Income Tax Act (Cap. 123), article 12

12. (1) There shall be ex empt from the tax - (a) (i) the income of the University of Malta; (ii) the income of the Malta College of Arts, Science and Technology; (b) the allowances and benefits as may be specified by the Minister responsible for fina nce by notice published in the Gazette which are payable under the Social Security Act , or in consequence of any measure announced in the annu al Budget Speech; (c) (i) any interest, discount, premium or royalties accruing to or derived by any person not resident in Malta: Provided that the exemption under this sub- paragraph shall not apply in respect of any year in which the said person is engaged in trade or business in Malta through a permanent establishment situated therein and where the royalties or the debt claim in respect of which the interest, discount or premium, is paid are effectively connected with such permanent establishment; (ii) any gains or profits accruing to or derived by any person not resident in Malta on a transfer of, or on a transfer of any rights over , any units in a collective investment scheme as defined in article 2 of the Investment Services Act, any units and other such like instruments relating to linked long term business of insurance , including the surrender or maturity of linked long term policies of insurance, any interest in a partnership which is not a property partnership and any shares or securities in a company (which for the avoidance of doubt includes redemption, liquidation or cancellation) which is not a property company and for the purpose of this paragraph the word "transfer" shall have the same meaning assigned to it under article 5(1)( b): Provided that the benefici al owner of the interest, royalty, gain or profit, as the case may be, is a person not resident in Malta and such person is not owned and controlled by, directly or in directly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta; (iii) (A) any dividend paid by a company registered in Malta to an individual out of profits *Applicable from year of assessment 2020. INCOME TAX [CAP. 123. 79 allocated to the any of the taxed accounts, other than the final tax account and the untaxed account, where such individual’s chargeable income, excluding such dividend, is equal to or exceeds the relevant threshold: Provided that, in the case where such individual is entitled to claim a deduction against a dividend declared in a tax return, the amount or portion of such dividend, up to the amount of the said deduction, shall not be exempt from tax: Provided further that in the case where the said individual’s chargeable income excluding such dividend is less than the relevant threshold, the amount or portion of such dividend to be exempt from tax shall be an amount determined by deducting from his chargeable income the relevant threshold: Provided also that the preceding proviso shall not apply where the said individual’s chargeable income does not exceed the relevant threshold. Cap. 372. (B) Any dividend or part thereof, exempt from tax under paragraph (iii)(A), shall, for the purpose of paragraph ( a) of the last proviso to article 60 and paragraph ( a) o f t h e l a s t proviso to article 48(1) of the Income Tax Management Act , b e a d i v i d e n d t o w h i c h the said paragraphs refer. (C) For the purpose of article 12(1)( c)(iii): (a) Where such individual has more than one such dividend, the aggregate amount of such dividends shall be treated as one dividend; (b) ''Relevant threshold'' is as follows: (i) in the case where the rates prescribed under article 56(1)( a) apply, the relevant threshold is €28,700; (ii)* i n t h e c a s e w h e r e t h e r a t e s prescribed under article 56(1)( b)(i) apply, the relevant threshold is €19,500; (iii)† in the case where the rates *Amendment applicable from th e year of assessment 2027. Vide Article 13(2) of Act III of 2026 . †Amendment applicable from th e year of assessment 2027. Vide Article 13(2) of Act III of 2026 . 80 CAP. 123.] INCOME TAX prescribed under article 56(1)( b)(ii), (iv) and (v) apply, the relevant threshold is €21,200: Provided that this sub-paragraph (iii) shall not apply in the case of dividends arising out of shares listed on a stock exchange recognised by the Commissioner for the purpose of this provision and distributed to an individual whose holding of such shares in a company represents less than 0.5% o f t h e p a i d - u p s h a r e c a p i t a l o f t h e s a i d company: Provided also that the preceding proviso shall only apply to distributions of dividends made out of profits derived in the year preceding the year of assessment 2018 or later; Cap. 450. (d) the income of any retirement fund or retirement scheme licensed, registered or otherwise authorized under the Special Funds (Regulation) Act or any Act replacing the said Act or derived by a company from long term contracts of insurance that are treated as qualifying personal retirement schemes or qualifying occupational retirement schemes in terms of the provisions of such rules as may be prescribed, other than income from immovable property situated in Malta; (e) the income of any institution, trust, bequest or foundation, of a public character, and of any other similar organization or body of persons, also of a public character, which is engaged in philanthropic work and either qualifies for exemption under this paragraph in accordance with rules made for this purpose by the Minister responsible for finance under article 96 or is named by the said Minister as engaged in philanthropic work for the purposes of this paragraph and there is not in respect of it a declaration by the said Minist er that it has ceas ed to be so named; (f) the income of any political party including the income of clubs adhering to political parties; (g) wound and disability pensions granted in respect of wounds or disabilities caused by war and any pensions granted to dependent relatives of members of the armed forces of the Commonwealth killed on war service; (h) any capital sum received by way of commutation of pension (up to a maximum of thirty percent (30%) of the total pension), retiring or death gratuity or received as consolidated compensation for death or injuries; (for the purposes of this paragraph, ''total pension'' INCOME TAX [CAP. 123. 81 means the total value of the pension available to provide pension payments): Cap. 450. Provided that in the case of commutation of pensions in relation to retirement schemes, licensed, registered or otherwise authorised under the Special Funds (Regulation) Act or any Act replacing the same, the maximum capital sum that may benefit from this exemption shall, unless provided otherwise by means of rules prescribed by the Minister, be as provided under that Act, including any regulations or directives issued thereunder; (i) the income arising from a s cholarship hel d by a person receiving full time instruc tion at a university, college or similar educational institution: Provided that this paragraph shall not apply to income, by whatever name called, paid out of funds disbursed or otherwise provided by the employer of the recipient which the recipient would have received by reason of his employment if he had not held such scholarship; and any income to which this paragraph does not apply shall be deemed to be income chargeable to tax in accordance with the provisions of article 4(1)( b); Cap. 452. (j) the income of any trade union registered under the Employment and Industrial Relations Act in so far as such income is not derived from a trade or business carried on by such trade union; (k) the profits of a non-resident shipowner as defined in article 28, provided that the country to which such non-resident shipowner belongs extends a similar exemption to shipowners wh o are not resident in such country but who are resident in Malta; (l) the income of a club or similar institution which the Commissioner is satisfied is organised and operated exclusively for social wel fare, civic improvement, pleasure or recreation, or fo r any other purpose except profit, no part of the income of which is payable to, or is otherwise available for the personal benefit of, any proprietor, member or shareholder, so long as such club or similar institution is not deemed to carry on a business in accordance with article 4(4); (m) Repealed by Act XX of 1996 . (n) t h e i n c o m e o f a p h i l h a rmonic society which the Commissioner is satisfied constitutes a bona fide band club, provided that such society has regular premises r e g i s t e r e d w i t h t h e P o l i c e a s a c l u b a n d t h a t s u c h premises are in daily use as a place of resort by its members; (o) the income of a club or similar institution which the Commissioner is satisfied constitutes a bona fide 82 CAP. 123.] INCOME TAX sports club, provided that no part of the income of which is payable to, or is otherwise available for the personal benefit of, any proprietor, member or shareholder, and provided also on winding up of such club or institution, no funds are distributed or available to such propriet or, member or shareholder; (p) any dividend paid by a company whose main source of income in the relevant year is charged at the rate provided for in article 56(13) in respect of a Contractor; (q) the income of a co- operative society; (r) such subsidy as may be prescribed related to the Common Agricultural Policy or to any other similar scheme introduced in accordance with international or supra-national agreements; (s) the income of a collective investment scheme other than income from immovable property situated in Malta and investment income to which article 41A(a) refers; (t) (i)any financial a ssistance, as determined by the courts of a European Union or a European Economic Area (hereinafter "EU/EEA") Member State or by the courts of another country as the Commissioner may approve or as agreed by a public deed of personal separation under the authority of the courts of a EU/EEA Member State or by the courts of another country as the Commissioner may approve, or as ordered by the courts of a EU/EEA Member State in a divorce judgment or decree or by the courts or other authorities of another country as the Commissioner may approve, received by an individual from his estranged spouse in respect of the maintenance of a child; (ii)any financial assistance received by the parent of a child in respect of the maintenance of that child and paid by the other parent in terms of a public deed regulating the obligations of the parents for the maintenance of that child. Cap. 372 (u) (1) any income or gains derived by a company registered in Malta from a participating holding or from the transfer of such holding, where the taxpayer has not shown such income or gain as part of his chargeable income in the return made pursuant to article 10 of the Income Tax Management Act : Provided that with respect to a dividend derived from a participating holding acquired on or after 1 January 2007 the exemption contemplated by this paragraph shall only apply when the conditions set out in either paragraph (i) or paragraph (ii) are satisfied: (i) where the body of persons in which the participating holding is held satisfies any one of the following conditions, that is to say: INCOME TAX [CAP. 123. 83 (1) it is resident or incorporated in a country o r t e r r i t o r y w h i c h f o r m s p a r t o f t h e European Union; (2) it is subject to any foreign tax of at least fifteen per cent (15%); (3) it does not have more than fifty per cent (50%) of its income derived from passive interest or royalties; (ii) where none of the conditions set out in paragraph (i) are satisfied then both of the following two conditions must be satisfied: (1) the equity holding by the company registered in Malta in the body of persons n o t r e s i d e n t i n M a l t a i s n o t a p o r t f o l i o investment and for this purpose the holding of shares by a company registered in Malta in a body of persons not resident in Malta which derives more than fifty per cent of its income from portfolio investments shall be deemed to be a portfolio investment; and (2) the body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than five per cent (5%): Provided further that the provisions of the immediately preceding proviso shall, wit h effect from 1 January 2011, also be applicable to dividends received from a participating holding acquired before the 1 January 2007: Provided also that in respect of: (a) a participating holding in a company or in a partnership, EEIG , other body of persons or collective investment scheme referred to in the first proviso to the definition of "participating holding" in sub-article (1) of article 2, that is resident in Malta; or (b) a participating holding in any other body of persons that holds, directly or i ndirectly, shares or other interests in a company or in a partnership, EEIG, other body of persons or collect ive investment scheme referred to in the first proviso to the definition of "participating holding" in sub-article (1) of article 2, that is resident in Malta, gains or profits arising on the transfer of any holding referred to in paragraph (a) or paragraph (b) derived by a company registered in Malt a (hereinafter in this sub- article referred to as "the transferor company"), shall only qualify for the exemption if such gains or profits would have been exempt in terms of sub-paragraph (ii) of paragraph (c) had the transfer of the holding been made by the beneficial owner of the transferor 84 CAP. 123.] INCOME TAX company. Where the beneficial owner is more than one (1), and if gains or profits made by one (1) or more thereof would have been ex empt (hereinafter in this sub-article referred to as "the exempt beneficial owner") and others not been exempt, the exemption shall apply to that part of the gain or profit to which the exempt beneficial owner is beneficially entitled. For the purpose of this proviso any body of persons or collective investment vehicle which is resident in Malta shall be deemed not to fall within the purport of the term "beneficial owner": Provided further that where the transferor company has claimed the exemption contemplated in terms of the immediately preceding proviso on the whole or part of the said gains or profits, and any person who would not have qualified for exemption in terms of sub-paragraph (ii) of paragraph (c) had the transfer of the holding been made thereby (hereinafter in th is sub-article referred to as "the non-qualifying shareholder"), thereafter becomes beneficially entitled to all or any of such gains or profits or to a larger part thereof than was the case at the time they arose, even prior to their distribution, such untaxed gains or profits or such additional part thereof to which the non-qualifying sharehold er becomes entitled, shall be taxed at the rate referred to in sub-article (6) of article 56 and such tax shall constitute tax payable by the company in the year of assessment in respect of which such person shall become entitled to such profits even prior to their distribution. Provided further that for the purpose of this paragraph the word "transfer" shal l have the same meaning assigned to it under article 5(1)( b): Provided further that the ex emption contemplated by this paragraph shall not apply to income derived from a participating holding in a body of persons resident for tax purposes in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for a minimum period of three (3) months during th e year immediately preceding the year of assessment unless it is proved to the satisfaction of the Commissioner that the said body of persons maintains sufficient significant people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in tha t jurisdiction and the income earned therefrom. Where such three (3) months are consecutive and fall in two (2) subsequent consecutive basis years, the exemption shall not apply in respect of any such income derived in any one (1) of the two (2) years; INCOME TAX [CAP. 123. 85 Cap. 372. (u) (2) any income or gains derived by a company registered in Malta (hereinaf ter "the particular company") which are attributable to a permanent establishment (including a branch) situated outside Malta or to the transfer of such permanent establishment, whether such permanent establishment belongs exclusively or in part to the particular company, including a permanent establishment operated through any entity or relationship other than a company, in which the particular company has an interest, where the taxpayer has not shown such income or gains as part of its chargeable income in the return made pursuant to article 10 of the Income Tax Management Act , and for these purposes "profits or gains" shall be calculate d as if the permanent establishment is an independent enterprise operating in similar conditions and at arm’s length: Provided that where, in the opinion of the Commissioner, a series of transactions is effected with the sole or main purpose of reducing the amount of tax payable in terms of this Act by any person by reason of the operation of this provision, such a person sh all be assessable as if this provision did not apply and, for the purpose of this provision, a series of transactions shall mean any two or more corresponding or circula r transactions carried out by the same person, either directly or indirectly, as the case may be: Provided further that for the purpose of this paragraph the word "transfer" shall have t he same meaning assigned to it under article 5(1)( b): Provided further that as from 1st January, 2016, in the case of distributed profits received from a participating holding by a parent company that is resident in Malta or the permanent establishment of a parent company that is resident in another EU Member State, which permanent establishment is situated in Malta and which benefit from the exemption from withholding tax set out in article 5 of EU Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States as amended, the exemption under the provisions of sub- paragraph (u)(1) shall only apply to the extent that such profits are not deductible by the relevant subsidiary in that other EU Member State. For the avoidance of doubt, notwithstanding any other provision to the contrary in this Act, distributed profits received by the said parent company or permanent establishment that are deductible by the relevant subsidiary in such other EU Member State shall fall under the charging provisions of sub-article (1) of article 4. This proviso implements the provisions of Article 1(1) of EU Directive 2014/86/EU of 8th July, 2014 amending Directive 2011/96/EU on the common 86 CAP. 123.] INCOME TAX system of taxation applicable in the case of parent companies and subsidiaries of different Member States and the terms used herein shall, unless the context requires otherwise, be interpreted in terms of EU Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States as amended; (v) royalties, advances and similar income derived from - (i) patents in respect of inventions (ii) copyright (iii) trademarks whether in the course of a trade, business, profession or vocation or otherwise, subject to the satisfaction of such terms and conditions (including any limits on the maximum amount of the exempt income) and obtaining such determinati ons as may be prescribed: Provided that where any in come which is exempt from tax in terms of this paragraph is derived by a company, the distribution of the particular profits by way of dividend by such company shall also be exempt from tax in the hands of the shareholders, so however that where the person in receipt of such dividend is itself a company (hereinafter ref erred to as "the second company"), any dividend paid to the members of the second company shall, to the extent that such dividend is paid out of profits which are exempt in terms of this paragraph, not be charged to tax under this Act, and where a member of the second company is again a company, the provisions of this proviso shall apply mutatis mutandis as though references to the second company were references to that member, and the principle set out in this proviso shall continue to be applied for as long as the exempt profits referred to in this paragraph are distri buted by way of dividends: Cap. 372. Provided further that wher e such royalties, advances or similar income are derived by a company, this exemption shall not apply where the company has shown such income as part of its chargeable income in the return made pursuant to article 10 of the I ncome Tax Management Act ; S.L. 123.149 (w) the income from employment (other than employment derived from the holding of an office of director) of a married person who is over forty years of age and starts in employment after having been absent from any gainful occupation for at least five years, and whose name was not during the said time on the unemployment register (Parts 1 and 2) as established by JobsPlus, and where such income does not exceed the amount mentioned in rule 2(a) of the Deduction (Income from Employment) Rules and the said person is chargeable to tax jointly with her or his spouse at the INCOME TAX [CAP. 123. 87 rates specified in article 56(1)(a): Provided that this paragraph shall apply for a period of five consecutive years of assessment commencing from the basis year in which the person started work;' (x) interest payable to an individual in his own name by: (i) a person carrying on the business of banking in accordance with the laws of any European Union Member State in respect of a sum of money deposited into a special individual saving account recognised as such by the Commissioner, and (ii) interest payable to an individual in his own name by the Government of a European Union Member State or by any agency thereof, by a corporation or authority established by law, or in respect of a public issue by a company, entity or other legal person howsoever constituted and whether resident in Malta or otherwise, where the relevant interest-bearing securities are credited for the benefit of the individual to a special individual savin g account recognised as such by the Commissioner: Provided that the aggregate amount of the deposits into such account and the value of the interest-bearing securities credited for the benefit of the individual into such account do not together exceed one thousand euro (€1,000) in any year or such other amount as may be prescribed by the Minist er from time to time; (y) any stipend or maintenance grant paid to a student by the Government or any Government institution; Disability Trusts and Disability Foundations. (z) any income or gains derived by the trustee of a disability trust or by a disability foundation upon the transfer of immovable property forming part of the disability trust or the disability foundation where the sale proceeds from the transfer of such property are to be exclusively utilised by the trustee or foundation for the maintenance of the disabled beneficiary, and an undertaking to that effect is made by the trustee or the foundation in the deed of sale: Provided that if the disabled beneficiary dies before all the sale proceeds are utilised for his maintenance, then any balance thereof distributed by the trustee of the disability trust or the disability foundation to the parents of the disabled beneficiary and, or the other beneficiaries of the disability trust or foundation shall be taxed as follows: (i) if less than eighty per centum (80%) of the sale proceeds have been applied for the maintenance of the disabled beneficiary up to his death, the remaining portion which is distributed to the parents and, or the other beneficiaries of the 88 CAP. 123.] INCOME TAX disability trust or foundation will be taxed at the rate of 8% of the transfer value, and the tax is to be paid by the trustee or foundation before any distributions are made to the parents of the disabled beneficiary and, or the other beneficiaries of the disability trust or foundation; or (ii) if eighty per centum (80%) or more of the sale proceeds have been applied for the maintenance of the disabled beneficiary up to his death, no tax shall be payable on the remaining portion which is distributed by the trustee or the foundation to the parents of the disabled beneficiary and, or the other beneficiaries of the disability trust or foundation. Cap. 331 For the purpose of this paragraph, "disability trust" and "disability foundation" mean any protected disability trust or foundation, as the case may be, which qualify as such in terms of the Trusts and Trustees Act, any other applicable law regulating foundations, or any regulations made thereunder, and provided that: (i) the trustee or administrator thereof shall not have the power to appoint new beneficiaries after the creation of the trust or foundation; (ii) the trust terminates on the death of the disabled beneficiary; and (iii) the relevant trust instrument or foundation deed specifically provides that the beneficiaries of such trust or foundation comprise only: Cap. 413. (a) a person or persons who is/are on the Register of Persons with Disability kept by the National Commission Persons with Disability set up in terms of the Equal Opportunities (Persons with Disability) Act, and (b) persons referred to in article 5(2)( e)(i), whether they are in existence or not at the time of such settlement, in relation to the disabled person: Provided that nothing in this sub-article shall be construed as granting any exemption from the filing of a return in respec t of any such income, or as exempting in the hands of the recipients any dividends, interests, annuities, emoluments, pensions or other gains or profits paid wholly or in par t out of the inco me so exempted . (2) The Minister responsible for finance may exempt any person or class of persons with or without retrospective effect from all or any of the provisions of this Act on any ground which to him may seem sufficient. Any such exemption may be made subject to such conditions or the payment o f such other rate or rates of t ax, whether related to income or otherwise, or to both such conditi ons INCOME TAX [CAP. 123. 89 and payment, as the Minister may deem appropriate. (3) The Minister responsible for finance may by order published in the Government Gazet te provide that the interest payable on any loan charged on the public revenue of Malta shal l be exempted from the tax, either generally or only in respect o f interest payable to persons not resident in Malta, and such int erest shall, as from the date and to the extent specified in the orde r, be exempt accordingly. Cap. 202. (4) The Minister responsible for finance may by order published in the Government Gazet te provide that the interest payable on any debentures, debenture stock or other securities issued by the Malta Development Corporation under the Malta Development Corporation Act , as security for any authorised borrowing of the said Corporation, shall be exempted from the t ax, either in whole or in part and to such extent as he may deem appropriate, and such interest shall, as from the date and to the extent specified i n the order, be exempt accordingly. Temporary residents. Renumbered by: XVII. 1994.2.