Setting up a Business in Malta

Corporate Taxation

General

Malta operates the ‘full imputation’ system of taxation so that any tax paid by the company is imputed to the shareholder in the event of a dividend distribution. The tax withheld by the company from the dividend it distributes is, therefore, no more than a payment on account of the shareholder’s own liability.

Tax Rates

Income Tax is the only tax imposed on the profits of companies. The standard rate of income tax is 35% of taxable income, which is the net profit (accounting profits) as reported in the companies’ audited financial statements, subject to certain adjustments. All expenses incurred wholly and exclusively in the production of the income are considered deductible.

Taxable income

In order to determine a company’s taxable income, the following adjustments need to be taken into consideration:

Wear and tear allowances are calculated using the straight-line method, and are distributed over the minimum number of years based on the following schedule prescribed by Law.

	Asset		No of years
	Computers and electronic equipment		4
	Computer software		4
	Motor vehicles		5
	Furniture, fittings and soft furnishings		10
	Construction and Excavation Equipment		6
	Catering Equipment		6
	Aircraft		12
	Ships and vessels		10
	Electrical and Plumbing Installations and Sanitary Fittings		15
	Cable Infrastructure		20
	Pipeline Infrastructure		20
	Communication and Broadcasting Equipment		6
	Medical Equipment		6
	Lifts and Escalators		10
	Air-conditioners		6
	Equipment mainly designed or used for the production of water or electricity		6
	Other machinery		5
	Other plant		10

* A ceiling of Lm3,000 on the cost of non-commercial motor vehicles applies.

Unabsorbed tax depreciation may also be carried forward indefinitely, but may offset only income derived from the same source.

Group Relief

A company that is part of a group of companies may surrender losses to another member of the same group. Companies are considered to be members of the same group of companies, for tax purposes, if they are resident in Malta and not resident in any other country for tax purposes, and if one of the companies holds 51% shareholding in the other or a third company (also resident in Malta) holds more 51% shareholding in both companies.

(The group company surrendering the losses and the group company receiving the losses must have accounting periods that begin and end on the same dates except for newly incorporated companies and companies put into liquidation.)

Tax Losses  

Tax losses incurred in a trade or business may be carried forward indefinitely to offset against all future income.

Tax Refunds

Malta's full imputation system of taxation and the refund of tax provisions contained in its fiscal legislation make Maltese companies potentially tax efficient vehicles, depending on the shareholder’s tax treatment in its country of residence. Whilst Maltese companies are taxed at the full rate of 35%, shareholders registered with the Inland Revenue Department may qualify for substantial refunds of the Malta tax paid by the company in respect of those profits allocated to the Foreign Income Account and the Malta Taxed Account. Such refunds may only be requested by shareholders subsequent to the settlement by the company of its Malta tax liabilities and the distribution of a dividend by the company, and are payable by the Inland Revenue Department not later than the fourteenth day following the end of the month in which the refund becomes due.

Personal Taxation

General

Personal income tax is paid on all income tax accruing in or derived from Malta and on income accruing in or delivered from abroad by persons domiciled and ordinarily resident in Malta.

Income arising outside Malta to a person who is not ordinarily resident in Malta or not domiciled in Malta will be taxed only if it is received in Malta. Expatriate employees are not considered to be ordinarily resident in Malta if they do not work or reside in Malta for more than 182 days in any one year. Foreign personnel working in Malta in possession of a work permit are taxable only on their income arising in Malta. The rules that apply to local residents apply also to foreign personnel working in Malta.

Individuals are charged tax at progressive rates that reach a maximum of 35% on their gross income less any allowable deductions. The system is that of filing an income tax return together with a self assessment of Income Tax due. The period within which this Income Tax Return and Self Assessment form is to be submitted is within 6 Months from the date of commencement of the Year of Assessment.

Tax Rates

There are two different sets of progressive rates, namely those for Married Couples (who submit a joint calculation of income) and those for Single Persons (also applicable to married persons who opt to submit a separate calculation of income and are therefore taxed separately). Our offic e will be happy to provide you with any guidance that you may require in respect of your personal status for the purposes of taxation in Malta.

Payment of Tax

Income Tax due on income from employment is collected through a system known as Final Settlement System (“FSS”) whereby the employer has a duty to deduct any income tax chargeable on each employee’s monthly income, and has the responsibility to remit to the Commissioner of Inland Revenue (“CIR”) any deductions made within one Month from the end of the month during which the deduction was made. This system allows for all income tax due on employment income to be collected on a monthly basis.

Withholding tax at the rate of 15% is charged on Interest Income which is considered to be the final tax to be paid on such income. However, the tax payer has the option to opt in or out of the system of withholding tax. If no withholding tax is deducted, the tax payer would then have to include Interest Income in the Income Tax Return and Self Computation, to have this income taxed at the appropriate rates. (This option is usually adopted by persons whose yearly income does not exceed the tax free ranges)

Income Tax due on any other income (such as rent), which is calculated on the income tax return is due to be paid to the CIR together with the submission of the same return.

Social Security Contributions

Employers and employees each must pay Social Security Contributions (“SSC”) equivalent to 10% of the weekly salary of the employee (to a maximum of Lm13.38/€31.17*).

Once the 10% of the weekly salary of the employee is calculated, it is multiplied by the number of weeks in the particular month, which is determined by the number of Mondays for the month (4 Weeks or 5 Weeks for a total of 52 weeks in one year). The result will be the value of SSC for that month.

The employer will then deduct the value of SSC for that month from the employee’s salary which represents the employee’s share, add the same amount representing his share and submit the payment to the CIR together with the payment for the FSS deductions (as per the personal taxation section).

Foreign workers, who are not ordinarily resident in Malta are not liable to pay contributions under the social security scheme if their employer is already or has opted to pay contributions in respect thereof under a scheme of social insurance in another jurisdiction.

* The maximum is revised annually depending on any Cost of Living Adjustments to salaries. The amount of Lm13.38 is the maximum for 2006.

Commercial & Residential Property in Malta

Restrictions to the Acquisition of Immovable Property

The acquisition of immovable property in Malta may be subject to certain restrictions which apply to persons who are not a citizen of Malta or of any other Member State of the European Union and/or who have not resided in Malta for a minimum period of 5 years. In cases where such restrictions apply, buyers must apply for a permit to acquire immovable property, within the provisions of Chapter 246 of the Laws of Malta, namely the Immovable Property (Acquisition by Non-Residents) Act or , the “AIP Act”.

Citizens of all EU member states who have resided in Malta continuously for a minimum period of five years at any time preceding the date of acquisition may freely acquire immovable property without the necessity of obtaining an AIP permit for such acquisition.

Citizens of all EU member states who have not resided continuously in Malta for a minimum period of 5 years can purchase their primary residence or any immovable property required for their business activities or supply of services without an AIP permit. The acquisition of any other property (whether a secondary residence or other business property) by such persons will require an AIP permit.

Individuals who are not citizens of a European Member state may not acquire any immovable property unless they are granted a permit.

The provisions of the AIP Act do not apply to those areas specifically designated as “special designated areas”. These areas represent recently constructed developments intended to provide top-end residential properties. Such properties are also exempt from any restriction on acquisition through inheritance and there are also several other special exemptions.

The existing Special Designated Areas are the following:

Fort Chambray, Ghajnsielem, Gozo

Portomaso Development, St. Julian’s Malta

Cottonera Development, Cottonera, Malta

Manoel Island / Tigne Point, Tigne/ Gzira, Malta

Tas-Sellum Residence, Mellieha, Malta

Companies and other bodies of persons are subject to a different set of rules. Where such company or body is established in and operating from an EU member state, such entity may freely acquire immovable property that is required for the purpose for which it has been set up provided that 75% of its share capital is held by a person (or persons) who is a citiizen of an EU member state and who has resided in Malta continuously for a minimum period of 5 years.

Any other body of persons will require a permit which will only be granted if the property is required for an industrial or touristic project or as a contributor to the development of the economy of Malta.

The Acquisition Process

Where property is purchased, the acquisition process typically involves a preliminary agreement or “promise of sale” agreement (konvenju) which is signed by the respective parties, and in terms of which the parties mutually undertake to enter the final deed of sale, subject to the satisfaction of certain specific conditions which must be clearly stated in the preliminary agreement. The preliminary agreement must be registered with the Inland Revenue Department within 21 days of its execution, together with a payment equivalent to 20% of the duty on documents due on the purchase price on the final deed of sale, in order to remain valid after such 21-day period.

Where applicable, the purchaser’s obligation to purchase should be made conditional upon the issuance of an AIP permit and the obtaining of any finance necessary for the payment of the purchase price. A sum of 10% is usually paid on this preliminary deed, either by way of deposit on account of the price or by way of earnest, although the parties may make any other arrangement as they consider appropriate in this regard, The deposit is typically retained by the Notary Public responsible for the publication of the final deed of sale, by the vendor or by any other person/s nominated for this purpose by the parties in the preliminary agreement.

The preliminary agreement may be valid for any period of time agreed upon by , and between the parties, but would usually be for a period of between 3 to 6 months. During this time period, legal title in the property concerned is established through the necessary notarial searches and any financing or AIP formalities are duly followed-up in anticipation of the publication of the final deed of sale. Once such formalities are finalised, the final deed of sale is duly read by the notary public to the parties (or their legal representatives) and signed in his presence. All relevant duties and taxes must be paid to the notary public (who collects such funds on behalf of the Inland Revenue Department ) at the same time as the publication of the final deed.

Renting

The rental of immovable property in Malta is subject to far less formality than the purchase process outlined above. The renting of a property would typically involve a written lease agreement setting out the general terms and conditions governing the rental of the property in question, namely a description of the property, the payment of rent, the warranty of all necessary permits by the landlord, where applicable, the provision of any security or damage deposit/s, the renewal of the lease period upon expiration and other matters of similar importance.

OCRA Malta will be happy to provide you with any guidance or support that you may require in the course of buying, leasing and/or selling any immovable property in Malta, whether for business and/or residential purposes. We will also be happy to recommend reputable real estate agents who will see to your requirements in respect of any immovable property in Malta.