INCOME TAXATION OF COMPANIES

Corporate Tax Rate

Income tax is the only tax imposed on the profits of companies. The standard rate of income tax is 35%. Taxable income is the net profit reported in the companies’ audited financial statements, subject to certain adjustments. Expenses incurred wholly and exclusively in the production of income are deductible.

Allowable Deductions

Expenses which are not incurred in the production of the income are not tax deductible and include the following: amortisation of goodwill; all kinds of provisions, voluntary payments; expenses recoverable under any insurance, pre-trading expenses except for expenditure incurred in respect of staff training, salaries or wages and advertising within eighteen months prior to the day on which the company begins to carry on its trading activity; and unrealised differences on exchange.

Inventories are normally valued at the lower of cost or net realisable value in accordance with generally accepted accounting principles.

Tax Depreciation

Tax depreciation allowances include initial allowances and annual wear-and-tear allowances. Initial allowances are granted in respect of new industrial buildings and structures is set at a rate of 10%. Wear and tear allowances are calculated using the straight-line method.

The following are the minimum number of years over which the main categories of plant and machinery may be depreciated:

Asset	No of years
Computers and electronic equipment	4
Computer software	4
Motor vehicles	5*
Furniture, fittings and soft furnishings	10
Other machinery	5
Other plant	10

* A ceiling of Lm3,000 on the cost of non-commercial motor vehicles applies.

The annual straight-line rate for industrial buildings and structures, including hotels, is 2%. Commercial buildings may not be depreciated.

Capital allowances are generally subject to recapture on the sale of an asset to the extent the sale proceeds exceed the tax value after depreciation. Any amounts recaptured are added to taxable income for the year of sale or are used to reduce the cost of a replacement asset. To the extent sales proceeds are less than the asset’s depreciated value, an additional allowance is granted. Capital allowances on assets for which investment allowances have been granted are not recaptured, and no additional allowances described in the preceding sentence are granted.

Groups of Companies

A company that is part of a group of companies may surrender losses to another member of the group. Two companies are deemed to be members of a group of companies, for tax purposes, 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 third company that is resident in Malta. A company is considered to be a 51% subsidiary of another company if all of the following conditions exist:

• more than 50% of the subsidiary’s ordinary shares and more than 50% of its voting rights are owned directly or indirectly by the parent company;

• the parent company is beneficially entitled to receive directly or indirectly more than 50% of profits available for distribution to the ordinary shareholders of the subsidiary; and

• the parent company is beneficially entitled to receive directly or indirectly more than 50% of the assets of the subsidiary available for distribution to the ordinary shareholders of the subsidiary in the event of a liquidation.

The group company surrendering the losses and the group company receiving the losses must have accounting periods that begin and end on the same dates except for newly incorporated companies and companies put into liquidation.

Relief for Losses

Tax losses incurred in a trade or business may be carried forward indefinitely to offset against all future income. Unabsorbed tax depreciation may also be carried forward indefinitely, but may offset only income derived from the same source. A carry-back of losses is not allowed.