Malta: Intellectual Property companies

Royalties receivable in respect of qualifying patents: EXEMPT

Royalties and similar income (including any amounts paid for the grant of a licence to exercise rights) received in respect of licensing of “qualifying” patents, whether registered in Malta or elsewhere, are exempt from tax in Malta as from 1 January 2010.  The exemption is subject to a number of conditions being satisfied, these being:

1. The person in Malta, must own the patent;
2. A patent is qualifying where it relates to an invention that is patentable under Maltese and/or EU law or is the result of fundamental research, industrial research or experimental development wherever the patent is registered and wherever the research and development relating to the patent was carried out;
3. An application has been submitted to the Malta Authority, for a determination that the patent is qualifying under the applicable rules;
4. The licensee/s is/are using the patent rights in a productive economic activity, such as but not limited to a manufacturing activity, software development and data processing;
5. Where the patent owner and licensee are related, the royalty or license fees payable are to be established on an arm’s length basis;

Royalties receivable in respect of non-qualifying patents: 0% to 10%

Royalties received in respect of non-qualifying (non patented) inventions are fully taxable in Malta and where received by a Malta company, are subject to the standard corporate tax rate of 35%, subject to tax refunds which the shareholders may claim upon the distribution of dividends.  Where the number of licensees are at least 6, the effective tax rate is reduced to 5%, which increases to 10% where the number of licensees is less than 6. This rate falls to 0% where the Malta resident entity is not incorporated under the laws of Malta but is resident for tax purposes in Malta (the so-called non-domiciled company) and the income is not physically received in Malta.

Refunds

Maltese companies are taxed at a flat rate of 35% allowing for deductibility of expenses incurred in the production of the income, including interest on debt financing, and allowing unutilized losses to be carried forward unlimitedly  to future years. However, under Malta’s tax system, shareholders, irrespective of their residence and upon a distribution of profits, are entitled to claim a refund of tax paid at the corporate level resulting in an effective rate of 5% in case the income is deemed to be active in nature (with the exception of profits derived, directly or indirectly, from immovable property situated in Malta or income which is subject to final withholding tax)

Advisory, consultancy and management fees are deemed to be active in nature and as a result the profits of these licenced entities are subject to an effective tax rate of 5%.

In case the dividend is paid out of profits consisting of passive interest or royalty income which is not derived, directly or indirectly, from a trade or business, where such interest or royalties have suffered foreign tax at a rate which is less than 5%, the effective tax rate will be 10%.  The refund is further reduced to 2/3 of the Malta tax paid on the profits from which the relevant dividend was distributed if such profits were allocated to the distributing company’s foreign income account and the company claimed double taxation relief in respect thereof.

The driving factors determining the amount of refund include the nature of the underlying income or activity and the extent form of double taxation relief available to the company resident in Malta.

It should be highlighted that it is the payment of the dividend of the company to the shareholder that triggers off the right of the shareholder to claim a refund of the Malta tax on the profits out of which the dividend is distributed. The refund mechanism is applied across the board, except when the income is derived from immovable property situated in Malta. Refunds are generally paid within fourteen to twenty-one working days from when they become due.

Contact Rudolph Psaila to find out more.