Taxation of interest income

1. Malta Corporate Tax of Interest Income

A Malta company, whether it is domiciled in Malta or resident in Malta only, is charged to corporate income tax on their net chargeable income.[i]  The standard rate of corporate income tax (hereafter ‘CIT’) charged in Malta is 35%.[ii]  Any expense which has been incurred wholly and exclusively in producing the income may be deducted from the gross chargeable income before tax is charged.[iii]

Interest income arising in favour of a Malta company falls to be classified as chargeable income of a company.[iv]

2. Refundable portion of the Malta tax paid

Maltese law provides that the registered shareholders of a Malta company, after they have received a dividend from interest income, are entitled to claim a refund of a portion of the Malta tax paid by the distributing company.[v]

The portion of the Malta tax refund which may be claimed varies according to:-

1. the source of the interest income which accrued in favour of the distributing company,[vi]

and

1. whether or not the distributing company has claimed relief from double taxation on these profits.[vii]

A shareholder’s right to claim a refund of Malta CIT paid would not apply if the distributing company’s CIT obligations have not been satisfied in full.[viii]  Moreover, a CIT refund would only be granted up to the extent that it does not exceed the Malta tax actually paid.[ix]

3. Malta tax treatment of dividend income and the CIT refund

A shareholder of a Malta company does not suffer Malta tax on:-

1. dividends received from a Malta company,[x]

and

1. on the subsequent refund of Malta CIT paid by the distributing company.[xi]

4. The source of interest income

The refundable portion of the Malta tax paid on interest income varies according to whether the company received ‘Passive Income’ or ‘Non-passive Income’.

4.1. 5/7ths refunds on Passive Interest

Interest income is classified as ‘Passive Interest’ if both of the following two conditions are met:-

1. The interest income is not derived, directly or indirectly, from a trade or business,
2.  
3. the interest income has not suffered or has suffered foreign tax of less than 5%.[xii]

A registered shareholder of a Malta company who has:-

i.              received a dividend from a Malta company,

from

ii.             profits of the company which arise from Passive Interest

is entitled to claim a 5/7^ths refund of the CIT paid by the Malta company on the Passive Interest.

4.2. 6/7ths refund on Non-passive Interest

Interest income derived by a Malta company which does not satisfy either of the above two conditions for Passive Interest, consequently cannot be classified as passive interest and is referred to as ‘Non-passive Interest’.

A registered shareholder of a Malta company who has:-

i.              received a dividend from a Malta company,

from

ii.             profits of the company which arise from Non-passive Interest

is entitled to claim a 6/7^ths refund of the CIT paid by the Malta company on the Non-passive Interest.

5. 2/3^rds refund on Interest Income which has enjoyed relief from double taxation

A Malta company which has suffered tax overseas on its interest income may claim double taxation relief in Malta either under a double taxation agreement or by virtue of the unilateral relief provisions. 

The double tax relief would lower the CIT rate charged in Malta by the amount of foreign tax suffered.

A registered shareholder of a Malta company who:-

i.              receives a dividend from a Malta company

from

ii.             profits profits of the company which arise from either Passive or Non-passive Interest,

and

iii.            in relation to which profit double tax relief has been claim in Malta,

has the right to claim a refund of 2/3^rds of the Malta tax paid on the interest income.[i]

6. Malta Holding Companies

The above described Malta CIT refunds apply also where the shares of a Malta company are held in a Malta holding company.

The ultimate owners of a Malta company may opt to incorporate a second Malta entity, to hold shares in the Malta company, and receive dividends and refunds in their stead.

A Malta holding company may be inserted between the underlying Malta company and its final owners, which would serve the function of:-

1. holding dividends and refunds and declare dividend income in favour of the ultimate beneficial owners of the structure at a later date or reinvestment into the underlying Malta or foreign entities,

2. receiving funds from various sources for their reinvestment in its subsidiaries in Malta or outside,

And

3. receiving dividends from non-Malta companies, with the possibility of a tax emption on these dividends.

[i] S.48(4A)(a)(ii), ITMA.

[i]S.4(1)(a–g), of the Income Tax Act, chapter 123 of the laws of Malta, hereafter referred to as the ‘ITA’, provides an exhaustive list of income which is charged to tax in terms of Maltese law.

[ii] S.56(6), ITA.

[iii] S.14, ITA.

[iv] S.4(1)(c), ITA.

[v] S.48(4),(4A), the Income Tax Management Act, chapter 372 of the laws of Malta, hereafter referred to as the ‘ITMA’.

[vi] S. 48(4A)(a), S.48(4A)(a)(i), ITMA.

[vii] S.48(4A)(a)(ii), ITMA.

[viii] S.48(4)(c), ITMA.