Malta remains attractive jurisdiction for the exploitation of intellectual property rights

Taxation of royalties through Malta IP Holding Companies in a tax-efficient manner

The so-called patent box scheme, enshrined in Article 12 (1) (v) of the Malta Income Tax Act, had been closed on 3rd June 2016 for new applications. This patent box was a preferential tax regime for intellectual property (IP) royalties and similar income derived from patents in respect of inventions, copyright and trademarks, exempting those from tax completely.

For “old” registrations submitted before 3rd June 2016 the 0% tax rate, which is gradually been phased out, can still be enjoyed until 2021.

Management of IP assets via Malta – still an excellent option

Nevertheless, Malta as a jurisdiction offers very interesting opportunities to exploit IP assets via a set-up consisting of a Malta IP Holding Company and a Malta IP Trading company, benefitting from a preferential taxation using the Maltese tax refund schemes.

There are three different cases to be considered for the taxation of IP royalties:

Active royalties, Passive royalties and the Tax with Flat Rate Foreign Tax Credit (FRFTC) system.

Active Royalties

Active royalties are royalties which are derived, whether directly or indirectly, from a trade or business of licensing patents. Royalty income is also deemed to be active where it is not deemed to be passive income by virtue of having suffered at least 5% foreign tax, irrespective of whether the tax was levied directly or indirectly, or through withholding or otherwise.

Active royalties’ payments are subject to a 6/7ths refund, resulting in an effective taxation of 5% on company level within the regular Malta holding-trading set-up.

Passive royalties

Passive royalties are royalties which are not derived, whether directly or indirectly, from a trade or business and which have suffered less than 5% foreign tax whether directly, by way of withholding, or otherwise.

These passive royalties are subject to a 5/7ths refund, providing an effective taxation of 10%.

Tax with Flat Rate Foreign Tax Credit (FRFTC)

The so-called FRFTC is an alternative taxation system in respect to foreign sourced income from IP. This taxation system is only available to companies registered in Malta.

The FRFTC is a credit of tax (25%) deemed to have been paid outside Malta which is calculated on the net foreign income received by the company in Malta. In practice, it often reduces the effective corporate tax rate on passive royalties from 10% to 6,25%.

Further Legal Development in Malta

In the Budget speech for the year 2019, presented on 22th October 2018, it was mentioned that Malta would introduce a new patent box regime complying with the EU Code of Conduct for Business Taxation and the OECD proposals.

However, no further details were provided at this stage as to requirements and conditions of a potential new Malta patent box scheme.