Investment Property Taxation
You'll probably already aware that rental income can be taxed at the rate of 15% on the gross income received. However this should not be the general rule and an automated process. Wrong or lack of information can lead to significant added taxation expenses, penalties and added administration hurdles you'll have to overcome.
It is possible that the rental income does not attract taxation in the first place which means that your entire rental income would be tax free. Other situations might not make it possible for you to benefit from the 15% final withholding tax.
Rental income from the Housing Authority
Property which is rented to the housing authority and satisfies certain criteria, can be taxed at a flat rate of 5% to 10% on the gross rental income.
The difference in rates depend on whether one is renting the immovable property directly to the Housing Authority or to tenants who are benefiting from the rent subsidies covered by the Housing Authority.
For landlords who rent directly to the Housing Authority, for them to benefit from the 5% rate, they must be the actual owners of the property. Additionally, the immovable property should be leased for a period of at least 10 years. The 5% tax is final and cannot be used as credit against tax receivable. Lastly, the Housing Authority automatically withholds the tax payment when issuing the payment to the landlord and it is the responsibility of the Housing Authority to pay the taxes to the Commissioner for Revenue.
On the other hand, if the landlord rents out the immovable property to tenants who are receiving a rent subsidy from the Housing Authority, and the landlord is also registered with the Housing Authority, tax can be charged at the rate of 10% on the gross rental income. Similarly to the above, the tax is a final withholding tax and cannot be refunded in any way back to the landlord. The tax is also withheld by the Housing Authority when they are making the payments to the landlord and it is the Housing Authority who is responsible of remitting the payments to Commissioner for Revenue.
Rental income from Restored Property
Owners of immovable property situated in urban conservative areas and who have benefitted from restoration schemes as issued by the Malta Environment and Planning Authority can also benefit from reduced taxation rates ranging from 10% to 15%. The other determination required is pretty straightforward as it depends whether the restored property was rented out for residential or for commercial purposes.
Property which falls into this scheme and was for rented out for residential purposes is taxed at the rate of 10% whereas property rented out for commercial purposes is taxed at the rate of 15%.
The landlord is responsible to pay the taxes to the Commissioner for Revenue by submitting the required forms, documentation and payment by not later than the 30th of June of the following year to which the income refers.
Other Rental Income
New legislation introduced in 2014 states that any other rental income can be taxed at the rate of 15%, which is too a final and withholding tax that cannot be refunded back. Originally, this legislation was intended for immovable property rented out for residential purposes. However, in 2016, this was changed to also allow commercial property.
All taxpayers, residents and non-residents can benefit from the 15% final withholding tax, except for when the property is rented out to related party. Companies which are resident in Malta too can benefit from this.
It is important to note that the required forms and declarations have to be submitted by not later than the 30th April of following year in which the rental income was earned. If this deadline is missed, one has to declare the rental income normally in their tax returns and have the said income taxed at the progressive rates.
Taxing using progressive rates
While the above reduced rates may be welcomed by the majority of tax payers, all of the said rates are optional and in any case, the tax payer i.e. the landlord may decide to declare the income as part of their normal income and have it taxed using the progressive rates if the lessor is an individual or company corporate tax rates if the lessor is a legal entity.
Prior to just declaring the income, at this stage, a final assessment is required to determine whether the property is rented out on a short term basis or on a long term basis.
Should the property be rented out on a short term basis and is licensed by the Malta Tourism Authority, the property income can be treated as a trading income and related expenses can be deducted before arriving at the taxable income. In this stage only the profit is subject to tax.
Conversely, should the property be rented out on a long term basis, a few deductions are still allowed, with the most generous deduction being an assumed expense of 20% of the rental income which is commonly referred to as the 20% maintenance allowance. This can be deducted without having the requirement to present or store supporting information.
Generally speaking individuals who have combined employment and rental income of less than Eur20,000 a year are likely to benefit if they declare the income with their progressive with instances managing to reduce the tax burden to Eur0.
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