In many countries the corporate tax system is a classical system. In other words, corporate profits are first taxed in the hands of the company and when the company distributes the profits by way of dividends to individual shareholders, the said shareholders are fully taxed on the net amount of dividends received. This leads to economic double taxation, that is, corporate profits are taxed first in the hands of the company and secondly when the said taxed profits are distributed by way of dividend, they are again taxed in the hands of the individuals in receipt of the dividend.
On the other hand, Malta operates the full imputation system of company taxation whereby corporate profits are taxed in the hands of the company at the flat rate of 35%. However, when dividends are distributed to individuals out of taxed profits, the dividend carries an imputation credit of the tax paid by the company on the profits so distributed.
This principle may be best explained by illustrating the mechanics as shown below.
Taking as an example a company which makes taxable profits of 1,000:
| Taxable profits of company | 1,000 |
| Corporate tax thereon at 35% | 350 |
| Profits after tax | 650 |
The company distributes all the post tax profits to its shareholder who is an individual resident in Malta. The company is obliged in terms of the provisions of the Income Tax Act to issue a dividend warrant which must contain the following information:
Dividend Warrant
| Deemed gross dividend | 1,000 |
| Tax at source (imputation credit) | 350 |
| Net dividend | 650 |
In Malta the highest tax rate which individuals suffer is also 35%. Should the shareholder declare the dividend in his tax return, the following would be declared:
Tax return
| Deemed gross dividend | 1,000 |
| Tax charge at 35% (marginal tax rate) | 350 |
| Imputation credit | (350) |
| Tax payable | 0 |
The imputation credit is set off against the tax charge on the dividend in the hands of the individual. This system thus eliminates the economic double taxation that occurs when the classical system is in operation. Under the full imputation system of company taxation, corporate profits are taxed only once.
The Income Tax Act also provides that individual shareholders are not obliged to declare dividends received from Malta companies as the dividend is already covered by the imputation credit of 35% which is equivalent to the maximum rate of tax that individuals pay in Malta.
The rates of tax chargeable on individuals income is progressive starting at 15% and reaching up to a maximum of 35%. If the shareholder receiving the dividend is not chargeable at the maximum rate of tax as his income is low, then the following would be declared in his tax return:
| Dividend | 1,000 |
| Tax chargeable at say 15% | 150 |
| Imputation credit | (350) |
| Tax refundable | (200) |
The individual will then receive a refund from the Inland Revenue authorities following the submission of his tax return.
The imputation system of company taxation applies to both resident and non-resident shareholders.