A dividend is a type of income chargeable to tax in the hands of the shareholder. Under Maltese tax law, “dividend” encompasses:
- Bonus shares: Additional shares given to existing shareholders without any additional cost.
- Distributions by a company: These can be cash payments or amounts credited to shareholders.
When a Malta-registered company distributes a dividend, it must deduct tax at the rate paid or payable by the company on the income from which the dividend is paid. Consequently, shareholders receive dividends net of tax. Articles 60-68 of the Income Tax Act (ITA) provide the framework for the taxation of dividends from the five taxed accounts.
The Full Imputation System (Article 60 of the ITA)
What is the Full Imputation System?
In Malta, companies are subject to an income tax rate of 35%. Unlike some jurisdictions, Malta does not have a separate system of corporation tax; instead, companies are taxed similarly to individuals. The full imputation system provides a full credit to shareholders for the tax paid at the corporate level when dividends are distributed from profits on which Malta tax was charged. This system applies to profits allocated to the Maltese Taxed Account, Foreign Income Account, and Immovable Property Account.
What Would Happen Without the Full Imputation System?
Without the full imputation system, shareholders would face economic double taxation, where the same profits are taxed both at the company level and again in the hands of shareholders upon distribution. For example:
Scenario:
Peter Borg fully owns Company A, which is tax resident in Malta. Company A makes a profit of €1,000, taxed at 35%, leaving €650 net profit. If this €650 dividend is paid to Peter, and assuming his marginal tax rate is 15%, he would be taxed an additional €97.50, reducing his net income to €552.50. Thus, the same €1,000 profit is effectively taxed twice: first at the company level and then at the shareholder level.
The full imputation system prevents such double taxation by allowing shareholders to credit the tax already paid by the company against their own tax liability.
Application of the Full Imputation System
Under the full imputation system, dividends carry a tax credit equal to the tax paid by the company on the profits from which the dividends are distributed. Both resident and non-resident shareholders benefit from this system. Resident shareholders are taxed on the gross dividend but can deduct the full tax credit, often resulting in tax refunds when their marginal tax rate is lower than the company tax rate.
If a shareholder’s tax rate is less than 35%, they will receive a refund of the difference from the tax authorities, known as the imputation refund.
Dividend Exemption and the Full Imputation System
Article 12(1)(c)(iii) of the ITA exempts dividends from Malta tax when paid to individuals whose chargeable income (excluding the dividend) meets specific thresholds:
- €28,700 for joint computation
- €19,500 for single computation
- €21,200 for single (parent) computation
When an individual’s chargeable income excluding dividend income is below these thresholds, they can claim a refund through the full imputation system. If their income meets or exceeds these thresholds, the dividend income is exempt, and no refund is available.
Taxed Accounts
The taxed accounts govern the tax treatment of dividends received by shareholders.
Order of Distributable Profits
According to Article 68 ITA, companies can distribute profits from different tax accounts in any order. However, profits allocated to the Immovable Property Account must be distributed before those in the Maltese Taxed Account. There are no restrictions on dividends from the Foreign Income Account and the Final Taxed Account.
Non-Disclosure of Dividend Income in the Income Tax Return
Article 68 ITA allows non-residents and Maltese residents who receive dividends from taxed accounts (excluding the Final Tax Account) to opt out of declaring these dividends in their income tax return. Since the maximum tax rate for individuals is 35%, the same as for companies, further tax is not applied to these dividends. However, declaring the dividend and applying the full imputation system may be beneficial if the individual’s income is below the relevant threshold to claim a refund.
Final Taxed Account (Article 68(1)(c) ITA)
Dividends from the Final Taxed Account are not subject to further tax and do not form part of the chargeable income of any person. No credit or refund can be claimed on such profits. This applies to certain taxed profits, such as property transfer tax or withholding tax on bank interest.
Untaxed Account (Article 62 ITA)
When a Malta tax resident company pays a dividend from its Untaxed Account, it must deduct a 15% withholding tax if the shareholder qualifies as a “recipient.”
Definition of a Recipient:
- A person, other than a company, resident in Malta
- A non-resident person controlled by or acting on behalf of a Malta-domiciled individual
- A trustee of a trust with beneficiaries who are recipients as defined above
- An EU/EEA individual taxed at resident rates
Features of the Untaxed Account
Dividends from the Untaxed Account are not subject to further tax, and no refunds under the full imputation or Income Tax Management Act apply. Maltese companies receiving dividends from another Maltese company’s Untaxed Account must allocate such profits to their Untaxed Account.
Disclosure in the Income Tax Return
- Recipient: May declare dividend income in the income tax return. The 15% withholding tax is credited against the recipient’s tax liability. If the marginal tax rate is less than 15%, a refund may be claimed.
- Non-Recipient: Non-residents do not have to disclose dividend income from the Untaxed Account in their income tax return.
In summary, the full imputation system in Malta ensures that shareholders are not subject to double taxation on dividends. The system provides credits and refunds based on the tax already paid by the company, and specific rules apply to the treatment of dividends from various taxed accounts. Understanding these provisions helps shareholders maximize their tax benefits and comply with Maltese tax regulations.
