Malta's double taxation treaties (abbreviated as DTTs/DTAs) are designed to promote international trade by avoiding double taxation on income, dividends, and capital gains. Currently, Malta has double tax treaties with over 75 jurisdictions, including the US and the UK.
Whether you are seeking Malta offshore company formation or already have an entity running, understanding how its double tax treaties work is crucial for effective tax management.
In this blog, we take a closer look at the core concept of the double taxation agreement in Malta, how they actually work, how they benefit local and overseas businesses, and how taxes are applied to profits and income.
What Are Malta Double Taxation Treaties?
As the name suggests, Malta's double taxation treaties are legal arrangements between Malta and foreign countries that prevent businesses and their owners from being taxed twice on the same income. A Malta DTA essentially serves:
- Maltese companies running operations abroad via a branch office or a subsidiary
- Foreign companies in Malta, regardless of business structure and industry
- Local and overseas shareholders of a Maltese company
The Republic of Malta has a tax imputation system that provides shareholders with 5/7 of the tax refund. Shareholders can apply for it once the company pays the corporate tax, bringing the effective tax rate down to 5 percent. When combined with DTA, this tax system creates a trade-friendly environment for overseas entrepreneurs seeking expansion into the EU and other key markets.
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Navigating the Network of Double Tax Treaties in Malta
Here is the tabulated view of the DTA network comprising a few countries that have a signed treaty with the Malta. The table also lists nations with whom treaties have been signed, but they aren’t in force as of now.
Please note that some treaties are modified by the Multilateral Instrument (MLI), a global agreement that allows countries to update their existing tax treaties to prevent tax avoidance and ensure alignment with current global standards set by the Organization for Economic Co-operation and Development (OECD).
Jurisdiction | Status | Notes |
Australia | Active | Modified by Multilateral Instrument (MLI) |
Canada | Active | Modified by MLI |
China | Active | |
Curaçao | Inactive | Signed; pending entry into force |
Ethiopia | Inactive | Signed; pending entry into force |
France | Active | Modified by MLI; includes protocol |
Germany | Active | Includes protocol |
Ghana | Inactive | Signed; pending entry into force |
Hong Kong | Active | |
Switzerland | Active | Includes protocol |
United Arab Emirates | Active | Modified by MLI |
United Kingdom | Active | Modified by MLI |
United States of America | Active | |
Benefits of Malta's Double Taxation Treaties for Maltese and Foreign Companies
When combined with a tax imputation system, Malta double taxation treaties offer a strategic edge to Maltese companies and overseas organizations by providing the following benefits:
- Malta-based subsidiaries in partner nations enjoy reduced withholding tax, ranging from 0 percent to 10 percent. Without a DTT, these tax rates can reach 25 percent. This reduction in tax rates results in significant tax savings on dividends and royalties.
- Tax paid by a Maltese subsidiary abroad qualifies for a tax credit in the Malta, preventing double taxation of income.
- Under Participation Exemption, foreign subsidiaries may keep 100 percent of their profit, provided they have paid taxes abroad and meet the “participating holding” criteria under the Income Tax Act (Chapter 123 of the Laws of Malta).
- The entire income of Maltese companies with branch offices abroad is not taxable in the foreign country. Taxes will apply to profit attributable to the branch office.
- While the effective corporate rate is set at 35 percent, Malta’s Full Imputation System allows non-resident shareholders to reduce it to 5 percent by applying for 6/7ths of the refund.
- Passive income enjoys favorable tax treatment. The taxpayer is entitled to a refund of 5/7ths of the tax paid, bringing the effective rate down to 10 percent. If a taxpayer can prove substance in Malta, they may qualify for a higher refund.
- Taxes from multinational groups (with annual revenues exceeding €750 million) can qualify for the 15 percent Global Minimum Tax, ensuring compliance with OECD and EU directives.
How do Malta's Double Taxation Treaties Work?
At the center of Malta’s tax system are the Malta tax treaties, which provide favorable tax treatment for businesses of all sizes and prevent double taxation of income. Here is a quick look at how these treaties work:
Let's assume you are a US resident and run a service-based business in Malta to target the EU markets. Your business generates a net profit (revenue minus expenses) of $1 million. Here is how the treaty will work on your earnings.
Step 1: Malta (Taxation at Corporate Level and Refund at Shareholder Level)
In Malta, the Malta Commissioner for Revenue will tax your gross income at the standard corporate tax rate of 35 percent. Hence, the tax you paid will be $350,000. Once the post-taxation dividend is distributed, the shareholders can apply for a 6/7 refund of the tax. This results in a $300,000 refund, leaving an effective tax of $50,000 (5%).
Step 2: United States (IRS Deduction And Exemptions)
Since you are the 100% owner of your Maltese company, your income is treated as Net CFC Tested Income (NCTI). Here is what tax implications and exemptions look like in this step:
- You report to the Internal Revenue Service (IRS) the overall business income and the taxable amount ($50,000) paid to the Malta’s tax authority.
- If you receive this income in a personal account, the personal income tax rate would be 37 percent. However, you can reduce this rate by electing Section 962, which means that the account the money is deposited in is a corporate account, qualifying you for the 21 percent corporate tax rate.
- Furthermore, under the One Big Beautiful Bill Act (OBBA), you can qualify for a Section 250 deduction of 40%. It means your taxable income will be reduced to $600,000, which will be subject to a 21 percent corporate tax rate.
- Once you have paid the taxes, you can apply the 90% Foreign Tax Credit to the taxes paid to Malta’s tax authority, which is $50,000.
The overall tax paid (the sum of Malta and US Taxes) in this case is $131,000.
Here is the tabular overview of this scenario.
Tax Step | Income Base | Tax Rate / Exemption | Legislation | Tax Amount |
1. Malta Initial Tax | $1,000,000 | 35% Corporate Tax | Malta Income Tax Act | $350,000 |
2. Malta Refund | — | (6/7) Refund | Malta Income Tax Act | ($300,000) |
3. US Exclusion | $1,000,000 | 40% Deduction | OBBBA Section 250 | $400k Exempt |
4. US Base Tax | $600,000 | 21% Corporate Rate | Section 962 Election | $126,000 |
5. US Tax Credit | $50,000 | 90% Credit (FTC) | OBBBA Section 960 | ($45,000) |
Total tax paid | | | | $131,000 |
How Can BSW Help?
Malta's double taxation treaties not only prevent income from being subject to unfair tax treatment but also allow businesses to scale efficiently.
However, these benefits depend on the fair and timely reporting of income to the relevant tax authorities. Unless your reporting is intact, you can’t expect tax authorities to render any benefit under the Malta DTAs. If reporting and compliance concern you, feel free to avail of BSW’s tax compliance services.
Business Setup Worldwide (BSW) is a top-rated consulting company that excels in offshore company formation, tax management, and accounting and bookkeeping, among other services. Our tax experts are experienced and have an in-depth grasp of local tax laws, benefitting a wide range of industries. Whether you are looking to expand your business or fine-tune your finances, BSW has your back. Contact us today to streamline your taxes.
