The Full imputation system in Malta

The Full Imputation System in Malta

With an advanced economy and a reputation for supporting financial services, Malta has developed itself into an opportune centre for business activity and investing. The favourable tax regime in Malta has been attracting the interest of international companies and entrepreneurs for quite some time now. 

From its Tax Refund System to its Full Imputation System, there are many supportive tax structures in Malta that companies should be aware of. At Firstbridge, we are committed to providing you with the necessary information about how tax in Malta works and how to utilise it for maximum business success. 

The Classical vs Imputation Systems 

In a number of countries, the corporate tax system is a classical tax system. With this type of tax method, a company is treated as a taxable entity that is separate from its own shareholders. In classical tax systems, company profits are first taxed in the hands of the business owners and later through shareholders’ dividends when the company dispenses them. This means that shareholders are fully taxed on the net amount of dividends received. 

The classical tax system leads to double taxation on company profits. Fortunately, Malta is one of the few countries that operate a full imputation system, which many foreign entrepreneurs find to be to their liking. 

In 2006, Malta reached an agreement with the European Union to conserve its imputation tax system for business in Malta. The proposal, which was developed by the Maltese Government, extends the refundable tax credit system to all Maltese companies and shareholders.

What Is The Full Imputation System?

This is Malta’s offered tax system whereby corporate profits are taxed to the company at the rate of 35%. The Full Imputation System avoids double taxation. It stipulates that dividends distributed to shareholders from company profits are not taxed a second time. 

Indeed, shareholders in receipt of dividends are granted a tax credit equal to the tax borne on the profits out of which the dividends are paid. Shareholders will not face any additional tax on the dividends owed since the highest tax rate in Malta, 35%, will have already been met. In cases where the shareholder’s tax on the dividend is lower than 35%, the amount by which the tax credit exceeds the tax on the dividend will be refunded to the shareholder if the shareholder includes the dividend in his tax return.

In other words, when dividends are issued to shareholders out of taxed profits, the dividend carries an imputation tax paid by the company on the issued profits.

Let us take the example of a company gaining taxable profits of €1,000:

Taxable profits of a company  €1,000
Corporate tax at 35% €350
Amount after tax  €650 

The shareholder as a result earns all of the post-tax profits. The company making the profits is required to issue a dividend warrant which must contain the necessary information. That is the deemed gross dividend, the imputation credit and the net dividend amounts. 

The imputation system of company taxation applies to both resident and non-resident shareholders.

Where We Come In

With years of experience and a wealth of technical expertise in taxation, we at Firstbridge provide our clients with the best practice solutions and strategies to optimise tax compliance and exposure that best fits their business needs.

Contact us today to set up a consultation at [email protected] 

*This article has been prepared for general information on matters of interest only, based on information available to us up until the time of writing and does not constitute professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article, and, to the extent permitted by law, Firstbridge does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it.