When a resident company (or a branch of a non-resident company) distributes profits to its shareholder (both individual and corporate), the shareholder may claim a refund for tax paid in Malta. The amount of the refund depends on the nature of the distributed profits and if these have benefited, or not, of any double taxation relief mechanisms.
The most common form of refund used is the 6/7ths refund which usually leads to an effective tax suffered in Malta to be lowered to 5%. Where double taxation relief has been claimed on income not allocated to the Foreign Income Account (FIA) then the tax refund will still be computed by reference to the Malta tax charge before double taxation relief, but cannot exceed the amount of the Malta tax paid. Hence, where the foreign taxes are 5% or more, the effective Malta tax after the tax refunds will be 0.
When the income is allocated to the FIA and double taxation relief is claimed then the shareholder is eligible for the 2/3rds tax refund after deducting Flat Rate Foreign Tax Credit (FRFTC) but before deducting other types of double taxation relief. The effective tax rate after claiming the 2/3rds tax refund will be of 11.67% or lower depending on whether the FRFTC or other double tax relief is claimed and the extent of foreign tax paid on the income.
The third type of refund relates to distributed profits which are derived from passive interest and royalties, in which case the tax refund amounts to 5/7ths of the Malta tax charge. Interest and royalties are of a passive nature when they are not derived from a trade or business and have suffered a foreign tax of less than 5%. The net effect of this refund is that the effective tax rate in Malta is reduced to 10% less any foreign taxes suffered below the 5% threshold. The 5/7ths tax refund is also applicable to dividends received from a participating holding where the participation exemption, or 100% tax refund, is not applicable
The tax refunds apply to both resident and non-resident shareholders in relation to Malta tax paid on profits that are derived from both local and foreign sources except for profits derived, directly or indirectly, from immovable property situated in Malta.
The tax refund claim should be made within four years from the date of profit distribution. The time frame for refunds applications for tax refunds should be made within four years from the date of the distribution of profits. With proper planning tax refunds are normally payable within period of 14 to 21 days of the date on which the tax is paid by the distributing company. Tax is paid in the currency in which the share capital of the distributing company is denominated and tax refunds are paid in the same currency.