Relief from Double Taxation

Maltese law contemplates four types of relief from double taxation: (a) Treaty Relief; (b) Unilateral relief; (c) Flat-Rate Foreign Tax Credit (“FRTC”); and (d) Commonwealth Relief.

These types of relief from double taxation apply hierarchically and thus, for instance, unilateral relief shall only be available where treaty relief is not available and FRTC shall only be available where treaty relief and unilateral relief are not available.

Treaty relief refers to double tax relief that is provided for in terms of a double tax treaty that Malta has concluded with another jurisdiction. Malta has a vast amount of double taxation agreements, most of which are based on the OECD Model Convention. Treaty relief is generally given using the credit method. Malta’s vast double taxation agreement network includes agreements with a number of countries.

The unilateral provisions of Maltese income tax law are intended to extend the granting of double tax relief even in those situations where Malta doesn’t have a double taxation agreement or, if a treaty exists, it doesn’t provide sufficient relief for the tax suffered in the other country.

Therefore, unilateral relief is given with respect to income arising outside Malta and which is subject, apart from the Maltese tax, to foreign tax of a nature similar to Maltese income tax.

The relief is available to individuals who are resident in Malta and companies which are registered in Malta (including non-resident companies that carry out activity in Malta). The foreign tax paid is allowed to be used as credit to be set off against the Maltese tax payable on the same income. The amount of the credit cannot exceed the sum of Maltese tax payable. In order to claim this type of relief, the taxpayer must prove to the Commissioner for Revenue that foreign tax was actually paid and the amount of the foreign tax paid.

In terms of the Income Tax Act, unilateral relief is only available in cases where there is no double taxation relief.

Unilateral relief provisions also provide relief where a person (including a company) receives dividend from a company that is not resident in Malta, which dividend is paid out of profits that were subject to foreign tax. This type of credit is referred to as a credit for underlying tax. The underlying tax may be claimed on multi-tier structures provided that the Maltese company is related to the oversea company.

FRFTC is only available where treaty relief and unilateral relief are not available. It applies where companies registered in Malta receive foreign income or capital gains. The FRFTC is granted in the form of a tax credit of 25% of the income or gains received by the company after deducting any foreign tax, but before any deductions or payments whatsoever are made from the said income or gains.

In order to apply for this type of relief, documentary evidence must be shown to the Commissioner for Revenue to prove that the income and/or gains arose overseas; a certificate issued by a certified public accountant and auditor is satisfactory documentary evidence for this purpose.

Unlike the other forms of double tax relief outlined above, the FRTC is a credit for foreign tax that is deemed to have been suffered on foreign-source income, rather than for foreign tax that is actually suffered on foreign-source income.

In terms of Maltese law, this type of relief is only available where no double taxation agreement is in force with the particular country. Also, its applicability depends on the reciprocity by the other Commonwealth country. For these two reasons, its scope is somewhat limited.