The Malta-US double taxation agreement

The Treaty for the Elimination of Double Taxation between Malta and the USA entered into force on November 23, 2010. Like all such treaties, this one aims to ensure that income arising to a resident of either of the states is taxed only in one of them, and hence to encourage more business between the two states.

The treaty applies to persons who are residents of Malta or the USA, or both. A person is a resident of a state if liable to tax therein by reason of domicile, residence, citizenship, place of management, place of incorporation or any similar criterion. Pension funds and certain other organisations, such as philanthropic ones established and maintained in one of the states, also qualify as residents.

Despite the above, a citizen or a long-term resident of a state may, for 10 years following the loss of such status, be taxed by that state.

The treaty identifies categories of income and determines which state is entitled to tax each category. Generally, such entitlement is either conferred on the state of residence (SR) or the state of source (SS) of the income. Where both states claim jurisdiction to tax, the tax paid in one of the states is credited against the tax payable in the other.

The most important income categories identified are:

Income derived by an enterprise is taxed in the SR, except for that income derived from a permanent establishment (PE) situated in the other state. A PE is a fixed place of business through which the business of an enterprise is carried on;

Dividends are taxed in the SR of the shareholder.

However, dividends may also be taxed in the SR of the company which pays them. Where the company is resident in the USA, dividends are taxed at a rate not exceeding five per cent if the shareholders beneficially own 10 per cent of the voting stock. Where the shareholders own less than 10 per cent, dividends are taxed at a rate not exceeding 15 per cent. Where the company is resident in Malta, the only tax paid is the company tax levied on the profits out of which the dividends are distributed.

Specific rules apply to dividends paid to pension funds and by US Regulated Investment Companies and US Real Estate Investment Trusts, in which case the tax claimed in the USA is generally 15 per cent.

Interest and royalties are taxed in the SR of the recipient. However, such income may also be taxed in the SS, but the tax rate shall not exceed 10 per cent of such income, except in the case of interest which arises in the USA and is contingent in that it does not qualify as portfolio interest under United States law, in which case tax charged is 15 per cent of the gross amount of the interest.

Gains from the alienation of real estate including shares in companies owning real estate are generally taxed according to the law of the situs.

Employment income derived by a resident of a state from the other is taxable in the former if the employee is present in the other state for a period which does not exceed 183 days in the year and the remuneration is paid by an employer who is not a resident of that other state and the remuneration is not born by a PE of the employer in the other state.

The above will apply if residents of Malta and USA are “qualified” persons. In general, qualified persons are resident individuals, pension funds, certain tax exempt organisations and companies, generally where the shares are listed, and regularly and primarily traded on a stock exchange in the SR, and less than 25 per cent of the companies’ income accrues to persons who are not qualified persons.

The treaty will clearly cause US investors to consider Malta as a feasible gateway into Europe, particularly because on repatriation of funds into the USA, Malta will not withhold any tax.

The Times 24th March 2011