 Benefits - Other Benefits
Benefits are given an annual value and such annual value of the benefit is added to the cash salary.
Category 1 Taxation of Employment Benefits - Motor Vehicles
There are two types of fringe benefits relating to motor vehicles. These include:
- The use by an employee of a car belonging to a third party;
- The grant of a fuel allowance
Category 2 Taxation of Employment Benefits - Use of Property
There are two types of fringe benefits relating to Use of Property. These include:
- Use of movable property
- Use of immovable property
Category 3 Taxation of Employment Benefits - Other
These include:
- Beneficial loan arrangements
- Free or discounted meals
- Free or discounted airline or sea transport tickets
- Free or discounted transfer of property and provision of services
- Share option scheme benefit
- Payment or reimbursement of expenses incurred for private purposes
- Other benefits
Tax on Employment Income
Tax on employment income (i.e. cash salary including the annual value of the fringe benefits) is paid via the Final Settlement System ("FSS").The FSS is a withholding tax system based on a 'Pay As You Earn' mechanism whereby the employer withholds income tax on the monthly wages paid to his employees. Prescribed Forms include:
- FS4 Form - Payee Status Declaration Form
- FS5 Form – Payer’s Monthly Payment Advice
- FS3 Form – Payee Annual Statement of Earnings
- FS7 Form – Payer’s Annual Reconciliation Statement
- FS 4 Form – Payee Status Declaration Form
This obliges the payee to indicate personal details and the rate of tax at which FSS should be applied. In the event that the employee fails to indicate tax rate or fails to complete FS4 income, the employer is bound to complete form and to deduct tax accordingly.
The FS4 form is to be completed at the start of every new employment or a change in the individual’s tax status within 7 days. Non-filing of form attracts penalties.
FS 5 Form – Payer’s Monthly Payment Advice
This form obliges the payer to declare the following:
- Details of payer;
- Number of payees receiving emoluments under either Main or Part-time employment;
- Gross amount of emoluments paid to payees in respect of main employment;
- Gross amount of emoluments paid to employees in respect of part-time employment;
- Gross amount of emoluments paid to payees in respect of other sources;
- Total tax deducted in regard to the various types of emoluments;
- Total tax deducted in regard to the tax arrears;
- Total social security paid and deducted in respect of a particular month.
FS 5 forms may also be used to correct errors in previous FS 5s’ submitted as well as to submit underpayments in previous months. It is to be submitted by the last working day of the month following that in which the emoluments were made. Non-payment and non-submission attracts additional tax.
Form FS 3 – Payee Annual Statement of Earnings
This form obliges the payer to provide the following information:
- Total emoluments paid;
- Total amount of fringe benefits divided into the various categories;
- Tax and social security contributions deducted for a calendar year or part thereof in respect of each payee.
This form is to be completed by the payer in respect of every calendar year or on termination of contract of employment by the employee if employment was terminated prior to year end. The payer must provide the form to the employee within seven days after termination or by the 31st January following each calendar year end. This form is to be sent to the Director General, Income Tax by not later than 15 February after the end of the year. Non-submission attracts additional tax.
Form FS 7 – Payer’s Annual Reconciliation Statement
This form obliges the payer to provide the following information:
- Total emoluments paid in respect of each type of Tax Deduction Method;
- Total tax & social security contributions deducted from the payees;
- Total number of FS 3 forms issued for a particular calendar year;
- Reconciliation between amounts of tax and social security paid and deducted.
It must be submitted to the Director General, Income Tax by 15 February following end of calendar year or by the last working day of the month following that during which the payer last made the payments of emoluments. Non-submission attracts additional tax.
The Part-Time Rules
Article 90A of the ITA provides that part-time traders and part-time employees may opt to pay tax at 15% on their part-time work. The application of this special rate is restricted to the persons mentioned Article 90A of the ITA and the Part-time Work Rules.
