Malta double taxation agreements: Effective system

Malta companies may benefit from:

• Unilateral relief, including credit system for relief of underlying tax
• Double Tax Treaty Network
• Flat Rate Foreign Tax Credit system (FRFTC)

Unilateral Relief

The unilateral relief mechanism creates a virtual double tax treaty between Malta and a large number of countries around the world which provides for a tax credit in cases where foreign tax has been suffered irrespective of whether Malta has a double tax treaty with such jurisdiction or not. To benefit from unilateral relief, a taxpayer must provide evidence to the satisfaction of the Commissioner that:

• that the income arose overseas;
• that the income suffered foreign tax; and
• the amount of foreign tax suffered.

The foreign tax suffered will be compensated through in the form of credit against the tax chargeable in Malta on the gross chargeable income. The credit shall not exceed the total tax liability in Malta on the foreign sourced income.

OECD based Tax Treaty Network

To date, Malta has signed over 70 double tax treaties. Most treaties are based on the OECD model, including the treaties signed with other EU member states.

Also read: Accounting in Malta

EU Parent and Subsidiary Directive

As an EU member state, Malta has adopted the EU Parent-Subsidiary Directive which disposes of cross border transfer of dividends from subsidiary to parent companies within the EU.

Interest and Royalties Directive

The Interest and Royalties Directive exempts interest and royalty payments payable to a company in a member state from tax in the source member state.

Participating Exemption

Malta holding companies may be structured to hold shares in other companies and such participations in other companies qualify as participating holding. Holding Companies which meet either of the conditions mentioned below may benefit from this participating exemption based on participating holding rules both on dividends from such holdings and gains arising on the disposal of such holdings:

• a company holds directly a minimum of 5% of the equity shares of a company whose capital is completely or partly divided into shares, which holding confers an entitlement to at least 5% of any two of the following (“Equity holding rights”)
  • right to vote;
  • profits available for distribution; and
  • assets available for distribution on a winding up; or
• a company is an equity shareholder in a company, therefore it is entitled to call for and acquire the entire balance of the equity shares not held by that equity shareholder company to the extent permitted by the law of the country in which the equity shares are held; or
• a company is an equity shareholder in a company, therefore it is entitled to first refusal in the event of the proposed disposal, redemption, or cancellation of all the equity shares of that company not held by that equity shareholder company; or
• a company is an equity shareholder in a company and is entitled to either sit on the Board or appoint a person to sit on the Board of that company as a director; or
• a company is an equity shareholder which holds an investment representing a minimum total value of €1,164,000 or its equivalent in a foreign currency, as on the date or dates on which it was acquired, in a company and that holding in a company must be held for an interrupted period of a minimum of 183 days; or
• a company is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of trade.
  Equity shares deal with the holding of the share capital in a company which is not a property company and which entitles the shareholder to at least any two of the following three years: the right to vote, the right to profits available for distribution to shareholders and the right to assets available for distribution on a winding up of the company.

Participation exemption can also apply to holdings in other entities which could be a Maltese limited partnership, a non resident body of persons with similar characteristics, and even a collective investment vehicle where the liability of the investors is limited, as long as a holding satisfies the criteria for the exemption outlined below:

• it is resident or incorporated in the EU;
• it is subject to any foreign tax at a rate of at least 15%; or
• less than 50% of its income is derived from passive interest or royalties.

The above are the safe harbours set. In cases where the company in which the participating holding is held does not fall within one of the aforementioned safe harbours, the income which is derived therefore may nevertheless be exempt from tax in Malta if both the conditions below are satisfied:

• the equity shares held in the non-resident company must not represent a portfolio investment; and
• the non-resident company or its passive interest or royalties have been subject to tax at a rate which is not less than 5%

Flat Rate Foreign Tax Credit

Companies which are receiving overseas income may benefit from the FRTC, provided that they provide an auditor’s certificate stating that the income arose overseas. The FRFTC mechanism assumes a foreign tax suffered of 25%. A 35% tax is imposed on the company’s net income grossed up by 25% FRFTC, with the 25% credit being applied against the Malta tax due.

Read more: 

• Benefits of setting up a business in Malta
• Malta company register