Malta tax of Dividend Income

Chetcuti Cauchi | Published on 17 Apr 2012 | Updated on 28 Nov 2018

Malta tax of Dividend Income

 

1.   Malta Corporate Income Tax

Malta income tax, whether personal or corporate, is regulated by two principle bodies of law, the Income Tax Act[i] and the Income Tax Management Act.[ii]  This paper considers the income tax treatment of companies only.  Please feel free to contact us should you require further information on aspect of Malta tax treatment not covered by this paper. 

The right for Malta to tax income and capital gains, and the manner in which Corporate Income Tax[iii] is applied, is contingent on:-

  1. the recipient of the income being a ‘Chargeable Person’ (see Point 2 below),

AND

  1. the income and/or capital gains being ‘Chargeable Income’ (see Point 3 below). 

 

2.   Chargeable Companies

Malta CIT applies only to ‘Chargeable Companies’, i.e. companies which are ‘Domiciled’ and/or ‘Resident’ in Malta.

There are three (3) categories of chargeable companies, seen in Points 2.1to 2.3 below.  The remit of income of these persons which is charged to tax (in this case specifically ‘corporate income tax’) hinges on the category in which the Chargeable Company falls (see Point 3 below).

2.1. Malta-domiciled companies

A company would be considered to be domiciled in Malta if it has either been:-

  1. incorporated in Malta,

OR

2.   if the company was incorporated in a jurisdiction outside Malta, but later elected to move its domicile and continue its existence in Malta.[iv]

2.2. Malta-resident companies

A company would be considered to be resident in Malta in either of the following cases:-

1. if the company has been incorporated in Malta;[v]

OR

2. if the company was incorporated in a jurisdiction outside Malta, but later elected to move its domicile and continue its existence in Malta;[vi]

AND

3. if the company, whether domiciled in Malta or elsewhere, holds its ‘Place of Effective Management’ (hereafter referred to as POEM) in Malta.[vii]

2.3. Malta-domiciled and Malta-resident companies

Following the explanation in Points 2.1and 2.2 above, a company would be considered to be both domiciled and resident in Malta when:-

  1. the company has been incorporated in Malta,

OR

  1. the company has opted to move its incorporation from a foreign jurisdiction into Malta,

AND

3.   when the company holds its POEM in Malta.

3.   Chargeable Income

The income and capital gains of a Chargeable Company are subject to Malta CIT if they are classified as ‘Chargeable Income’.[viii]  Chargeable income is determined by adding all income streams of a Chargeable Company – note that income streams which enjoy a statutory exemption from tax should be excluded from the sum – and subtracting there from any ‘Permissible Deductions’.[ix]    

However, the category of Chargeable Company under consideration determines which of all of income streams are subject to tax liability.  Chargeable Companies classify for one of two kinds of liability. 

3.1. Worldwide liability

The chargeable income of a company which is domiciled and resident in Malta is considered to encompass all earnings of the company, arising in any world-wide jurisdiction, and whether or not the earnings are remitted to Malta.[x]

3.2. Source and remittance liability

In the case of a company which is either only domiciled in Malta or only resident in Malta, its chargeable income is considered to consist only of earnings which arise in Malta or earnings which arise in any world-wide jurisdiction but which are remitted to Malta.[xi]

4.   Corporate Income Tax rates, refunds, and exemptions

Chargeable income is subject to CIT at a flat rate of 35%.[xii]  However, Maltese law makes provision to reduce the tax liability of the said company through certain tax exemptions.  Further, by opting for the specific corporate structures explained below, the CIT rate may be refunded to the Chargeable Company’s shareholders.

4.1. The ‘Participation Exemption’

Dividends received by a Chargeable Company are considered to form part of its chargeable income.[xiii]  Nevertheless when a dividend is received from a ‘Participating Holding’,[xiv] the Chargeable Company is entitled not to declare the dividend from its tax return.[xv]  The chargeable income of the company is consequently reduced by the amount of the dividend since as a consequence of the lawful omission, the dividend is not charged CIT.[xvi]

The possibility of opting for the Participation Exemption is conditional on the conditions in Points 4.2.1 belowand 4.2.2 belowbeing satisfied.

4.2. The full tax refund

If a Chargeable Company pays its shareholders a dividend from profit derived from a Participating Holding, these shareholders have a right to claim from the local Inland Revenue Department[xvii] a full tax refund of the tax paid[xviii] by the company on these profits.[xix]

The possibility of making a successful claim for a full tax refund assumes that the conditions in Points 4.2.1 belowand 4.2.2 beloware satisfied.

4.2.1.     What is a Participating Holding?

A Participating Holding refers to the holding of shares by a Chargeable Company in another company which is not resident or domiciled in Malta, hereafter referred to as ‘Foreign Company’, which holding:-[xx]

1.     represents 5% or more of the equity shares of the Foreign Company;

2.     gives the Chargeable Company an entitlement to call for and acquire the entire balance of the equity shares in the Foreign Company;

3.     gives the Chargeable Company the right of first refusal in the event of the proposed disposal, redemption or cancellation of all the equity shares in the Foreign Company;

4.     entitles the Chargeable Company to sit or appoint a person to sit on the Board of Directors of the Foreign Company;

5.     represents an investment of a minimum of €1,164,000 (or an equivalent in another currency) which is held for an uninterrupted period of not less than 183 days;

OR

6.     has been acquired to further the Chargeable Company’s own business and but is not held as trading stock for the purpose of trade.

4.2.2.     Anti-abuse provisions

The availability of the full tax refund (Point 4.2 above) and the Participation Exemption (Point 4.3 above) rests on the Foreign Company satisfying any of the conditions below:

  1. it is domiciled or resident of one of the 27 EU member states;
  2. it pays tax in any foreign territory of at least 15%;
  3.  
  4. less than 50% of the Foreign Company’s income is derived from passive interest or royalties.[xxi]

Where none of the above 3 conditions are satisfied, the Participation Exemption may still apply if the Participating Holding of the Chargeable Company:

  1. does not represent a portfolio investment;

AND

  1. the Foreign Company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%.[xxii]

4.3. The 6/7ths tax refund

Income which arises from the trade of a Chargeable Company is considered to form part of a company’s chargeable income (for it does not enjoy an exemption from taxation) and is therefore taxed at the CIT rate of 35% in terms of Point 4 above.[xxiii]

If a Chargeable Company pays a dividend to its registered shareholders from profit of trading income[xxiv] these shareholders are entitled to claim from the local IRD a 6/7ths refund in their favour of the CIT paid by the Chargeable Company in question.[xxv]

4.4. The 5/7ths refund

Income which is derived by a Chargeable Company from Passive Interest or Royalties[xxvi] is considered to form part of its chargeable income and is consequently also taxed at the CIT rate of 35% in terms of Point 4 above.[xxvii]

However, if a Chargeable Company pays a dividend to its registered shareholders from profit derived from this income, the shareholders are entitled to claim from the IRD a 5/7ths refund in their favour of the CIT paid by the Chargeable Company in question.[xxviii]

A refund of 5/7ths of the CIT paid by a Chargeable Company is also available to the said company’s shareholders in receipt of a dividend paid out of profits received from of a Participating Holding which does not satisfy the Anti-abuse provisions in Point 4.2.2 above.

The CIT refunds due in terms of Points 4.2, 4.3, and 4.4above are considered to be debts of the Commissioner for Revenue which should be paid within 14 days from when the refund is due. [xxix]  The right to a CIT refund in terms of the above is contingent on all procedural requirements having been completed in full and according to law.[xxx]

4.5. The 2/3rds refund

The right to claim the above CIT refunds does not arise if the Chargeable Company has claimed relief from double taxation on the profits from which the dividend was declared.[xxxi]

Instead the shareholders receiving a dividend from these profits and allocated to the Malta Taxed Account[xxxii] may claim a 2/3rds refund of the Malta tax paid by the Chargeable Company which has claimed double taxation relief.[xxxiii]

5.   The ‘Full Imputation System’

Over and above the system of refunds which have been explained above, the members of a Chargeable Company enjoy a ‘Full Imputation System’ in regards to dividends which they have received from profits paid out of the Maltese Taxed Account or Foreign Income Account.

The shareholders should add the dividends on their tax return to their own chargeable income, which is then subject to the rate of tax in which they classify.  However, the ‘Full Imputation System’ entitles them to a credit equivalent to the tax paid by the company.[xxxiv]  This means that there is no double taxation on the same profits of a Chargeable Company.

 

[i] Chapter 123 of the laws of Malta, hereafter referred to as the ‘Act’.

[ii] The Income Tax Management Act can be found at Chapter 372 of the laws of Malta.  In addition to these two principle legal works, a number of subsidiary laws have been enacted there under.

[iii] Hereafter referred to as ‘CIT’.

[iv] Maltese law permits the redomiciliation of companies into and out of Malta in terms of the Continuation of Companies Regulations (Subsidiary Legislation 386.05).

[v] S.2(1), the Act.

[vi] Ibid.

[vii] The possibility of a company assuming residence in Malta by establishing its POEM in Malta arises from the Double Taxation Treaties (hereafter referred to as the ‘Treaties’) entered into by Malta (of which there are over 50).  These treaties are modelled upon the O.E.C.D. Model Tax Convention (hereafter referred to as the ‘Convention’).  The Convention provides in Article 4 paragraph 3 that the preferred criterion for determining a company’s residence is by reference to its POEM.  S.76(1) of the Act makes way for Treaties’ provisions to be implemented into national law, in favour of any conflicting Malta law provisions, thereby permitting the adoption of POEM nationally. In brief, POEM is determined by the place where executive decisions of a company are taken, which need not coincide with the place where meetings are held and this is not equivalent to the place where the day-to-day decisions for the running of the company are taken. 

[viii] S.4(1)(a–g), the Act provides an exhaustive list of Chargeable Income under Maltese law.

[ix] Permissible Deductions are listed in S.14, the Act.

[x] S.4(1), the Act.

[xi] S.4(1) proviso (i–iii), the Act.

[xii] S.56(6), the Act.

[xiii] S.4(1)(c), the Act.

[xiv] Participating Holding is defined in Point 4.2.1.

[xv] S. 12(1)(u), the Act.

[xvi] Ibid.

[xvii] Hereafter the ‘IRD’.

[xviii] S.48(4)(c), ITMA - tax must actually have been paid by the Chargeable Company to the Commissioner for Revenue on the profits distributed as dividends.

[xix] S. 48(4)(b), ITMA.

[xx] S.2, the Act.

[xxi] S. 48(4)(b)(1), ITMA.  Interest or royalties are deemed to be passive when they are not derived directly or indirectly from a trade or business and where such interest or royalties have suffered foreign tax at a rate of less than 5%.

[xxii] S. 48(4)(b)(ii)(1-2), ITMA. 

[xxiii] S.4(1)(a), Income Tax Act.

[xxiv] The trading income from which a dividend was paid should be allocated to the Foreign Income Account (chargeable income which is arises outside of Malta is accounted for in this account) or the Maltese Taxed Account (chargeable income not allocated to the Foreign Income Account is accounted for in this account) in order for the right to refund to arise.  These two accounts exclude income which is exempt from tax and profits which are derived directly or indirectly from immovable property which is situated in Malta.

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

[xxvi] Interest or royalties are deemed to be passive when they are not derived directly or indirectly from a trade or business and where such interest or royalties have suffered foreign tax at a rate of less than 5%.

[xxvii] S.4(1)(a), Income Tax Act.

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

[xxix] S.48(8), ITMA.

[xxx] The procedural requirements are namely the submission to the IRD of a valid income tax return, filing an application for refund on the prescribed form, affixing a dividend warrant of the recipient shareholder in question, and the payment in full by the company of its tax obligation.

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

[xxxii] See en. 19.

[xxxiii] S.48(4)(a),(c), ITMA & see S.48(4A)(a)(ii), ITMA.  The 2/3rds refunds applies to profits which are distributed from the Malta Taxed Account. 

[xxxiv] S.31, 59(1)(a) and 60, the Act.

 

 


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