As a general rule, every taxpayer is required to file an annual income tax return with the Commissioner for Revenue. The format of the income tax return varies according to the person filing it, but in all cases, it will include the following basic information:

• The chargeable income of the person for a year of assessment;
• The tax chargeable thereon; and
• The tax payable by or refundable to that person for the year of assessment.

This computation is referred to as a “self-assessment”. Indeed, the self-assessment system envisages a system wherein the taxpayer calculates his/its own tax liability and the taxpayer ‘assesses himself/itself’. Although it is a self-assessment system, the Maltese tax legislation contains some very wide anti-avoidance provisions. The Maltese Income Tax Act empowers the Commissioner to assess, penalise and nullify any transaction made by any person who in his opinion will and with intent evaded tax (or assisted any other person to avoid tax) or entered into any artificial or fictitious arrangements with the sole or main purpose being to avoid, reduce or postpone the tax liability, or of obtaining any refund or set-off tax.

Tax Returns for individuals cover a calendar year and are due on the 30 June of the following year (Year of Assessment – YA).  Thus, for example, the tax return covering the year 1 January 2018 to 31 December 2018 (basis year) will be due on the 30 June 2019.  The tax settlement deadline for individuals is likewise the 30 June in the year of assessment.  Tax payments for individuals are also made during the basis year, and the most common are by Final Settlement System (FSS deductions), which are payroll tax deductions or through Provisional Tax (PT) payments – see below – in the case of sole traders or individuals conducting a business activity in their own name.

Tax Returns for companies are due nine months after year end, or the 31 March of the YA, depending on the scenario.  In practice, if the year end of a company happens to be some time between July and December, then the tax return will be due nine months after year end.  For example, if a company’s year ends on the 31^st October in the basis year, the tax return would be due on the 31 July of the YA.  On the other hand, if the year end of a company happens between January and June of the basis year, the tax return in all cases will be due on the 31^st March of the YA.

In recent years, the Inland Revenue Department has granted an extension for the submission of tax returns for companies when submitted online.  The extension is normally of two months.

The tax settlement deadline for companies is the same as the tax return dates.  However, tax is normally paid during the basis year through PT payments – see below.  Exceptions to the tax settlement dates apply in the instances that a company obtains an exemption under the Duty on Documents and Transfers Act.  In such cases, the company may be exempt from the obligation of affect PT payments, and may obtain an extension for the settlement of tax of up to 18 months after year end.

Provisional Tax (PT) Payments

PT payments are tax payments that are required to be made by tax payers (when applicable) during the basis year.  The PT payments for a basis year are calculated based on the previous year’s tax charge (there is an exemption in the first year) and are dividend as per below:

• 20% of the tax by the 30 April
• 30% of the tax by the 31 August
• 50% of the tax by the 21 December

Any differences in tax over paid or under paid are to be adjusted for the in the tax return in the YA.

Trading Losses in the context of a person carrying out a trade, business, profession or vocation occurs if a negative figure results after taking into account all the applicable and allowable deductions (for tax purposes) against the trading profit.  Trading losses are very beneficial since they may be offset against any source of income, and not just income from trading activities.  In addition, any unabsorbed trading losses may be carried forward to the following year and indefinitely, until fully absorbed against any taxable income.

A company that is registered in Malta may be entitled to claim an exemption (referred to as the participation exemption) in respect of income (e.g. dividends) or capital gains that the company derives from a ‘participating holding’, subject to the satisfaction of certain conditions.

Claiming the participating exemption is optional and accordingly, a company registered in Malta has a right not to apply the participation exemption and to declare the income or capital gain derived from the participating holding in its income tax return. If the income or capital gain is declared by the company in its return, the company would be required to pay income tax in the normal manner i.e. at a standard rate of 35%. However, upon a dividend distribution of the corresponding profits, the shareholder/s may be able to claim a full refund of the Malta tax paid by the Company on such profits.

Although there are other criteria that may enable a holding to qualify as a “participating holding”, the most common scenario which enables a holding to qualify as a participating holding, is when the following conditions are satisfied:

1. A holding of the share capital in a company which is not a ‘property’ company;
2. A holding in a company of at least 5% of the equity shares which holding confers to an entitlement to at least 5% of any of two of the following
   • Right to vote;
   • Profits available for distribution; and
   • Assets available for distribution upon winding up
3. The holding satisfies any one of the following conditions:
4. • It is resident or incorporated in a country or territory which forms part of the European Union;
   • It is subject to any foreign tax of at least 15%;
   • It does not have more than 50% of its income derived from passive interest or royalties

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.

Treaty Relief

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.

Unilateral Relief

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).

The Maltese tax legislation incorporates what is called as the full imputation system. Shareholders, whether resident or non-resident, who receive dividends from a Maltese company are entitled to a credit of the corporate tax levied on profits out of which the dividends are paid.

Maltese corporate shareholders are taxed on the gross dividend at the standard rate of 35% but are entitled to deduct the tax credit attached to the dividend against their total income tax liability. Likewise, Maltese individual shareholders are taxed on the gross dividend at the applicable tax rates and will be entitled to a refund, subject to certain conditions, when the marginal tax on the dividend is less than the tax paid by distributing company.

When a company distributes a dividend to its shareholder/s out of profits allocated to the Maltese Taxed Account and/or the Foreign Income Account, the shareholder/s may be entitled to claim a full or partial tax refund on the Malta tax paid by the Company on the qualifying profits out of which the dividend was distributed.

Such refund is over and above the full imputation refund due to the operation of the full imputation system mentioned above.

The choice of the refund which the shareholder/s is entitled to claim depends on several factors including, the original source of the profits being distributed (whether local or foreign-sourced income/gains), the nature of those profits (whether of a trading or a passive nature), and whether the company distributing those profits claimed double taxation relief.

As a result, the tax refund system may bring down the overall effective tax charge in Malta to 0%-10%.