Income tax

Income Tax is governed by the Income Tax Act (ITA), the Income Tax Management Act and subsidiary legislation.

This tax is levied on income and some specific kinds of capital gains for natural and legal persons, but there is no specific legislation for natural and legal persons.

Entities subject to taxation

Partnerships En Nom Collectif and Partnerships En Comandite whose capital is not split into shares and civil partnerships are transparent entities. The business income from these entities is considered income for the shareholders and is only taxed at this level - tax transparency.

Generally, the other collective entities are taxed as separate entities, as distinct from their shareholders.

Basis of taxation

Natural or legal persons, resident and domiciled in Malta, are taxed on their overall taxable income, i.e. income and capital gains obtained in Malta and other countries are taxed at 35%.

An individual who is resident, but not domiciled in Malta, is subject to tax in Malta on the taxable income and capital gains obtained in Malta and on the income (but not capital gains) obtained abroad but received or sent to Malta.

In the case of non-residents in Malta, only the income and capital gains obtained in Malta are subject to taxation in Malta.

A company is domiciled in Malta if it was incorporated there. A foreign company which transfers its head office to Malta will be considered to be resident for tax purposes, but will still be considered to be a foreign company and not domiciled in Malta. In this case, the foreign company will only be taxed on income and capital gains obtained in Malta and on revenues received or sent to Malta. Capital gains from aboard (whether they are sent to Malta or not), and income made and held abroad will be exempt from taxation in Malta, which opens up very interesting tax planning opportunities.

Taxable income

Article 4 (1) of the ITA lists which income are subject to tax, including:

• Profits or gains from commercial activities, a profession or vocation;
• Remuneration from employment or self-employment, including fringe benefits;
• Dividends, bonuses, interest or discounts;
• Pensions, compensation, annuities;
• Rent payments, royalties, bonuses and other income from property;
• Other income.

Capital gains are taxed as another source of revenue, but only capital gains on the sale of the following assets are taxable:

• Property: use and enjoyment or other property rights;
• Securities: use and enjoyment or other securities rights;
• Shares: use and enjoyment or other rights related to Partnership interests;
• Transfers, goodwill, licenses and authorizations;
• Some intellectual property: brands, patents, copyright, trade names;
• Beneficiary interest in a trust that includes the assets mentioned above.

Tax calculation

A company’s taxable profit is calculated from the net profit for the year using accounting standards with the adjustments (exemptions, deductions and accruals) set out in the ITA. This taxable profit is subject to a 35% tax.

Special tax regime for company groups

A company’s operating losses (this does not apply to capital losses) can be assigned to one or more companies within the same group. Two companies are considered to belong to the same group when one of the companies is a subsidiary of the other or if they are both subsidiaries of a third company.

This system only applies to companies that are resident in Malta and not resident in any other country.

A company is considered to be the subsidiary of another when the parent company, directly or indirectly:

1. Owns more than 50% of the capital and voting rights; and
2. Has the right to more than 50% of the profit available for distribution; and
3. Has the right to more than 50% of the assets available for distribution on liquidation.

The tax year for both companies has to coincide, and they have to belong to the same group for the entire year. The assignment, which may be partial, has to be made up to 12 months after the end of the year in which there have been operating losses. The assignment may be free or subject to charges. Assigned losses cannot be re-assigned or transferred to another company.

Special tax regime for investment income

Malta has created a special system for income from investment, which complies with certain requirements and makes provision for a 15% withholding tax on the following kinds of income paid to Maltese residents, with few exceptions:

• Interests paid by a bank in Malta;
• Interest, discounts or bonuses paid by the Maltese government, by one of its agencies or any other entity or authority established by law;
• Interest, discounts or bonuses paid by a foreign bank but paid through an authorized Financial Intermediary;
• Capital gains arising from the sale of shares or Collective Investment Schemes units.

This system is optional. The beneficiary of the income may choose to receive the gross income and include it in their taxable earnings.