In Malta the corporate tax rate and the highest personal tax rate are both 35%, but Malta has the full-imputation tax system. Through this system, tax paid at the company level is regarded as a prepayment for the tax payable by the shareholder when the profits are eventually distributed. After the dividends are paid, the 35% paid by the company is given as credit for the shareholder's tax, whether they are resident in Malta or not. If the shareholder's personal tax rate is lower than 35%, they qualify for a refund of corporate tax. The full-imputation system reduces tax-induced economic distortions and avoids the double taxation of corporate profits.
During the Budget Speech on October 18 2006, the government announced it had concluded an agreement with the EC that effectively safeguards this system.
The Maltese tax system uses different tax accounts: the Malta taxed account, the foreign income account and the untaxed account. Income allocated to the foreign income account benefits not only from the flat-rate foreign tax credit method of relieving double taxation but also from the tax refund provisions. The tax accounts system ensures that the profits will be treated according to their origin. Income arising in Malta will be fully taxed but income arising outside Malta is allocated to the foreign income account, creating big benefits when that income is distributed by way of dividends to non-resident shareholders. As from January 1 2007, non-residents should be able to apply for a refund of six-sevenths of the Malta tax paid, resulting in an effective Malta tax rate of 5% on distributed foreign income. The details of this system are being discussed with the EU Commission's Code of Conduct (Business Taxation) Group, after which the government expects to conclude this political process and to publish the necessary legislation to implement the agreement.
A system for holding companies also ensures that, where there is a participating holding, non-resident shareholders qualify for a 100% refund of the tax paid on income arising from these foreign holdings upon a distribution of profits. A participating holding arises if the Maltese company directly holds at least 10% of the equity shares of the non-resident company that distributes dividends.
Another positive aspect of Maltese tax law is the possibility of double taxation relief. Malta has signed double tax treaties with more than 40 other states across Europe, north America, Africa and the Middle East. These treaties are largely based on the OECD model. Relief is also provided through domestic rules in the form of unilateral relief and the flat-rate foreign tax credit. Relief from double taxation on a unilateral basis is provided where overseas tax is charged in a country with which Malta does not have a tax treaty. This tax is allowed as a credit against the tax chargeable in Malta on the gross amount to the extent that the credit does not exceed the total tax liability in Malta. The flat-rate tax credit is available to Maltese companies that receive income or capital gains from overseas allocated to the foreign income account. This flat rate for deemed foreign tax paid is set at 25% even if no foreign tax has been charged, so this is an attractive option.
Group companies may surrender tax losses to be set off against the tax profits of another group company. A company claiming losses from a group company may also carry them forward to be used for set-off against future profits. Transfers of assets between group companies do not give rise to capital gains tax and duty is exempted on restructuring within a group of companies through mergers, demergers, amalgamations and reorganizations.
Frank Chetcuti Dimech
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