Taxation of Rental Income in Malta

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 to 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 in further detail 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 in Malta 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 final withholding tax cannot be applied to rental income received from related parties. A body of persons is related to an individual if more than 25% is either owned or controlled, directly or indirectly, by that individual, and two bodies of persons are related they are owned or controlled, directly or indirectly, in more than 25% by the same persons.

Rental income subjected to the final 15% tax in Malta does not need to be declared in the lessor’s tax return. Instead, a TA24 form, together with the payment of the tax, must be submitted either manually or electronically by not later than the 30^th 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 will be allowed to claim solely the following deductions against the rental income:

1. Interest, provided it relates to the asset that produces the income.
2. Rent, ground rent, or similar burdens.
3. License fees paid for the purposes of the Guest Houses and Holiday Furnished Premises Act.
4. A maintenance allowance equivalent to 20% of the net income remaining after deducting from the gross rent the expenditure referred to at (b) above, i.e., the rent or relative ground rent, and at (c), i.e., the license fees. This allowance is supposed to comprise all other deductions. This means that one may not claim other deductions in respect of, say, any repairs or improvements to the building.

The above rental income will need to be declared by the taxpayer in his income tax return in Malta. Each immovable property is to be regarded as a separate source of income. This means that income from each property is to be calculated separately, with appropriate records kept by the taxpayer to identify individual net income streams.

VAT on Rental Income 

Under the VAT Act, the letting of immovable property in Malta is generally considered exempt without credit for VAT purposes. 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, the following activities shall be subject to VAT in Malta:

1. the letting of or the provision of accommodation before which a license is required from the Malta Travel and Tourism Services Act, or equivalent.
2. the letting of premises and sites for parking vehicles.
3. the letting of permanently installed equipment and machinery and the hiring of safes.
4. the letting of property by a limited liability company to a person registered under Article 10 of the VAT Act for the purpose of economic activity of that other person.
5. the letting of immovable property for not more than thirty days in the course of that person’s economic activity, except for: 
6. those mentioned in (a), (b), (c), and (d) or for artistic and cultural activities; 
7. the letting for the purposes of habitation of any premises that do not require a license in virtue of the Malta Travel and Tourism Services Act, or similar; 
8. the letting of premises used or intended to be used as garages, stores, or similar; 
9. the letting to players of rooms or other spaces lawfully designated for the playing of poker.

The applicable VAT rates vary. For instance, the letting of or the provision of accommodation that require a license in virtue of the Malta Travel and Tourism Services Act shall be subject to 7% VAT. A lessor required to charge VAT on the letting of immovable property must correctly registered with Malta tax authorities for VAT purposes (i.e. under Article 10 or Article 11 of the VAT Act, depending on the expected annual turnover). 

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 to undertake 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 best legal form to undertake letting activities.