Taxation on Intellectual Property
Malta is an ideal jurisdiction in which to locate intellectual property. It offers a number of incentives, fiscal and non, which make Malta an attractive IP jurisdiction.
The tax treatment of royalties and similar income derived from intellectual property depends on whether such income would be considered to be passive or active in nature. The effective tax rate of such income is from 0 – 10% depending on a number of criteria as may be seen below.
Exemption on royalties and similar income from patents
Malta offers a full tax exemption on royalties and other similar income derived from patents in respect of inventions. The income must be derived from a ‘qualifying patent’ and the exemption applies whether such income would be considered to be active or passive in nature.
A ‘qualifying patent’ is a patent which is registered in Malta or in any other country in relation to which research, planning, developing or similar activating leading to an invention was carried out in Malta or in any other country.
Tax on Royalty Income derived from Trading Activities
Any royalty income which does not fall within the above mentioned exemption will be taxed in the hands of a Maltese company at the corporate tax rate of 35%.
The distribution of such profits to a shareholder triggers a tax refund in the hands of the shareholder of 6/7ths of the tax paid by the company, which reduces the effective tax rate to 5%.
In order for this 6/7ths tax refund to apply, the company must be receiving royalty income which is not considered to be passive in nature. Such income would be considered to be passive if they are not derived from a trade or business where such royalties have suffered less than 5% foreign tax.
Tax on Passive Royalty Income
Passive royalty income would also be taxed at the corporate rate of 35%, and upon a dividend distribution to its shareholders, they may be able to claim a refund of 5/7ths of the tax paid by the Maltese company.
Such a refund would result in an effective tax rate of 10%.
The effective tax rate in this case may be reduced to 6.25% by application of one of Malta’s domestic tax relief provisions, the Flat-Rate Foreign Tax Credit, more commonly known as FRFTC.
By virtue of the participation exemption any income or gains derived by a company from its subsidiaries will be fully exempt from tax, subject to the satisfaction of certain conditions.
Malta does not impose a withholding tax on outbound royalty payments and together with the lack of specific transfer pricing, CFC and thin-capitalisation rules continue to enhance Malta’s position as an IP jurisdiction.
Malta also provides for a step-up in the base cost of the intellectual property from its book value to its market value in situations of redomiciliation of foreign companies to Malta, transfer of tax residence of a company to Malta and upon a cross-border merger.
The above benefits are also applicable to companies incorporated outside Malta that transfer their tax residence to Malta. Such companies would be considered to be resident but not domiciled for tax purposes and taxed on the following:
- Income and capital gains arising in Malta;
- Income arising outside Malta which is received in Malta.
Therefore, any foreign sourced income which is not received in Malta, to the companies mentioned above, would not be taxed.
For further information contact
Nicky Gouder, Tax & Private Clients partner of ARQ Group, completed his Association of Char... More