Date: Wednesday 12th February 2020 & Wednesday 19th February 2020
Author: Markita Falzon
It is important to distinguish between capital and income since this will help us determine what is subject to tax to tax in Malta. In principal all income is deemed to be taxable in Malta however only capital gains derived from transfer of assets specifically listed in Article 5 of the Income Tax Act will be subject to tax in Malta.
Source of Income
Determining whether income or capital gains arise in or outside Malta is critical for establishing whether such income or capital shall fall within the scope of Maltese income tax. This is particularly relevant when income is derived by non-residents or resident not domiciled individuals.
The ITA does not explicitly specify how one should determine where income is deemed to arise however the source of income varies depending on the type of income in question. The following basic guidelines should be taken into consideration when determining whether income is deemed to arise in Malta or otherwise.
- Trading Income – considered to arise in the country where the activities which generated such income are performed. For example, if the activities that generated the income were carried out in Malta such income is deemed to be derived in Malta and is consequently taxable in Malta;
- Employment Income – generally regarded as arising where the physical activity is carried out. Other factors should be considered such as where the payer is established and on behalf of whom the work is being performed;
- Passive Income – such as dividends, royalties and interest are deemed to arise in the country where the payer resides;
- Intangible property – arises in the country where the intangible is exploited;
- Tangible Property – the income derived from the disposal of tangible property is deemed to arise in the country where the asset is situated when the sale takes place;
- Immovable Property – The gain derived from the sale of immovable property arises in the country where the property is located.
In a nutshell, earned income is deemed to arise in the country where the activities which produce the income are physically carried out.
Basis of Taxation
Article 4(1) of the Income Tax Act provides that;
‘’…..income tax shall be payable…. with respect to any capital gains….accruing or derived in or from Malta or elsewhere and whether received in Malta or not… Upon the income of any person accruing in or derived from Malta or elsewhere and whether received in Malta or not….’’
‘‘(i) in the case of income arising outside Malta to a person who is not ordinarily resident in Malta or not domiciled in Malta, the tax shall be payable on the amount received in Malta
(ii) no tax shall be payable on the capital gains arising outside of Malta to a person which is not ordinarily resident or not domiciled in Malta’’
The principles of residency and domicile are used to determine the personal status of the taxpayer which will in turn establish the tax compliance obligations and how the source and type of income is subject to tax in Malta. In principle, Malta has the right to tax income and taxable capital gains arising in Malta, income and taxable capital gains arising abroad received by individuals who are ordinarily resident and domiciled in Malta, foreign source income derived by individuals who are resident in Malta but not domiciled in Malta received in Malta and foreign source income derived by persons who are domiciled in Malta but not ordinarily resident in Malta received in Malta.
Any individual who is ordinarily resident and domiciled in Malta is subject to tax on a worldwide basis, meaning that all of his income and capital gains are subject to tax in Malta, irrespective to whether the income or capital gains arise in Malta or not and irrespective of whether the income or capital gains are received in Malta or otherwise. Income arising in, or remitted to Malta, is taxable in Malta even if the recipient of such income is not resident, not domiciled or is a temporary resident, however if these individuals derive foreign sourced capital gains, they are not taxable in Malta even if these gains are remitted to Malta.
The same principle applies for any company incorporated in Malta. By virtue of its incorporation in Malta the company should be considered as being both domiciled and resident in Malta and therefore subject to income tax on a worldwide basis.
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