How royalty income is taxed in Malta
Article 4 minute read

How royalty income is taxed in Malta

13 September 2019

Malta provides fiscal incentives for companies to hold intellectual property such as patents, trademarks and copyrights.

There’s no shortage of jurisdictions to choose from when deciding where to protect your intellectual property (IP) but Malta should be high on your shortlist. The European Union member state offers the unique combination of a favourable onshore tax regime in a heavily-regulated business environment.

Malta’s tax regime provides various fiscal incentives to Malta-based companies purposely set up to hold IP such as patents, trademarks, copyrights and intellectual property rights.

When a company in Malta derives royalty income from qualifying IP rights, any income stemming from those rights is exempt from corporate tax in Malta. The exemption is further extended to qualifying patents, wherever registered, even if their development and registration is carried and held outside of Malta.

Determining the type of income for unregistered IP

A company in Malta may earn royalty income from IP that is not registered in the country or otherwise. In this case, it is important to determine the ‘type’ of income. This distinction is needed because it determines the tax refund applicable to non-Maltese residents.

Typically, entities that receive royalty income in Malta from an unregistered IP fall into two categories:

  • active income
  • passive income.

The key questions to ask are, is the company actively trading an IP? Is it constantly marketing and actively engaging that IP and consequently earning royalty income? If this is the case, it’s deemed to be trading in its nature and that income would therefore be classified as active income. Royalty income that is subject to at least 5% tax, irrespective of whether the tax is levied directly or indirectly, or even through a withholding tax mechanism, would be classified as active royalty income.

On the other hand, if a Maltese company receives royalty income from an unregistered IP that is not actively being marketed and traded, the income derived from it would be deemed passive. Royalty income received by the Malta company which has been subject to less than 5% tax whether directly or indirectly (by way of withholding tax or otherwise) is deemed to be income of a passive nature.

Here’s a summary of four key ‘clusters’ of the refund mechanism. While TMF Group does not provide specific tax or legal advice, our team located in Malta can work with your advisors to set up the appropriate structure for your IP.

Cluster 1: Full refund – exemption on registered and qualifying royalties

Companies deriving income from a qualifying IP, irrespective of whether such income is of an active or a passive nature, would be exempt from tax on that income in Malta. The Maltese company has the option to tax the income in Malta at 35%. However the non-Maltese resident shareholder is entitled to claim a 100% tax refund upon the distribution of a dividend by the Maltese company.

Cluster 2: 6/7ths – ‘trading’ refund

This cluster applies to a situation where the IP income derived by a Maltese company in Malta is classified as that of a trading nature - 35% of its net profit would be taxed. However, the non-resident shareholder would be entitled to claim back a 6/7ths refund of the 35% tax paid at the level of the distributing company. This would effectively result in a total tax liability of 5% in Malta.

Cluster 3: the 5/7ths – ‘passive’ refund

A Maltese holding company which receives royalties from IP that is deemed to be classified as passive, would similarly be taxed 35% on its net profit. When the Maltese holding company distributes a dividend, the non-Maltese resident shareholder will effectively be entitled to claim back 5/7ths of the 35% tax paid. This effectively reduces the tax paid in Malta to 10%.

Cluster 4 – double tax relief

There may be situations where the royalty fee received by the Maltese company has been subject to foreign tax. In such instances, the Maltese company may tax the royalty income at 35% without applying any tax relief. In these cases non-Maltese resident shareholders are entitled to a 6/7ths refund of the total tax paid in Malta, or they can opt to tax the royalty income at 35%. One may choose to deduct the tax withheld by the other jurisdictional tax authority and effectively pay the difference in Malta. However, in this scenario, one would then only be able to claim 2/3rds of the total tax paid in Malta.

Other considerations

Withholding tax on dividend payments: Dividend and royalty payments made by the Maltese company are not subject to withholding tax in Malta. Malta also caps the amount of withholding tax applied by countries with which Malta has a tax treaty. The capped percentage may not exceed 10% of the dividend and/or royalties being paid into the Maltese company.

Setting up your IP protection

The first step to establishing your IP protection in Malta is to talk to your tax or legal advisor. Our expert team works with advisors across the world, providing clarity on the local market. If Malta is suitable for your particular structure, we will assess the aggressiveness of the tax and apply a rigorous compliance check to ensure all legal obligations can be met.

We can then assist with the registration of the IP, Maltese company establishment and provide ongoing directorship, corporate secretarial, accounting and tax services.

Need more information? Contact us today.

Written by

Elian Mallia

General Manager, TMF Malta
Elian

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