Malta tax refund system.
Often termed the 5% tax charge, Malta provides a distinctive tax refund system for shareholders of Maltese-registered companies, offering a variety of tax refund options that can be utilized.
This tax refund system is governed by Articles 48(4) and 48(4A) of the Income Tax Management Act (ITMA), which allows shareholders to claim refunds on the Malta tax paid by the company on profits allocated to the Maltese Taxed Account (MTA) and Foreign Income Account (FIA). This article delves into the intricacies of this system, detailing the conditions, eligibility, and various refund rates applicable to different types of income.
Before going through the eligibility and the different types of tax refunds, we need to understand how the income of a Malta company is divided. Malta tax laws operate 5 distinct tax accounts which are the following:
1. The Immovable Property Account (IPA)
The Immovable Property Account (IPA) contains distributable profits that have been taxed, such as profits derived directly or indirectly from immovable property SITUATED IN MALTA (not allocated to the FTA), as well as profits from rents and premiums, profits from providing accommodation, construction, structural works on immovable properties, plumbing, electrical works, lifts and elevators among others.
2. The Final Taxed Account (FTA)
The Final Taxed Account (FTA) comprises distributable profits that have been taxed, including income taxed under investment income rules, profits from the sale of immovable property in Malta taxed at a final rate of 12%, among other sources.
3. The Foreign Income Account (FIA)
The Foreign Income Account (FIA) holds distributable profits that have been taxed, including profits from royalties and similar income generated outside Malta, and from dividends, capital gains, interest, rents, and other income from investments outside Malta. This also includes income from an overseas branch, agency, or permanent establishment of a Maltese company.
4. The Malta Taxed Account (MTA)
The Malta Taxed Account (MTA) includes distributable profits that have been taxed but have not been allocated to the FTA, IPA, or FIA.
5. The Untaxed Account (UA)
The Untaxed Account consists of the difference between the company’s accounting profits and the amounts allocated to the FTA, IPA, FIA, and MTA.
Who is eligible for Tax Refunds?
The tax refund system in Malta is particularly advantageous for certain types of shareholders:
- Non-Resident Shareholders: Shareholders who are not resident in Malta, and are not owned or controlled by, directly or indirectly, or acting on behalf of, a person who is ordinarily resident and domiciled in Malta.
- Malta-Resident Companies Owned by Non-Residents: Companies resident in Malta but wholly owned by persons who are not resident in Malta as described above.
Maltese resident shareholders can also register to claim the tax refund; however, the refund received will be subject to tax.
Tax Refund Rates for Foreign Income Account (FIA)
Dividends paid out of profits allocated to the FIA can benefit from various refund rates, depending on the nature of the profits and whether double taxation relief has been claimed. Here are the primary refund categories:
1. 2/3rds Refund
Applicable to: Profits from any foreign source income where double taxation relief (treaty relief, unilateral relief, or Foreign Tax Credit (FRFTC)) is claimed.
Details: Shareholders can claim a refund equivalent to 2/3rds of the Malta tax charge (35%) before the deduction of the double taxation relief.
2. 100% Refund
Applicable to:
- Capital gains from the disposal of a participating holding.
- Dividends from a participating holding that meets anti-abuse provisions of the participation exemption, where the participation exemption was not claimed by the company.
Details: Shareholders may claim a full refund (100%) of the Malta tax charge on these profits, effectively resulting in a zero tax cost for the shareholder. If the participation exemption is claimed, the profits are exempt from tax in Malta and allocated to the Untaxed Account.
3. 5/7ths Refund (10% Effective Tax Rate)
Applicable to:
- Passive interest or royalties.
- Dividends from a participating holding that does not meet participation exemption conditions, where no double taxation relief is claimed.
Details: Shareholders can claim a refund of 5/7ths of the Malta tax charge, reducing the effective tax rate to 10%.
4. 6/7ths Refund (5% Effective Tax Rate)
Applicable to:
- Profits from a permanent establishment outside Malta.
- Rent from immovable property outside Malta.
- Trading interest or royalties.
- All other profits not covered by other refund categories, where no double taxation relief is claimed.
Details: Shareholders can claim a refund of 6/7ths of the Malta tax charge, resulting in an effective tax rate of 5%.
Tax Refund Rates for Maltese Taxed Account (MTA)
Profits allocated to the MTA also qualify for refunds, with specific rates depending on the nature of the income:
1. 6/7ths Refund
Applicable to:
- Malta source trading income not derived from immovable property in Malta.
- Foreign trading income not attributable to a permanent establishment outside Malta.
Details: Shareholders can claim a refund of 6/7ths of the Malta tax charge, even if double taxation relief is claimed, maintaining an effective tax rate of 5%.
2. 5/7ths Refund
Applicable to: Malta passive interest or royalties.
Details: Similar to the FIA, a refund of 5/7ths of the Malta tax charge applies, resulting in an effective tax rate of 10%.
Limitation of Tax Refund
The refund claim is based on the Malta tax chargeable at the company level (typically 35%) before any treaty or unilateral relief deduction. However, when FRFTC is claimed, the refund is limited to the actual Malta tax paid by the company. Thus, the refund cannot exceed the tax paid on the income of the company.
No tax refunds are available on tax paid on profits classified under the immovable property account and Final Tax account.
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