Full Imputation System & Tax Refunds

Companies which are incorporated in Malta and/or whose management and control are exercised predominately in Malta are taxed at a flat rate of 35%. However due to a combination of its full imputation system as well as a refund system, the effective tax rate for a Malta company may be reduced to as low as 5%.

The full imputation system ensures that following the payment of corporate taxation by the company, no further tax is charged upon the income distributed from the profits of the company.

This is because although dividends are subject to tax in the hands of the shareholder upon distribution, said shareholders receive an imputation credit for the tax paid by the company effectively nullifying the shareholders’ tax liability.

In the event where the shareholder’s personal income tax rate is lower than 35%, he would receive a tax refund for the difference in the tax paid by the company.

The full imputation system applies to dividends distributed by Maltese companies to its shareholders irrespective of whether the latter are considered to be resident or not in Malta and whether they are individuals or corporate entities. The system however only applies to dividends that are distributed by a company out of profits allocated to the company’s Immovable Property Account, Foreign Income Account and Maltese Taxed Account (i.e. profits that have been subject to tax at the standard rate of corporate tax).

Companies subject to Malta tax are required to allocate their distributable profits to any of the following five tax accounts (depending on the nature and source of said profits): the Final Tax Account (“FTA”), the Immovable Property Account (“IPA”), the Foreign Income Account (“FIA”), the Maltese Taxed Account (“MTA”), and the Untaxed Account (“UA”).

The applicability of the full imputation system and tax refunds depend on the nature of the company’s income.

Upon the distribution of a dividend by a Malta company to its shareholders, out of profits allocated to its MTA or FIA, the shareholders may claim a full or partial refund of the Malta tax paid on those profits that it distributes.

Such refund is separate to the refund claimed under the full imputation system. However, one cannot benefit from both the full imputation and the tax refund in terms of the below. Thus, if a shareholder claims a refund in line with the following available refunds, then such shareholder will not be entitled to claim a full imputation refund.

The choice of the refund which the shareholder is entitled to claim depends on a number of factors including:

• the original source of the profits being distributed;
• the nature of those profits; and
• whether or not the company distributing the profits claimed double tax relief.

A company is entitled to claim the participation exemption in respect of income that it derives from an entity which qualifies as a participating holding or gains that it derives from the transfer of such a holding as long as certain conditions are met.

However, a company is merely entitled, rather than required, to claim the participation exemption. Accordingly, the company may thus choose to nonetheless pay the corporate tax on said income and gains, which would then entitle its shareholder/s to claim a 100% refund of such tax paid, upon the distribution of a dividend out of such income/gains.

A shareholder in receipt of a dividend paid by a company registered in Malta from profits which do not consist in passive interest or royalties, and which are allocated to its FIA or MTA, and which aren’t covered by the 100% refund, 5/7ths refund or 2/3rds refund, may claim a refund of 6/7ths of the tax paid by the distributing company.

This refund does not apply when the dividend is paid out of profits allocated to the FIA for which relief from double taxation has been claimed (in this case only the 2/3rds refund, as explained below, can be claimed). The 6/7ths refund is the most common form of refund and typically, as a result thereof, the net effective tax leakage to the shareholder is only that of 5%.

This refund applies to dividend distributions from profits derived from passive interest or royalties which were allocated to the MTA or FIA.

As with the 6/7ths refunds, this refund does not apply when the dividend is paid out of profits allocated to the FIA for which relief from double taxation has been claimed (again, in this case only the 2/3rds refund, as explained below, can be claimed). Typically, this type of refund results in an effective Malta tax rate of 10%.

A 2/3rds refund of the Malta tax suffered will apply where the profits out of which the dividend is distributed was allocated to the FIA and has been subject to double taxation relief.

The manner in which this refund is calculated would depend on the type of double tax relief claimed on the profits that are being distributed.