Why Do Businesses Move To Malta?
On the face of it, Malta literally has the highest corporate tax rate in the EU. At 35%, it hardly seems to be a competitor to European tax havens like Ireland and Cyprus, both applying a rate of 12.5%, or territories like Gibraltar. At a rate of 10%, the latter would seem to be the cheapest place to do business, in this, the largest economic bloc of the world.
However, the actual rate at which investors pay in Malta is significantly lower than that charged even in these countries. In fact, once the provisions of full imputation and the refund system, as well as the participation exemption are applied, the tax rate for business derived income can be expected to be somewhere between 0% and 5%.
The full imputation system prevents double taxation on dividends. Companies pay tax on their income at a flat rate of 35%. Dividends paid out of yearly profits, have essentially already been taxed, at the company level. So when investors receive those dividends, they are not taxed further on them. This is in stark contrast with most other systems implemented around the world, where dividend recipients are charged a tax on top of that the company pays on its profits.
Claim Your Tax Refund
In addition to this, the refund system allows investors to claim back significant amounts of what the company paid in income tax on profits from which their dividends were derived. The size of the refund depends on the account(s) out of which dividends are paid.
By law, a company resident in Malta or the branch of a non-resident company, is required to maintain five separate accounts, across which profits get distributed. These are the final tax account, the immovable property account, the foreign income account, the Maltese taxed account and the untaxed account.
Dividends paid out of the Maltese taxed account or the foreign income account are entitled to a refund of six sevenths (6/7) of the amount paid at the company level.
However, if the profits were generated through the receipt of passive interest or royalties, this refund drops to five sevenths (5/7). Furthermore, if profits in the foreign income account have been the subject of a successful double taxation relief claim, dividends derived from those profits are only allowed a two thirds (2/3) tax refund on income tax paid at the company level.
The participation exemption is another mechanism available to investors to reduce their business-derived income tax. This scheme allows firms that hold an interest in another firm to claim a 100% refund on tax paid on dividends and capital gain derived from the held company or the transfer of said holding.
Several more exemptions exist, though the above mentioned ones are those most applicable to foreign investors. A full list can be found in article 12 of the Income Tax Act.
Low Property Taxes Add Extra Appeal
In relation to ownership of immovable property, Malta is the only EU country which does not impose any annually recurring charges on the holding of such assets. Taxes are only charged at the point of transfer of properties and they come in two forms. First is a stamp duty, which is applied on documents certifying transfer of ownership.
This is charged to the buyer, at 5% of the transaction value or the estimated market value of the property, whichever is higher. The second tax is a withholding tax which sellers are charged at a rate of 8%.
Business owned and commercial property in Malta is exempt from the payment of stamp duty when a company is being broken up into separate entities and the shareholders of the new companies are the same as the original one.
As one can see, the Maltese government has gone to great lengths to ease the tax burden on investors bringing their capital into Malta. It has taken several decades to create the current environment and it is one which the Maltese are rightly proud of and foreign businesses are keen to use.
