US Tax Advice for US Expatriate Living and Working in Malta.
Tax Guide for US Expats Living and Working in Malta
Who Is Liable For Income Taxes in Malta
Persons who are both ordinarily resident and domiciled in Malta are subject to tax on their worldwide income and chargeable capital gains. Persons who are either not ordinarily resident in Malta or not domiciled in Malta are subject to tax only on Maltese-source income and on foreign income that is remitted to or received in Malta.
In practice, individuals generally are considered resident in Malta if they spend more than 183 days in a calendar year in Malta. Individuals are considered ordinarily resident if Malta is their habitual residence.
Under Act I of 2010, income derived by an owner, lessor or operator of an aircraft or aircraft engine engaged in the international transport of passengers or goods is deemed to arise outside Malta, regardless of the fact that the aircraft may have called at or operated from an airport in Malta.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable employment income consists of gains or profits from any employment or office, including directors’ fees and fringe benefits, such as the grant of the following:
- The private use of a motor vehicle
- The use of immovable and movable property
- Other benefits granted as a result of the nature of the employment or office
Article 56 (17) of the Income Tax Act (ITA) provides for favorable tax treatment of employment income derived from activities carried on outside Malta. At the taxpayer’s option, income arising from employment exercised outside Malta is taxable at 15%. The scheme is available to any individual. Specific conditions must be satisfied for the system to apply.
The beneficial tax treatment described above does not apply to income derived from services rendered on ships and aircraft owned by Maltese companies and to government services, excluding services on ships, aircraft or road vehicles owned, chartered or leased by Maltese companies and to services for the government of Malta.
Income taxed under Article 56 (17) of the ITA is deemed to constitute “the first part of that individual’s total income for that year” for computational purposes. Under this measure, if the individual derives income from other sources, the income is taxed at the progressive rates applicable to the portion of the income in excess of the income taxed at 15% (that is, any surplus income is not taxed at the progressive rates beginning at 0%; instead, it is taxed at the higher progressive rates applicable to the subsequent tax brackets).
Article 56 (21) of the ITA creates a beneficial tax system for persons who receive emoluments payable under a qualifying employment contract. This measure provides for a potentially favorable tax rate of 15%, which can be applied at the option of the taxpayer. The 15% rate may be used both with respect to work duties carried out in Malta and work duties performed outside Malta in connection with work duties in Malta. Persons who may benefit from these rules are highly qualified individuals who receive employment income of a minimum of €75,000 (exclusive of the annual value of any fringe benefits) from an eligible office.
The tax benefit consists in the right to elect to pay tax at a rate of 15% on income from a qualifying employment contract. Income from a qualifying contract exceeding the sum of €5 million is exempt from tax. The rate of 15% applies without the possibility to claim any relief, deduction, reduction, credit or set off.
To benefit from the tax system described above, an individual must meet all of the following conditions:
- He or she must derive income subject to tax under Article 4(1) (b) of the Income Tax Act, which are emoluments payable under a qualifying employment contract.
- He or she is protected as an employee under Maltese law and has the required adequate and specific competence, as proven to the satisfaction of the competent authority.
- He or she proves to the satisfaction of the competent authority that he or she possesses professional qualifications.
- He or she has not benefitted under Article 6 of the Income Tax Act, which provides for certain fringe benefit exemptions.
- He or she fully discloses for tax purposes and declares emoluments received with respect to income from a qualifying employment contract.
- He or she proves to the satisfaction of the competent authority the following:
— He or she performs activities of an eligible office (see below).
— He or she receives stable and regular resources that are sufficient to maintain himself or herself and the members of his or her family without recourse to the social assistance system in Malta.
— He or she resides in an accommodation that is regarded as normal for a comparable family in Malta and that meets the general health and safety standards in force in Malta.
— He or she possesses a valid travel document.
— He or she possesses sickness insurance with respect to all risks normally covered for Maltese nationals for himself or herself and the members of his or her family.
— He or she is not domiciled in Malta.
For the purposes of the above beneficial tax system, the following offices with companies licensed and/or recognized by the Malta Financial Services Authority are considered eligible offices:
- Chief Executive Officer, Chief Risk Officer, Chief Financial Officer, Chief Operations Officer and Chief Technology Officer
- Portfolio Manager, Chief Investment Officer, Senior Trader/Trader, Senior Analyst (including Structuring Professional), Actuarial Professional, Chief Underwriting Officer and Chief Insurance Technical Officer
- Head of Marketing and Head of Investor Relations
The benefit applies for a specific number of years from the date of first election and it may be clawed back retrospectively if the expatriate’s stay in Malta is not in the public interest.
Persons wishing to benefit from the scheme must file an application with the Malta Financial Services Authority.
Self-employment and business income. Taxable self-employment and business income is based on accounting profits, adjusted for tax purposes. Tax adjustments include the addition of such disallowable expenses as accounting depreciation, amortization of good will, provisions, donations, stamp duty expense and start-up expense.
Taxable self-employment and business income is aggregated with other income and taxed at the rates set forth in Rates.
Investment income. Malta operates a full imputation system under which dividends paid by a company resident in Malta carry a tax credit equal to the tax paid by the company on the profits out of which the dividends are paid. Shareholders are taxed on the gross dividend at the regular rates, but are entitled to deduct the tax credit attaching to the dividend against their total income tax liability. The full imputation system applies to both residents and nonresidents. If a dividend is paid to resident individuals out of the untaxed amount (the difference between tax and accounting profits), a 15% withholding tax is imposed. This withholding tax does not apply to nonresidents. Dividends paid out of profits exempt from tax are not taxable in the hands of the shareholders.
Resident individuals may choose to pay a 15% withholding tax on bank interest. This tax is treated as a final tax and need not be disclosed in the income tax return. Interest, royalties, premiums and discounts paid to nonresidents are exempt from tax in Malta unless they are effectively connected to a permanent establishment in Malta through which the nonresidents engage in a trade or business.
In general, rental income is taxed with other income at the rates set forth in Rates. A special withholding tax rate of 5% applies if an individual rents immovable property to the Housing Authority for a period of not less than 10 years. The 5% tax is applied to the gross rental income received. It is considered a final tax and is not available for credit or set-off. The tax is withheld by the Housing Authority from payments made and remitted to the Commissioner of Inland Revenue by the 14th day following the end of the month in which the rent is paid.
Bank interest, license fees and rents payable may be deducted if incurred in the production of rental income. An additional 20% maintenance allowance, calculated on the difference between rents receivable and rents and license fees payable, may be taken.
Each property is treated as a separate source of income. Losses from one property may not offset income from another.
Taxation of employer-provided stock options. The exercise by an employee of a share option is taxable as a fringe benefit. When an employee exercises the option to acquire shares in a company in which the employee is employed, the taxable value of the fringe benefit equals 42.851% of the excess, if any, of the market value of the shares on the date of the exercise of the option over the option price of such shares.
Capital gains. Capital gains derived from the transfer of the following capital assets are taxable:
- Immovable property
- Securities
- Business
- Goodwill
- Business permits
- Copyrights
- Patents
- Trademarks and trade names
- Beneficial interests in trusts
- A full or partial interest in a partnership
In certain cases, share dilutions and degroupings result in deemed transfers of securities in a company and are subject to tax. In addition, if a person acquires or increases a partnership share, a transfer of an interest in the partnership to that partner from the other partners is deemed to occur and accordingly is subject to tax.
Taxable capital gains are included with other income and taxed at the rates.
Capital losses may not offset trading profits; however, capital losses may be carried forward for offset against future capital gains. Trading losses may offset capital gains.
Individuals who are not ordinarily resident or not domiciled in Malta are exempt from tax on gains derived from the disposal of shares in a Maltese company that is not primarily engaged in holding real property situated in Malta.
In the course of a winding up or distribution of assets of a company, the transfer of property by a company to a shareholder who owns all of the share capital of the company, or to an individual related to the shareholder, is exempt from tax, provided certain conditions are satisfied.
Property transfers tax. In general, the transfer of immovable property in Malta is taxed at a rate of 12% on the higher of the consideration or market value of the immovable property at the date of the transfer. No deductions may reduce the tax base, except for agency fees subject to value-added tax (VAT). If the immovable property is transferred within a period of seven years from the date of its acquisition, the seller may choose to be taxed on either of the following: 12% of the transfer price or market value of the immovable property at the time of the transfer; or 35% of the difference between the transfer price and the acquisition cost (capital gains in terms of the regime discussed above).
For the purpose of computing capital gains, the acquisition cost of immovable property includes the following:
- The purchase price of the property at the time of acquisition
- Duty on documents paid on acquisition
- Notarial fees on acquisition
- Agency fees paid when the property was acquired
- Cost of any improvements
- An allowance for inflation calculated in accordance with the index of inflation
- A maintenance allowance of 0.4% per annum
- Any expenses that have increased the value of the property since its acquisition
- Selling expenses up to 5% of the sales price
Nonresidents may opt out of the 12% regime if they produce a statement signed by the tax authorities of the country of residence confirming that they are resident in that country and that any gains or profits derived in Malta are being taxed in their country of residence. In such circumstances, the tax on the capital gain derived from the sale of immovable property in Malta is calculated by reference to the difference between the consideration and the cost of the property. Tax is calculated at the nonresident rates.
Deductions
Deductions from employment income. The following deductions from employment income are expressly allowed:
- Individuals may deduct certain alimony payments including alimony payments ordered by foreign courts.
- Women who have not yet attained the statutory retirement age and who return to employment on or after 1 January 2005 after having been absent from any gainful occupation for at least five years immediately preceding the date of the income tax return (30 June) benefit from a tax credit of €1,630.56. This tax credit is set off against the tax on gains or profits from the employment and may be claimed for two consecutive years beginning in the year of assessment in which the employment begins.
- School fees paid to schools specified by the Minister of Finance and fees with respect to a registered private kindergarten are deductible to persons paying such fees on behalf of their children. The maximum amounts deductible are €1,600 for each child attending secondary school and €1,200 for each child attending primary school. Fees paid to one of the specified schools for a facilitator with respect to a child with special needs (handicapped child) may be deducted up to an amount of €9,320 if a board established by the Minister of Finance for this purpose determines that a facilitator is necessary.
- Individuals who prove to the satisfaction of the Commissioner of Inland Revenue that they have paid fees for childcare services for their children who were below the age of 12 to bonafide childcare centers may claim a deduction for such payments confirmed by official receipts, up to a maximum deduction of €935.
- Individuals who prove to the satisfaction of the Commissioner of Inland Revenue that in the year preceding a year of assessment they have paid fees on their own behalf or on behalf of family members with respect to a residence in a private home for the elderly may deduct such fees up to a maximum amount of €2,000. The proof must consist of information provided by the operator of the private home for the elderly.
- Individuals may claim a deduction for fees paid on behalf of their children younger than age 16 for attendance at sports activities approved by the Kunsill Malti ta’ l-Isport, up to a maximum deduction of €100 for each child.
- Individuals who prove to the satisfaction of the Commissioner of Inland Revenue that they have paid fees with respect to their studies at recognized tertiary education institutions, located in Malta or abroad, may claim a deduction against their income with respect to such fees in such manner and subject to such conditions as may be prescribed.
- Under the Donations (National Heritage) Rules, 2006, individuals may claim deductions for donations of not less than €2,329.37 to Heritage Organisations. The donations may be made in cash or in the form of any other asset, excluding immovable property, to the Superintendent of Cultural Heritage, Heritage Malta, Fondazzjoni Patrimonju Malti or a nongovernment cultural heritage organization. Deductions for such donations are subject to the following conditions:
— A signed certificate for such donation must be issued by one of the above organizations and attached to the donor’s income tax return for the relevant year.
— The donation must be made for the purpose of research, conservation or restoration, education or exhibition of the cultural heritage, and such purpose must be indicated in the certificate mentioned above.
— For a donation made to a nongovernmental cultural heritage organization, the organization must not be related to the donor.
- Individuals who prove to the satisfaction of the Commissioner of Inland Revenue that they have paid fees with respect to their studies at recognized tertiary education institutions, whether locally or abroad, may claim a deduction against their income for such fees in such manner and subject to such conditions as may be prescribed.
Business deductions. Self-employed individuals may deduct all expenses incurred wholly and exclusively in the production of income, including capital allowances (tax depreciation) at specified rates. In addition, a deduction of up to €931.75 per child may be claimed for payments by an employer to a licensed or registered childcare center with respect to childcare services rendered to children of employees.
Electrical vehicle deduction. If a qualifying person incurs qualifying expenditure on an electrical vehicle in the year preceding the year of assessment, a deduction equal to 125% of the cost incurred may be claimed as a deduction in such year of assessment. The total deduction claimed may not exceed €25,000 with respect to each electrical vehicle. If a deduction is claimed, no deduction with respect to wear and tear may be claimed for the same electrical vehicle.
Relief for losses. Individuals may offset any losses incurred in a trade, business, profession or vocation against other income. These losses may be carried forward for offset against future years’ income. Losses may not be carried back. Unabsorbed capital allowances may be carried forward indefinitely to offset income from the same source.
B. Estate and gift taxes
Malta does not impose estate or gift taxes. However, duty on documents is imposed on heirs upon inheritance of immovable property at a rate of 5% and on shares at a rate of 2%. The same rates of duty apply to transfers of real immovable property and shares, including transfers through gifts. Duty on documents at a special rate of 5% is imposed on the transfer of shares of a company if 75% or more of the company’s assets consist of immovable property or rights over immovable property.
C. Social security
Social security is provided by a system of social insurance and a system of social assistance regulated by the Social Security Act.
Contributions. All employed and self-employed persons must pay social security contributions. Employers make social security contributions at a rate of 10% of the basic wage paid to their employees, subject to a minimum amount of €15.35 and a maximum amount of €33.03 for persons born up to 31 December 1961 or €35.39 for persons born from 1 January 1962 onwards, per week per employee. Employees make a 10% contribution, subject to the same minimum. Employees aged 18 years and older earning less than €153.45 per week may elect to pay 10% of their weekly gross wage. However, if the employee makes such election, he or she is entitled to pro rata contributory benefits.
Employers deduct the social security contributions before paying the net salary to the employee. The minimum amount for persons under 18 years old is €6.62 per week. The employer must remit the amount due to the Commissioner of Inland Revenue by the end of the following month in which the wages or salaries are paid.
For self-employed persons, the amounts of social security contributions for 2011 are calculated in the following manner. If the self-employed person’s income during the calendar year immediately preceding the contribution year was less than €7,743, a weekly contribution of €22.34 applies. If the income in the preceding year exceeded €7,743, but did not exceed €9,203, the weekly contribution is €26.55, or 15% of the annual net earnings if the person is a part-time self-employed woman whose annual net earnings do not exceed €9,203. For persons born up to 31 December 1961, if the income in the preceding year exceeded €9,204, but did not exceed €17,175, an annual contribution rate of 15% of annual income applies. If the income in the preceding year exceeded €17,176, a weekly contribution of €49.54 applies.
For persons born from 1 January 1962 onwards, if the income in the preceding year exceeded €9,204, but did not exceed €18,400, an annual contribution rate of 15% of annual income applies. If the income in the preceding year exceeded €18,400, a weekly contribution of €53.08 applies. The above contributions are calculated weekly, but paid monthly.
Coverage.
Maltese citizens receive free services and financial aid benefits for unemployment, illness, work injury, disability, old age, early retirement (at 61 years of age), marriage, maternity, children, widowhood and medical care. All employees who pay a minimum amount of social security contributions are entitled to a basic pension on retirement.
Totalization agreements. To prevent double taxation and assure benefit coverage, Malta has entered into social security totalization agreements with Australia, Canada, Libya, the Netherlands and the United Kingdom.
As a member of the European Union (EU), Malta is governed by EU Regulations 883/04 and 987/09 regarding the social security exemption system.
Double tax relief and tax treaties
Most of Malta’s treaties are based on the Organization for Economic Cooperation and Development (OECD) model convention. Recent treaties with Qatar and the United Arab Emirates incorporate elements of the United Nations’ model. Malta’s double tax treaties eliminate double taxation through the credit method.
Malta has entered into double tax treaties with the following countries.
Albania
Iceland
Poland
Australia
India
Portugal
Austria
Ireland
Qatar
Barbados
Isle of Man
Romania
Belgium
Italy
San Marino
Bulgaria
Jordan
Serbia
Canada
Korea (South)
Singapore
China
Kuwait
Slovak Republic
Croatia
Latvia
Slovenia
Cyprus
Lebanon
South Africa
Czech Republic
Libya
Spain
Denmark
Lithuania
Sweden
Egypt
Luxembourg
Switzerland*
Estonia
Malaysia
Syria
Finland
Montenegro
Tunisia
France
Morocco
United Arab Emirates
Georgia
Netherlands
Germany
Norway
United Kingdom
Greece
Pakistan
United States
Hungary
* This treaty is limited to ships and aircraft.
Malta has signed treaties with Bahrain, Belgium, Switzerland and Uruguay, but these treaties have not yet entered into force. Other available relief includes commonwealth income tax relief, unilateral relief and a flat-rate foreign tax credit.
To learn more about the history, culture, economy and other information about Malta
We have been preparing US income tax returns for US Citizens and permanent residents living in Malta for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Malta and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Malta.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email