How does the tax refund system works?
Taxation in Malta is complex. However, one has to keep in mind that specific taxation laws have been enacted with the main purpose of attracting foreign investors to Malta, which is why so many companies from around the world decide to open their business on our islands.
As previously mentioned, the general rule for corporate tax rate in Malta is at a flat rate of 35%. All expenses incurred in relation to the economical activity of the firm, are deductable as an expense, with few exeptions. Few expenses are disallowed for taxation purposes. Hence, these do not impact the tax computation in general.
Malta embraces the full imputation taxation system. This means that the income is only taxed once and is not taxed again when passed on in the hands of the shareholders.
Let's consider the below example.
A Holding company (Company H) owns 100% of the sharecapital of an Operating company (Company O) in Malta and the 6/7ths tax refund mechanism is applicable.
Company O registers a profit before tax of Eur100,000. 35% Corporate tax must be paid by Company O, which means that Eur65,000 are available for distribution by way of dividend.
Company O distributes gross dividends of Eur100,000, which in actual terms represent a net dividend of Eur65,000.
Once the dividend is received by the Holding company, Company H, this dividend is exempt from taxation as it was already subject to tax at the level of the operating company.
In addition, once a tax refund form has been submitted by the Holding Company for the 6/7ths refund portion of the taxes paid by the Operating Company, the Holding company is entitled to receive Eur30,000 from the Maltese government as a refund of the taxes already paid. Moreover, the refund is also exempt from additional taxation.
This is the most common refund available and implies that the effective tax rate is just 5%.
Other refunds exist which can take the form of 5/7, 2/3, etc...of the taxes paid. However, these type of refunds are uncommon and companies only opt for them if the economic activity of the operating company is not eligible for the 6/7ths refund.
Double Taxation Treaties
In addition, Malta has a number of unilateral agreements with various other countries, even outside of the European Union. These agreements safeguard companies operating in Malta from paying double taxation on the same income.
If a company in Malta suffered taxation on its profits outside of Malta in a country that has a taxation agreement with Malta, the Maltese company only pays additional taxes, if any, on the amount that would have been taxed in Malta.
If for example the Maltese company sufferred 10% taxes on its profits in country X (outside of Malta), and Malta has a unilateral agreement with Country X, the Maltese company does not pay 35% on the profits received in Malta but pays only 25% (35% - 10%).
Lastly, the Maltese company can apply for a refund computed on the portion of taxes which have been paid in Malta.
All of the above examples have been drafted in a simple manner for illustration purposes only. Various factors need to be taken into consideration while computing taxation.