Maltese residents may benefit from three main types of double taxation relief in the following order:
- Double tax treaties
- Unilateral relief
- Flat rate foreign tax credit
Malta has concluded more than 70 double tax treaties with major trading partners as well as with several emerging markets to promote international trade. Double tax treaties usually grant a credit for taxes paid abroad, lowering the Maltese tax burden by the tax already paid on that income in the foreign jurisdiction/s.
Whereby a Maltese resident does not qualify for the treaty benefit or where there is no treaty concluded with a particular jurisdiction, then the Unilateral relief granted in terms of the Maltese Income Tax Act may be used. Unilateral relief works similarly to treaty benefit whereby a credit is granted for taxes paid abroad.
Where both double tax treaty and unilateral relief are not applicable, the company may claim the Flat Rate Foreign Tax Credit (FRFTC). The FRFTC is a deemed credit for taxes paid abroad set at 25% of the net income earned from foreign sources. It should be noted that there is no requirement for the company to prove that the tax has been paid abroad. The only required classification is the confirmation that the income has been earned from foreign sources, which is usually confirmed by both the accountant and auditor when allocating such income to the Foreign Income Account (FIA).
To calculate the tax due taking into consideration the FRFTC, the net income received from abroad is increased by 25% to arrive at the gross income. Any expenses that are deductible would be deducted from this gross amount to arrive to the net taxable amount. The tax is then calculated on this net amount and the FRFTC is deducted from the tax due in Malta. It should be noted however that the FRFTC deduction should not exceed 85% of the tax payable in Malta on the income allocated to the FIA, before applying the FRFTC and after applying any other tax credits under any other form of double taxation relief.
The following is an illustrative example of how FRFTC works:
The FRFTC can be applied alongside the 2/3rds refundable tax credit providing some efficient tax structures.