Malta has established a wide network of double taxation treaties to facilitate international trade and investment while preventing a consequence of double taxation. These treaties which are based on the OECD Model Tax Convention, aim to allocate taxing rights between Malta and the treaty partner, thereby providing clarity on tax obligations for cross-border transactions and income.

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Under these treaties, Maltese residents can claim treaty relief to avoid or mitigate double taxation. Treaty relief typically involves either an exemption method or a credit method. In the exemption method, the income earned in the foreign country may be exempted from Maltese tax, thus avoiding double taxation. The credit method, on the other hand, allows Maltese residents to offset the foreign tax paid against the Maltese tax payable on the same income. This system ensures that taxpayers are not doubly burdened by taxes in both jurisdictions. There are certain requirements for a Malta resident company to claim treaty relief including documentation and certification to substantiate the foreign tax paid and the entitlement to relief under the treaty.

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Malta also provides unilateral relief to further mitigate the effects of double taxation. This relief is available when no double tax treaty exists between Malta and the other country. Under this system, Maltese tax law allows for the deduction of foreign tax paid on income that is also subject to Maltese tax. This relief can be granted in the form of a tax credit, reducing the Maltese tax liability by the amount of foreign tax paid, or as a deduction from the income earned abroad.

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In addition to the above, Malta offers a Foreign Relief from Foreign Tax Credit (FRFTC) to address the issue of double taxation on foreign income. This is a double tax relief mechanism which offers a credit for notional tax paid at 25% of the overseas income or gain received in Malta and is to be added to such amount. A tax credit equivalent to the amount by which the foreign source income is increased is available for set-off against the tax due on the chargeable income. However, the FRFTC claimed as a credit cannot exceed 85% of the Malta Tax payable on the foreign income.

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Additionally, Malta’s participation in the European Union adds another layer of tax relief mechanisms. The Parent-Subsidiary Directive and the Interest and Royalties Directive, for example, facilitate the elimination of withholding taxes on cross-border payments of dividends, interest, and royalties within the EU. These directives complement Malta’s double tax treaties and unilateral relief provisions, enhancing the overall tax efficiency for Maltese entities involved in intra-EU transactions. This integrated approach ensures that Malta remains an attractive jurisdiction for international business operations, providing a stable and predictable tax environment.