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One of the most common forms of income for an ICT entity is royalty income. The tax treatment of royalty income depends on its classification as an active or passive income:

1. Active Royalties

Active royalties are royalties which are derived, whether directly or indirectly, from a trade or business.
Where a Maltese Company receives royalties as part of its business of licensing patents, for example, the income is deemed to be part of its business income and is initially taxed at the rate of 35%. Eventually, upon the subsequent distribution of the income as dividend, the shareholder would be in a position to claim a tax refund of 6/7ths of the Malta tax paid, thus effectively reducing taxation in Malta to only 5%.

2. Passive Royalties

Passive royalties are royalties which are not derived, directly or indirectly, from a trade or business.
Where a Maltese company derives royalty income which is of a passive nature, initially this income suffers tax at 35%. Once again, upon the distribution of this income as dividends, the shareholder would become entitled for a tax refund. In this case, the shareholder can claim a 5/7ths refund of the Malta tax paid by the company, thus reducing the effective tax paid in Malta to 10%. This may be further reduced by virtue of the Flat-Rate Foreign Tax Credit to 6.25%

Royalty income tax exemptions

  • In addition, to the normal tax refunds, royalty income may also be subject to full tax exemptions.
  • The first exemption applies when the royalty income (also applicable to interest or premiums) is deemed arising in Malta and is derived by persons (companies or individuals) who are not resident in Malta. In other words, a royalty income derived by a non-resident person from a patent registered in Malta will not be subject to Maltese tax. However, for this exemption to apply, the royalty income must be of a passive nature.
  • The second exemption applies to royalty income derived from patents in respect of inventions, even where derived in the course of a trade or business. This exemption applies irrespective if the income is derived by a resident of Malta or not.

Other tax benefits of Royalty income

Malta has concluded more than 60 double tax treaties which typically impose a maximum (not higher than 10%) or a 0% tax rate on cross-border royalty payments between the two contracting states.
In addition, upon its accession to the EU, Malta transposed the Interest & Royalties Directive and the Parent-Subsidiary Directive, both of which prevent withholding taxes on cross-border income flows.