Double taxation may occur in the form of economic double taxation when tax is charged on the same income but on different taxpayers. Economic double taxation is not restricted to double taxation on an international level but may occur in the same jurisdiction. On the other hand, double taxation on the same income in two or more jurisdictions is referred to as juridical double taxation.
Jurisdictions have sought to eliminate double taxation by providing for relief of double taxation in their national laws. The Maltese tax system provides for the following mechanisms to for relief of double taxation:
- Treaty relief;
- Unilateral relief;
- The Flat Rate Foreign Tax Credit.
Treaty Relief: Treaty relief is double tax relief provided in terms of a double tax treaty that Malta may have concluded with another foreign jurisdiction. The form of relief would generally be available in the form of an ordinary credit. The credit would be subject to per-country and per-income limitations and would be equivalent to the Malta tax chargeable on the relevant foreign income or the foreign tax suffered on that income, whichever is the lesser.
Unilateral Relief: is available in a manner essentially identical to that applicable under a treaty and, accordingly, extends ‘treaty’ relief to income derived from non-treaty countries – provided that such income is, under the laws of a territory outside Malta, subject to any tax of a similar character to that imposed in Malta.
The Flat Rate Foreign Tax Credit: essentially represents a notional tax credit for foreign tax deemed to have been suffered on income which falls to be allocated to the Foreign Income Account. The notional tax credit is equivalent to 25% of the foreign source income in respect of which it is claimed.
The computational methodology of the Flat Rate Foreign Tax Credit requires that the relevant foreign source income be grossed up by the available credit, then charged to tax at the applicable flat rate of 35% with the amount by which the income was grossed up being available as an ordinary credit to be set-off against the tax due on the grossed up income.
