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Malta has a unique refundable tax system whereby tax paid by a trading company is, generally, refunded to the shareholder upon the distribution of a dividend. There are different rules governing the refunds but it is the 6/7th refund that is most frequently applied and which is the basis of the economic model built around this legislation.The shareholder of a Maltese trading company can receive 6/7th of the tax paid by the company on most of its trading income. This refund system is payable to both resident and non-resident shareholders, and applies to the dividends derived from all companies, irrespective of the activity exercised or source (both local and foreign) of the income derived by such distributing companies, bar some exceptions such as dividends derived from profits generated through immovable property situated in Malta.
In addition, Malta does not impose any withholding tax upon distributions of outbound dividends. Neither does it tax the refund. However, the nature of this refund may be hard to determine from a fiscal point of view in certain jurisdictions and require being determined in practice. Given the correct structuring, the overall tax leakage in Malta will be as little as five per cent. At AE we can advise the best way to make the most of the Tax Refund System, and look forward to collaborating with you on the matter.
Malta enjoys a participation exemption which exempts gains derived from participating holdings of 10 per cent or more. This exemption applies to both dividends as well as capital gains realised from the transfer of such holding. In most cases, dividends distributed from subsidiaries (EU or non-EU) and received in Malta will benefit from this exemption.
Alternatively, the company receiving the dividend can elect to pay tax at the standard rate of 35% . The shareholder will then be entitled to a 100% refund. . A 35 per cent tax rate is applied to dividends from holdings which do not qualify for a participation exemption. Nevertheless, the effective rate of tax can be reduced to less than 10% through a system of shareholder’s refunds.