Malta Company Taxation

Malta Company Tax System

Companies are subject to income tax and tax on capital gains at 35% in terms of the Malta Income Tax Act and there is no separate law charging corporation tax. 

Meaning of Company

For income tax purposes, a company means a body of persons that falls under any of the following categories:

1. A limited liability company constituted in Malta (partnership anonyme)
2. A partnership en commandite (limited partnership) constituted in Malta whose capital is divided into shares
3. A body of persons incorporated outside Malta of a nature similar to (1) or (2)
4. A cooperative society registered under the Co-operative Societies Act 

Rate of Tax

The chargeable income of a company, which includes its taxable income and capital gains, is taxed at 35%. Cooperative societies are, however, exempt from tax.

Basis of Taxation of Companies

A company incorporated in Malta is treated as domiciled and resident in Malta and is subject to tax on its worldwide income and capital gains. A company that is not incorporated in Malta is resident in Malta if its management and control are exercised in Malta. Like other taxpayers, a company that is resident but not domiciled in Malta is subject to tax on income and capital gains arising in Malta and on foreign income received in Malta (except for foreign source capital gains). The test of management and control is usually applied by reference to the place where the shareholders’ and directors’ meetings are held and where the important decisions are taken. The fact that a foreign company has a branch in Malta does not, of itself, constitute residence. A company that is not resident or domiciled in Malta is still taxable on income and capital gains arising in Malta.

Accounting Period

Companies are subject to tax for every year of assessment on the income derived in the financial year ending during the preceding calendar year.

Taxable Income

The audited financial statements of the company will normally form the basis of the tax computation. However certain adjustments will be necessary in order to arrive at the company’s income chargeable to tax.

Relief of Losses

Tax losses incurred in trade or business can be set-off against any other income (including capital gains). Otherwise, such loss can be carried forward and set-off against future income. Such losses must exclude capital allowances (the income tax equivalent of depreciation in accounting). Such capital allowances can only be set-off against the same source. Capital losses can be carried forward just like other trading losses but can only be set-off with other capital gains.

Deductions

Limited liability companies may deduct all expenses that are wholly and exclusively incurred in the production of the income, including capital allowances (tax depreciation) at the specified rates. 

Capital Allowances

The annual wear and tear (capital) allowances for fixed assets are calculated on a straight line basis. Capital allowances are the income tax equivalent of depreciation in accounting. Whilst accounting depreciation is added back tax purposes, capital allowances are allowed as a deduction in arriving at the company’s taxable profit. Such capital allowances can be carried forward to future years if not utilised but can only by set-off against the same source.

Group Loss Relief

Trading losses incurred by a company may be surrendered to another company or companies within the same group. Two companies are within the same group for tax purposes if they are both resident in Malta and in no other jurisdiction and one is the subsidiary of the other or both are subsidiaries of a third company resident in Malta. The group must be a group throughout the full year and must also have the same year end. The loss must be transferred within 12 months after the year end. Capital losses and capital allowances may not be surrendered.

Capital Gains Tax

Maltese tax law does not contemplate a blanket tax on all capital gains but rather charges to tax capital gains derived from the disposal of certain capital assets. A gain on the transfer of capital assets is aggregated with a person’s other income and the total of income and capital gains is charged to income tax. Such capital assets include; (1) immovable property; (2) securities, business, goodwill, patents, copyright, trademarks, trade-names; (3) the beneficial interest in a trust. The transfer of valuable assets such as antiques, fine arts, coins, stones and gems will not give rise to tax liability.

Article 43 of the Income Tax Management Act (ITMA) creates a withholding tax mechanism which applies generally to all taxable transfers. The rate is generally 7% of the consideration and this is a provisional tax. However special rules apply to certain transfers of immovable property (the property transfer tax) as put forward by article 5A of the ITA. The property transfer tax is a special tax on property transfers at a rate of 12% of the transfer value. This tax is final and distinct from income tax and income tax on capital gains. Different rates apply in the case of property acquired causa mortis before/after the 25th of November 1992.

Malta also has a special jurisdiction rule regarding the taxation of foreign source capital gains. In fact foreign source capital gains remitted to Malta are only taxable in the case of persons who are both ordinarily resident and domiciled in Malta. Besides, transfers between companies in the same group are exempt from capital gains tax.

Roll Over Relief

The roll-over relief postpones tax on capital gains by setting-off profits derived from the sale of an asset against the cost of acquisition of the replacement asset. Any capital gains realised is not taxed but the cost of acquisition of the replacement asset is reduced by the amount of the gain. Thus capital allowances on the replacement asset will be lower since they will be taken with reference to a reduced cost of acquisition base. This therefore creates a cash flow benefit to businesses. However, the roll-over relief can only be used where a taxable asset which is used in a business for at least 3 years is transferred and replaced within 1 year by an asset that is used solely for a similar purpose in the business.

Dividend Taxation

Malta operates a full imputation system of dividend taxation whereby dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profits being distributed. The shareholder has the option not to declare this dividend if his tax liability is within the 35% bracket which is the highest rate of personal tax in Malta. Shareholders may elect to apply for a refund of the tax paid by the company. A 15% withholding tax applies on the payment of a dividend by a resident company out of untaxed profits to resident individuals.

Tax Accounts

These are accounts that are to be created in terms of the ITA and which make up the company’s distributable reserves. The tax account system is made up of the following 5 accounts;

1. Final Tax Account (FTA)
   
2. Immovable Property Account (IPA)
   
3. Maltese Taxed Account (MTA)
   
4. Foreign Income Account (FIA)
   
5. Untaxed Account (UA)

Assessments and Collection

Provisional tax is payable in three installments by the 30th April, 31st August and 21st December. The balance of tax due must be paid within 9 months from the year end.


For more information about Company Taxation in Malta please contact us on info@virtusmalta.com or by filling in the form on the Contact Us page.