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.

However, the Malta tax system has a desirable Tax Refund System that enables shareholders of a Malta company to claim refunds of tax paid when passive income gets issued as a dividend.

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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.

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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 enquiries@papilioservices.com or call us on +356 2122 7553.

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