United States-Malta Tax Treaty
Quick Summary. An island archipelago located in the Mediterranean Sea, the Republic of Malta is a constitutional republic.
Malta gained independence in 1964. Its constitution provides for a parliamentary system modeled on the Westminster system and a unicameral Parliament known as the House of Representatives. Malta is comprised of five regions, each having its own Regional Committee, and 68 local councils.
Malta’s tax system employs a participation exemption system. Its tax laws are primarily derived from the Income Tax Act, Income Tax Management Act, Duty on Documents and Transfers Act, Malta Enterprise Act, and the Value Added Tax Act.
U.S.-Malta Tax Treaty
Malta is a member of the Commonwealth of Nations as well as the United Nations.
Malta Tax Treaty
- CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF MALTA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
- Technical Explanation of the Convention between the Government of the United States and the Government of Malta For the Avoidance Of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on August 8, 2008
Currency. Euro (EUR)
Common Legal Entities. Public and private limited liability company, partnership en nom collect if and the partnership en commandite, trusts and foundations, and branches.
Tax Authorities. Inland Revenue Department, VAT Department
Tax Treaties. Malta is a party to approximately 80 tax treaties and is a signatory to the OECD’s MLI.
Corporate Income Tax Rate. 35%
Individual Tax Rate. 35%
Corporate Capital Gains Tax Rate. Varying rates may apply.
Individual Capital Gains Tax Rate. Varying rates may apply.
Residence. Personal tax residence is generally determined based upon domicile and location of permanent home.
Transfer Pricing. No.
CFC Rules. Malta has implemented CFC rules based upon the EU ATAD as of 2019.
Hybrid Treatment. No rules currently in force.
Inheritance/estate tax. No.
OVERVIEW OF TAXATION IN MALTA
Malta imposes tax on net income at the national level. The definition of income subject to tax is expansive and includes certain capital gains. These gains may be taxed at lower rates than the rates applicable to ordinary income. Taxable income is computed on an annual basis and is taxed either by assessment or by withholding tax.
The Maltese income tax system mitigates double taxation of dividend income through a full imputation system, which provides shareholders receiving dividends from Maltese corporations a credit for Maltese corporate tax imposed on earnings out of which dividends are paid by those companies. The imputation credit is allowed for resident and non-resident shareholders.
Individuals who are both ordinarily resident and domiciled in Malta are subject to Maltese income tax on their worldwide income. Individuals are resident in Malta if they permanently reside in Malta, allowing for temporary absences deemed reasonable by the Maltese tax commissioner and which are not inconsistent with the individuals’ claim of Maltese residence. Individuals who are not of Maltese origin and who do not intend to permanently establish themselves in Malta are not considered to be domiciled in Malta for tax purposes.
Individuals who are either not ordinarily resident in Malta or are not domiciled in Malta are generally subject to Maltese income tax on their income and capital gains arising in Malta and on their foreign income (but not foreign capital gains) that is received in Malta. Nonresidents are exempt from tax on any capital gains derived from the disposal of shares in a Maltese resident company the assets of which do not consist wholly or principally of immovable property situated in Malta.37 Non-resident individuals are subject to different tax rates than those generally applicable to resident individuals. Non-resident rates extend from zero percent for taxable income up to to 35 percent for taxable income. As Malta generally provides a full imputation credit for residents and non-residents alike, no withholding tax is imposed on dividends received from companies that are tax resident in Malta. Furthermore, distributions from “untaxed income” to non-resident shareholders are also not taxable. No withholding taxes apply to interest and royalty payments unless the interest or royalties are effectively connected with a permanent establishment situated in Malta. In such cases, the withholding tax would be 25 percent if paid to an individual. Such withholding taxes are not final in that any withholding taxes paid are credit against the nonresident’s tax liability in respect of the income, and any excess withholding tax paid is refunded.
An individual’s taxable income is the sum of all gain and profits from the following sources: trade or business; profession or vocation; employment or office; dividends, interests or discounts; pensions, annuities or annual payments; rents, royalties, premiums and any other profits arising from property; certain capital gains; and other gains or profits. Trade losses may be offset against income of the same year and thereafter carried forward indefinitely and offset against the income for succeeding years.
Losses due to depreciation, however, may only be carried forward indefinitely and set off against the profits of the same and continuing trade. No carry-back of losses is allowed. Losses arising outside Malta are allowed as a deduction if the losses, had they been profits, would have been taxable in Malta. Capital losses may be set off only against capital gains. The set-off is allowed against capital gains of the current and following years.
The Maltese tax system distinguishes between “taxed income” and “untaxed income.” The difference between a company’s distributable profits, as shown in its financial statements, and the total amounts of the taxed income, is referred to as untaxed income. As a result of the operation of the full imputation system, there is generally no withholding tax on dividends paid out of profits subject to Maltese corporate tax. However, a withholding tax rate applies to dividends paid to resident individuals out of untaxed profits. In general, there is no withholding tax on interest paid to resident individuals. However, a final withholding tax may apply in the case of interest paid by Maltese banks, the government of Malta and public corporations and authorities. There are no withholding taxes on royalties paid to resident individuals.
Income tax is imposed on capital gains derived from the transfer of ownership of certain assets by individuals. Tax on capital gains does not apply to immovable property that has been owned and occupied for at least three years as the transferor’s own residence immediately preceding the transfer and provided that the property is disposed of within 12 months of vacating the premises. Exempt capital gains also include those from the sale of securities listed on the Malta Stock Exchange, other than securities in a collective investment scheme held in a fund investing less than 85 percent of its total investments in Malta-based securities.
For both resident and non-resident individuals, Maltese tax law generally does not allow the deduction of expenses related to income from capital or employment. Only deductions for expenses for the production of business income and income from self-employment are permitted.
Under Maltese tax law no personal allowances or credits are granted.
Corporations that are both ordinarily resident and domiciled in Malta are generally taxed in Malta on a worldwide basis at a 35-percent rate. Maltese tax law does not specifically provide for taxation of corporations on the basis of accounting profit. However, in practice, the profit shown on the income statement, in accordance with International Financial Reporting Standards forms the basis on which income is computed and the basis on which tax is levied, subject to such specific adjustments as are required and imposed by the relevant tax rules. In general, a company’s gains on the transfer of capital assets are aggregated with its other income, and the total income and capital gains are taxed at the general rate. However, gains on the transfer of immovable property situated in Malta are separately subject to a flat rate property transfer tax. Reduced income tax rates of five percent to 15 percent are applicable to companies qualifying for benefits under the Business Promotion Act. Malta has neither thin capitalization rules with respect to deductibility of interest expense nor controlled foreign company rules or other similar specific anti-abuse legislation.
Under the “participation exemption rules” Malta exempts from tax dividend income and capital gains derived by a company registered in Malta from a “participating holding” of a foreign subsidiary or from the disposal of such holding. A holding in a foreign company is considered to be a participating holding if either a company holds directly at least 10 percent of the equity shares of a foreign company (that is, a company that is not resident in Malta) or a company is an equity shareholder that invests sufficient funds in a foreign company and that investment is held for an uninterrupted period of at least 183 days.
Dividends derived from a participating holding of a foreign subsidiary acquired after January 1, 2007 qualify for the exemption if the company in which the participation is held satisfies any of the following conditions: (1) it is a European Union (“EU”) resident; (2) it is subject to tax in its country of residence of at least ten percent; or, (3) it does not derive more than 50 percent of its income from passive interest or royalties. If none of the above conditions is satisfied, both of the following two conditions must be fulfilled: the investment in the non-Maltese resident company is not a portfolio investment in the hands of the Maltese company; and, the non- Maltese resident company or its passive interest or royalties income is subject to tax in its country of residence tax of at least five percent.
There is generally no withholding tax on the payment of dividends, interest, or royalties by one Malta resident company to another Malta resident company.
Inheritance, gift and wealth taxes
Malta imposes no inheritance, gift, or wealth taxes.
Social security contributions are levied. Social security contributions are not deductible for income tax purposes.
Other indirect taxes
Malta imposes a value added tax (“VAT”) on the consumption of goods and services.
Although the VAT is levied at each stage of the economic chain, it is ultimately borne by the final customer. The VAT due on any sale is a percentage of the sale price less all the tax paid at the preceding stages. The rate is reduced for certain products and services and in some cases is zero.
An initial registration fee applies upon the incorporation of a company. The registration fee is calculated on the basis of the amount of the authorized share capital of the company.
Stamp duty is levied on the purchase of shares, business assets, and immovable property. The stamp duty is imposed at the rate of five percent or two percent on the amount of consideration received from a transfer of, respectively, immovable property or marketable securities (or, if greater, on the value of the property transferred). The five-percent rate also applies to a transfer of marketable securities in a company if 75 percent or more of the value that company’s assets (excluding all current assets other than immovable property) is comprised of immovable property. An environmental tax is imposed at fixed rates on products, such as plastic, metal and glass containers, batteries, and household appliances that result in waste. The tax is payable by traders importing or manufacturing taxable goods.
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