Malta is one of the most tax-friendly countries in Europe when it comes to taxes and social contributions paid by companies. Malta’s entrance in the European Union has made it a very interesting investment destination for foreign businessmen hence the modifications brought to the taxation system, especially when dealing with companies. Not only the corporate tax is very flexible (5% final tax), but Malta has also concluded about 70 double tax treaties with other countries in order to reduce the tax burden even more.
According to the Income Tax Act, Maltese companies are subject to the corporate tax on their worldwide income. Foreign companies carrying business activities in Malta will be levied the corporate tax on the local income only. The taxable income of corporations in Malta comprises:
The tax rate on corporate income in Malta is 35% on the chargeable income. However, certain types of companies benefit from reduced tax rates up to 5% of tax and, among these, there are international trading companies and international holding companies. Branches and subsidiaries of foreign companies will be levied the same 35% corporate tax rate as domestic companies, but benefit from tax exemptions when repatriating profits to their parent companies.
The encouragement of the research and development industry has led to more corporate tax exemptions for Maltese companies, among which the copyright and the patent royalties exemptions. Also, companies distributing dividends to local and foreign shareholders are entitled to refunds on the taxes paid in Malta.
Maltese companies can benefit from refunds of 6/7 parts of the corporate tax. Where a company pays a 35% corporate tax, shareholders can claim 6/7 of the tax. This leads to an effective tax rate of 5%. There are also exceptions to this rule.
Maltese holding companies can receive a full refund of the corporate tax under the participation exemption if it derives profits from holdings in a company registered outside Malta. However, Maltese holding companies may also choose to pay the corporate tax on certain incomes and following the distribution of dividends, the shareholders can claim back the refund on that tax.
The tax base on which the corporate tax is levied in Malta is made of the profit and losses made by a company in a fiscal year with adjustments on the incomes and expenditures.
Expenses can depend on the type of income. Repairs and costs of equipment maintenance, interests on capital used for acquiring incomes, bad debts and capital allowance that may depend on the type of activity, expenses made with the incorporation of the company and charitable donations can be considered allowable expenses. Unrelieved losses can be carried on an indefinite amount of time if they come from foreign or local sources. The foreign source income falls under the protection of double tax agreements. Tax groups can also benefit from reliefs for income and capital expenses.
When paying the corporate tax in Malta, companies must allocate their profits to one of the following accounts:
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