Optimizing Intellectual Property & Royalties: Key Income Tax considerations for IP Holders in Malta

Exemption on royalty income derived from qualifying IP
Royalty income may be exempt from corporate tax in Malta if such payments are derived from qualifying IP. Notably, this exemption applies even if the IP was developed and registered outside Malta, allowing for flexibility to IP holders with international IP assets.

The tax refund mechanism

In instances where, the aforementioned exemption does not apply, Malta companies deriving royalty income are subject to the standard corporate tax rate of 35%. Nevertheless, a non-resident shareholder of a Malta company holding IP would be entitled for a corporate tax refund on the taxes paid.

The type of tax refund will predominantly depend on the nature of royalty income received by the Malta company. Typically, royalty income falls under one of the following categories:

• Active royalty income
• Passive royalty income

If the Malta company is actively trading in IP, then the royalty income received from holding such IP is deemed to be active income, meaning that the non-resident shareholder would be entitled to a 6/7ths tax refund on the 35% corporate tax charge, resulting in an effective tax rate of 5%.

The non-resident shareholder would also be entitled to a 6/7ths tax refund if the royalty income is deemed to be passive in nature but has suffered at least foreign tax of 5%. On the other hand, if the passive royalty income has not suffered at least 5% of foreign taxes, then the non-resident shareholder would be entitled to a 5/7ths tax refund on the 35% corporate tax charge resulting in an effective tax rate of 10%. 

Withholding tax on royalty payments

Malta does not impose any withholding taxes on outbound royalty payments. Furthermore, Malta has an extensive double tax treaty network (over 80 double tax treaties in place) which is particularly useful in instances where a Malta based company holding IP, is receiving inbound royalty payments from other jurisdictions since the Malta double tax treaty network caps the withholding tax rate to a maximum of 10% from the country of source and allows for double taxation relief.

Double Taxation Relief

In instances where the inbound royalty payment received by a Maltese company was subject to foreign withholding taxes, the Malta company also has the option to opt for the double tax relief mechanism which would deduct the foreign taxes withheld by the other jurisdiction from the Malta tax charge. It is pertinent to note that proper documentation and evidence needs to be in place to utilise the double tax relief mechanism. In such scenario, the non-resident shareholder would still have the option to claim a corporate tax refund, however the tax refund would amount to 2/3rds of the Malta tax paid.

Should you need more information, do not hesitate to contact us on info@zencopartners.com