MALTA TAX REFUNDS EXPLAINED
A. INTRODUCTION - GENERAL INFORMATION
B. TAX ACCOUNTING AND RELEVANCE TO REFUNDS
C. TYPES OF TAX REFUNDS
D. THE PROCESS OF CLAIMING A TAX REFUND
E. GENERAL RULES ON TAX REFUND
F. PENALTIES FOR ABUSES IN CLAIMING TAX REFUNDS
G. CORPORATE STRUCTURES FOR CLAIMING REFUNDS
H. OUR CONTACT DETAILS
A. GENERAL INFORMATION
Malta’s fiscal benefits revolve around a system of tax refunds. In effect, this is a percentage repaid to the shareholder of the Maltese tax paid by the company. The amount of refund depends on a number of factors, including the nature of the income of the Maltese company and whether any double taxation relief has been claimed.
Since the immediate shareholder will apply for the refund, it is important that such a shareholder be first registered with the Maltese tax authorities before. In line with the above, in order to apply for a tax refund, the company must first pay a corporate tax of 35% and then distribute the dividends.
By Maltese law, the refund will be paid directly to the shareholder within 14 days and shall not be taxed again in Malta. As evidenced below, appropriate documentation has to be submitted to the tax authorities in this respect, such as the dividend warrant. Hence, all the statutory audit requirements have to be complied with beforehand in order to calculate the profits of the company, and consequentially, the refunds.
It should be made clear from inception that not every Maltese company will automatically be able to claim the tax refund. In generic terms, two following issues have to be looked at, namely:
1. The nature of the income of the Maltese Company; and
2. Whether the Beneficial Owner of the Company is a Maltese resident and domiciled person.
B. TAX ACCOUNTING AND THE RELEVANCE TO REFUNDS
Tax Accounting is not a special system on how to account for tax but it is a statutory methodology for accounting for distributable reserves or profits. In fact, every company registered in Malta is, for income tax purposes, required to keep and allocate distributable profits/losses to five alternative tax accounts, being the:
(I) Final tax account (‘FTA’)
(II) Immovable property account (‘IPA’)
(III) Foreign income account (‘FIA’)
(IV) Maltese taxed account (‘MTA’)
(V) Untaxed account (‘UTA’)
The aim of the tax accounts is:
(I) To classify the source of the income;
(II) To understand whether the income has been subject to tax or not;
(III) To keep a track record as to what tax is attached to profits and distributions;
(IV) To determine whether the tax refunds are due or otherwise.
The relevance of Tax Accounting with regards to the Tax Refunds is in essence the fact that refunds can only be claimed from profits allocated to the FIA and MTA. In addition, the tax accounts mentioned above are listed in a ‘chronological way’, i.e. first the profits are distributed from the FTA, then the IPA, followed by the FIA, the MTA and the UA respectively.
In order to better understand the contents of the tax accounts mentioned above, one may analyze the following summary:
(I) Final Tax Account
In generic terms, the following types of profits are allocated to the FTA:
(a) Profits that have already suffered a final tax and
(b) All tax exempt profits (and where such an exemption is retained at shareholder level following a distribution)
(II) Immovable Property Account
As the name suggest, the IPA consists in any profits directly or indirectly connected to immovable property situated in Malta. Any income even if remotely connected to immovable property in Malta is to be allocated to the IPA. This includes amongst others:
(a) Brokerage fees for property sale;
(b) Gross interest derived from loans granted for the development, acquisition etc. of immovable property
(c) Gross insurance premiums related to the insurance of immovable property
(d) Profits or gains after tax derived from the disposal of shares or other interests in any entity which, directly or indirectly, principally owns immovable property.
In addition to the above, one has to factor in the “Economic Rent” concept in the IPA. This is an amount equivalent to €250 per square metre of immovable property that is owned and used by a company for the purposes of its activities. This however excludes property that is rented to other parties. The term “owned” includes property held by title of emphyteusis. In order to curtail abuse, the concept of the ‘Economic Rent’ also applies whenever the property is rented between related parties.
(III) Foreign Income Account
In simple terms, the FIA consists in income subject to tax under the Maltese law, which is derived mainly from investments situated outside Malta. These include:
(a) Royalties, dividends, capital gains, interest, rents and any other income derived from investments situated outside Malta;
(b) Income or gains derived from a participating holding or from the disposal of such holding other than a participating holding in a company resident in Malta, or in a partnership en commandite the capital of which is not divided into shares which is resident in Malta;
(c) All profits or gains attributable to a permanent establishment situated outside Malta;
(d) Profits resulting from investments, assets or liabilities situated outside Malta to a Maltese bank or to a company holding a licence under the Financial Institutions Act;
(e) Dividends received from the FIA of another Maltese company
(f) Profits or gains resulting to an insurance company from the business of insurance in relation to risks situated outside Malta.
(IV) Maltese Taxed Account
In the MTA one allocates profits that are not included in the FIA, and which have:
(a) Which have suffered tax
(b) Which have been exempt from tax AND where the distribution of such profits is also exempt from tax in the hands of the shareholders
(V) Untaxed account
The UA is a balancing account, in which the company would allocate the difference between total distributable profits/accumulated losses and those amounts allocated to any of the other taxed accounts.
C. TYPES OF TAX REFUNDS
There are a number of tax refunds available, depending on the source of income, structure and on whether any form of double taxation relief has been claimed. The refunds choices are as follows:
(I) Two-thirds (2/3rd) refund
This is available for profits allocated to the FIA whenever any form of double taxation relief is claimed. The types of double taxation relief in Malta comprise the following: Treaty Relief, Unilateral Relief, Commonwealth Relief or the Flat-Rate Foreign Tax Credit System (FRFTC).
It must be pointed out that the refund is claimed not only on the Maltese tax suffered but it also takes into consideration the foreign tax. However, the refund will be only paid up to the amount of Malta tax suffered.
(II) Full (100%) refund
This tax refund is applicable in the context of the participating holding, specifically for profits allocated to the FIA. In this scenario, provided all the criteria of the participating holding are satisfied, the shareholder can either decide to totally exempt all income, or else, pay the 35% corporate tax and claim a full refund.
(II) Six-seventh (6/7th) refund
This applies to the following two scenarios:
(a) Profits allocated to the FIA from which no Double Taxation Relief is claimed, and
(b) Profits allocated to the MTA, irrespective if any Double Taxation Relief is claimed.
(III) Five-seventh (5/7th) refund
This type of refund also applies to two distinct situations:
(a) If the income is passive interest or passive royalties. This in turn is defined as interest or royalty income which is not derived from trading activities and which has suffered tax at a rate lower than 5%.
(b) If the participating holding structure does not satisfy the anti-abuse criteria, namely:
a. That the subsidiary is not in the EU; or
b. That the subsidiary has not been subject to tax at least to 15%; or
c. That the subsidiary has more than 50% of its income as passive interest or royalties.
D. THE PROCESS OF CLAIMING THE REFUNDS
The following is the process to claim the tax refunds in chronological order:
(I) Shareholder Registration
The distributing company must ensure that the immediate shareholders claiming a tax refund are registered. Such registration is done online and a registration form is submitted electronically. The latter contains details of the shareholders, the capital structure and the business objectives of the company.
Shareholder registration is a one-time process, and it is not done every year. Obviously, whenever there is a new shareholder, or a change in the capital structure, a fresh shareholder application has to be submitted.
Once this is done, the tax authorities issue a shareholder number (SR Number) which will be needed for purposes of the refund claims.
It is very important that such a shareholder registration be made before any tax payment, even before the payment of any provisional taxes (if any).
(II) Dividend Warrant together with Refund Claim
In order for the company directors to be able to sign the dividend warrant, the company must first close-off the financial accounts, prepare the tax return and do the tax accounting work in order to allocate the income of the company in the respective tax accounts as mentioned above.
The dividend warrant has to be drawn up according to the statutory requirements and hence must show the:
(a) Distribution amounts from the different tax accounts;
(b) Year of accrual of the profits;
(c) Profits both as a gross and net of tax;
(d) Tax suffered and any double tax suffered.
(III) Submit the Refund Claim to the Income Tax Authorities
The Refund Claim consists in a package of documents that must be submitted to the tax authorities. Such documentation consists in:
(a) Company details, address, capital structure and list of shareholders
(b) List of Shareholders claiming the refunds together with the SR numbers;
(c) Gross dividends that the shareholders is receiving (which must coincide with the Dividend Warrant particulars);
(d) A Schedule of Reserves for each year;
(e) Compilation of refund, specifying which refund the shareholders are claiming;
(f) Instruction to the Income Tax Authorities as to the manner in which the shareholders wish to receive the refund – to date, the authorities accept either a direct transfer or a bank transfer. In addition. The refunds can be received in the bank account of the distributing company;
(g) The Dividend Warrant as explained and defined above;
(h) In case of nominee shareholders, a declaration that the nominee company holds shares on behalf of other shareholders;
(i) Evidence of any tax paid, including the copy of the tax return of the paying company;
(j) Copy of accounts of the company;
(k) The Refund Claim is to be signed by the shareholder – it is possible however to do so via a Power of Attorney in original.
(IV) Make the tax payment
As observed in the chronological structure, the tax refund claim is submitted before the tax payment itself. This is a procedure used in practice in order to expedite matters in respect of the tax refund.
In essence, once the tax accounts are closed and the tax return is filed, all the above-mentioned documentation is submitted to the authorities for their perusal. Once the authorities give the green light for the tax payment, this is made, following which the refunds are paid back.
The above procedure is not compulsory, but if the tax payment is made before the actual refund claim and accompanying documents is made, the time period of getting the refunds might be longer than 14 days.
Tax is paid to the tax authorities’ bank account, usually via a normal bank transfer.
Tax falls due for Companies depending on the date of the accounting date:
Accounting date 30 June or earlier – tax return falls due on the 1st April.
Accounting date later than 30 June – tax return falls due on the last day of the 9th month after the accounting date.
(V) Receive the tax refund
In order to receive the tax refund, full tax payment must be made. This includes any penalties that might have incurred.
If the procedure in section 4 above is observed, the refund is received within 14 days of the tax payment.
E. GENERAL RULES ON TAX REFUND
The following are a number of simple, practical rules on the refunds:
a) The tax refund can never exceed tax payable in Malta, and hence, the Maltese tax authorities can never incur any out-of-pocket expenses from their part;
b) Refund claims can be made within 4 years from the date of distribution – otherwise, the shareholder stands to lose his benefit to claim the refund;
c) Refunds can only be claimed if there are profits available for distribution, i.e. if the company has accounting reserves for distribution;
d) The refunds can only be claimed through the submission of the refund claim documentation discussed above;
e) The tax at source on dividend income can only be set-off against the tax charge on such dividend income;
f) The phrase “Malta tax paid” means tax actually paid in Malta together with foreign tax claimed under Treaty or Unilateral Relief;
g) Shareholder registration as explained above must precede the refund application and process;
h) There must be a dividend payment before a refund claim, and such a payment must be seen in the accounts.
H. OUR CONTACT DETAILS
Kinanis Fiduciaries Limited
7A, Sir Luigi Camilleri Street
Sliema, SLM 1843
Tel: + 356 27 54 00 24
Fax: + 356 27 54 00 25
E-mail: - Website:
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.