MALTA Law and Practice Contributed by: Donald Vella and Kirsten Debono Huskinson, Camilleri Preziosi Advocates
individuals is also 35%. Accordingly, there is no need for rules to prevent individual professionals from earn - ing income at corporate rates. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations In principle, companies established in Malta can accu - mulate earnings and profits for investment purposes, free from rules constricting or impacting such accu - mulation of profits. A capital tax or duty is not imposed through the ITA or any other form of fiscal legislation. In this context, no distinction is made between closely held companies and other types of companies. 3.4 Taxation of Individuals on Shares in Closely Held Corporations Dividends Malta operates a full imputation system, which means that profits will first be taxed at the level of the com - pany at the flat rate of 35%. However, when distrib - uted to shareholders by way of dividend, the divi- dend carries an imputation credit of the tax paid by the company on the profits so distributed. The credit results in the elimination of the Maltese tax charge - able at the shareholder level on dividends received. As stated earlier, the highest personal tax rate imposed in Malta is 35%. Where a shareholder is not subject to tax or qualifies for a lower rate of tax than the 35% already paid by the company, such shareholder will be entitled to a tax refund equivalent to the “excess percentage” of the tax paid by the company. This sys - tem avoids economic double taxation of distributed corporate profits. Shareholders in receipt of dividends distributed out of certain profits of a Maltese company may be entitled to claim a refund of the tax paid in Malta on those prof - its. The rate of tax refund to which a shareholder will be entitled depends on a number of factors, including: • the nature of the underlying profits (allocated to one of the five tax accounts – namely the Mal - tese taxed account, the foreign income account, the FTA, the immovable property account or the untaxed account) out of which dividends will be distributed by the Maltese company, includ - ing whether the income is of an active or passive nature; and
• the application of any double taxation relief by the Maltese company on such profits. The possible refunds, and the resulting effective tax rates, are as follows: • 6/7 refund: In most cases, the tax refund entitle - ment of a registered shareholder is six-sevenths of the Maltese tax suffered on the profits out of which the dividend is distributed, particularly in the case of profits derived from trading activities. The effec - tive tax rate would equate to 5% in such cases. • 5/7 refund: This refund applies where the profit out of which a dividend is distributed consists of passive interest or royalties. It also applies to Maltese companies holding shares in an underlying company that does not qualify as a “participating holding” and is therefore not eligible for a participa - tion exemption. The five-sevenths refund results in an ultimate tax leakage of 10%. • 2/3 refund: This applies to dividends distributed out of profits in respect of which the Maltese distributing company would have claimed dou - ble taxation relief (including double tax treaty relief). The effective tax rate in this case would be between 2.49% and 6.25%. • 100% refund: This applies where the company is entitled to claim the participation exemption but chooses not to. This is an exemption in respect of income derived from a participating holding or the gains that it derives from the transfer of such a holding, as long as certain conditions are met (as detailed in 2.7 Capital Gains ). However, as an alternative to the full imputation sys - tem, certain qualifying companies may elect to be regulated under the FITWI Regulations (see 9.2 Gov- ernment Policy and Objectives Approach ) whereby such a qualifying company can elect to pay a 15% final tax on its chargeable income. This means that the tax shall not be available as a credit or set off against the tax liability of any individual or entity or as a refund to any person. As a general rule, Malta does not charge any type of withholding tax on inbound or outbound dividends, except where a distribution of a dividend is made from the “untaxed account” of a Maltese company to cer -
309 CHAMBERS.COM
Powered by FlippingBook