Income may, in certain circumstances, be taxable both in Malta an in another jurisdiction. This may therefore result, at least in theory, in a situation where the same income/ person could be taxable in two jurisdictions giving rise to doutble taxation.
Malta affords double taxation relief by way of credit and provides three main mechanisms, for the elimination of double taxation.
i. Treaty Relief
Double tax relief may be claimed by virtue of the applicable provisions of Malta’s double tax treaties. Malta currently has more than 65 double tax treaties in force, most of which are based on the OECD Model Convention. Given that Malta is a credit country, in most of its tax treaties, Malta has agreed to relieve double taxation using the credit method. Domestic tax law further provides that relief should be provided on a country-per-country basis. Most of the treaties provide for a reduced withholding tax on dividends, interest and royalties paid to a resident of Malta in the form of an ordinary credit for actual tax paid.
ii. Unilateral Relief
Unilateral relief can be claimed 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 and companies resident 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 credit is limited to the tax chargeable in Malta on the same income. In order to claim this type of relief, the taxpayer must prove to the Commissioner for Revenue that foreign tax was 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.
iii. Flat-Rate Foreign Tax Credit
Flat-rate foreign tax credit may only be availed of by Maltese resident companies. It applies to income or capital gains earned from overseas and allocated to the foreign income account. Companies precluded from operating the foreign income account, such as international trading companies and banks failing the 95% deposit test, may not make use of flat-rate foreign tax credit.
The credit is calculated at 25% of the net overseas income and capital gains received by the company, before deductions but after taking into account any foreign tax. The net overseas income plus the tax credit less any deductible expenses is subject to Malta income tax with relief given in respect of the deemed tax credit. Flat-rate foreign tax is limited to 85% of Malta tax on foreign income.