Malta – A Rundown of Recent Tax Legislative Updates

Much speculation on the future of Malta’s corporate tax regime, including the continued longevity of Malta’s full imputation and tax refund systems, has dominated the local tax landscape ever since the Minister for Finance previously announced an overhaul in Malta’s tax system, including the introduction of new tax rates, aimed at being in place by 2025.

By way of background, the application of Malta’s full imputation system of taxation results in the complete elimination of economic double taxation of company profits, given that shareholders in receipt of dividends are entitled to a tax credit equal to the tax borne on the profits out of which the dividends are paid. Where the credit is higher than the Maltese tax chargeable to the shareholder, then the excess of the credit over the chargeable tax results in a tax refund (referred to as an imputation refund) due to the shareholder, subject to certain restrictions. Co-existing harmoniously with the aforementioned full imputation system, is Malta’s tax refund system, in terms of which, recipients of dividends from a Maltese company may become entitled to a full or partial refund of the tax paid by the company on the profits that it distributes. While the quantum of the refund varies depending on a number of factors, including the original source of the profits being distributed, the most common refund is that of 6/7ths of the taxable profits.

Against the above backdrop, the budget speech for 2024 was met with high anticipation from tax advisors and taxpayers alike, and luckily for the audience, the Minister provided some sought-after clarity on the destined fate of the current tax regime, at least for the foreseeable future. This particular update was especially welcomed within the context of the changes to the international corporate tax framework, including the introduction of a 15% effective tax rate on worldwide profits to multinational groups with consolidated revenue of over EUR750 million – the so called “Pillar 2”.

In this respect, on 30 October 2023, the Minister of Finance, Clyde Caruana, confirmed that Malta will be exercising its right to apply the derogation allowed by the EU Minimum Tax Directive, as a consequence of which, Malta will be deferring the introduction of the 15% minimum top-up tax under Pillar 2, past 2024. Accordingly, the three main components of the Pillar 2 rules, namely the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and the Qualified Domestic Minimum Top-Up Tax (QDMTT), will not be transposed into Maltese law in 2024.

For the time being, despite prior indications from the Minister, there do not seem to be any concrete plans to alter Malta’s current corporate tax system, and accordingly, the full imputation system of taxation and the tax refund system will continue to apply. As further announced during the budget speech, there are, however, plans for new forms of statutory grants and tax credits (referred to as Qualified Refundable Tax Credits (QRTCs)) to be introduced, as part of the government’s commitment to ensure compatibility with rules imposed by both the EU and the OECD. The government likewise pledged its commitment to retain Malta’s competitive edge despite potential increases in the tax burden of certain entities in the transitory period.

During the budget speech, the Maltese government also communicated its firm priority to counteract the effects of the rising cost of living particularly felt by those who are most vulnerable, such as pensioners and low-income families. This commitment is embodied through a number of personal income tax measures having been introduced, including the following:

The local tax landscape has also been impacted by recent legislative developments in the value added tax (VAT) sphere, which have been brought about as a result of the transposition of the rules set out under Article 105a of Council Directive 2022/542 of 5 April 2022 (amending Directives 2006/112/EC and (EU) 2020/285) with regards to rates of VAT.

In contemplation of the above, a new reduced rate of VAT of 12% was introduced to the Maltese VAT framework on 6 October 2023. The new rate, which will apply with effect from 1 January 2024, applies mainly to four categories of services:

It is understood that the Malta Tax and Customs Administration will be publishing explanatory guidelines to provide additional clarity on the applicability of the 12% rate vis-à-vis the above-mentioned supplies.