Overcoming the complexities of income tax laws, in general, can be daunting for any business owner. However, understanding and utilizing available tax deductions can significantly enhance your Business’s financial health.
An expense is allowed as a deduction if it is ‘wholly and exclusively incurred in the production of the income’.
In this article, we will explore some of the essential tax deductibles that businesses in Malta can leverage to maximize their savings, ensuring they retain more of their hard-earned revenue.
Interest (Article 14(1)(a) of ITA)
Interest expenses incurred by businesses are deductible under Article 14(1)(a) of the Income Tax Act (ITA) in Malta. This deduction applies to interest paid on loans or other financing used for business purposes. These expenses must be directly related to the generation of taxable income and are supported by appropriate documentation for verification by tax authorities.
Rent (Article 14(1)(b) of ITA)
Under Article 14(1)(b) of the ITA, rent paid for premises used in business operations is deductible. This deduction covers lease payments for office space, warehouses, or other property essential for conducting business activities. The rental agreement must be commercially justifiable and supported by valid lease agreements or contracts to qualify for deduction.
Repairs of premises, plant or machinery (Article 14(1)(c) of ITA)
Businesses in Malta can deduct expenses incurred for the repairs and maintenance of premises, plant, or machinery under Article 14(1)(c) of the ITA. These expenses must be necessary to keep the assets in operational condition and cannot be of a capital nature. Documentation such as invoices and receipts must be retained to substantiate these deductions.
Bad debts (Article 14(1)(d) of ITA)
Article 14(1)(d) of the ITA allows businesses to deduct bad debts that have become irrecoverable during the year. To qualify for this deduction, businesses must demonstrate that reasonable efforts were made to recover the debts and that they are written off in the accounts. Supporting documentation, including records of attempts to recover the debts, is required for verification.
Pensions (Article 14(1)(e) of ITA)
Businesses can deduct contributions made to approved pension schemes under Article 14(1)(e) of the ITA. These deductions apply to both employer and employee contributions to registered pension plans, ensuring that provisions for retirement benefits are adequately funded. Contributions must comply with pension regulations and be supported by appropriate documentation for tax purposes.
Capital Allowance (Article 14(1)(f) & (g) of ITA)
Under Article 14(1)(f) and (g) of the ITA, businesses can claim capital allowances on eligible assets used in their operations. This deduction covers the depreciation or amortization of tangible and intangible assets such as machinery, equipment, vehicles, and intellectual property. The deduction amount is calculated based on specified rates and conditions outlined in the Income Tax Act.
Trading losses (Article 14(1)(g) of ITA)
Businesses can offset trading losses against their taxable income under Article 14(1)(g) of the ITA. This deduction allows companies to mitigate the impact of losses incurred in trading activities on their overall tax liability. Losses can typically be carried forward to future years or offset against other income within certain limits and conditions stipulated by tax regulations.
Scientific Research (Article 14(1)(h) of ITA)
Article 14(1)(h) of the ITA provides deductions for expenses incurred in scientific research and experimental development activities. Businesses engaged in qualifying research projects can deduct costs associated with personnel, materials, and overhead directly related to scientific investigations. Proper documentation and compliance with guidelines set forth by tax authorities are essential for claiming this deduction.
Expenses by a candidate for election (Article 14(1)(k) of ITA)
Candidates for election in Malta can deduct expenses related to their campaign activities under Article 14(1)(k) of the ITA. These deductions cover expenditures such as advertising, public relations, transportation, and other campaign-related costs incurred during the election period. Detailed records and receipts must be maintained to support the legitimacy of these deductions.
Marketing and promotion (Article 14(1)(l) of ITA)
Businesses can deduct expenses incurred for marketing and promotional activities under Article 14(1)(l) of the ITA. This includes costs associated with advertising campaigns, sales promotions, and public relations efforts aimed at enhancing brand visibility and increasing sales. Documentation supporting these expenses is essential for tax compliance and verification purposes.
Intellectual Property Rights (Article 14(1)(m) of ITA)
Under Article 14(1)(m) of the ITA, businesses can deduct expenses related to the acquisition, registration, and maintenance of intellectual property rights. This deduction applies to costs incurred in securing patents, trademarks, copyrights, and other forms of intellectual property essential for business operations. Documentation proving ownership and registration of these rights is required for tax purposes.
Childcare Services paid by an employer (Article 14(1)(n) of ITA)
Employers in Malta can deduct expenses incurred for providing childcare services to employees under Article 14(1)(n) of the ITA. This deduction supports businesses in offering childcare facilities or subsidies to employees, enhancing work-life balance and productivity. Proper documentation of expenditures and compliance with childcare facility regulations are necessary for claiming this deduction.
Notional Interest Deduction (NID)
The Notional Interest Deduction (NID) in Malta aligns the tax deductibility of equity costs with debt costs, allowing businesses to deduct a notional interest on equity invested in their operations. This deduction aims to level the playing field between debt-financed and equity-financed investments, encouraging businesses to raise capital through equity while enjoying tax benefits similar to those available for debt financing.
Pre-Trading Expenditure Regulation of 2002
The Pre-Trading Expenditure Regulation of 2002 allows businesses to deduct certain expenses incurred before commencing their trading activities. These deductible expenses typically include costs related to staff training, salaries or wages, and advertising aimed at promoting the business before it starts generating revenue. This regulation helps new businesses offset initial setup costs against their taxable income once they begin operations.
Deduction of Expenses in Respect of Immovable Property Rules
Under these rules, businesses can deduct specific expenses related to immovable property. Deductible items typically include interest expenses on loans used to acquire or maintain property, rent paid for leased premises, ground rent obligations, and maintenance allowances for property upkeep. These deductions support businesses in managing the costs associated with owning or leasing immovable property while optimizing their tax liabilities.
Deduction (Workplace Accessibility) Rules
The Deduction (Workplace Accessibility) Rules provide for deductions on qualifying expenditures aimed at increasing workplace accessibility for disabled employees. These deductions cover expenses incurred for installing ramps, accessible toilets, and other facilities that enhance accessibility and inclusivity within the workplace. By supporting these initiatives, businesses not only improve working conditions but also benefit from tax incentives designed to promote equal opportunities for all employees.
The deduction is equivalent to 100% of the cost incurred but capped at €20,000 with the possibility to carry such deduction to future periods.
Deduction (Childcare Facilities at the Workplace) Rules
Under these rules, businesses can deduct expenses related to constructing or converting childcare facilities at the workplace. This deduction encourages employers to provide onsite childcare services, benefiting employees by facilitating work-life balance and reducing childcare costs. By investing in childcare facilities, businesses can also claim tax relief on capital expenditures associated with establishing or improving these facilities.
The deduction is equivalent to 100% of the cost incurred but capped at €20,000 with the possibility to carry such deduction to future periods.
Deduction (Pharmacy of Your Choice) Rules
The Deduction (Pharmacy of Your Choice) Rules allow businesses to deduct capital expenditures on equipment or software used in a pharmacy outlet. This deduction supports pharmacies in upgrading their infrastructure, enhancing service delivery, and complying with regulatory standards. Businesses can claim tax relief on investments made towards improving pharmacy operations, thereby optimizing their financial resources while meeting healthcare service demands.
The deduction on expenditure incurred after 1st January 2016 is equivalent to 100% of the cost incurred but capped at €14,000 with the possibility to carry such deduction to future periods.
Deduction (Apprentices and Work Placements) Rules
Businesses can claim deductions under these rules for expenses related to apprenticeships and work placements. Specifically, €600 can be claimed for each work placement and €1,200 for each apprenticeship undertaken. This incentive encourages businesses to invest in skills development and workforce training, fostering a skilled labor pool and supporting career opportunities for young individuals entering the workforce.
Deduction (Mature Workers) Rules
The Deduction (Mature Workers) Rules provide for a deduction of up to €11,600 per annum for 2 years for employing mature workers. This deduction aims to incentivize businesses to hire and retain older employees, contributing to workforce diversity and leveraging the experience and skills of mature workers.
Deduction for Transportation Cost of Employees Rules
Under these rules, businesses can claim deductions on transportation costs incurred for employees. This deduction applies to expenses related to providing transportation services or subsidies to employees and facilitating commuting to and from work.
Deductions can amount to lower of:
- 150% of the total employee transportation costs capped at €25,000; and
- €300 per employee whose transportation costs have been incurred by the undertaking.
Audit Report Waiver and Deduction Rules, 2017
New companies in Malta may waive audit reports or claim deductions on audit fees under these rules. This provision aims to reduce compliance costs for startups and small businesses, allowing them to allocate resources more efficiently during their initial stages of operation. By opting for audit report waivers or claiming deductions on audit fees, businesses can manage their financial obligations effectively while complying with regulatory requirements.
Group Loss Relief
Group Loss Relief provisions allow companies within a group structure to transfer trading losses between group members under specific conditions. This mechanism enables profitable group companies to offset their taxable income with losses incurred by other group members, thereby reducing overall tax liabilities. Group Loss Relief fosters collaboration within corporate groups, encouraging strategic financial management and maximizing tax efficiencies.
Donations to National Heritage (“Rule 1”)
Under Rule 1, businesses can claim deductions for donations made to support national heritage, research, conservation, or restoration projects. Minimum donation amounts apply, with €2,320 required for cultural heritage initiatives and €11,600 for restoration works. These deductions incentivize corporate support for preserving Malta’s cultural and historical assets, contributing to sustainable development and community engagement.
Donations to University Research, Innovation and Development Trust (“Rule 2”)
Businesses can deduct donations made to the University Research, Innovation and Development Trust under Rule 2. A minimum donation of €150 qualifies for the deduction, supporting initiatives aimed at advancing research, innovation, and academic development within universities. These deductions encourage corporate investment in education and knowledge creation, fostering partnerships between businesses and academic institutions.
Donations to Creativity Trust (“Rule 3”)
Under Rule 3, businesses can claim deductions for donations made to the Creativity Trust. A minimum donation of €150 is required, with additional deductions available for contributions up to €100,000 aimed at promoting culture, arts, and education. By supporting the Creativity Trust, businesses contribute to the enrichment of Malta’s cultural landscape and the development of creative industries, while benefiting from tax incentives designed to stimulate philanthropic giving.
Donations to Sports and Culture (“Rule 4”)
Rule 4 allows businesses to deduct donations made to support sports events, cultural organizations, and artists. Specific deduction amounts vary:
- Up to €60,000 for sports events.
- Up to €50,000 or 150% of the donation amount for cultural organizations.
- Up to €18,600 for artists.
Donations to Community Chest Fund (“Rule 5”)
Under Rule 5, businesses can claim deductions for donations made to the Malta Community Chest Fund. A minimum donation of €2,000 qualifies for the deduction, supporting charitable initiatives and social welfare programs benefiting the Maltese community. By contributing to the Community Chest Fund, businesses demonstrate corporate social responsibility while enjoying tax benefits designed to incentivize philanthropic contributions.
Other examples of expenses that may qualify as deductibles, if the right conditions are met, are listed below:
- Realised losses from fluctuations in foreign currencies
- Realised losses from the disposal of financial instruments that were specifically held for trading.
- Gross wages, salaries and employers’ social security contributions.
- Staff training, uniforms, welfare and expenses concerning safety.
- Travel expenses that were incurred during the production of income.
- Business Insurance.
- Professional, consultancy and expert fees.
- Rentals of equipment and machinery.
- Utilities and fuel costs.
- ICT-related expenses.
- Bank charges
- Any expense that, according to Article 14(1) of the ITA, satisfies the positive test—meaning that it was wholly and exclusively incurred in the production of the income—can be deducted
