(1) All income is taxable while not all capital gains are subject to tax: Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. Income that is Capital in nature is income generated by an asset over time, rather than through work carried out using the asset.
(2) The Tax computation is different: gains or profits defined as income in nature are taxed differently for capital gains, in particular the determination of the taxable capital gain is subject to complex rules not applicable in the case of trading income.
(3) Rules for deductions and exemptions are different: Deductions and exemptions both reduce the income that is subject to tax in Malta. The exemptions claimed could depend on the tax filing status and the dependents one may have. The standard deduction is a set amount that can be deducted each year.
(4) Tax treatment of losses is different: Trading losses can be set off against all types of income, including both active and passive income and also capital gains. Capital gains on the other hand can only be set off against capital losses. Therefore whilst a trading loss can be set off against a capital gain, a capital loss cannot be set off against a trading gain or any type of income other than a capital gain.
(5) Jurisdictional rules: A person that is ordinarily resident and domiciled in Malta is subject to tax in Malta on their worldwide income. However if this person is domiciled in Malta but not resident in Malta, or vice versa, this person is not taxable in Malta on foreign capital gains, even if this foreign capital gain is remitted to Malta.
The Final Settlement System is a tax deduction system for Malta employment income, in which tax is deducted at source from the gross employment income. The Employment income includes the value of any fringe benefits.
The Employer is responsible to make the correct deductions and to pay these to the Inland Revenue on time.
Employment in Malta
When an individual is exercising employment in Malta; that is the source of the employment income is Malta; the income is subject to tax in Malta. Employment income in Malta is taxed under the final settlement system (FSS).
Rental Income can be either passive or active in nature. Passive rental income is generally derived from long term rental contracts, whereas active rental income from a series of short term letting.
For passive rental income (the following applies for both companies and individuals receiving passive rental income), the following is a list of tax allowable deductions;
(i) any ground rents payable on the said property;
(ii) license fees;
(iii) bank interest on a loan directly related to the property;
(iii) 20% maintenance allowance (rental income less license fees and grounds rents)
For active rental income, which would be taxed as trading income, the tax allowable deductions would be those costs that are incurred in the production of rental income.
As from 1st January 2014, there is an option for rental income derived from eligible property, to opt for a 15% final tax rate calculated on the gross rental income. Non resident persons and resident Malta companies can also benefit from this. This option can be exercised (and changed) each year, but the tax treatment would apply on all rental income from eligible residential properties.
SSC is calculated on the basic salary. Within the EU, a person is insured in the country where the gainful employment or self employment is exercised.
Malta employment income attracts Class 1 Social Security Contributions, whereas other economic activities (non employment related) attract Class 2 Social Security Contributions (for income over Eur910); these are in turn split in two categories; self occupied individuals and self employed individuals.
An attractive programme for Non-EU Nationals to take up residence in Malta, granting the individual a beneficial tax status.
A flat rate of 15% tax on any income arising outside Malta and received in Malta (by the applicant, their spouse and/or their dependents) during the whole year when the special tax status was granted, with the availability of double taxation relief.
The requirements are:
A. Primary residence in Malta, either;
(i) acquired at a minimum value of Eur275,000 (Eur220,000 for property in the South of Malta or in Gozo); or
(ii) rented for not less than Eur9,600 each year (Eur8,750 for property in the South of Malta or in Gozo);
B. applicant has sufficient financial resources and a regular income stream;
C. valid travel documents;
D. health insurance for the applicant and any dependents;
E. fluent in either English or Maltese.
The minimum amount of tax in Malta under this scheme is of Eur15,000 per year. There is no additional tax for dependents and there is no need for a government bond contract. Any Malta source income would be taxed separately at the rate of 35%. A non refundable administration fee of Eur6,000 (Eur5,500 for property in the South of Malta or in Gozo) is payable to the commissioner.
These are taxable statutory bonuses calculated on a six month period paid by the Employer directly to the employee. These are calculated pro rata for part time employee or employees that have left their employment.
The Government Bonus is made up of the Weekly Allowance and the Statutory Bonus. The Weekly Allowance is paid every March and September, currently Eur121.13. The Statutory Bonus is paid every June and December, currently Eur135.10.
Gains from any Trade, Business, Profession: This can be broadly applied to all commercial activities. However where a profession is exercised in the course on a contract of employment, such income is taxable under Art.4(1) (b) ITA as income from employment and not in term of Art.4(1) (a) ITA. Furthermore a One- off transaction is generally outside the scope of income tax, that is if one carries out a one-off transaction for personal use and subsequently disposes of that asset, there would be no tax on any profit made seeing this would be a one-off transaction as opposed to a transaction were the motive or reason was a profit-seeking one, carried out with the intention to carry out a trading activity by trading in this asset, and therefore any profit made would be treated as trading income. Therefore one-off transactions carried out with a speculative intent at time of the acquisition of the asset, would be treated as trading income. For instance if an individual disposes of a painting which was acquired with the intention of making a gain/profit on the sale of the painting, such a transaction would be taxable as trading income, despite being a one-off transaction.
(4) Existence of similar trading transaction or interest: Where a transaction is entered into that is similar to an existing trade carried on by that person then this indicates that this transaction is part of that same trading. Therefore a transfer of an immovable property by a property dealer is generally deemed to be of an income nature unless he can prove that the transaction was a one-off transaction (eg. Transferring one’s own residence).
(5) Changes to the Asset or Supplementary work: this is also an indication of whether a trade is being carried out or not in that when an asset is purchased on for instance a short-term financial loan, which loan is then repaid out of the proceeds of the sale of that same asset, then this could be an indication that this transaction was trading venture.
(6) The reason underlying the sale and the intention of the purchaser: if for instance the sale is triggered due to financial difficulties, this indicates a non-trading transaction.
Dividend, Premiums, Interest or Discounts: Dividends are distributions of retained profits by a company to its shareholders. Dividend income includes a bonus issue of shares and deemed distributions. Interest generally includes any income from a sum of money in whatever currency deposited with for instance a Bank. Interest income also includes interest taxable in terms of the investment income provisions. Discounts refer to discounts arising out of discounting of bills of exchange.
Capital Gains Tax: Capital gains tax is a tax which is levied on the gains derived from the sale /transfer/disposal of tangible or intangible assets. Generally not all assets are subject to capital gain tax and only the assets specifically mentioned Article 5 (1) (a) of the Income tax act are subject to capital gains in Malta. This includes the transfer of the ownership or usufruct of or from the assignment or cession of any rights over Securities, Business, Goodwill, Copyright, Patents, Trademarks, Trade names.
Exemptions related to transfers of immovable property: the seller of an immovable property in Malta would be subject to either Property transfer tax or income tax on capital gains, both regulated under the Malta Income Tax. Property transfer tax is the default transaction-based tax that affects transfers of any real right over immovable property from one party to another. It is generally calculated as a prescribed percentage rate of the transfer value of the immovable property involved in a given transaction.
Exemptions related to transfers in securities: the transfer of Malta government bonds and stocks is still not taxable as such financial assets do not meet the definition of ''Securities'' in Article 5 of the Income tax act.
Employment Income (Art.4(1) (b) ITA): Income derived from work carried out under an employment contract, including from the holding an office. This Includes Wages, allowances, bonuses and fringe benefits. When a director receives regular emoluments in line with a contract of employment, such income is classified as employment income and should be reported under the Final Settlement Scheme system. However if the director receives a fee by virtue of being a member of the board of directors, such fee is not classified as employment income and would be taxed under Art.4(1) (a) ITA. Director fees are taxed in the country where the company is tax resident, which is usually the country where the management and control of the company lies.
Generally when dividends are received from a company, the profits from which these dividends were distributed would have suffered tax at the company's level, which in Malta is 35%. The shareholder, through the Maltese full imputation system, can claim the tax already suffered by the company as an imputation credit, setting this off against the tax charge on this dividend income.
Also if the shareholder pays tax at a rate lower than that of the company, the difference can be claimed back through the shareholder's tax return.
This therefore means that the dividend income is not taxed further in the hands of the shareholder (therefore corporate profits are only taxed once, avoiding double taxation), and this applies to whether the shareholder is resident or not in Malta.
This is unlike other tax systems in many other countries were the dividend income could be further taxed in the hands of the shareholder.
There are generally two types of direct tax in Malta, these are Tax on Income (also known as Revenue tax) and Capital gains tax. The difference between the two types of taxes depends on the Source from which the profits have been derived.
Tax on Income (Revenue tax) (Article 4(1) of the Income tax Act): Malta Tax revenue is defined as the revenue collected from taxes on income and profits, social security contributions, taxes levied on goods and services, payroll related taxes, taxes on the ownership and transfer of property, and other taxes.
Capital gains tax (Article 5 of the Income tax Act): this tax is based on profits and other gains made throughout a calendar year which are generally applicable to immovable property and other long term capital gains.
Malta Tax on Immovable Property transfers (Article 5A of the Income tax Act): generally falls under a final withholding tax system.
(7) The source of finance: Sources of finance are also an indicative factor of whether a trade is being carried out, these sources of finance include equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, and venture funding.
(8) the Time between the purchase and sale: in cases were a long interval exists between the purchase and the sales of an asset, this generally indicates that the transaction is not trading in nature, but of a capital nature. Therefore the sale was just a realisation of the investment, not the trading of that asset for a profit.
(9) Method of Acquisition: if one receives the property as a gift or through inheritance, then the subsequent sale of this same asset would unlikely be treated as being treading in nature.
Pensions, Charges, Annual Payments: Pension Income refers to income received in respect of past employment on retirement for disability, old age, Widow's or social security. An annuity is a type of retirement income product that one could buy with some or all of your pension. This would yield a regular retirement income either for life or for a set period.
A final tax of 15% is available on eligible part time income. This does not need to be declared in the personal tax return of the individual; being a final tax; this income is not subject to further tax. Currently the 15% final tax is capped to part time income from employment of up to Eur10,000 each year (Eur12,000 for part time self-employment). The surplus income would be taxed at the individual's normal rates of tax.
The part time income could be derived from both employment (with a different employer) or self employment (must be duly VAT registered if required and currently cannot have any employees in this part time self employed activity). Pensioners or full time students can benefit from this part time rate without requiring full time employment with another employer.
For a married person, if either of the couple has a full time employment (or is a pensioner or full time student), the other person can also benefit from the part time rate. Part time employment is capped to a maximum of 30 hours per week on average (or less if a wage regulation order applies).
This part time rate is not applicable to part time company director fees.
Badges of trade
Badges of trade essentially originate from Case law and are often used to determine whether a transaction fall within the definition of a trade or not, which determination could affect the tax treatment of the transaction. Important factors include the nature of the subject matter being exchanged, the length of ownership and the reason for the transaction. It is important to note that the badges of trade should be considered holistically and the presence or absence of one badge of trade on its own does not necessarily determine whether particular an activity is of a business or of a capital nature. Badges of trade includes:-
Distinguishing between Income and Capital
Capital includes all assets (such as cash, investments, buildings, machinery) that have a value. Income is something that is earned. Income can be earned by capital (for instance earning interest on a bank account balance, make profit from a business activity, earning dividends from the holding of shares), or by labour/employment.
(1) Profit seeking motive: that is the underlying intention to make a profit supports the idea that the transaction constitutes a trade. Profit motive is the intention to achieve monetary gain in a project or transaction.
(2) The number of transactions: repeated transactions will support the idea that the transaction is one of a trading nature. It is possible that a single transaction can also constitute a trade, but it is generally the case that where there are few transactions (or a one-off transaction) that this would indicate that the transaction is one of a non-trading activity.
(3) The nature of the Assets involved: An asset can be defined as a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to this entity. It is the result of a past event or transaction. Often the nature of the goods indicates whether the goods are acquired by way of stock in trade or by way of capital investment.
Any other gains: All other income not listed above, such as alimony payments, receipts in respect of electoral duties, examiner fees.
Taxes on Income include:
Rents, Royalties, Premiums and other profits arising from property : This section includes rental income which is not taxed under Art. 31D of the income tax Act, and any other income from immovable property such as ground rent and key money of a passive nature. From this rental income (not taxed under Art. 31D at 15% flat rate), Bank interest charges incurred in the financing of the acquisition of the immovable property generating the rental income, license fees and related rents payable may be deducted from the rental income if this is incurred in the production of rental income. Royalty income is a payment for the exploitation of intellectual property.
This is generally determined using 4 main factors;
1) Territoriality: All income and taxable capital gains arising in Malta is subject to tax in Malta, irrespective of residence, domicile or remittance
2) Residence: generally based on whether one spends more than or less than 183 days per year in Malta. A stronger concept of Residence is Ordinary residence, being the person's habitual place of residence
3) Domicile: the permanent home of the person, the place to which they intend to return one day. The Domicile of origin is the place of birth, whilst the domicile of choice is where the person spends most time and where they intend to live and settle permanently.
Persons that are Malta Resident and domiciled are taxed on their worldwide income (incl. foreign source income and capital gains)
4) Remittance: Persons that are Malta Resident, but not domiciled (or domiciled but not Resident), are taxed on their foreign source income only on a remittance basis