Understanding the way capital allowances and asset depreciation methods in Malta operate is important for tax computation, financial valuations and accounting practices. As it happens, depreciation can significantly impact company profits. First of all, what are capital allowances?
The term ‘capital allowances’ or ‘asset depreciation’ refers to the process of subtracting a value or proportionate value of money invested in business assets from operational income which ultimately impacts the company’s profits and tax bill. In accounting, capital allowances refer to a type of tax reduction that occurs when the cost of business-related assets are deducted from the tax owed over a set number of years.
The term capital allowances links up to the tax treatment of asset cost deductions whilst depreciation is a very similar treatment but essentially impacts profitability. The difference between the two relates to what is acceptable from an accounting point of view as a best practice method to present profits within an organisation in the most representative and fair manner (depreciation) versus what is expected from tax authorities in computing taxes due (capital allowances).
In addition, a business may acquire a tax reduction by presenting a sufficient report of company expenses to the Maltese Commissioner for Revenue. General guidelines set out by the Maltese Income Tax Act are also to be adhered to.
Depreciation Rates Malta
When it comes to asset depreciation, the calculation of rates varies according to the category of asset spending in question.
Moreover, the deduction of a proportionate amount invested in tangible assets does not only relate to the first year of its use after it is purchased but it is considered over a number of years.
The table below depicts the tax rates and the minimum number of years over which asset items can be depreciated:
| Asset | Number of years | Rate % |
| Industrial buildings | 50 | 2% |
| Computer software | 4 | 25% |
| Computer & electronic equipment | 4 | 25% |
| Lifts & escalators | 10 | 10% |
| Aircrafts | 12 | 8.33% |
| Furniture and fittings | 10 | 10% |
| Motor vehicles | 5 | 20% |
| Electrical equipment | 15 | 6.67% |
| Catering Equipment | 6 | 16.67% |
| Premises (offices, car parks etc) | 50 | 2% |
| Air conditioners | 6 | 16.67% |
| Other machinery | 5 | 20% |
| Other plants | 10 | 10% |
An example of the above:
Let’s say an organisation had to purchase €18,000 worth of air conditioners to be used within its office block out of which it operates. That €18,000 would not be deducted in full against the company’s income resulting in a lower profit value, however, depreciation rules would expect the company to divide that value by 6 (€3,000 per annum) and apply that cost of €3,000 for 6 consecutive years until that air conditioner remains in possession of the organisation.
Other Considerations
- Oil and shipping companies have special rates of capital allowances.
- The wear and tear rate on industrial buildings and structures may not exceed 2% per year. This also includes hotels, car parks, offices, etc.
- No deduction is offered for the consumption of natural resources.
- The asset depreciation method in Malta is the straight-line method, meaning that capital allowance is not granted on the value of the land.
- Start-up expenses (marketing, staff training, wages etc) are subject to depreciation but only if they are incurred 18 months prior to the commencement of business.
- Interest on any borrowed money can be subject to depreciation if it is paid on capital employed in acquiring income.
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