Double tax relief

There are five types of relief from double taxation, namely:

• Treaty relief
• Unilateral relief
• Relief in respect of Commonwealth income tax
• Flat-rate foreign tax credit
• Double Tax Agreements

Malta has double tax agreements with more than thirty-eight countries including:

Albania, Australia, Austria, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Hungary, India, Italy, Korea, Latvia, Lebanon, Libya, Luxembourg, Malaysia, Netherlands, Norway, Pakistan, Poland, Portugal, Romania, Slovakia, South Africa, Sweden, Switzerland (limited to profits derived from operation of ships or aircraft in international traffic), Syria, Tunisia, United Kingdom and USA (limited to profits derived from operation of ships or aircraft in international traffic).

Treaties with Barbados, Estonia, Lithuania, Morocco and Russia have been signed but not ratified. Up to the time of writing, double tax treaties with Iceland, Jordan,Singapore, Slovenia, Thailand, Turkey, and Ukraine are being negotiated.

Unilateral Relief
Unilateral Relief is available when a person or company receives income from a country not covered under a double taxation agreement or relief of Commonwealth income tax. Relief is allowed as a credit of the foreign tax against the income tax chargeable in Malta. The credit is limited to the tax chargeable in Malta on the same income.

Unilateral relief may be claimed by a Maltese resident company in receipt of foreign dividends for foreign tax charged directly on the distribution or charged by deduction.

Flat-Rate Foreign Tax Credit
Flat-rate foreign tax credit may only be availed of by Maltese resident companies. It applies to income or capital gains earned from overseas and allocated to the foreign income account. Companies precluded from operating the foreign income account, such as international trading companies and banks failing the 95% deposit test, may not make use of flat-rate foreign tax credit.

The credit is calculated at 25% of the net overseas income and capital gains received by the company, before deductions but after taking into account any foreign tax. The net overseas income plus the tax credit less any deductible expenses is subject to Malta income tax with relief given in respect of the deemed tax credit. Flat-rate foreign tax is limited to 85% of Malta tax on foreign income.

Interaction of the Reliefs
There is no election or option as to which type of relief from double taxation applies. The four reliefs interact according to the provisions of the Income Tax Act and to the extent of information the claimant submits. Unilateral relief applies if the person making the claim may not make use of double taxation relief and relief in respect of Commonwealth income tax; flat-rate foreign tax credit can only be applied when the other three reliefs are not available to the company making the claim.

How can Grant Thornton help?
We have a team of experts who have years of experience and skilled technical knowledge in this field. Double taxation is an important aspect of tax-planning and we understand that you want to ensure that the optimum tax treatment is applied to the results of your hard work. Grant Thornton will advise you so that there are no unforeseen negative tax consequences of cross-border transactions. Contact us about Double Tax Relief