Similarly to real property, intellectual property is subject to tax. However, IP is not subject to physical constraints, so its owners are theoretically free to own it in any jurisdiction. Therefore, IP is patents, trademarks, and copyrights. These patent rights or intellectual property rights allow you to exclude other people, companies and practically every country in the world from these exclusivity rights. The accounting team at GCS Malta delve deeper into the topic in this article.

Why do companies pick Malta for tax planning purposes?

Many companies consider Malta for tax planning purposes since Malta is the perfect European jurisdiction to manage intellectual property (IP). On the one hand, companies potentially don’t have to pay taxes on income from royalties. But on the other hand, Malta can provide IP protection helping optimise IP management in a tax-efficient manner. Here are some key benefits of a Malta IP holding company:

• access to the EU interest and royalties directive
• no withholding tax on dividends paid by the Malta IP holding company
• access to an extensive double tax treaty network which is essential for tax-efficient IP management
• potential tax exemption for certain royalties derived from qualifying patents, copyrights and trademarks
• very low effective tax rate where the exemption does not apply (potentially as low as a 5% effective tax rate)

Refunds of tax to shareholders of Malta companies

There are three tax refunds which are applicable in the case of a Malta company receiving royalty income:

2. 5/7ths tax refund – this is generally applicable when the Malta Company is in receipt of income consisting of passive royalties.  As stated above, passive royalty income consists of royalty income that is not directly or indirectly derived from a trade or business and has not suffered or has suffered foreign tax, which is less than 5%. This results in a net tax leakage in Malta of 10%.
3. 2/3rds tax refund– this is generally applicable when the Malta Company distributing the dividends and which is in receipt of royalty income, has benefitted from one of the various forms of relief from double taxation, mainly treaty relief, unilateral relief or the Flat Rate Foreign Tax Credit (FRFTC). The FRFTC is a deemed credit that only applies to companies and becomes available should the first two forms of relief from double taxation are not applicable.
4. 6/7ths tax refund– this is generally applicable in cases where the two refunds mentioned above are not applicable. This results in a net tax leakage in Malta of 5%. This tax refund is usually applicable when the Malta company distributing the dividends derives royalty income from a trade or business and is not considered passive. Furthermore, the Malta company must not have derived such royalty income from a foreign, permanent establishment nor claimed any form of relief from double taxation.

Taxation on capital gains derived from IP

Intellectual property transfers between two companies that form part of the same group are not subject to Malta tax.  For two companies to form part of the same group, they must have a parent-subsidiary relationship, or both companies must be owned by more than 50% of a parent company.  Two companies owned by more than 50% by the same shareholders (including individuals) also form part of the same group to transfer intellectual property without paying any tax.

Roll over relief is also applicable in case an intellectual property used in a business for at least three years is sold and replaced within one year from the date of sale.  In this case, the gain derived from the sale of the first intellectual property will not be taxed.  Taxation on such a gain will be deferred to a date when the second or subsequently acquired intellectual property is sold without a replacement.

Why GCS Malta?

At GCS Malta, our accounting experts offer a full range of accounting and support services tailored to the needs of each client. Contact us today for more information on how we can help you.

Article by Terence Agius