Tax benefits of using Malta as an IP regime
For myriad reasons, Malta has over the years established itself as an ideal jurisdiction to hold intellectual property rights. The country offers many tax benefits on income derived from Intellectual Property. Apart from the tax exemption on income derived from patents, copyrights and trademarks as will be further explained below, Malta also provides for various forms of relief from double taxation as a result of more than 70 double taxation agreements.
Additionally, Malta has also transposed applicable EU law such as the Interests and Royalties Directive.
Tax Exemption on Patents, Copyrights and Trademarks
Article 12(1)(v) of the Maltese Income Tax Act exempts from tax, any advances, royalties and similar income obtained from:
(i) patents in respect of inventions;
(ii) copyrights; and
This tax exemption applies only if the royalties ensue from legal trading, commercial or professional business, and is subject to the satisfaction of such terms, conditions and approvals as may be prescribed by subsidiary legislation.
Malta provides for an exemption from tax with respect to income derived from patents. For this tax exemption to apply, one is required to register all patent researches and development activities separately. The royalty income will still be exempt from tax, even if the patent or the invention was not developed or registered within the territory of Malta or in the EU.
As part of the implementation of the 2012 budget measures, the Malta Income Tax Act also introduced a tax exemption for royalties and income derived from copyrighted intellectual property. According to the Maltese Copyright Act, works eligible for copyright includes artistic, audio-visual, literary and musical works.
Royalties and similar income derived from trademarks are also included within the scope of the above tax exemption. However, in order for one to benefit from this tax exemption, one has to register the trademark in Malta.
Refunds of tax to shareholders of Malta companies
Maltese limited liability companies receiving royalty income which does not qualify for the above tax exemption, may still benefit from a considerably law tax burden as a result of the Maltese refundable tax credit system. Upon the distribution of the income as dividend, shareholders of Maltese companies may claim one of the following tax refunds.
5/7ths tax refund – This refund applies when the income consists of passive royalties resulting in an effective tax burden of 10%. Passive royalty income refers to royalties that are not obtained from a trade or business and which has not suffered or has suffered less than 5% foreign tax.
2/3rds tax refund – Where a double taxation relief is applicable on foreign royalty income, the payor company will receive 2/3rds of the tax paid.
6/7ths tax refund – When this is applicable, the amount of tax payable will only be 5%. This is generally applicable when the aforementioned two tax refunds do not apply.
Exemption from taxation over the transfer of intellectual property rights
Transfers of intellectual property are subject to Malta capital gains tax. However, Malta offers a tax exemption for transfer of such assets when this occurs between two companies that form part of the same group. In order for companies to be considered to form part of the same group for the purposes of this exemption: (i) they must either have a parent-subsidiary relationship; (ii) both companies must be owned as to more than 50% by a parent company; or (iii) both companies must be owned as to more than 50% by the same shareholders (including individuals).
Roll-over relief is also applicable where an intellectual property which has been used in a business for at least 3 years is transferred and replaced within 1 year by an asset that is used solely for a similar purpose in the business. In this case, the gain derived from the first transfer will not be taxed. Taxation on such a gain will be postponed to when the second or subsequently acquired intellectual property is sold and not replaced.
The above provides a brief overview of the tax benefits of Intellectual Property in Malta.