The Malta Income Tax Act outlines that companies, incorporated or managed and controlled in Malta, are subject to Malta corporate tax rate of 35% on a worldwide basis. Consequently, passive income falls under the imposition of Malta Income Tax.
The definition of Passive Interest in the Malta Income Tax Act is:
(a) “interest or royalty income which is not derived, directly or indirectly, from a trade or business” and
(b) “where such interest or royalties have not suffered or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of tax which is less than 5%.”
5/7 Malta Tax refund on Passive Interest
Passive interest is where the income of the business is made up of passive interest and royalties. Therefore the shareholders may claim a 5/7th refund of the tax charged to the Maltese company. Therefore, this makes the effective tax rate of 10%.
This effectively reduces your tax leakage on passive income by a massive 25%.
However, where interest and royalties have been subject to foreign tax at a rate of 5% or more, it will automatically no longer be considered passive, and therefore qualify for the 6/7th refund.
6/7 Malta Tax Refund on Non-Passive Interest
If the income generated by a Malta company does not satisfy the passive interest definition, mentioned above, then the income generated will fall under the 6/7th tax refund.
You can qualify for a 6/7th tax refund in Malta if you’re a shareholder in a Malta Company and received a dividend from a Malta Company from profits arising from providing a product or service to other individuals.
2/3 Malta Tax Refund on Passive Interest
If your passive income and royalties have been subject to a claim for double taxation relief, including the FRFTC (Flat Rate Foreign Tax Credit), a 2/3rd refund of the Malta tax charged may be applicable.
Malta Holding Company
The tax refunds, stated above, also apply to shares in a Malta company that are held in a Malta Holding Company. Certainly, there are many advantages for owners who incorporate and register a holding company in Malta. However, incorporating a Malta Holding Company opens up many tax planning opportunities for companies and individuals. If you seek the correct advice, you could potentially:
- Tax efficiently hold dividends for reinvestment purposes are declare the dividend to the owner at a later date.
- Apply for tax exemption on dividends if you meet a specific criteria
- Ultimately protect your assets
Do you need help setting up a Malta Holding Company? Contact our team today for a consultation and we can discuss whether it is the right option for you and your tax needs.
If you’re looking to become more tax effective in Malta or you want to speak with our tax advisory team directly, contact us today using the form below to arrange a consultation. Alternatively, you can email us at firstname.lastname@example.org or call us on +356 2122 7553.