Taxation
Companies
Scope
Companies that are incorporated under Maltese law and other companies which are managed and controlled from Malta are liable to corporation tax on their worldwide profits.
Companies which are not incorporated under Maltese law and not managed and controlled from Malta, are liable to corporation tax on any trading profits that they derive from a permanent establishment in Malta, which includes especially a place of management, an office, a factory or a warehouse. Where there is a double tax treaty between Malta and the country in which such a company is based, its terms may modify the extent to which the company is liable to corporation tax.
Taxable profits
Corporation tax is charged on a company's income and capital gains for each of its accounting periods. An accounting period is normally the period for which accounts are produced to comply with company law, but special rules apply where such accounts cover a period of more than 12 months.
The principal part of a trading company's corporation tax computation is the adjustment of its profits for tax purposes. The starting point is the company's profit before tax as is shown by the statutory accounts. Disallowable expenses are then added back.
Depreciation is also added back as disallowable, and capital allowances (see below) are deducted instead. Capital receipts and expenses are generally excluded.
The general rule for deductible expenses is that they must be 'wholly and exclusively' incurred for the purposes of the trade. There are also specific rules disallowing pre-incorporation expenses (except those relating to staff training, salaries or wages and advertising), improvements to premises (as opposed to their repair), donations (except those relating to certain institutions) and all accounting provisions.
Statutory inflated deductions available to companies include the inflated part of expenses claimed for scientific research and job creation.
Transfers of immovable property may be subject to a final withholding capital gains tax of 12% which is levied on the sales proceeds. The previous capital gains tax regime based on a maximum tax rate of 35% on the profit, may still be levied on certain property transfers which are to be defined shortly through changes in the tax legislation. Capital gains arising on the transfer of company shares are subject to particular legislation. The tax charge arising on the capital gain derived from share transfers depend whether the shares carry a controlling interest in the company. A controlling interest is usually a 25% stake in the company or whether the shareholder can influence the directorship of the company.
Controlling interests in companies owning immovable property and a minimum 10% equity investment in other companies are revalued for capital gains tax purposes when share transfers are executed. Furthermore, an adjustment for business goodwill is made when share transfers having a controlling interest are executed in companies which have reported profits for the previous 5 financial years or less as the case may be.
Companies carrying one or more of the target activities as defined within the Business Promotion Regulations will be chargeable to tax on their trading profits at reduced rates of income tax. For new companies these rates will be 5% for the first 7 years, followed by 10% for the next 6 years and 15% for the subsequent 5 years. In addition to the above mentioned reduced rates of tax, companies engaged in the target activities are eligible to an investment tax credit which is deducted from the tax due computed at the above reduced rates or at the applicable rate of tax after the expiration of the aforementioned year. The credit is calculated either as a percentage of qualifying investment expenditure or as a percentage of the two years wage costs of employees in respect of whom jobs have been created as a result of the investment payment.
Companies which are not engaged in one of the target activities defined by Business Promotion Regulations benefit from reduced rates of tax under the Value Added Investment Scheme. This incentive is available to all other manufacturing companies which increase their value added. Such companies will be subject to tax on part, or in deed a multiple, of their increased trading profits at 5%, 10% and 15% for 7, 6 and 5 years respectively. In order to qualify for this incentive, companies must only be engaged in manufacturing activities, they must not sell by retail and their activities must not be spurious in nature.
Tax credits are available to companies which stimulate research and development of new technology. These tax credits are extended to companies whose business consists of back-office operations, e- business or film production.
Reinvestment tax credits are available to any company in any business sector and whose turnover is less than Lm 250,000 and which employ a minimum of 3 and not more than 10 persons.
Finally, shipping companies registered under the Merchant Shipping Act are exempt from paying tax on profits generated from the operations, management and ownership of ships. Furthermore, dividend distributions to shareholders of shipping companies are also tax exempt.
Capital Allowances
Capital allowances are deductible from trading profits as a replacement for the depreciation charged in the statutory accounts. These are computed using the straight-line method of depreciation. The principal classes of assets eligible for allowances are:
Capital Allowances
Industrial buildings
Machinery and plant.
Allowance in respect of industrial buildings and machinery and plant are the most commonly claimed. There is an elaborate statutory definition of an 'industrial building'. Broadly speaking, building costs incurred on a building used for industrial manufacturing, processing or repair will usually qualify, and allowances also available for certain storage facilities. In general, allowances are not given on the cost of retail premises or office buildings. The rate of allowance on industrial buildings is generally 2% per annum together with an initial allowance of 10%. Furthermore an investment allowance of 20% is given in respect of industrial buildings and structures under the Business Promotion Act. There is no statutory definition of machinery and plant, while machinery presents no problems a considerable amount of case law has developed to define 'plant'. An investment allowance of 50% is given respectively to plant and machinery which fall under the particular definitions within the Business Promotion Act.
Interest Payments
Interest payable is usually deductible from profits for tax purposes in the same way as any other trading expense. There is no withholding tax on interest payments to non-resident companies and individuals.
Royalty Payments
Royalties are deductible for tax purposes over a three-year period. There are no withholding taxes to non-resident companies and individuals.
Dividend Payments
There is a withholding tax of 2.5% or 15% on a particular category of dividend distributions to Maltese residents individuals. No withholding taxes are levied on dividend distributions to Maltese resident companies and nonresident companies and individuals that are companies and individuals. Dividend payments to non-resident persons including individuals out of the foreign income account of Foreign Income Account Companies or the Maltese Taxed Account of international trading companies are subject to a tax refund equal to the two thirds of the Malta tax paid. In the case of a participating holding such refund is increased to 100%.
Calculation of Liability
Corporation tax levied on trading income is chargeable at the rate of 35%. Interest income may be subject to a final withholding tax of 15% should one elect so. Companies engaged in agricultural produce, may opt to be taxed at a final withholding tax of 3% on qualifying sales within the meaning of the Income Tax Act.
Due Dates for Payment
Settlement of corporation tax is payable nine months after the end of the accounting period for companies having a December year-end. For companies having a year-end other than December, settlement of corporation tax is payable within nine months or March of the following year, whichever is the latter. Companies are obliged to pay provisional tax by the end of April, August and December of every calendar year. Provisional taxes are based on taxes paid at the benchmark year of assessment. Short payments on taxes due incur interest at 1% per month.
Relief for Losses
Trading losses incurred in an accounting period may be offset against other sources of income in that period or carried forward indefinitely against future trading income. They may also be surrendered to other Maltese group companies for relief in the same accounting period. Capital losses may be offset against future capital gains.
Administration
A system of self-assessment is in operation. Interest is payable or receivable on any under/overpayment of tax subsequently agreed. A Corporation tax return is required from companies in respect of each accounting period. A penalty is levied if the return is not delivered, together with the company's accounts, within nine months of the end of the accounting period for companies with a December year-end. Companies having a year-end other than December must file their return within nine months after the year-end or the following March, whichever is the later.
