Malta DTA has played a significant role in optimizing taxes for global businesses, including MNCs and subsidiaries, regardless of their residency. It is primarily introduced to prevent double taxation of the same income, whether net profit, dividends, or capital gains. Currently, Malta has double taxation treaties with over 76 nations, of which three are yet to be enforced. Let’s understand how Double Tax Treaties in Malta work and how they benefit global businesses.
Key Takeaway
- Malta has signed double taxation treaties with over 76 nations, including the US, the UK, Switzerland, France, and Singapore.
- You are only taxed at the higher of the two countries’ rates. Whatever taxes you have paid in Malta, the home country will credit them against your final tax liability.
- credit them against your tax liability after applying the domestic tax rate.
- Nations with whom treaties have been signed but are not yet enforced include Curacao, Ethiopia, and Ghana
- The DTA prevents unfair tax treatment by preventing global businesses and shareholders from being subject to double taxation on the same income.
- The Malta DTA applies to various types of income, including business profits, dividends received by shareholders, and capital gains.
- Most treaties are modified by a Multilateral Instrument (MLI) to comply with OECD guidelines and prevent Base Erosion and Profit Shifting.
What are Double Tax Treaties in Malta?
The Malta Double Taxation Treaty/Agreement refers to a legal arrangement between the Republic of Malta and foreign countries. It essentially prevents the double taxation of income, promoting international trade. Malta DTA essentially benefits
- Local companies with subsidiaries operating abroad.
- Foreign companies with Maltese subsidiaries or parent companies.
- Resident shareholders of the foreign companies
- Foreign shareholders of Maltese subsidiaries
The double taxation treaty in Malta can have several mutually agreed arrangements that may modify
- Tax rates (for example, there is a cap 10% tax on dividends paid to a Maltese company by the US company. Without a treaty, the tax rate can go as high as 30%.
- How credits are reported and filed
- How taxes are reported
- What qualifies as a corporate shareholder
- How capital gains are taxed
How do Double Tax Treaties in Malta Work?
Let’s understand the concept of a double taxation treaty from the real-world example. Let’s say you run a US parent company that owns a Maltese subsidiary. Your subsidiary has made a net profit of $1000000. Here’s how taxes will apply in this scenario:
- 35% corporate tax will apply to the profit of a Maltese subsidiary. Once the tax is paid, shareholders (whether individual or corporate) will then apply for 6/7 ths tax refund, bringing the effective tax rate down to 5%. This benefit stems from Malta’s tax imputation system. In this case, the total tax paid is $50,000.
- The IRS will recognize the taxes paid (5%) in Malta. Yet they do not directly offset that by reducing the applicable tax rate to 21%. Your net income of $1000000 will still be subject to 21%. But at this juncture, section 250 comes in, which can let you deduct 40% of your income before paying taxes. After applying this benefit, you will pay 21% on $1,000,000 – $400,000 = $600,000. Thus, your tax bill will be $600,000 × 12% = $126,000.
- Since you have paid $50,000 in tax in Malta, you can claim a 90% foreign tax credit. It means you will receive $45,000 as credit. This will bring down your net taxable amount from $126,000 to $81000.
So the overall tax paid in this scenario is $81000 + $50000 =$131000
The double taxation treaty in Malta has significantly reduced the tax burdens on companies and their shareholders. Also, it reinforces clarity, making the tax flow between the two nations predictable and trade-friendly. The Malta DTA is designed to promote global trade by eliminating double taxation on net business income, dividends, and capital gains.
However, all these benefits under the Malta DTA would cease to exist in the event of a failure to report or mismanagement. That’s where you need a tax compliance partner who can streamline your reporting as well as filing.
Business Setup Worldwide (BSW) ranks among the top consulting firms, specializing in offshore company formation, tax compliance services, accounting, and among others. Partnering with BSW can simplify your tax compliance journey, leading to improved financial performance. Contact BSW now for a hassle-free consultation.
