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The Maltese Tax Refund System
By George Farrugia
Updated: 25 Ocytober 2007

In response to the EU Commission’s request to abolish the ‘International Trading Company’ regime, various provisions of the Income Tax Act and the Income Tax Management Act have been amended in 2007.

The full imputation system for dividend taxation has been retained, however, the amendments have introduced a new tax refund system applicable to companies registered in Malta on or after 1st January 2007. The new provisions aim to continue establishing Malta as an International Financial Centre.

A company registered in Malta includes both:

• A company resident in Malta
• A Maltese branches of overseas companies carrying on an activity in Malta

Tax Accounting

Malta operates a system of tax accounting whereby profits derived by company are allocated to one of the following 5 tax accounts:

• Foreign Income Account
• Maltese Taxed Account
• Untaxed Account
• Immovable Property Account
• Final Taxed Account

Dividend Taxation

Dividends from the Foreign Income Account (FTA) and Maltese Taxed Account (MTA)

Malta operates a full imputation system for dividends paid from a company’s Maltese Taxed Account and the Foreign Income Account. Dividends are subject to tax in the hands of the shareholder however, shareholders receive a full imputation credit for the tax paid by the company. Since the highest tax rate for individuals is equal to the corporate tax rate in Malta, the full imputation ensures that the shareholder is not subject to further tax on dividends distributed from the Maltese Taxed Account and the Foreign Income Account.

Dividends from the Untaxed Account

Profits which are exempted from tax are allocated to the Untaxed Account. Dividends from the untaxed account paid to resident shareholders are subject to a 15% withholding tax. No withholding tax is levied when dividends from the Untaxed Account are distributed to non-resident shareholders.

Dividends from the Final Taxed Account and the Immovable Property Account

Certain types of income which have suffered a tax at source are not subject to corporate income tax. These types of income are allocated to the Final Taxed Account or the Immovable Property Account. Dividends paid from the Final Taxed Account or the Immovable Property Account are not subject to further tax at the level of the shareholder.

Tax Refund

The shareholder/s of a company registered in Malta is entitled to claim certain types of refunds

Tax Refunds may be claimed on income allocated to the Maltese Taxed Account and Foreign Income Account

No refunds may be claimed on income allocated to the Final Taxed Account and Immovable Property Account

Refunds may be claimed both by resident and non-resident shareholders

6/7ths Refund

• Company is not entitled to claim double tax relief
• Income is not qualified as ‘ passive interest or royalties’

5/7ths Refund

• Company is not entitled to claim double tax relief
• Income is qualified ‘ passive interest or royalties’

2/3rds Refund

• Company may claim double tax relief
• Company may claim a Flat Rate Foreign Tax Credit on income arising outside Malta
• No limitations on the classification income of income allocated to the FTA (or MTA)

Full Refund

• Applicable to income derived from a participating holding’
• Anti – abuse provisions may apply

Date of Refund

A refund of tax due by the Commissioner of Inland Revenue is payable by not later than the 14th day following the end of the month in which the refund becomes due.

Example

ABC Limited was registered on 1st January 2007. The accounting year-end date of ABC Limited is 31st December. On 31st May 2008, the audit of the ABC Limited is concluded and the company makes a dividend distribution to its shareholders on that date.

Provided that ABC Ltd. has not made a distribution of dividends, the company may opt to file its tax return and pay the tax due by not later than 18 months after the accounting year-end date.

Disclaimer

The above information is being provided as a general guide only and should not be considered as a substitute for professional advice.

George Farrugia is the founding partner of MGI Malta. He can be reached at

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