Driven by strong economy, growing population and expatriate workforce, in recent years the demand for rental property in Malta has been on the rise. The Maltese property market also attracts foreign investors who wish to diversify their investment portfolio, whilst deriving healthy rental income. It is very important that lessors understand tax implications of renting out their Maltese immovable property. This article aims to be a quick tax guide on the subject.
Key Tax Issues
- Lessors in Malta can choose a final withholding tax of 15% on rental income.
- Alternatively, they can declare rental income in their annual tax return and have it taxed at applicable, standard income tax rates.
- Letting of immovable property in Malta is generally exempt from VAT, but specific activities (e.g. short-term rental to tourists) may be subject to VAT.
Tax on Rental Income
When a property is rented out in Malta, the lessor can decide to either opt for the 15% final withholding tax or declare the rental income in the annual tax return (and have it taxed at applicable standard income tax rates). This can be changed each year. However, a taxpayer cannot choose to subject part of the rental income to a final 15% tax and have another part of his rental income declared in his tax return.
Below we explain these two alternative methods of taxing rental income in Malta.
Option 1: Final Withholding Tax at the Rate of 15%
The final withholding tax of 15% is calculated on the gross rental income received by the lessor. It is a final tax, and no deductions, set-offs, or refunds shall apply against the income. This tax rate may apply to both resident and non-resident recipients of rental income, irrespective of whether the taxpayer is an individual or a body corporate. This tax cannot be applied to rental income received from related parties.
Rental income subjected to the final 15% tax does not need to be declared in the lessor’s tax return. Instead, a TA24 form, together with the tax payment, must be submitted by the 30th of April of the year following the year when rental income was received.
Option 2: Rental Income Declared as Part of the Taxable Income
In this case, rental income will be added to other income of the taxpayer and will be subject to Malta income tax at standard personal or corporate tax rates, as applicable to the taxpayer. The taxpayer may claim certain deductions against the rental income, such as interest on property loans, ground rent, and a maintenance allowance.
Rental income must be declared in the taxpayer’s income tax return, with each immovable property considered a separate source of income.
VAT on Rental Income
Under the VAT Act, the letting of immovable property in Malta is generally exempt without credit from VAT. This means that the lessor shall not charge VAT on gross rent and may not claim VAT on any expenses incurred related to the provision of the same.
However, certain types of activities shall be subject to VAT in Malta, so it is advisable to seek professional guidance.
What this means for you
Property lessors in Malta have two options of taxing rental income. A final 15% tax is a simple solution to account for rental income whilst offering a benefit of relatively low tax rate. On the other hand, including rental income in the tax return allows the taxpayer to benefit from various deductions. With two options offering distinct benefits, it is worth undertaking a tax assessment to verify which solution will work best for you.
How we can help
Our team of experienced international tax advisors can help you choose between final withholding tax and declaring rental income in your tax return. Based on your financial circumstances, we can deliver a tailor-made solution considering eligible deductions and the best legal form to undertake letting activities.
