Tax refund and Participation Exemption regime

Companies, registered or resident in Malta, are subject to income tax on chargeable income at a standard rate of 35%. However, in view of Malta’s full imputation system of taxation, significant tax refunds are credited to the shareholder upon a distribution of profits.

When distributions by way of dividends are paid by trading companies to the shareholders, these shareholders become entitled to claim refunds of 6/7th of the Malta tax paid by the company (with a resultant effective rate of Malta tax of 5%).

These refunds are legally guaranteed and payable by the IRD to the shareholders within 14 days from the last day of the month in which the 35% was paid by the Maltese trading company.

Types of Refunds

1. 6/7ths refund - refund of 30% out of 35% tax thus producing a tax liability of 5%. This is the typical refund due on trading profits.
2. 5/7ths refunds (refund of 25%) due in respect of passive interest & royalties. 
3. 2/3rds refund due where the company has claimed double taxation relief.
4. 100% refund due where the profits derive from a Participating Holding (see below)

Participating Holding

A holding by a Maltese Company in a non resident company qualifies as a participating holding if any of the following is satisfied;

•The holding by the Maltese Company is 10% or more of equity share capital
•The Maltese Company has an investment of minimum €1.16million held for at least 183 Days
•The Maltese Company is entitled to appoint a director in the non-resident company  
• Where the holding is a furtherance of the business of the company inMalta. 

The Profits by the Maltese Company from a ‘Participating holding’ is exempt from tax if one of the following is satisfied:  

• The non-resident Company is resident in an European Union State; or  

• It is subject to foreign tax of 15% or more; or   

• It does not have 50% or more of its income derived from passive interest and royalties  

If none of the above conditions is satisfied, the both the below conditions need to be satisfied for the participation exemption to apply:

• The holding of the Maltese company is not a portfolio investment. If the non resident company derived more that 50% if its income from portfolio investments this will be deemed as a portfolio investment.
• The non resident company has paid foreign tax of more than 5%.

Contact us for more information as well as for a quote. We will happily guide you through the Malta company formation process and also advise you on the solutions that would best suite your needs!.