Malta’s tax refund regime is one of the main fiscal attractions to foreign investors and/or entrepreneurs who want to establish a business in Malta or have links to business in Malta. On a high level, the refund regime allows qualifying shareholders of Maltese registered companies to have the possibility to claim tax refunds on dividends received. Throughout this article, you will find all the relevant information required to get a better understanding of Malta’s tax refund system. Received on the tax paid by Maltese registered company or companies on income that is to be allocated to the Maltese tax account and foreign income account.
How does tax refund work in Malta?
In view of Malta’s full imputation system, meaning that the tax levied by the Maltese registered company is deemed to be tax fully imputed on the direct shareholders. Upon a distribution of dividend by the Maltese entity to its shareholder, the latter will be able to claim a tax refund on the tax paid by the former. It is key to note that tax refunds are attributable to the shareholders and not to the distributing company.
Tax refunds are only applicable in situations where profit after tax is to be allocated to the Maltese Tax Account (MTA) and Foreign Income Account (FIA). There are in total four different types of tax refunds and the application of each refund depends on whether or not the income earned is of either and active or passive nature. If foreign taxation has already been levied on such income or if such income is deemed exempt in Malta.
Who is eligible for tax refund in Malta?
Eligibility of tax refunds is not restricted to the type of industry/sector but looks more into the type of income being taxed. Both natural persons and/or legal persons are eligible to claim a refund, as long as;
- The person claiming the refund is a direct shareholder of the distributing company.
- The shareholder is either (i) not resident in Malta, or (ii) if a company, being the shareholder, is resident in Malta, it is not wholly-owned by the person/s resident in Malta. In both situations, neither can such person/s be controlled, nor acts on behalf of person/s ordinarily resident and domiciled in Malta.
- The shareholder is registered with the Commissioner for Revenue for the purpose of tax refunds
The four beneficial refund rates
There are in total four different types of refund applicable under the tax refund regime, as per the following;
- 6/7ths
- 5/7ths
- 2/3rds
- 100% refund
1. 6/7ths refund
The 6/7ths refund, being the most common tax refund available, will reduce the tax payable of 35% down to an effective tax leakage of 5%. Such refund is applicable to active income which is trading in nature.
2. 5/7ths refund
The 5/7ths refund will reduce the effective tax leakage down to 10%. Such refund is applicable to passive income such as interest and royalties which have been subject to tax at the rate of less than 5%. If such income was subject to 5% tax or more, the 6/7ths refund will apply accordingly.
3. 2/3rds refund
The 2/3rds tax refund is applicable where passive income and royalties and certain active income have been subject to a claim for double taxation relief, which when combined with the Flat Rate Foreign Tax Credit (FRFTC), can reduce the effective tax charge between 2.49% and 6.25%.
4. 100% Malta Tax Refund
When the revenue is made up of income and gains from participating holdings, and the participation exemption has not been availed of, the shareholder may qualify and opt for a full refund of the Maltese tax paid.
Fiscal Consolidation FAQs
How is foreign income treated under the fiscal unit?
Foreign income under a fiscal unit will be treated no different than that to a standalone taxpayer. The only difference is that such income, like any other income, shall be considered as incurred by the principal taxpayer and double taxation relief will apply accordingly.
Who is responsible for filing the tax return of the fiscal unit?
The principal taxpayer is responsible for filing the tax return for the applicable year of assessment since the principal taxpayer assumes rights, duties and obligations under the Income Tax Act for all entities within the fiscal unity.
How long does it take to register the fiscal unit?
The registration for fiscal unity is not a complex process since it only requires the service provider to be a tax representative of all entities within the fiscal unit. Any taxes due by each member of the fiscal unit shall be NIL, hence all tax liabilities settled. This includes Income Tax, VAT as well as FSS.
Tax Liability
Even though the responsibility of filing the income tax return of the fiscal unit lies with the principal tax payer, the payment of tax and any interest or penalties to be accrued shall be jointly and severally liable by each member within the fiscal unit.
What to keep in mind about the Malta tax refund regime
Getting advice from a professional
A professional will dwell into further detail and analyse if all eligibility criteria and conditions to benefit from Malta’s tax refund regime will apply. In addition, the shareholder seeking the possibility to apply for a refund will have to prepare and submit supporting documentation in conjunction with the refund claim.
Eligibility and conditions to be satisfied
Malta’s tax refund regime is not applicable to each and every person, hence one shall firstly satisfy the eligibility requirements and secondly ensure that all conditions to apply for a refund have been ticked such as point number 5 and 6 to this sub-heading.
Consider corporate restructuring
Non-domiciled Maltese resident individual/s and shareholders of Maltese corporate entities could still benefit from Malta’s tax refund regime, subject to the correct corporate structure is in effect.
Duly registered with the Commissioner for Revenue
Details of the qualifying shareholders, eligible for tax refunds would have to be registered accordingly with the Commissioner for revenue.
Tax paid by the distributing company
Unless the corporate tax by the distributing company is paid, the tax refunds attributable to the shareholders will not be disbursed.
Dividend to be distributed to its shareholders
Unless a dividend is distributed to the shareholders, the processing of the refund claim application will be rejected.
How ADVITAC seamlessly helps you navigate all your tax needs
ADVITAC can assist you in understanding whether all eligibility requirements and conditions are satisfied and if not, propose possible corporate restructuring to be able to benefit from with the tax refund regime, analyse the type of refund/s applicable, and assist you with the preparation and submission of all required and applicable documentation.
Our service provision extends also beyond direct taxation. ADVITAC can also help you navigate through the complexities associated with VAT and other indirect taxes. When tailoring our proposed solution to our clients, we take the time to really understand our clients’ business, with all its intricacies, to be in a position of capturing VAT and other indirect taxes into the formula when advising Clients on efficient tax practices, such as performing a VAT Health check followed by a VAT opinion. Based on this opinion, we provide Clients with our recommendations on how to update and reorganise their VAT affairs by detecting opportunities of potential VAT savings and optimisation.
Tax refund Malta FAQs
Are tax refunds taxable in Malta?
No tax refunds are not taxable in Malta since the refund relates to tax already paid by the distributing company, though this is not the general rule for jurisdictions other than Malta.
Does tax get refunded automatically?
To receive a tax refund, taking into the assumption that all eligibility criteria have been satisfied and that the conditions to apply for a tax refund have been fulfilled, a refund application, together with other applicable supporting documentation, will have to be prepared and submitted to the International & Corporate Tax Unit, which will then be vetted and reviewed accordingly prior to being approved. Once approved, the tax representative will be advised accordingly that the tax refund will be remitted to the shareholder.
How can you check my tax refund?
This requires direct correspondence with the International & Corporate Tax Unit. Such correspondence is ideally channelled through your tax representative in Malta, which would normally be your service provider.
How much income is tax-free in Malta?
For corporate entities, all chargeable income is taxed at a flat-rate of 35%, unless applicable tax exemptions apply. For natural persons (individuals), different applicable tax rates and tax -free brackets apply, as per the following –https://cfr.gov.mt/en/rates/Pages/TaxRates/Tax-Rates-2022.aspx</p
