How do Malta tax refunds work?
When a Maltese company pays a dividend, the shareholder can claim a refund of part of the tax the company paid. The refund is 6/7ths on trading profits, 5/7ths on passive interest or royalties, 2/3rds on foreign-income-account profits and 100% on participating holding profits.
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Detailed Explanation
## The mechanism
Malta operates a full imputation system. The company pays tax at 35%. On receiving a dividend, the shareholder may claim a refund of part of that tax under article 48 of the Income Tax Management Act, Cap. 372.
## The four refund rates
The refund is 6/7ths for trading profits, which gives an effective Malta tax of about 5%. It is 5/7ths where the dividend is paid out of passive interest or royalties, which gives about 10%. It is 2/3rds on foreign-income-account profits where double tax relief was claimed. It is 100% where the distributed profits derive from a participating holding or its disposal.
## The limit
The refund can never exceed the tax the company actually paid.
## Timing
Because the company pays first and the shareholder claims afterwards, there is a cash-flow gap. A fiscal unit achieves the same result at source.
## What Finn does
Finn shows the effective position after refunds. The claim is made on the shareholder's side, so a practitioner should confirm the mechanics.
Source: https://legislation.mt/eli/cap/372/eng
Real-World Examples
Trading profit
A company pays €35,000 of tax on €100,000 of trading profit. A 6/7ths refund is €30,000, leaving €5,000.
Passive income
A company pays €35,000 of tax on €100,000 of passive interest. A 5/7ths refund is €25,000, leaving €10,000.
Participating holding
Profits from a participating holding are distributed and a 100% refund is available, subject to conditions.
Common Mistakes to Avoid
- Assuming a 6/7ths refund applies to all income
- Expecting a refund larger than the tax paid
- Forgetting the shareholder must claim it
- Not planning for the cash-flow gap
Frequently Asked Questions
What is the refund on trading profits?
6/7ths.
What is the effective rate then?
About 5%.
What about passive interest?
5/7ths, leaving about 10% effective.
Can the refund exceed the tax paid?
No.
Is there a way to avoid the cash-flow gap?
A fiscal unit achieves the refund-adjusted result at source.
Practical Tips
- Keep profits separated by type, since the refund rate depends on it
- Model the cash-flow gap before dividends
- Ask about a fiscal unit for groups
- Keep evidence for participating holding claims
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