Corporate - Income determinationLast reviewed - 08 February 2023
Inventory valuations are generally made at the lower of cost or market value. In general, the book and tax methods of inventory valuation will conform. However, the last in first out (LIFO) method is not accepted for taxation purposes. Obsolescence is accepted where proven, but there are no provisions to take into account the effects of monetary inflation on the inventory valuation.
Tax is chargeable on capital gains realised on the transfer of immovable property (real estate), shares and other securities, business, goodwill, business permits, copyrights, patents, trade names, trademarks, any other intellectual property (IP), interests in a partnership, and beneficial interests in a trust.
In respect of transfer of Maltese immovable property, a WHT system applies (see Property transfer taxes in the Other taxes section).
Furthermore, similarly to the stamp duty situation set out in the Other taxes section, in the event that the market value of shares held by a person is reduced following a change in the company’s issued share capital or voting rights and the value shifts onto the other shareholders, the transferor will be deemed to have transferred the said value to the transferee(s) and such value shifting may be subject to a tax on capital gains (although certain exceptions/exemptions may apply).
No tax is levied on investments that yield a fixed rate of return. A tax exemption applies in certain instances and subject to the satisfaction of certain conditions on the capital gain arising on the transfer of shares in a company listed on a recognised stock exchange other than shares held in certain collective investment schemes.
Subject to the satisfaction of certain conditions, if the asset is transferred between group companies, no loss or gain is deemed to arise from the transfer. Note that a provision exists that brings to charge the transfer of shares in property companies (as specifically defined) that were originally subject to intra-group tax deferral when the transferee ceases to be a member of the original group within six years from the date of such intra-group transfer.
Gains arising outside Malta and derived by a company that is either not domiciled or not ordinarily resident in Malta are not subject to tax. There are also a number of exemptions provided in the law. For example, gains realised by non-residents on transfers of units in Maltese collective investment schemes, similar investments relating to linked long-term insurance business and shares, or securities in Maltese companies (except for companies holding certain Maltese immovable property) are exempt from tax.
Rollover relief is granted with respect to capital assets used in a business for a period of at least three years and transferred and replaced within one year by an asset used solely for similar business purposes (i.e. no tax is chargeable on the capital gain). In such instances, the cost of acquisition of the new asset is reduced by the gain on the transfer of the previous asset that would otherwise have been taxable.
Maltese tax law also provides for the surrendering and claiming of allowable losses between companies that form part of the same group (see the Group taxation section for more information) as well as for reorganisation relief, subject to certain specific conditions.
Dividends received by one resident company from another, whether or not a subsidiary, are taxable on the gross amount in the recipient’s hands. If the distributed profits have been taxed, no further tax should be chargeable to the recipient company. However, for resident shareholders, if the corporate rate of tax in the year in which the profits are earned is lower than that in the year in which they are distributed, an amount equivalent to the difference in rates (topping up) is payable. If the distribution is made from untaxed income, the dividend will be tax-free in the hands of the recipient company.
Dividends and gains on disposal of shares received by a corporate investor from a non-resident company (or from a non-resident partnership, subject to certain conditions), as well as profits from a PE, including a foreign branch, may qualify for a participation exemption in Malta, subject to the satisfaction of certain statutory conditions.
The participation exemption may also apply to gains upon the disposal of equity holdings in Maltese-resident entities. Distributions of taxed income by Maltese-resident companies are not subject to further tax under the full imputation system.
All tax refund claim forms submitted should identify and disclose information relating to all the direct and indirect beneficial owners of the shareholder claiming the tax refund. Further to the changes relative to the beneficial ownership register brought about by the 5th AML Directive (EU) 2018/843, which was transposed into Maltese legislation through LN26 of 2020, art 5(3) of the Income Tax Management Act was amended (effective from 1 June 2020) such that the relevant certificate will only be considered as compliant where it identifies and discloses all the beneficiaries and ultimate beneficial owners of relevant trusts/fiduciary arrangements.
With effect from 1 January 2021, the participation exemption shall not apply to income derived from a participating holding in a body of persons resident for tax purposes in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for any period of three months during the year preceding the year of assessment. This exclusion does not apply if it is proved to the satisfaction of the Commissioner that the said body of persons maintains sufficient significant people functions in that jurisdiction (listed as non-cooperative) as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom.
A Maltese company may distribute bonus shares from profits, whether of an income or capital nature, and from share premium and capital redemption reserves. When bonus shares represent a capitalisation of profits, they are deemed to be dividends for tax purposes. Such bonus shares are subject to tax in the recipients’ hands, gross of any tax paid at the corporate level on the relative profits, but tax credits equivalent to the gross-up of tax are available to stockholders.
Interest is chargeable to tax under the provisions of Article 4(1)(c) of the Income Tax Act and subject to the standard corporate tax rate. Nevertheless, in the event the receipt of interest falls within the definition of ‘investment income’ as established by Maltese tax legislation, a WHT of 15% may be generally applicable. Furthermore, in the case of interest income payable to non-Maltese residents, such interest should be exempt from Maltese tax, subject to the satisfaction of certain statutory conditions.
Similar to interest income, royalty income is chargeable to tax under the provisions of Article (4)(1)(e) of the Income Tax Act (see Intellectual property in the Deductions section for a description of the possibility of a tax deduction for expenditure of a capital nature on IP or any IP rights). In the case of royalty income payable to non-Maltese residents, such royalty should be exempt from Maltese tax, subject to the satisfaction of certain statutory conditions.
Corporates and individuals in receipt of income from the letting of urban and/or rural property and of commercial tenements and clubs, provided that such properties are not being rented to or from a related body of persons (as defined), have the option to apply a final 15% tax on the gross rental income (other tax rates may apply in specific circumstances).
Otherwise, the rental income is subject to normal rates of tax, but special tax deduction rules apply.
A company is taxable on its worldwide income when it is ordinarily resident and domiciled in Malta. A company that is either not ordinarily resident or not domiciled in Malta is taxable on its foreign income only insofar as such income is remitted to/received in Malta (or where such foreign income is treated as arising in Malta). Foreign tax is relieved by way of tax credits. This may occur under the terms of a DTT. Where no treaty exists, the foreign tax can be relieved through a system of unilateral relief. Relief for underlying tax is also granted with respect to dividend income, either in terms of a DTT or as unilateral relief. Such relief may be available if, among other things, evidence of tax paid abroad is produced.
Profits of Malta resident companies are subdivided for Maltese tax purposes into five accounts: the Immovable Property Account, the Final Tax Account, the Maltese Taxed Account, the Untaxed Account, and the Foreign Income Account. The last of these includes, among other things, taxable profits of Maltese-resident companies resulting from foreign investments; profits of a foreign PE; and profits resulting from foreign investments, assets, or liabilities of an onshore bank licensed in Malta. Income allocated to the Foreign Income Account for which no evidence of tax paid abroad is available can qualify for a flat-rate foreign tax credit of 25%.
The Immovable Property Account includes profits and income derived directly or indirectly from immovable property situated in Malta. The Final Tax Account includes, among other items, profits that have been subject to a final tax at source (apart from Maltese immovable property). The Maltese Taxed Account includes any other taxed profits while the Untaxed Account represents the difference between the distributable profits and the profits allocated to the other taxed accounts.
Under Malta’s system of taxation of dividends, shareholders receiving distributions from the Maltese Taxed Account and/or the Foreign Income Account may be entitled to a tax refund of part of the tax suffered by the distributing Maltese company on such profits being distributed. The tax refund may be either a six-sevenths refund, a five-sevenths refund, or a two-thirds refund of the tax suffered by the Maltese distributing company on the distributed profits. The type of the tax refund depends on the nature of the income to be distributed.