• Releif from double taxation

The new regime extends domestic relief from double taxation and introduces further two systems of double tax relief in Malta: 

• unilateral relief, and
• a flat-rate foreign tax credit.

Malta now allows relief from double taxation on a unilateral basis where overseas tax is suffered on income received from a country with which Malta does not have a treaty and relief from Commonwealth income tax is riot applicable. 

The overseas tax suffered may be allowed as a credit against the tax chargeable in Malta on the gross amount.  The credit shall not exceed the total tax liability in Malta on the receipt. 

Unilateral relief for underlying tax suffered is now available under these provisions where the taxpayer is a Maltese company that holds more than 10% of the voting power of the overseas company paying the dividend. 

When claiming unilateral relief, the recipient of the income must prove the following to the satisfaction of the Commissioner: 

• that the income arose from overseas;
• that the income suffered overseas tax; and
• the amount of that tax.

The flat-rate foreign tax credit is available to a Maltese company which receives income or capital gains from overseas allocated to its Foreign Income Account (see Section 2.2 above).  A certificate from the auditor stating that the income arose from overseas is sufficient for this purpose.  The credit is only given where none of the other three regimes for relief from double taxation is available in Malta. 

The flat-rate foreign tax credit is calculated at 25% of the amount of the overseas income or gain received by the company, before deductions.  The income plus the credit (less deductible expenses) is subject to full Maltese income tax with relief for the deemed credit.  The mechanics of the relief are demonstrated in tile following examples: 

Example 1 (no expenses) 
 

	LM
Net foreign income	800
Flat-rate foreign tax credit  25%	200
Gross Income	1,000
Maltese tax at 35%	350
Less flat-rate foreign tax credit	[200]
Malta tax payable	150
Rate of tax on gross income	15.00%
Effective rate of tax on net income	18.75%

 Example 2 (with Expenses)  

	Lm
Net foreign income (before deductions)	800
Flat-rate foreign tax-credit (25%)	200
Gross income	1,000
Gross income	1,000
Deductable expenses	[100]
	900
Maltese Tax at 35%	315
Less flat-rate forein tax credit	[200]
Malta tax payable	115
Rate of tax on gross income	11.50%
Rate of tax on net income after expenses	16.50%

Interaction of the four reliefs  

The taxpayer has no option as to which relief of double taxation he is to benefit from.  On any claim for relief from double taxation, the Inland Revenue is responsible for determining which, if any, system of relief is applicable. 

The four systems will interact according to the provisions of the Income Tax Act as illustrated in the flow chart on the last page of this paper.