Juridical double taxation arises whenever the same income is taxed more than once in the hands of the same taxpayer. The most common form occurs when income, for example, dividends, would have suffered withholding tax in one country and would likewise be subject to tax in Malta on that same income. Malta’s law allows for the relief of double taxation.
Malta has entered into Bilateral treaties with numerous countries. Such treaties are in the form of Double Taxation Treaties, which govern cross-border transactions between two or more states and allocate taxing rights accordingly. Malta’s double tax treaties are mainly modelled on the OECD Model Tax Convention.
This type of relief is provided for in Malta’s income tax law. Malta relieves the tax payer from double tax by granting a credit for the foreign tax against the tax payable in Malta. Limitations apply, namely that the credit may not exceed the Malta tax on the income in question.
Evidence of foreign tax paid is required under the treaty relief and the unilateral relief above. The actual computational rules under both mechanism is very similar, with minor differences.
Flat Rate Foreign Tax Credit (FRFTC)
The FRFTC is another form of relief contemplated in Maltese income tax law (so essentially unilateral relief too) but is a method of relief of a deemed foreign tax. Therefore, one may claim this relief even though the income in question would not have suffered tax. Thus, no evidence of foreign tax is required under this method.
The FRFTC may be claimed only by companies and it may be claimed only in relation to certain foreign income, which would be allocated to one of the tax accounts, the Foreign Income Account (FIA). In claiming the FRFTC, a company would be required to obtain a special certificate from an auditor as required in the law. This form of relief is availed of when the other forms would not be available to the tax payer.
The FRFTC is calculated at 25% of the foreign income after deducting foreign tax (if applicable) but before deducting any allowable expenses. The (net) foreign income is grossed up by this deemed credit (25%) and any attributable expenses are then deducted to arrive at the taxable amount that will be taxed at the Malta tax rate of 35%. The FRFTC originally calculated will then be available as a credit against the Malta tax charge, subject to the limitation that the FRFTC may not exceed 85% of the Malta tax payable on the foreign income. The application of the FRFTC reduces the effective rate of tax suffered in Malta to 18.75% (without deductible expenses).