Homo sapiens is Latin for “the wise man” and that’s for good reason – we all strive to live a better life – a more affluent, comfortable, happier one.

So, it’s only understandable and prudent that some of us are seeking for solutions to optimise or even reduce their taxes. Legally, that is. In that noble search they might find themselves looking closer at some of the most developed countries’ distant shores, where Malta holds a special place. The small island state in the Mediterranean is rightfully considered a “serene harbour” in the stormy seas of world tax systems.

Let’s take a closer look at what exactly that Maltese “tax comfort zone” is and what needs to be done to take advantage of it. The latter, if we are honest, is not that easy, but still possible! While citizenship by investment programs are being closed in most of the EU countries, Malta’s is still in place* thanks to an exceptionally zealous, multi-stage and thorough due diligence check of the investor.

* The Citizenship by investment program is at this point suspended for citizens of Russia and Belarus.

In order to successfully handle it one has to be persevering and committed, but the reward is worth it. In fact, the program is a mutually beneficial cooperation between investors and country’s authorities. The former receiving the coveted Maltese passport with the right to live, work and study within the EU, a mild taxation climate, visa-free travel opportunities and confidence in the future for the whole family, whereas the latter enjoy a significant government revenue.

Let’s delve into details of Malta’s taxation system where the central question would be the status of tax residency. In other words, the taxable base, interest and deduction rates depend on whether the Individuals and legal entities have the status of a tax resident or a non-resident.

TAX RESIDENTS

An individual or a legal entity considered a resident for tax purposes in Malta is required to pay taxes in the country and is eligible to claim various tax deductions or benefits established by law.

TAX RESIDENT INDIVIDUALS

Many expats seek for Maltese tax residency, since there are no taxes on luxury, ownership of property, inheritance, gifts and royalties. Say, in most other EU countries royalties are taxed at 10% or more.

Besides, in a number of cases a tax resident of Malta is eligible for impressive tax subtractions – a significant saving opportunity offered by very few countries, in fact.

In order to become a tax resident of Malta, one needs to be present in the country for more than 183 days a year or receive income from conducting business there. So, if one owns a restaurant in Valletta or a dairy shop in Birzebbuga, they are automatically regarded as a tax resident.

Tax residency is available to holders of a temporary or permanent residence permit in Malta or those with Maltese citizenship. In addition, a citizen of any country permanently residing or having a contract with an employer in Malta automatically becomes a tax resident.

However, if the holder of Maltese residence permit or citizenship conducts business and even gets income from it in a different country, they don’t pay taxes in Malta.

Taxes for resident individuals in Malta:

  • Stamp duty is a mandatory tax payment imposed when one buys real estate, shares in a company or a stake in a business. When buying a residential or commercial property, a resident is obliged to pay about 5% to the government, while when transferring marketable securities, the percentage varies from 3 to 5%.
  • Income tax. Malta has a progressive personal income tax scale: the higher the income, the higher the tax rate that ranges from 0% to 35% of the annual taxable income. Besides, the resident has the right to return part of the money. Income tax and deduction rates depend on the resident’s marital and parental status.

Income tax rates and deductions for tax residents of Malta:

For single taxpayers with annual income up to €9,000 the rate is 0%, and the income up to €14,500 is taxed at the rate of 15%. 25% is applied for earnings up to € 60,000 and finally, 35% for earnings over € 60,001.

The minimum tax subtraction is €1,365, while the maximum is 8,725 (for incomes over €60,000).

  • There is no annual property tax in Malta. However, the buyer of a property will need to pay 5% and the seller pays 8% of the transfer value of the property. If we look at rental income from immovable property the rates are higher. Rental income is taxed as part of the individual’s regular income. However, the property owner can apply for a special tax scheme to pay a flat 15% on the rental income with the reduced tax rate applying to all objects that the owner leases. The deduction of expenses is not allowed in this case
  • The general rate of dividend tax and bank interest is 15%
  • Social security and insurance contributions are paid both by the employer and the employee and are equivalent to a minimum of 10% of the actual weekly wage of the latter. The employer thus reduces the taxable base by the very amount paid for each employee. The scheme applies to both residents and non-residents

CORPORATE RESIDENCE

The advantages of the Maltese taxation system have long been appreciated by the business community. One can greatly optimise the amount of taxes paid in the country, return a significant part of the funds through tax deductions and in some cases even get a 100% tax refund. All there’s to do is get a resident taxpayer status for the company (which is obtained if the legal entity is incorporated in the country or management and control is exercised in Malta).

Taxes for legal entities in Malta

The main taxes paid by tax resident legal entities in Malta are value added tax (VAT) and income tax.

The VAT rate in Malta is 18% being one of the lowest in the EU.

There is no fixed VAT throughout the European Union with each country setting its own rate. The lowest rates of 17% can be found in Switzerland and Luxembourg whereas the highest rates are in Hungary (27%), Denmark, Croatia and Sweden (25%).

A number of goods and services are not subject to VAT. The zero rate is applied to insurance and banking services and sale and lease of real estate. Also, VAT is not levied on goods sold outside the island.

Income tax in Malta is a flat 35%. It does not depend on the amount of profit and applies to all income received in Malta and outside the country. However, resident companies can apply for a tax deduction and return 6/7, 5/7, 2/3 or even 100% of the amount paid, depending on a number of conditions.

Income tax refund for legal entities

A resident company is entitled to a refund of income tax if:

  • under the Double Taxation Agreement, it claimed for a double taxation relief. In this case 2/3 of the tax paid is subject to a refund;
  • it receives passive interest and royalties’ income through the use of patents, copyrights, franchises, natural resources and other types of property. In this case a company can count on a 5/7 tax refund;
  • its income was gained from trading activity. This scenario allows for 6/7 of the tax to be returned.

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Let’s look at an example. A trading company must pay a 35% income tax. The share of the profit received in the domestic market is about 8% and most of the income derives from international operations. By law, a legal entity is entitled to refund 6/7 of the accrued tax which leaves it with the actual tax rate of 5%!

Such tax allowances are another significant argument in favor of international companies’ relocation to Malta.

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  • And finally, a full 100% income tax refund is provided to holding companies qualifying for the Participating Holding program. This is applicable when a Maltese company holds shares in a foreign entity.

Profit received from dividends, as well as from export activities to the EU market, is tax exempt, too. In addition, the authorized share capital of a company based in Malta is also tax exempt.

Companies should submit their tax return within nine months from the end of the company’s financial year by March 31st and take into account taxes on income arising in and outside Malta, income from real estate, tax-exempt goods or services and the final withholding tax.

Important. A tax refund can only be obtained on the final withholding tax and tax on income received in Malta.

The tax return is filed after all of the taxes have been paid. The tax authorities review the application for 14 days, and if approved, the refund is made to the company’s account.

The taxation and deductions are completed in the currency in which the income was received. Thus, the risks of losing funds due to exchange rate differences are leveled.

Double taxation avoidance

Consider the case where a person, being a tax resident of Malta, receives income in another country, be it dividends or profits interest. According to law, the individual in question will have to pay taxes twice – in each of the states. But that does not happen.

Malta has signed around 70 bilateral tax treaties with other countries for avoiding the double taxation, including the USA, Great Britain, China and Russia. The idea of the agreement is that income received in the form of dividends, interest or royalties when remitted from one country to another, is subject to a source country taxation of no more than 15% tax rate. Thus, in our case, the tax is withheld from the individual only in the country of source. When crediting dividends to a Maltese resident account, no tax is paid.

NON-RESIDENTS

Legal framework for taxation in Malta is fiscally very attractive to foreign investors. If an individual is present in Malta for less than 183 days a year, they are not considered a tax resident. However, income and capital gains (wages, business profits, gain on sale of asset) generated from activities inside Malta are fully taxable.

Tax optimization

Simply put, if an investor is not yet ready to become a tax resident, the maximum number of days they can be present in a country before an income tax liability comes into force is 183 days a year. The main thing to remember here is that being physically present in a jurisdiction for more than the period mentioned allows a country to automatically create a tax claim over a person.

Income tax for non-residents

A non-resident is liable to pay taxes on income received in Malta or remitted to Malta. The tax rates for non-residents depend on the income bracket. Besides, the taxpayer is entitled to certain tax deductions.

Individual non-resident tax rates and subtractions: 

  • annual income €0 – €700 at 0%, subtraction €0;
  • annual income €701 – €3100 at 30%, subtraction €140;
  • annual income of €7801 or more at 35%, subtraction of €840.

Interest, royalties and dividends income derived by non-residents is exempt from tax in Malta.

So, now you have all the information to weigh the pros and cons and make up your mind whether you want it serious with Malta – as a loyal tax partner – or you’d rather make a temporary tax companion. Because if you feel like obtaining tax residency status you might have to think about applying for permanent residence or citizenship by investment program.

Fortunately, it’s still possible: Malta’s citizenship by investment and Permanent Residence Programs are the only ones still available in the European Union.

Relaunched in November 2020, the Citizenship by Naturalization for Exceptional Services by Direct Investment invites wealthy investors to apply for a passport after only one or three years of residence in the country, depending on the investment option chosen. Moreover, local law does not require individuals going for their citizenship to renounce their existing passport.

The Maltese Government maintains the highest standards of investor due diligence to ensure only high standing and reputed applicants are approved.

Candidates must have no health issues and clean criminal record.

Another solid advantage of the program is that the civil status in Malta is passed on to children which makes them full citizens of the country even if their place of birth is outside of Europe.

Several stages to obtaining a Maltese passport:

Stage 1

Non-refundable Government fund contribution

  • €600,000 – standard option: investors must hold residency for 36 months before applying for citizenship; or
  • €750,000 – By exception Investors must hold residency for 12 months before applying for citizenship.

Stage 2

  • €700,000 – Minimum real estate purchase value

The minimum ownership period is 5 years. The object can then be sold; or

  • €90,000 property rental for a five-year period (at a minimum €18,000 per year).

Stage 3

  • €10,000 donation to a non-profit authorized charity organization.

Additional payments:

The applicant will have to pay €15,000 for Due Diligence, €5,000 for issuing a resident card and about €3,000 for administrative fees. Health insurance valid in Malta is also needed.

The procedures for obtaining both a residence permit and citizenship are extremely clear and fairly fast, with a bunch of benefits to go with, including the right to live, work and study in the EU, visa-free access to over 182 countries, dual citizenship coupled with double taxation relief and a very attractive tax system that allows for tax burden optimisation.

How can Citizenship by Investment program participants optimise their taxes?

Tax optimisation is yet another strong point of Malta’s Global Residence and Citizenship by investment programs.

Under the Citizenship by investment program, residents enjoy special tax status with a flat rate of 15% (but no less than a minimum annual tax of 15,000 Euros) on all foreign source income remitted and declared in Malta. This is an ideal way to avoid double taxation and even count on a refund (full or partial).

Important! Under Malta’s “Citizenship by Naturalization for Exceptional Services by Direct Investment” requirements, the applicant has to use an accredited agent in order to apply. To get things done efficiently and hassle-free we recommend contacting experienced and competent lawyers with international law expertise.

The Astons team of experts is on hand to guide you through the benefits of the Maltese program and advise you on the process and conditions for the fastest and most efficient solution.

The information in this article is for general informational purposes only. 

Astons does not provide tax advice. The data is accurate on the date of publication (05 Jan, 2023).