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Double Taxation Relief
The main mechanisms for relief of double taxation under Malta law are the following:
- Treaty relief;
- Unilateral relief; and
- The Flat Rate Foreign Tax Credit.
(a) Treaty Relief
Malta has entered into Double Taxation Agreements with forty-eight countries including most of the major European states. A further ten agreements have been initialled or negotiated and are awaiting ratification. These agreements are generally based on the Organisation for Economic Cooperation and Development (OECD) Model. Treaty relief is generally provided in the form of an ordinary credit with per-country and per income limitation, whereby the overseas tax suffered, limited to the Malta tax charge on the income, is allowed as a credit against tax chargeable in Malta.
(b) Unilateral Relief
Relief from double taxation is also possible on a unilateral basis where tax is suffered overseas on income received from a country with which Malta has not concluded a treaty, irrespective of whether or not that income is remitted to Malta. The overseas tax suffered, limited to the Malta tax charge on the income, is allowed as a credit against tax chargeable in Malta. Likewise such ordinary credit will have per-country and per income limitations.
An indirect foreign tax credit is also available for tax suffered at the level of the foreign distributing company where at least 10% of the voting power of the related company is held directly or indirectly.
(c) Flat Rate Foreign Tax Credit (FRFTC)
A Malta company which is specifically empowered to receive foreign source income or gains in accordance with its constitutive documents may also be entitled to double taxation relief in the form of a Flat Rate Foreign Tax Credit, when in receipt of such foreign source income or gains which fall to be allocated to the foreign income account of the Malta company. This form of double taxation relief is a notional credit which does not refer to the tax actually paid overseas and therefore it is generally utilised where the company is not in a position to provide evidence of the overseas tax paid to the satisfaction of the Commissioner of Inland Revenue. Notwithstanding this, it must be proved by the company to the satisfaction of the Commissioner of Inland Revenue that the said income is allocable to the foreign income account.
The Flat Rate Foreign Tax Credit is calculated at 25% of the overseas income or gain received in Malta. The income plus the notional tax is subject to Malta income tax at the rate of 35% with credit given for the deemed tax. This may be illustrated as follows:
| FRFTC | |
| Company Level |
Euro |
| Net foreign income [interest income less interest payable] |
800 |
| Deemed tax - 25% of net foreign income |
200 |
| Gross income | 1,000 |
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| Tax at the rate of 35% |
350 |
| Credit for deemed foreign tax |
-200 |
| Tax payable in Malta |
150 |
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| Profits distributed as dividends |
650 |
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| Shareholder Level |
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| Gross Dividends received |
800 |
| Malta tax at 35% |
280 |
| Less credit for Malta tax deemed suffered at company level |
-280 |
| Malta tax payable |
0 |
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| Refund (2/3rds) of Malta tax suffered at company level |
100 |
The claim or otherwise of double taxation relief by a Malta company on income allocated to the Foreign Income Account would determine the level of refund that the shareholder of the company registered in Malta would be entitled to, following receipt of dividends from the said account.
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