While being one of the smallest countries in the world, Malta boasts a lengthy and colourful history. It is a very popular destination for tourists. The relaxed livestyle, warm climate, generous taxation system and overall safety of the island encourages many to relocate here. People who opt to relocate here come from every walk of life such as business people looking to minimize their taxation while within the EU, young professionals seeking to live and work in a positive yet rewarding atmosphere and pensioners who retire in Malta to enjoy the warm weather and the many benefits which the islands provide. Apart from the many who decide to relocate permanently, many tourists flock to the islands throughout the year.
Yet, many do not know that Malta not only has one of the lowest corporate taxation in the EU, but has of the lowest taxation in the world.
Malta's corporate tax system
While the official quoted corporate tax rate is that of 35%, many mechanisms exist which allow companies to pay a significantly lower effective tax rate. This means that the company will have a healthier profit after tax allowing it to keep investing in their employees and to further their own business.
Malta embraced a simple mechanism which is able to differentiate individuals based on their residence and domiciled status. Being a resident of Malta is pretty straightforward. Anyone who stays in Malta for a period of more than 6 months in a year is considered to be a resident of Malta. Some exceptions exist which allows individuals who have stayed in Malta for a period of less than 6 months to still be considered residents such as being employed with an indefinitive contract.
On the other hand, domiciliation is not easy to change. By default, every individual takes on what is called the domiciliation of birth which is the country in which such individual was born. Other domiciliations exists but they will be featured into a future publication. For the scope of this article, all that one needs to know about domiciliation is that it is very difficult to change. For those who have been born in Malta and are residents of Malta, we're afraid that the chances of you benefiting from corporate tax rates lower than 35% is very difficult. However, if you were born outside of Malta and reside or are considering to reside in Malta, keep reading to learn how to lower your corporate tax rate.
Resident of Malta
Unless you are living in a country which does not charge tax on profits derived in Malta such as Monaco, Dubai and other similar countries, the key to avoid having problems with any taxation authority is to be resident in Malta. Why is this so important?
Well, if you live and are resident (for more than 6 months in a year) in normal or high taxed countries such as the United Kingdom, Germany, Spain, France etc... the likelihood is that your country of residence (i.e. where you are living) will want to tax the income which was generated in Malta as well. In most of the scenarios, it is your duty to report profits generated in Malta to your country of residence to pay taxes thereon. Failure to do so implies that you are breaching your tax obligations and end up in trouble with your taxman. You do not want to be in that situation.
However, being a resident of Malta while not being domiciled in Malta allows you to pay much less tax. We're sorry to all of our Maltese friends. If you are still reading, there is very little you can do to lower your corporate tax rates. But if you are not Maltese, here is what you need to know.
Tax Refunds and Effective Tax Rates
If you are resident of Malta (or of any other country which does not tax Maltese profits) and you are not domiciled in Malta (i.e. were not born in Malta to put it simply), you can reduce your taxation to as little as 5%. At this point in time, companies owned by residents and non-domiciled individuals can opt to either pay the full corporate tax at the rate of 35% and apply for a refund of 6/7th of the tax paid (which means that effectively, you have paid just 5% tax) or else form what is called a fiscal unit and pay immediately the effective tax rate of 5%.
Getting tax refunds
This system has been in place for numerous years and tens of thousands of companies have been incorporated in Malta simply to benefit from this scheme. Simply put, it works by having the trading company paying the full tax of 35% and declaring a dividend to its shareholder and the shareholder has the right to claim a refund on the tax paid at the level of the company. The shareholder will in return receive 6/7th of the tax paid assuming the maximum tax refund can be claimed.
Forming Fiscal Units
Many complained that the tax refund system takes quite some time or that it is too complicated to administer. Recently in 2019, the government introduced a new subsidiary legislation which allows for companies to pay only the effective tax rate. To be able to do so, one should form what is called a fiscal unit. Certain criteria must be met prior to the formation of the fiscal unit such as having all your company tax affairs in order.
The fiscal unit can be considered as the tax refund v2.0. It provides a number of advantages such as: -
- Cashflow advantages (you do not have to wait to receive your refund);
- More serenity that you pay only what is due and not have to wait.
Understanding Malta's corporate tax system might save you lots of money and you can now understand why so many startups and other well established businesses and multinationals flock to the island to do business here.