What investors need to know about Malta’s taxation system

Since becoming a member of the European Union in 2004 and of the Eurozone in 2008, Malta has become a jurisdiction of choice both for businesses and private individuals. Malta adopts a business friendly approach, as part of a well regulated and robust financial services sector within the EU, and provides a very competitive tax regime and a wide tax treaty network with over 70 jurisdictions. This has helped attract a large number of investors and operators to Malta, accelerating Malta’s consistent economic growth to one of the fastest growing economy within the EU. From a ‘lifestyle’ perspective, Malta is a politically stable, safe, yet vibrant place to live. Its great weather, Mediterranean cuisine and unique culture are attractive to individuals looking to retire in Malta or individuals seeking employment opportunities. 

RESIDENCE AND DOMICILE 

Malta was a British colony for a number of years before gaining independence and becoming a Republic. One of the things inherited from the British, besides English being one of the official languages, is its tax framework. This framework has largely evolved since then, however certain principles, such as Malta’s basis of taxation remain relevant until today.  

An individual’s basis of taxation in Malta depends on the person’s residence and domicile. The term ‘domicile’ is not defined under local legislation, however as a rule of thumb in order for an individual to take up a ‘domicile of choice’ in Malta, they should express the intention to reside in Malta indefinitely[1]. This would mean that typically, individuals relocating to Malta, would retain their ‘domicile of origin’ outside of Malta and not be considered as having taken up a ‘domicile of choice’ in Malta and therefore should be classified as non-domiciled individuals for Malta tax purposes. 

Tax residence for individuals, on the other hand, is defined in the Malta Income Tax Act as meaning ‘an individual who resides in Malta except for such temporary absences as the Commissioner may seem reasonable and not inconsistent with the claim of such individual to be resident in Malta’. In practice, taking up residence in Malta requires an individual to be physically present in Malta and have a number of connections to Malta (such as family residing in Malta, a Malta bank account, a Malta medical practitioner, social club membership, a local mobile phone line, business connections and others). Individuals residing in Malta for more than 183 days a year would generally be considered as being a Malta tax resident, while individuals spending less time in Malta may also be considered as Malta tax resident, depending on their other connections to Malta. Accordingly, each situation should be considered on a case by case basis, taking into consideration both the physical presence in Malta together with the other factors connecting the individual to Malta. 

Malta also applies a concept of ‘ordinary residence’, which is not defined in local legislation, but in principle refers to a ‘continued residence’ in Malta and typically subsists after an individual is tax resident in Malta for at least three years. The concept of ‘ordinary residence’ is especially important for non-domiciled individuals as such individuals (once they become an ordinarily resident in Malta),  would be liable to pay a minimum tax in Malta, up to a maximum of 5,000 euros, which is only applicable in certain cases and subject to a number of conditions. Such minimum tax applies as from basis year 2018. 

BASIS OF TAXATION  

The extent of an individual’s Malta tax liability is dependent on such individual’s residence/ordinary residence and domicile[2].  

1. An individual who is ordinarily resident and domiciled in Malta, would be subject to tax on a worldwide basis, like on their worldwide income and gains. This typically applies to Maltese persons and/or their spouses.

2. An individual resident / ordinarily resident but not domiciled in Malta should be subject to tax in Malta on: 

• Malta source income and gains (irrespective of where such income / gains are received); 
• Foreign source income which is received in Malta; 
• Foreign source capital gains should not be subject to tax in Malta, irrespective of whether such gains are received in Malta or not.  

The above ‘source and remittance basis of taxation’ typically applies to non-Malta domiciled individuals taking up residence in Malta (unless such individual is a spouse of an individual ordinarily resident and domiciled in Malta, in which case the worldwide basis of taxation would apply). 

3. Non-resident, non-domiciled individuals are only subject to tax on Malta sourced income and/or gains. Typically this source basis of taxation would apply to non-residents or temporary residents, for example tourists or any other individuals not resident in Malta. 

MALTA TAX RATES 

Malta applies progressive rates of tax from zero to 35 percent. The 35 percent rate is for chargeable income in excess of 60,000 euros. The progressive rate tax brackets vary depending on whether an individual is resident/non-resident, single, married or parent. Also, tax programs exist, in terms of which, a reduced rate of tax of 15 percent applies on foreign source income remitted to Malta. The tax year in Malta applicable to individuals runs from 1 January to 31 December, with income tax returns due the following June. 

It is also important to note that Malta does not levy wealth taxes, capital taxes, entry or exit taxes and does not impose any domestic withholding tax on outbound dividends, interest and royalties. 

Note:

[1] The domicile of origin of an individual should be that of his father. The intention to settle indefinitely in a different jurisdiction to that of a person's domicile of origin may displace such domicile of origin, with a domicile of choice.

[2] One must also consider any applicable tax treaty implications.

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