How does dividend taxation work in Malta?
Now that we know that Cyprus intends to tax dividends, its popularity as a country of residence is in decline. For those who are wondering what alternative route to take, one already seems to be a candidate. Malta has recently appeared to have increased in popularity as a result of the introduction of dividend taxation by Cyprus. But what makes Malta such an interesting destination? In this blog, we will discuss the benefits of doing business in Malta.
EU Member State
Malta is an EU Member State, which means, for instance, that you are free to travel and reside there as an EU resident. In addition, the other basic EU freedoms that are of importance for entrepreneurs, i.e. freedom of establishment and free movement of goods and services, also apply. This promotes international trade. Similarly, Malta also uses the euro as its unit of currency, so there is no additional red tape due to differences in currency. English is also the second language in Malta and is even the working language in business.
Taxation in Malta
In Malta, there is no separate corporate tax, with only one system for taxing income. At first glance, doing business in Malta appears unfavourable, with the income tax rate there being 35%. Due to the fact, however, that Malta operates a tax credit system, which, incidentally, makes it unique in the EU, the tax rate in Malta is relatively low. This tax credit system works as follows: shareholders of a Maltese company are able to reclaim the income tax paid on the company’s profits.
There are two options for reclaiming this tax credit. In the case of passive income, five-sevenths of the tax paid may be claimed back, and in the case of active income, six-sevenths. This means that, for passive income, 25% of the profit can be reclaimed and, in the case of active income, 30%. Reclaiming tax does require there to have been a dividend payment, but as Malta does not have a withholding tax, dividend payments are not subject to dividend tax.
In short, this means an effective tax rate of 10% for passive income and 5% for active income.
Disadvantages of doing business in Malta
Besides the above advantages of doing business in Malta, there are also a number of disadvantages. Since the tax credit system requires there to have been a dividend payment, the company’s cash flow may be disrupted: 25-30% of the profit disappears from the coffers, and although this doesn’t go to the Maltese tax authorities, it does go to the sharehsolder. There may also be individuals wanting to do business in Malta, but who wish to remain living in the Netherlands. In this case, substance requirements will have to be met, creating additional financial and administrative burden.
If you are wondering whether a business in Malta could work well for you as an entrepreneur, please contact us. You can also come to us with any queries you may have regarding the creation of sufficient relevant substance.