Double Taxation Relief

Overview of Double Taxation Relief in Malta

Malta provides a variety of double taxation relief including treaty relief, unilateral relief and a Flat Rate Foreign Tax Credit (FRFTC).

Malta’s Double Taxation Treaty Network

Malta has concluded over 80 double taxation agreements most of which are based on the OECD Model Convention. Treaty relief is generally provided under the credit method.

Unilateral Tax Relief

Unilateral relief is granted to a Maltese taxpayer provided satisfactory proof of the foreign tax suffered is made available to the Maltese tax authorities. The tax relief is always limited to the Malta tax (on the same income). However, it is interesting to note that in the case of dividends, unilateral relief is extended to cover the underlying taxes (and not limited to withholding tax). Therefore, one may claim unilateral relief not only where no double taxation agreement exists but also if the unilateral relief provisions are more favourable than those granted under a particular tax treaty.

Flat Rate Foreign Tax Credit (FRFTC)

An interesting type of double taxation relief is the Flat Rate Foreign Tax Credit (FRFTC) which may be claimed by a company registered in Malta which is in receipt of foreign source income. The only condition to claim the FRFTC is that the company is able to provide to the Maltese tax authorities a certificate issued by a certified auditor confirming that the income in respect of which the FRFTC is being claimed stands to be allocated to the Foreign Income Account (FIA).

The FRFTC amounts to 25% of the income or gains receivable by the company. It is computed on the amount receivable, after deducting any foreign tax (charged directly or by way of withholding) but before any other deductions. It may be claimed with respect to dividends, capital gains, interest, royalties, rents and other income as long as these stand to be allocated to the FIA. A company claiming the FRFTC must first add the amount to the foreign source income or gain and then deduct the same FRFTC from the Malta tax charge. The deduction (against the Malta tax) is limited to 85% of the Malta tax. Therefore, there will always be a Malta tax leakage through the operation of the FRFTC.

Understanding the FRFTC Calculation

The following illustrations are intended to help the reader gain a better understanding of the way the FRFTC operates:

(Your illustrations or tables would appear here)

Optimising FRFTC and Managing Expenses

The illustration in the last column is intended to demonstrate the optimal FRFTC claimed by the company in view of the 85% restriction referred to earlier on. The optimal FRFTC becomes relevant when the allowable expenses are high compared to the foreign source income or gain.

Overall Malta Effective Tax (COMET) and Shareholder Refunds

One may also conclude that the combined overall Malta effective tax (COMET) is reduced substantially when the company claims the FRFTC and other expenses or the NID and the shareholder then claims the tax refund. Whenever the Malta company claims the FRFTC, the tax refund which may be claimed by the shareholder is limited to two-thirds of the Malta tax paid. Other distributions from the FIA will entitle the shareholder to claim a tax refund equivalent to 5/7ths whereas distributions from the Maltese Taxed Account (MTA) will entitle the shareholder to claim a tax refund equivalent to 6/7ths.

How can we help

EMCS may advise and assist on the interplay of the various types of tax reliefs and credits as well as other deductions and how combining these possibilities may reduce the COMET. We may also liaise with the foreign tax advisors to ensure that the Malta effective tax satisfies the requirements of other jurisdictions which may be involved in the structure.