Individual - Income determination

Last reviewed - 28 February 2020

Employment income

Gains or profits from employment income arising in Malta are usually fully taxable, including the value of ‘any benefit provided by reason of any employment or office’. Remuneration received for services rendered outside Malta by persons not domiciled or not ordinarily resident in Malta should not be liable to tax in Malta. Apportionment is used where necessary.

All rewards for services rendered, including fringe benefits and benefits in kind, are taxable, although some exemptions are provided. Taxable benefits include living allowances, housing allowances, tax reimbursements (grossed up), use of car, and paid vacation trips.

Fringe benefits

Fringe benefits regulations provide the valuation criteria for fringe benefits and the instances where a fringe benefit is deemed not to arise.

Three main categories of fringe benefits are identified by the regulations.

Category 1 - Use of motor vehicles

The valuation of a fringe benefit arising on the use of a car is calculated on the basis of three elements: the car use value, the maintenance value, and the fuel value. The car use value is equivalent to 17% of the car value, or 10% if the car is more than six years old. In respect of both the maintenance and fuel value, the basis of valuation is 3% of the car value if the latter does not exceed EUR 28,000 and 5% of the car value in any other case. The fringe benefit is equal to the aggregate of these three elements multiplied by a percentage representing the private use of the car. The private use percentage varies depending on the respective car value and may go up to 60%.

The private use element (i.e. the taxable element) of a car cash allowance is 50% of the allowance if the allowance is EUR 2,340 or less, or the cash allowance less EUR 1,170 if the allowance exceeds EUR 2,340.

The said private use element of a vehicle shall not be deemed to constitute a fringe benefit when a vehicle, the value of which does not exceed EUR 16,310, is used by a salesperson or a support person who is not a company official, provided that due approval is given by the Commissioner of Revenue.

Amendments to the Fringe Benefit Rules have clarified that vans are included as non-taxable vehicles and that the use of vehicles by messengers and drivers do not constitute a fringe benefit.

Category 2 - Use of other assets, including accommodation

Use of immovable property/accommodation involves a chargeable fringe benefit of 5% of the higher of the market value and the original cost of the immovable property. No fringe benefit is deemed to arise in certain situations (e.g. use of an official residence by the holder of public office, temporary accommodation for security purposes). The cost of making the immovable property available for use by the employee (e.g. water, electricity, ground rent, redecoration, repairs and maintenance, professional fees) is also a fringe benefit.

The fringe benefit on the use of other assets (other than immovable property and motor vehicles) stands at 12% of the higher of the market value and the original cost of the asset. The original cost is reduced by 40% in the case of assets that are owned for more than six years. Use of computers, related equipment, and internet connection service is not considered a fringe benefit.

Further to the clarification made to the relevant rules in 2017, to determine the price of immovable property held under a title of emphyteusis, the price of acquisition will be considered to be the price or premium which may have been paid according to the deed of emphyteusis without the requisite to increase the amount by five times the annual ground rent payable.

Where property is held under a title of emphyteusis by the provider of the benefit or by a related person, the annual value of an immovable property used for private use shall be taxed on the higher value between 5% of the market value, the total of 5% of the cost of the property and an amount equivalent to the relative annual ground rent.

Movable property shall be taxed at 12% of the higher value between the market value and the cost of the property. The original cost is reduced by 40% in the case of assets that are owned for more than six years. Use of computers, related equipment, and internet connection service is not considered a fringe benefit.

Category 3 - Other benefits

The value of other fringe benefits is the actual cost to the employer of providing the fringe benefit or the market value thereof. This category of fringe benefits includes, amongst other items, beneficial loan arrangements, reimbursement of private expenses, discounted goods and services, free or subsidised meals, and gifts. Valuation criteria differ according to the type of benefit, with the possibility of a partial or a full exemption in certain cases.

L.N. 205 of 2017 has introduced clarifications in terms of which certain items are not deemed to constitute a benefit, for instance, an exemption on cost of travel now includes relocation costs and costs of the journey between shifts or periods of work. In addition, a new exemption for health related costs (including costs of medical exams, preventive medical care for work-related risks and work related counselling) has been introduced.

The benchmark interest rate with reference to beneficial loan arrangements is 6.5% per annum.

In the case of share option schemes, a share option becomes taxable when the option is exercised. In this respect, the taxable value of the said share option would be equivalent to the full excess of the price that the shares would realise on the open market, on the date when the benefit is provided, above the price actually paid for those same shares. The taxable value shall be taxed separately from the other chargeable income and subject to a flat rate of 15%.

Telephony services, computer equipment, recreational and child-minding facilities, health insurance (subject to some restrictions), certain awards, and certain training courses, among other items, provided to employees are not considered to be fringe benefits.

Capital gains and investment income

Tax on capital gains is imposed on any gain realised on the transfer of immovable property (real estate), shares and other securities (excluding investments that yield a fixed rate of return), business, goodwill, business permits, copyrights, patents, trade names, trademarks, and any other intellectual property (IP), interests in a partnership, and a beneficial interest in a trust. Gains from the transfer of other assets should fall outside the scope of such tax.

The rate of tax is the marginal rate of tax applicable to the particular taxpayer. In the case of transfers of Maltese immovable property (or any rights thereon) made on or after 1 January 2015, the withholding tax (WHT) on such transfers should in general be 8% or 10% of the transfer value (the latter rate applying in the case where the property was acquired before 1 January 2004). Certain other rates of WHT may apply in specific circumstances.

No tax is chargeable on a transfer of certain property by a company to its shareholder or to an individual related to its shareholder in the course of winding up or in the course of a distribution of assets pursuant to a scheme of distribution. This applies where the said shareholder is an individual or one’s spouse who owns, directly or indirectly, not less than 95% of the share capital and voting rights of the said company transferring the property, provided a number of conditions are satisfied.

Capital gains arising outside Malta and derived by a person who is either not domiciled or not ordinarily resident in Malta or who is a returned migrant who qualifies for a reduced rate of income tax are not subject to tax, even if remitted to Malta.

Subject to the applicable statutory requirements, non-residents are exempt from tax on any interest, discount, premium or royalties, and capital gains from specified sources (e.g. disposal of units in collective investment schemes and of shares or securities in companies, subject to the satisfaction of certain conditions).

A final WHT system operates under the investment income provisions of the Income Tax Act for certain types of investment income paid by certain payers to specified categories of (Maltese-resident) recipients (see Payment of tax in the Tax administration section for more information).

No tax is levied on investments that yield a fixed rate of return. A tax exemption also applies on the transfer of shares in a company listed on a recognised stock exchange (as of year of assessment 2018, this exemption was widened in scope) other than shares held in certain collective investment schemes.

Transfers of immovable property in Urban Conservation Areas

The final tax rate on transfers of regenerated immovable property situated in Urban Conservation Areas has been reduced to 5% of the transfer value, subject to the satisfaction of a number of conditions.

Furthermore, in the case of a transfer of immovable property situated within an Urban Conservation Area or scheduled by the Malta Environment and Planning Authority, the stamp duty chargeable is at a reduced rate of 2.5%. Such reduced rate is subject to the satisfaction of a number of conditions.

Dividend income

Dividends from Maltese companies

Malta operates a full imputation system of taxation of dividends. Through this system, the tax paid at the company level is regarded as a prepayment for the tax due by the shareholder upon the eventual distribution of profits. Individual shareholders will, subject to certain conditions, not be subject to further income tax on the receipt of a dividend of taxed profits (or exempt profits that are exempt up to the level of the ultimate shareholder) from a Maltese company. Subject to certain thresholds of income, individual shareholders will be entitled to deduct the tax credit attaching to the dividend against their total income tax liability.

Dividends from foreign companies

Maltese resident and domiciled individuals are taxed on a worldwide basis of taxation; consequently, dividends from foreign corporations will be subject to income tax in Malta. Maltese resident but not domiciled individuals are subject to income tax in Malta on dividends from foreign corporations only if such dividends are remitted to / received in Malta.

Dividends are taxed at the standard progressive rates of tax applicable to individuals. Foreign WHT suffered should be granted as a credit against the Malta tax liability on the foreign dividend income, subject to the satisfaction of certain conditions. The credit must not exceed the tax liability in Malta on that income.

Rental income

Any person who owns immovable property that has been restored in accordance with any scheme issued for this purpose by the Malta Environment and Planning Authority and rents out such property may opt to be subject to tax at a final WHT rate of 10% on the gross rental income received in respect of rent for residential purposes and a final WHT of 15% for commercial purposes. Rent also includes ground rent for both urban or rural tenements.

Persons in receipt of rent/ground rent of residential property and of commercial tenements and clubs (in all cases, not necessarily restored property), provided that the commercial tenements and clubs 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.

Otherwise, the rental income is subject to normal rates of tax, but special tax deduction rules apply.

Indeed, subject to the satisfaction of certain conditions, where the general progressive tax rates apply, interest payable on loans to acquire/improve the property, licence fees, and rents payable may be deducted if incurred in the production of passive rental income.