【From CFTInet, Beijing 07/14/2000】　MAJOR DEVELOPMENTS Malta has concluded two new double tax agreements: one with Romania and one with the Czech Republic. The agreements apply to income derived as of 1997 and 1998, respectively. INCOME TAXES ON CORPORATIONS 1. Rates The income tax rate for corporations is 35%. 2. Local Income Taxes None. 3. Capital Gains Taxes Capital gains derived from the transfer of immovable property, securities (excluding securities that yield a fixed rate of return), the goodwill of a business, trademarks, and trade names, as well as the usufruct or other rights over any such assets are subject to income tax. 4. Branch Profits A branch of a foreign corporation is taxed on the profits of the branch as though it were a resident corporation. 5. Foreign Tax Reliefs The Maltese income tax system provides for the following reliefs for foreign taxes imposed on income that is liable to Maltese tax: q Treaty relief for tax levied in the countries listed in item 19; q Commonwealth relief for tax levied in those Commonwealth countries with which no treaty is in force and provided their laws contain similar Commonwealth relief provisions; q Unilateral relief for tax proved to have been levied abroad and that does not qualify for treaty relief or for Commonwealth relief; q Flat rate foreign tax credit, which is granted to companies at a flat rate of 25% on foreign income allocated to the foreign income account (see item 28) where no application has been made for any other form of foreign tax relief the credit is limited to 85% of the tax payable by the company on its foreign income net of any credit for double taxation relief. q Relief for underlying tax is allowed to a company resident in Malta that receives a dividend from a foreign company in which it controls, directly or indirectly, at least 10% of the voting power. 6. Classification of Corporations A resident company is one that is registered in Malta or whose management and control are exercised in Malta. A company registered in Malta is taxable on its worldwide profits, while other companies are taxable only on profits arising in or remitted to Malta. A collective investment scheme may be formed as a company (SICAV) or as a unit trust. Its profits are exempt from tax unless it opts otherwise, in which case it will be taxed at 25%. All other companies, whether resident or not, are taxed at 35%, but nonresident shareholders of companies (including resident companies owned by nonresidents) holding a qualifying participation and of international trading companies qualify for a favorable tax treatment on their dividends (see item 28). A qualifying participation is an interest, e.g., 10% of the equity shares, held by a resident company in a nonresident company. An international trading company is a trading company that does not engage in trading activities in Malta except for transactions with other international trading companies or with offshore companies. The profits of partnerships with unlimited liability of their members, or whose capital is not divided into shares, are apportioned and taxed directly in the partners?hands. 7. Payment of Taxes Corporations are required to pay provisional tax every four months during the basis year equal to one-third of the tax liability in the last assessment. These provisional tax payments are regarded as advance payments of the tax liability. Corporations are also required to make a further advance payment by June 30 of each year. The amount payable (if any) will be the excess of the tax chargeable in accordance with the corporation own tax computation over the sum of the tax paid in advance, any tax deducted at source, and any double taxation relief. Any balance of tax due resulting from assessment is payable within one month of receipt of a demand for this tax. The above rules do not apply to tax payable by an international trading company or by a company in respect of its foreign income. This tax becomes payable 18 months after the end of the relevant accounting period or on the date the profits are distributed, whichever is earlier. Tax payments by and refunds to a company are made in the currency or currencies in which its share capital is denominated. INCOME TAXES ON INDIVIDUALS 9. Rates Individuals ordinarily resident and domiciled in Malta are liable to tax on their income from all sources. Individuals not domiciled or not ordinarily resident in Malta are liable to tax on income arising in Malta and on any foreign income remitted to Malta. The following are the rates of tax on the taxable income of individuals.Married Resident Individuals Taxable Income Tax on Percentage Over Not Over Lower Amount on Excess Lm 4,000 Lm 5,500 Lm 0 15 5,500 7,000 225 20 7,000 8,500 525 25 8,500 10,000 900 30 10,000 1,350 35 Single Resident Individuals Taxable Income Tax on Percentage Over Not Over Lower Amount on Excess Lm 3,000 Lm 4,000 Lm 0 15 4,000 5,000 150 20 5,000 6,500 350 25 6,500 8,000 725 30 8,000 1,175 35 Nonresident Individuals (Married/Single) Taxable Income Tax on Percentage Over Not Over Lower Amount on Excess Lm 300 Lm 1,800 Lm 0 20 1,800 3,300 300 25 3,300 4,800 675 30 4,800 1,125 35 The income of a married couple is treated for tax purposes as the income of one spouse. One of the spouses is, for this purpose, appointed as the responsible spouse.?The responsible spouse, who will be responsible for the filing of the income tax return and the payment of the tax, may elect a separate computation of income. If this election is made, the other spouse earned income (income from dependent or independent personal services or from a pension) is separated from the other income, and the single individual tax rates apply to each portion. Only one assessment is raised. Certain income paid to resident individuals is subject to withholding tax. A 15% rate applies to interest (excluding loan interest), income from prescribed part-time work, dividends distributed out of untaxed company profits, and distributions by a collective investment scheme out of its foreign income. Dividends paid out of taxed company profits are distributed net of company tax without any further taxation. Dividends and other income subject to withholding tax need not be reported by individuals in their tax returns. If reported, tax is assessed at the normal rates on the gross amount, while the tax withheld, including underlying tax on dividends, is fully credited to the taxpayer. 10. Local Income Taxes None. 11. Capital Gains Taxes See item 3. 12. Foreign Tax Reliefs See item 5. 13. Tax Period See item 32. INCOME TAXES ON NONRESIDENTS 16. Rates See item 9. 17. Withholding Tax Rates As a rule, income arising in Malta and paid to nonresidents is subject to withholding tax at 35% if paid to a corporation and at 25% in other cases. The withheld tax is not final and is credited against the tax liability resulting on assessment. Any difference between the tax withheld and the tax assessed is payable within one month from the assessment or is refunded. A lower or nil rate of withholding tax may be authorized if it is shown that the statutory rate would result in a refund (e.g., because of deductions) or if a lower maximum rate is provided in the relevant double taxation treaty (see item 19). The maximum treaty rate on dividends paid by companies resident in Malta is the rate of company tax (currently 35%) except in the case of the treaty with Austria (32.5%), Bulgaria (30%), and Libya (15%). Many of the treaties provide for the possibility of a reduced rate of tax (15%) on dividends paid by companies eligible for benefits under the industrial incentive legislation. Underlying tax on distributed profits is fully credited to the shareholders and any excess credit is refunded to them. Dividends paid to nonresidents out of profits that were exempt from tax in the company hands are not subject to any tax in the hands of the shareholders. Treaties provide for a maximum rate of tax payable in Malta on interest and royalties. However, interest and royalties paid to nonresidents are exempt from tax under Maltese domestic law (see item 20). 19. Tax Treaties Comprehensive treaties are in force with Australia, Austria, Belgium, Canada, China, Cyprus, Finland, France, Germany, Hungary, India, Italy, Libya, Luxembourg, The Netherlands, Pakistan, Poland, Romania, Sweden, and the United Kingdom. A treaty with Switzerland provides for the elimination of double taxation on shipping and air transport profits. A treaty with the Czech Republic will be operative in 1998. 20. Other Matters Exemption on Certain Income Paid to Nonresidents. Interest and royalties (except where the income is connected with a permanent establishment in Malta), and capital gains on the disposal of shares (except shares in companies owning property in Malta) paid to a nonresident are exempt from tax. Dividends paid to nonresidents out of untaxed profits or by a collective investment scheme are exempt from tax. 　　Investment Service Companies. Investment service companies qualify for certain exceptional deductions, while expatriates employed with investment services companies qualify for a tax exemption on certain fringe benefits they may receive from their employer. 　　Other Exempt Income. Provisions exist for the exemption from tax of income derived by cooperative societies, approved pension or provident funds, philanthropic institutions, trusts or foundations of a public? character, members of the diplomatic corps of foreign countries, trade unions and clubs, and similar institutions. A nonresident shipowner is also exempt from Maltese tax provided the law of the country of residence of the shipowner allows a reciprocal exemption. OTHER SIGNIFICANT TAXES 21. Sales (Value-Added) Taxes The Value Added Tax Act was repealed as of July 1, 1997. It was replaced by the Customs and Excise Tax Act, which imposes an excise tax at 15% on imports (ETI), at 5% on local sales of products (ETP), and at 5% on the value of services provided in Malta (ETS). ETP is chargeable on sales other than sales made by retailers. Businesses, other than retailers, qualify for a refund of the ETP they pay on products purchased for resale. Businesses whose turnover does not exceed the prescribed thresholds do not charge ETP and are not subject to ETS. The law provides for an exemption on exports and export-related services, investment services, domestic supplies of basic necessities, credit facilities, insurance, sales and leasing of property, and a number of other transactions. 22. Inheritance and Gift Taxes There are no inheritance and gift taxes in Malta. The inheritance of immovable property and of securities situated in Malta is, however, subject to stamp duty (see item 25). 23. Taxes on Payrolls (Social Security) For employed persons, social security contributions are payable by the employee and by the employer. The employee rate is one-twelfth and the employer rate is one-tenth of the basic pay. These rates are subject to a minimum weekly rate of Lm 3.66 and Lm 4.41, respectively, and to a maximum weekly rate of Lm 9.98 and Lm 12.00, respectively. The employees?shares are deducted from their wages by the employer and remitted monthly to the Inland Revenue Department together with the employer share. The rate of contributions payable by a self-employed person depends on the bracket within which his or her annual income falls. There are six brackets; the lowest bracket applies to income not exceeding Lm 2,820, and the highest applies to income exceeding Lm 5,150. The contribution rates range from a minimum of Lm 7.37 to a maximum of Lm 15.40 per week. Payments are made to the Inland Revenue Department every four months. 24. Taxes on Natural Resources Profits from the sale and production of petroleum produced in Malta are taxed as income at the normal company rate of 35%. 25. Other Taxes Land and Property. There are no taxes on land and property. Stamp Tax. Tax under the Duty on Documents and Transfers Act, 1993, is imposed on various documents executed in Malta. These include insurance policies, the transfer inter vivos of immovable property, grants of leases, assignments of rights, auction sales, and the allotment or transfer of securities. Documents executed outside Malta and involving the said transactions become subject to duty if and when they are used in Malta. The Act also imposes a duty on the inheritance of immovable property (7% subject to certain reliefs) and securities (2%) situated in Malta. Customs Duty. Import duty is imposed on goods imported from countries outside the European Union. A special levy is payable on the importation of certain goods by way of a temporary measure designed to protect locally manufactured goods. COMPUTATION OF TAXABLE INCOME 26. Capital Gains Capital gains that are subject to tax (see item 3) are treated as income and are added to and taxed together with any other income of the transferor for the relevant year. A capital loss can offset other capital gains, but not other income, of the taxpayer and may be carried forward indefinitely until absorbed by other capital gains. The gain derived from the transfer of immovable property is reduced by an allowance for inflation and for maintenance and by deductions for the costs of improvements and costs directly related to the acquisition and the transfer. Various exemptions and reliefs are provided, including an apportionment of gains derived from the transfer of immovable property or shares that were acquired before 1992. 27. Depreciation and Depletion Depreciation charged in the accounts is ignored for taxation purposes. There is, instead, a system of capital allowances. These allowances fall under three main headings: q Initial deduction; q Wear and tear; q Balancing allowances and charges. Initial Deduction. The initial deduction is fixed by law at 20% of cost with respect to plant and machinery and 10% of cost for an industrial building or structure. Wear and Tear. The wear and tear allowance for industrial buildings and structures is 1% (of cost) per year. For plant and machinery, the eduction (Wear and Tear of Plant and Machinery) Rules 1965?apply. These rules set out the prescribed rates for various items and state that the Commissioner of Inland Revenue is to determine a reasonable rate for items not so listed. These rates are applied on a reducing balance basis. The initial and wear and tear allowances in the aggregate cannot exceed the cost of the asset. 　　Balancing Allowances and Charges. Balancing allowances and charges are made on the disposal of premises and plant and machinery. The balancing allowance is the amount by which the wear and tear allowances and the proceeds of sale or disposal fall short of the original cost of the asset. Where the allowances and the receipts on disposal together exceed the original cost of the asset, a balancing charge is made. Where an asset is sold for more than its purchase price, the balancing charge is limited to the total of the allowances made. 28. Treatment of Dividends The treatment of dividends paid by a company resident in Malta depends, among other things, on the category of the profits out of which the distribution is made. For this purpose, companies are required to allocate their distributable profits to: q The foreign income account, which is made up of profits taxable in Malta and derived from an investment or a permanent establishment situated outside Malta or from the foreign income account of another company; q The Maltese taxed account, which is made up of other profits taxable in Malta; q The untaxed account, which consists of the difference between the company distributable profits and its taxable income. Variations to the rules of allocating profits apply to international trading companies, banks and insurance companies, and collective investment schemes. Dividends paid out of the foreign income account or the Maltese taxed account are paid net of the tax paid by the company on the distributed profits, and the company tax is then treated as tax withheld on the dividend. Individual shareholders and nonresident shareholders may opt to not declare dividends received, in which case the tax withheld is final. The withheld tax is allowed as a credit against the shareholder tax on declared dividends, and any excess credit is refundable. A dividend paid out of the foreign income account to a nonresident shareholder or to a resident company owned by nonresidents entitles the shareholder to a refund of two-thirds of the tax paid (net of any credits) by the company on the distributed profits. If the dividend is distributed out of profits derived by the paying company from a qualifying participation, the refund is 100% of the relevant company tax. A dividend distributed by an international trading company to a nonresident person or to a company owned by nonresidents is taxed at 27.5%. The credit for the relevant company tax will normally result in a refund. The shareholder, moreover, qualifies for a refund of two-thirds of the tax paid by the company on the distributed profits. Profits distributed to a resident individual shareholder out of the untaxed account are subject to a 15% withholding tax. The shareholder may declare the dividend with other income, in which case the shareholder is taxed at the normal rates and qualifies for a credit in respect of the tax withheld. If the distributions are paid to a resident company, there is no withholding tax, but they are allocated to the company untaxed account. Distributions out of untaxed profits paid to a nonresident shareholder are exempt from tax. 29. Loss Carryovers Trading losses may be set off against income from other sources and against capital gains of the taxpayer. Capital losses may be set off only against capital gains. Unabsorbed losses are carried forward indefinitely until absorbed, but may not be carried back. Trading losses of a company may be surrendered to another company within the same group. 30. Transactions Between Related Parties Profits derived by a nonresident from transactions with a related resident may be adjusted by the tax authorities to the amount of profits that would have been derived had the transaction been made at arm length. There are no other specific transfer pricing rules, but the law contains generic anti-avoidance provisions. A company may request a binding advance revenue ruling confirming that a specified transaction will not be considered as a tax avoidance scheme. 31. Consolidation of Income There are no provisions for consolidation of income for taxation purposes. 32. Tax Periods Tax liability arises in the calendar year (year of assessment) following the year (basis year) in which the income arises. Permission may be obtained from the Commissioner of Inland Revenue for companies and certain other entities (but not individuals) to adopt a basis year other than the calendar year, but the basis year must always be a 12-month period ending in the calendar year immediately preceding the year of assessment. RELATED CONSIDERATIONS 34. Incentives and Grants Incentives for Industrial Development. The Industrial Development Act offers tax and other incentives to companies and small enterprises engaged in manufacturing and other qualifying industries. companies?include companies and commercial partnerships constituted in Malta or operating through a branch in Malta. small enterprises?include sole traders. The main tax incentives are a ten-year tax holiday for companies satisfying prescribed export thresholds, exemption on profits derived from increased exports of companies not qualifying for a tax holiday, reduced rates of tax for companies that incur qualifying expenditures on profits used for approved projects, enhanced capital allowances, and inflated deductions in respect of the costs of training, export promotion, and research and development. Other forms of assistance that may be granted to companies and small enterprises include relief from customs duty, soft loans, subsidized rents on factories, and grants. Beneficial tax treatment also is available to shareholders and expatriate employees of qualifying companies. 　　Residence Permit Holders and Returned Emigrants. Foreign nationals taking up permanent residence in Malta under a residence permit, and persons born in Malta who return after an absence of at least 20 years or who derive foreign income above certain prescribed levels are taxed at a flat rate of tax of 15%, which is levied on income exceeding Lm 2,500 (married) or Lm 1,800 (single). They are, however, subject to a minimum annual tax liability, after any double taxation relief, of Lm 1,000. The foreign income of these individuals is not taxable unless remitted to Malta. Income from a business or employment exercised in Malta is taxed separately at the normal rates without any further tax-free portion. 　　Special Concessions to Shipping Companies. A body corporate registered under Maltese Law and having a place of business in Malta, and which satisfies the Minister that the laws of Malta relating to merchant shipping will be observed, is exempted from income tax and stamp duties related to gains or profits derived from the ownership or operation of an exempted ship. 　　Trusts. The income of a Maltese trust and of a foreign trust registered in Malta is taxed at a flat rate of Lm 200 per year. No further tax is due by the beneficiaries. 　　Freeport Areas. The Malta Freeports Act 1989 designates certain zones in Malta as freeport areas. A company licensed to carry out operations in a freeport (e.g., storage, labeling, packing, stevedoring) is exempt from tax on these profits and is entitled to other benefits, subject to an annual fee of Lm 1,000. Depending on the value added as a result of operations in Malta, a certificate of Maltese origin may be issued in respect of goods treated in a freeport. 35. Exchange Controls Malta has comprehensive exchange control regulations, which are embodied in the Exchange Control Act 1972. The Act controls the movement of gold, currency, and securities in and out of Malta. It, however, guarantees approval for the repatriation of funds that had originated outside Malta or from the disposal of or profits from property and investments acquired with foreign funds. Foreign-source funds may be held in foreign currency accounts. 36. Investment Restrictions on Nonresidents There are no restrictions on investment in Malta by nonresidents. However, an investment project of an industrial nature would require acceptance from the exchange control division at the Central Bank, the Malta Development Corporation, and other ministries before formal approval is granted. The transfer of profits accruing to a foreign investor is guaranteed. SELECTION OF BUSINESS ENTITY BY NONRESIDENTS Nonresident investors can operate in Malta through a branch or locally registered company. The special tax treatment on dividends and foreign tax reliefs in respect of income from investments or from trading activities outside Malta applies only to companies resident in Malta. The payment of a dividend by a Maltese company out of its foreign-source income triggers the right to a full or partial tax refund. This right arises when the dividend is paid to a nonresident shareholder or to another Maltese company which in turn is fully owned by nonresidents. The formation of an intermediary company (a dividend feeder company) may thus serve as a tax shelter for dividends paid by a Maltese company out of foreign income that the nonresident investor may wish to retain in Malta. SPECIMEN TAX COMPUTATION Information: q The company, which is registered and resident in Malta, is a fully owned subsidiary of a company resident outside Malta. It does not qualify for incentives under the Industrial Development Act. q The company profits for the year are: ?interest received on a foreign investment, net of any foreign tax Lm 300,000?profits from trading in Malta 150,000 Lm 450,000 q The trading profits were adjusted for: ?depreciation 4,000 ?provision for bad debts 5,000 ?unrealized exchange loss 1,000 ?nondeductible expenses 2,000 Computation of Company Tax: Profits per accounts Lm 462,000 Less: capital allowances (5,000) Lm 457,000 Gross up by flat-rate foreign tax credit (25% of Lm 300,000) 75,000 Chargeable income Lm 532,000 Tax at 35% 186,200 Flat-rate foreign tax credit 75,000 Net Maltese tax Lm 111,200 A dividend of Lm 250,000 is distributed eventually out of the year　 profits. This includes a distribution of Lm 243,750 out of the foreign income account, representing the interest (net of tax) on which the company paid Lm 56,250 net Maltese tax. Tax Treatment of Dividend: Net dividend Lm 250,000 Maltese tax payable on dividend nil Refund payable to shareholders in respect of Maltese tax paid by the company on foreign income (2/3) of Lm 56,250 Lm 37,500