Malta: Taxation Of Private Pensions

Introduction

Malta is increasingly becoming a financial services centre of repute looked at by a number of financial services operators as the ideal platform to set up their private pension schemes. Malta’s success is attributable to the flexible and prudent manner in which the industry is regulated, providing the desired certainty, while allowing room for flexibility and innovation. Moreover, Malta’s tax regime, together with over 65 double taxation agreements, ensures a favourable tax regime, while providing relief from double taxation.

Taxation of retirement schemes

An occupational retirement scheme is a vehicle whereby contributions are made by the employer and the employees, for the benefit of the employees. The main purpose of a retirement scheme is to provide benefits payable after retirement, or upon permanent invalidity or death of the beneficiary of the scheme. Any income and capital gains derived by a licensed retirement scheme or retirement fund established in Malta is exempt from income tax in Malta, unless the income or gains are derived from immovable property situated in Malta.

Taxation of beneficiaries receiving pension income

In terms of Maltese income tax legislation, any income or benefits distributed by a Malta-based retirement scheme is characterised as pension income, and is considered to be income arising in Malta i.e. having a Maltese source. This means that beneficiaries are subject to income tax in Malta on any benefits received from such schemes, irrespective of their tax residence. The rates of tax are progressive rates of tax and the highest rate of tax is 35 percent. Different rates of income tax apply to residents and non-residents.

In cases where the recipient of the income is resident in a country with which Malta has concluded a double taxation agreement for the avoidance of double taxation, one would have to look at the pertinent provisions in the said treaty. Where taxing rights under the treaty are given exclusively to the country of residence of the beneficiary, then the income will not be subject to income tax in Malta. If treaty benefits are claimed, evidence of the recipient’s residence is required usually in the form of a tax residence certificate issued by the tax authorities of the country in which the recipient is a resident.

Taxation at the level of the administrator

The income derived by the retirement scheme administrator is taxable at the standard corporate rate of income tax of 35 percent. Upon the distribution of a dividend to the shareholders, a partial refund of tax is due to the shareholders amounting to 6/7ths of the tax paid in Malta.

Trusts and QROPS (“Qualifying Registered Overseas Pension Scheme”)

Malta is an ideal jurisdiction to set up trusts, and to receive income and/or capital from foreign pension schemes. It is also possible to establish such pension schemes as Maltese trusts, with Maltese trustees as administrators, which may also be recognised as QROPS for UK tax purposes.

A Qualifying Registered Overseas Pension Scheme (“QROPS”) is a pension scheme that is set up outside of the UK, which must obtain approval from the HMRC. Retirement schemes established in Malta and regulated by the Malta Financial Services Authority (“MFSA”) may be recognised by Her Majesty’s Revenue and Customs in the UK (“HMRC”) as QROPS.

Trusts are treated as transparent for Maltese income tax purposes provided certain conditions with respect to the source and type of income and the status of the beneficiaries are satisfied.

However, trustees of a trust have the possibility to elect that the income attributable to the trust is to be treated as though it was income of a company. Thus, the same tax accounting rules applicable to companies will apply to trusts; and distributions to beneficiaries are treated as distributions of dividends. Election is only possible if income attributable to the trust is in the form of passive income such as royalties, dividends, capital gains, interest, rents or any other income from investments.

Income of a retirement scheme licensed by the MFSA is deemed to be trading income and therefore it is not possible for a trustee of a retirement scheme to elect that the income be treated as though it was income of a company.

Elimination of double taxation

Malta has over 65 double taxation agreements in place, and more are in the process of being ratified. These agreements ensure that payments made out of a Maltese retirement scheme to an individual beneficiary who, at the time of receipt of the income, is resident for tax purposes in a State with which Malta has a double taxation agreement in place will not be subject to tax twice in two different jurisdictions.

Most of Malta’s double taxation agreements give an exclusive taxing right to the state of residence of the beneficiary (Jersey, Isle of Man and Spain), while some others give an exclusive taxing right to Malta as the source state (Bulgaria, Egypt and Finland). In some of the treaties in which the exclusive taxing right is allocated to the country of residence of the beneficiary, the exemption is restricted if the beneficiary is subject to tax in his country of residence on a remittance basis (UK, USA and the Netherlands). In such a case, in terms of the treaty, relief from Malta tax only applies on the income that is received in or remitted to the state of residence.

The remaining treaties provide for the taxation of pension income in the residence state, while still allowing the source state to tax the income in terms of its domestic law (Canada, India and South Africa). This is referred to as ‘shared jurisdiction to tax’ where Malta, as the source state, is granted a primary jurisdiction to tax, while the State in which the recipient is resident is granted a secondary right to tax, with the obligation to grant relief from double taxation.

Concluding remarks

Why Malta? Malta offers a number of advantages:

(a) a prudent but flexible approach by the Maltese authorities;

(b) an approachable and efficient single regulator, which is committed to provide timely and efficient responses to proposals while accommodating the needs of the industry;

(c) a stable and favourable tax regime, which provides certainty to retirement schemes and funds established in Malta; and

(d) Malta is an EU Member State whereby its laws are aligned with EU regulations, providing for the operation of cross-border occupational pension schemes.

For further information please contact the firm’s tax partners:

Stephen Balzan – sbalzan@act.com.mt
Elaine Camilleri – ecamilleri@act.com.mt

Disclaimer

This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.