Maltese residents, who comply with certain requirements, can have double taxation relief on the income that has already been taxed abroad.
Double taxation relief can be achieved by one of the three following methods (that apply hierarchically):
1. Application of double taxation treaties
Except in rare situations, Malta has over 60 treaties that make provision for the double taxation relief using the ordinary tax credit method.
Gross income (including taxes paid abroad) obtained abroad is included to calculate taxable income and is subject to a 35% tax rate. The taxes paid abroad are then deducted, but this deduction is subject to two limitations:
a) No credit can exceed the proportion of tax paid in Malta on the income in question.
b) Total tax credits for international double taxation relief cannot exceed the total amount of taxes paid in Malta in the same year.
2. Unilateral tax credit
In cases where there is no double taxation treaty or where it cannot be applied, the unilateral credit clauses set out in the Income Tax Act may apply. Their application and the limitations are practically the same as when tax credit is applied through the double taxation treaties mentioned above.
In the case of dividends, the double taxation relief can also cover tax paid on underlying subsidiary profits.
3. Flat rate foreign tax credit (FRFTC)
Companies registered in Malta, with income allocated to a Foreign Income Account (FIA) but without benefitting from the tax credit set out in the other double taxation relief mechanisms, can benefit from a fixed international tax credit rate which is assumed to be 25%.
There are no requirements to prove foreign withholding tax but the accountant or auditor has to certify that the income comes from a foreign source, with allocation to the FIA tax account.
The net income obtained abroad is added to 25% of the presumed tax to calculate the taxable income which is then subject to a 35% tax, after expenses have been deducted. The FRFTC amount is then deducted, but this deduction cannot be more than 85% of the taxes to be paid in Malta on the income allocated to the FIA account, before applying the FRFTC and after applying any other tax credits under the other double taxation relief mechanisms.
This mechanism, along with a 2/3 refund of the paid tax, provides some very efficient tax structures.