This booklet has been prepared for the use of clients, partners and staff of HLB International.  This booklet is intended to provide general information about Malta and its regulatory system to those contemplating doing business in Malta.  It does not give comprehensive and detailed information on which investment decisions can be based.  Because Maltese laws and regulations are complex and constantly changing, it is of paramount importance that in specific cases all matters of detail are reviewed and, where appropriate, professional advice is sought.  HLB Falzon & Falzon cannot be held liable for any action undertaken on the basis of information in this booklet,  listed on this site 

The material contained in this booklet was put together in October 2002 and, unless otherwise indicated, based on information available at that time. 

© HLB Falzon & Falzon is a member of HLB International l A worldwide organization of accounting firms and business advisers.

GENERAL INFORMATION

Location  

The Island of Malta includes the sister island of Gozo.  It is situated in the centre of the Mediterranean Sea, 80.5 kilometres south of Sicily and 289.7 kilometres from the North Africa coast.  The island of Gozo is only a few kilometres northwest of Malta.  Malta will join the European Union with effect from 1 May 2004.

Size and Population

The total area is 316 sq. km., of which Malta is the larger island, occupying 246 sq. km.  A regular ferry boat (half an hour’s trip) and helicopter services exist between the two islands.  The population of Malta is around 381,600.

Climate

Malta has a typical Mediterranean climate, dry warm summers and mild winters.  The maximum temperature is about 30.6C   (87 F) and the minimum 9.4 C (49 F).  The average annual rainfall is 521 mm.

History

The first settlers of Malta were the Phoenicians, followed by the Carthaginians and the Romans.  In A.D. 60 St. Paul was shipwrecked in the Maltese Islands and converted the islanders to Christianity.  The Arabs came to Malta in 1870 and with the arrival of Count Roger of Normandy in 1090, it became part of Sicily until 1530, when the Knights of Jerusalem came to Malta.  The knights were pushed out by Napoleon in 1798, and in 1800 Malta became a British Crown Colony.  In 1964 it became an independent sovereign state and in 1974, declared itself a Republic but remained within the Commonwealth.  Malta boasts of numerous historic buildings and temples some of which date back to Megalithic times.

Language

The official language is Maltese, but English is used in official correspondence and is spoken by most Maltese.  Laws are published in Maltese and English, but the official version is Maltese.  There are daily newspapers in Maltese and English.  Being so close to Italy, Italian is also widely spoken.

Education

School attendance is compulsory between the age of 5 to 16 years.  The majority of children attend Government and Catholic Schools which are free of charge.  There are also a number of Private Schools.

Tertiary education is provided by the University of Malta which runs courses in business management, accountancy, banking and finance, information technology, engineering, architecture, medicine, dental surgery, pharmacy, nursing, science, arts, diplomacy and law.  Post graduate courses are also offered by the University of Malta.

Currency

The basic unit currency is the Maltese Lira (Lm).  The exchange rate of the Maltese Lira is established by the Central Bank of Malta on the basis of a basket of currencies comprising the Euro, Sterling and US dollar weighted to Malta’s trade relationships.

Government

Malta is a Republic within the Commonwealth.  The president is the Head of the State and is elected by the Parliament.  The responsibility for enacting laws lies with Parliament.  Parliament consists of a single house i.e. the House of Representatives.  Its members are elected every five years by General Elections on a proportional representation system.  Every citizen over 18 years is eligible to vote.  The party with the highest first preference number of votes will hold a majority of seats in the House of Representatives, headed by the Prime Minister, leader of the winning party.

Economy

The Maltese economy is based on various sectors.  The three main sectors are the tourist industry, financial services and manufacturing activities.  Software developers are also establishing themselves in Malta.

Telecommunications and Transport

An extensive national and international public telecommunications service is available and includes telegrams, telex, telephones, telefax, electronic communications, maritime telegrams, etc.

Internal transport is provided by regular and inexpensive public bus services.  Metered taxis and a full range of car rentals are also available.

Malta is efficiently served by sea, air and travel communications.  Sea Malta Company Limited, provides regular containerised services both for full container loads and groupage  cargoes, from and to the UK, Netherlands, Belgium, France, Italy and Libya and regular RoRo services to Genoa, Tunisia, Marseilles, Reggio Calabria and Catania.  It also provides container feeder services to all Western Mediterranean ports, connecting the main Transshipment Hub Ports of Marsaxlokk in Malta, Gioia Tauro, Voltri Genoa, La Spezia and Salerno.  Through its connections with other major shipping lines, Sea Malta provides regular containerised services to the Arabian Gulf and the Far East.

Air Malta Company Limited, the national airline, operates scheduled and charter services.  Scheduled services of varying frequencies link Malta with Amsterdam, Athens, Bahrain, Barcelona, Berlin, Birmingham, Brussels, Budapest, Cairo, Casablanca, Catania, Copenhagen, Damascus, Dubai, Dublin, Dusseldorf, Frankfurt, Genoa, Glasgow, Hamburg, Istanbul, Larnaca, Lisbon, London Gatwick, London Heathrow, Lyons, Madrid, Manchester, Marseilles, Milan, Monastir, Munich, New York, Oslo, Palermo, Paris, Rome, Stockholm, Tel Aviv, Tunis, Vienna and Zurich.  Foreign airline operators also provide scheduled services.

TYPES OF BUSINESS ORGANISATIONS

Establishing a business

Businesses in Malta are normally set up in the following forms:-

(i)  Limited liability companies

(ii) Partnerships

(iii) Sole traders

Limited Liability Companies

Limited liability companies may be either private companies, which do not invite the public to subscribe for shares, or public companies which may invite the public to subscribe and may apply for listing on the Malta Stock Exchange.

The  minimum  share  capital  required  to  set  up  a   private company is Lm500, 20% paid up and subscribed to by at least two persons except in the case of single member companies, with restricted objects.  In the case of a public company the minimum share capital requirements is Lm20,000, 25% paid up and subscribed for by at least two persons.

Company directors are responsible for the preparation of the annual financial statements.  The financial statements must be drawn up in accordance with the provisions of the Companies Act.  Moreover, the financial statements must comply with the requirements of International Accounting Standards.  The financial statements of a limited liability company must be audited by an independent auditor.  Amongst other things the auditor must state whether a true and fair view is given of the state of affairs as at the end of the financial year, the profit or loss for the year and the cash flows for the financial year.  Companies are required to submit a copy of the annual audited financial statements to the Registrar of Companies for publication .  Certain private exempt companies are only required to submit abridged accounts to the Registrar of Companies.

Partnerships

Where two or more persons carry on business in common with a view to a profit they are said to be in partnership.  In forming this kind of relationship the following must be observed:

(1) Individual partners assume unlimited liability for debts and obligations incurred in the name of the partnership.  It is possible to have some of the partners in a partnership with limited liability;

(2) The accounts of a partnership are not required to be audited;

(3) Partnerships may be formed between limited liability companies as well as with individuals.

Sole traders

There are no legal requirements for any individual establishing a business on his own, except that he is registered with the tax authorities and keep proper trade books.  The account  of  a  sole  trade  need  not  be  audited,  but  must  be submitted to the tax authorities

Sources of finance

The major source of finance in Malta is provided by the commercial banks.  The commercial banks offer all kinds of commercial banking services.  Commercial banking services are offered by the following banks:

Bank of Valletta p.l.c.

HSBC Bank (Malta) p.l.c.

Lombard Bank (Malta) p.l.c.

A.P.S. Bank Limited

Other source of finance are loan stock which may be listed on the Malta Stock Exchange and finance leasing.  A number of offshore banks have established themselves in Malta.

Exchange Controls

In the last years Government has taken several measures to dismantle exchange controls.  Foreign companies setting up business in Malta can freely transfer funds including dividends outside Malta.

Expatriate Staff

The Maltese authorities grant work permits to foreigners that apply for such a permit if no local expertise are available in the Island in that particular field.

When a foreign company sets up a subsidiary company in Malta, a foreign managing director of general manager is normally granted a work-permit.

Foreign branches

It is possible for foreign companies to set up a branch in Malta.  Such an overseas company must register the branch with the Registrar of Companies.  The foreign company  must on an annual basis submit a copy of its audited accounts to the Registrar of Companies.  The profits of the branch are subject to tax at the rate of 35%.

Company formation costs

The only fees payable to the local authorities on the registration of a company are the registration fees to the Registrar of Companies.  The fees payable depend on the authorised share capital of the company.  The maximum fee payable to the Registrar amounts to Lm573 while the legal / professional cost to register a company are in the region of Lm500.

LABOUR AND SOCIAL SECURITY 

Malta’s major asset is manpower.  The majority of Maltese speak and understand English. Government has invested heavily in the educational system.  A number of trade schools assure a steady outflow of skilled workers.  The university provides courses in engineering, architecture, business management, accountancy, banking, law, science, information technology and in various other fields.

Industrial relations

Malta enjoys industrial stability.  Disputes are normally dealt with by friendly discussions.  Resort to strikes or lock-out is very rare.

Wage regulation

A national minimum wage has been established by law.  The national minimum wage is revised every year.

All employees are entitled to a half yearly bonus of Lm58-00 each, paid in June and December and Lm2 weekly allowance payable in March and September.

Other conditions of employment normally include:

Sick leave varies from sector to sector.  The minimum sick leave entitlement is of 12 days with full pay and 12 days with half pay per annum.

Social security system

The social security system is provided by a system of social insurance and a system of social assistance regulated by the Social Security Act.  Maltese citizens receive free services and financial aid for unemployment, illness, work injury, disability, old age, retirement (at age of 61), marriage, maternity, children, blindness, widowhood and medical care.

Under the Social Security Act, employers, employees and self-employed persons pay Social Security Contributions.  Employees contribute 10% of their salary, and employers contribute another 10% of employees’ salaries.  Employers withhold employees’ contribution and pay such amounts to the government monthly.  Self-employed persons pay their contributions by three annual installments in April, August and December.

To prevent double payment of social security and ensure benefit coverage, Malta has concluded social security totalisation agreements with Australia, Canada, Libya and the United Kingdom.  Under such agreements, social security contributions are only paid in one country by individuals of member states.

TAXATION OF INDIVIDUALS

Persons who are ordinarily resident and domiciled in Malta are subject to income tax on their worldwide income and on certain capital gains.  Persons who are either not ordinarily resident in Malta or not domiciled in Malta are subject to tax in Malta on their foreign income remitted to Malta and on any income arising in Malta, other than income exempt for non-residents.

Business profits

Taxable income is equivalent to the profit as per financial statements subject to certain adjustments.  These adjustments include the addition of disallowable expenses such as accounting depreciation and the subtraction of tax depreciation.  Expenses incurred wholly  and exclusively in the production of the income are tax deductible.

Any losses incurred by a person in a trade or business, may be set off against his other income or carried forward and set off against future income.  Unabsorbed tax depreciation may be carried forward indefinitely to off-set income from the same sources.

Employment income

Taxable employment income consist of gains or profits from any employment or office.  Fringe benefits are considered to form part of taxable income.  Directors’ remuneration is taxable in the same manner as employment income.

INVESTMENT INCOME

Dividends

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 on the profits being distributed.  Recipient shareholders are taxed on the gross dividend, however, they are entitled to deduct the tax paid by the company on the profits distributed.  A 15% tax is withheld on the payment of a dividend by a resident company out of untaxed profits to resident individuals. Malta’s full imputation system applies to residents and non-residents alike.  Dividends paid to non-residents are not subject to Malta tax, regardless of whether they are paid out of taxed or untaxed profits.

Interest and royalties

Resident individuals may opt to pay a 15% withholding tax on interest received from banks and certain other institutions.  Interest and royalties paid to non-residents are exempt from tax in Malta if they are not effectively connected to a permanent establishment in Malta through which the non-residents engage in a trade or business.

Income Derived from Immovable Property

Rents received from furnished flats and similar accommodation on a short-let basis is considered to be income derived from business.  Rents received from long-term lets is considered to be investment income and only the following deductions are allowable against such income:-

(1) any rent, ground rent or similar burden payable;

(2) license fee paid for the purposes of the Guest Houses and Holiday Furnished Premises Act;

(3)   the amount of interest for sums borrowed to acquire the property;

(4) a 20% deduction of the rental income received net of expenditure referred to in paragraph (1) or (2) above.  This deduction is not allowable in respect of ground rents receivable.

Capital gains

Capital gains are subject to tax if they are realized from a transfer made on or after 25 November 1992 on any of the following assets:-

(1)  immovable property;

(2)   company shares which do not yield a fixed rate of return;

(3)   goodwill of a business;

(4)  copyrights, patents, trademark and tradenames;

(5)  usufruct or any rights over assets listed above.

Gains arising from the following transfers are not subject to tax:-

(1) alienation of immovable property which has been the transferor’s only or main residence for at least 3 years;

(2) the transfer of inherited immovable property;

(3) the transfer of shares in listed companies on the Malta Stock Exchange;

(4) donations to close relatives or to philanthropic  institutions;

(5) transfer covered by exemptions from income tax.

Tax rates

The income tax rates and bands are as follows:-

                        Single Persons

Income                                                     Rates

up to Lm3,100                                                            nil

Lm3,101 to Lm4,100                                                15%

Lm4,101 to Lm5,000                                                20%

Lm5,001 to Lm6,000                                                25%

Lm6,001 to Lm6,750                                                30%

Rest                                                                        35%

                                  Married Persons

Income                                                        Rates

up to Lm4,300                                                          nil

Lm4,301 to Lm6,000                                                15%

Lm6,001 to Lm7,250                                                20%

Lm7,251 to Lm8,500                                                25%

Lm8,501 to Lm10,000                                              30%

Rest                                                                       35%

Part-Time Work

Employees, pensioners and students carrying on part-time work are subject to a withholding tax at 15%.  This rate is also applicable to individuals who carry out part-time work as self employed.  The 15% rate of tax is applicable up to a maximum income of Lm3,000.

Assessments and Compliance

The Commissioner of Inland Revenue is responsible for the assessment and collection of income tax.  The income tax year is the calendar year ending 31 December.  Tax is charged in the ‘year of assessment’ on the income of the preceding year ending 31 December.  Provisional tax is payable during the current year in three installments during the year in which the income is earned.  With regard to individuals in receipt of Employment income, the tax liability is paid through the final settlement system.  This system consists of  a monthly deducting from the gross emoluments and paid on the employee’s behalf by the employer.

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TAXATION OF COMPANIES

In Malta there is no separate system of corporation tax; a company is subject to income tax at 35%.  Malta operates a full imputation system.  Under the full imputation system, shareholders receive a credit for tax paid by the company on the profits distributed to them.  The credit given may be utilised by the recipient of such a distribution to offset his income tax liability.

The tax system distinguishes between taxed income and untaxed income.  Taxed income is further segregated between foreign source income and Maltese source income.  Foreign source income is allocated to the foreign income account while Maltese source income is allocated to the Maltese taxed account.

Foreign sourced income includes interest, royalties, dividends, profits derived from a permanent establishment situated outside Malta and gains or profits derived from assets situated outside Malta (including capital gains).  Dividends paid by a Maltese company to another local company from foreign source income stands to be allocated to the foreign income accounts.

Malta source income includes income arising in Malta and subject to Malta tax and income which is exempt from Malta tax both at company level and at shareholder level.

Person in receipt of dividends paid out of the Maltese taxed account do not suffer any further tax since the highest rate of tax in Malta is 35%, same as the company rate of tax.  Dividends paid out of the past profits may be subject to a top up withholding tax equal to the difference between the past lower tax rate and the current tax rate of 35%.

Dividends paid out of untaxed income to Maltese individuals and bodies of persons, not being companies, suffer a final withholding tax of 15% which is withheld by the company and paid to the Inland Revenue Department.

Taxable Companies

Companies which are resident and domiciled in Malta are subject to tax in Malta on their worldwide income.  If a company is incorporated in Malta or its business is managed and controlled from Malta it is considered as being resident in Malta for income tax purposes.

Companies that are not resident or not domiciled in Malta are subject to income tax on their Malta source income and on foreign income remitted to Malta.

Determination of Taxable Income

Taxable income is equivalent to the profits declared in the company’s financial statements subject to certain adjustments.  All expenses incurred wholly and exclusively in the production of the income are allowable for tax purposes.

Depreciation

An initial deduction of 10% is allowed for industrial premises (but not for land on which they are erected).

The annual wear and tear allowance for plant and machinery vary between 5% and 25% depending on the type of machinery. Wear and tear allowance are calculated  on the straight line method. As regards to industrial buildings and structure, the annual wear and tear allowance is 2% on cost.

Valuation of stock

In practice, stock-in-trade is valued in accordance with generally accepted accounting principles

Provisions

As a general rule provisions are not tax deductible.  On the other hand unrealised gains are not subject to income tax.

Capital gains

Income tax is imposed on capital gains derived from the transfer of assets listed in paragraph 4.4.

Gains arising from the following transfers are not subject to tax:

1)     transfer of taxable assets between companies forming part of the same group of companies;

2)     transfers of shares by non-residents if not engaged in holding real property in Malta

3)     the transfer of shares in listed companies on the Malta Stock Exchange;

Role-over relief on the transfer and replacement of business assets is available.

Relief of losses

Tax losses incurred in trade or business can be set off against any other income or carried forward and set off against any future income.  Losses due to tax depreciation, however may only be carried forward and set off against profits arising from same source.  No carry-back of losses is allowed.  Losses made outside Malta are allowed as a deduction if the loss, had it been a profit, would have been taxable in Malta.

Capital losses may only be set off against capital gains of the current year and future years.

Group Relief

A company that is part of a group of companies for tax purposes may surrender losses to another member of the group.  Two companies are deemed to be members of a group if they are resident in Malta and not resident in any other country for tax purposes, and if one of the companies is a 51% subsidiary of the other or both are 51% subsidiaries of a thir