In the evolving landscape of international taxation, Malta remains a cornerstone for businesses seeking a robust, EU-compliant fiscal framework. However, a common point of confusion for many international entrepreneurs is the classification of income as Active or Passive. Under Maltese law, this distinction is not merely academic—it is the deciding factor between an effective tax rate of 5% or 10%.
The Core Mechanism: Full Imputation and Refunds
Malta operates a “Full Imputation System.” While the statutory corporate tax rate is 35%, shareholders are entitled to a tax refund upon dividend distribution. The size of this refund depends on the nature of the income:
- Trading (Active) Income: Shareholders are generally entitled to a 6/7ths refund, resulting in an effective tax rate of 5%.
- Passive Interest and Royalties: Shareholders are entitled to a 5/8ths refund, leading to an effective tax rate of 10%.
Defining “Passive” Income: The Default Position
Income from interest or royalties is considered passive if it is not derived, directly or indirectly, from a trade or business. If a Maltese company simply holds intellectual property or an intercompany loan without any operational involvement, the income is classified as passive. This is often the case for “letterbox” companies or simple holding structures that lack local infrastructure.
The Shift to “Active”: The Power of Substance
For interest or royalties to qualify as active trading income—and thus benefit from the 5% rate—the company must demonstrate Economic Substance. This means the income must be the result of a functional business activity carried out in Malta.
Key indicators of active status include:
- Risk Management: Actively evaluating credit risks (for loans) or managing the commercialization of IP.
- Local Expertise: Having qualified personnel in Malta who make strategic decisions, rather than just performing administrative tasks.
- Physical Presence: A real office and functional operational costs that reflect a genuine business trade.
The 2024 Regulatory Landscape: Transfer Pricing & Compliance
It is crucial to note that since 2024, Malta has implemented Transfer Pricing rules. Any transactions between related parties—such as intercompany loans or licensing agreements—must reflect market conditions (the “Arm’s Length Principle”). Furthermore, under the EU’s Anti-Tax Avoidance Directives (ATAD), companies lacking substance risk being disregarded by foreign tax authorities, leading to potential double taxation or loss of treaty benefits.
Strategic Conclusion
Choosing Malta as a hub for financing or IP management requires a proactive approach. The era of “passive holding” is being replaced by a requirement for operational reality. If your business model involves active management, Malta provides one of the most competitive and stable environments in the Eurozone.