PL clarifies corporate tax plans after pledge causes confusion

A Labour pledge to slash corporate tax rates to 25% will only apply to a company’s retained profits, a Labour Party spokesperson said, with dividends taxed in line with the shareholders’ personal income tax rates.

On Monday, Prime Minister Robert Abela and Finance Minister Clyde Caruana unveiled a pledge to cut corporate tax for companies with an annual turnover of under €1 million.

These companies would start paying a corporate tax rate of 25% rather than the standard 35%, according to the pledge.

The measure would affect around 13,000 small and medium enterprises in Malta, at a cost of €32 million to the public purse, Abela and Caruana said.

However, the measure’s announcement caused confusion, with some questioning whether the lower rate would also apply to individual shareholders’ dividends.

Under current rules, shareholders are effectively not taxed on their dividends, since the corporate tax rate of 35% is identical to the top personal income tax bracket.

If a shareholder falls within a personal income tax band below 35% (such as the 15% or 25% tax bands) they are instead refunded the difference between their personal tax rate and the 35% corporate tax rate paid by the company.

‘Personal income tax rate applies’ for dividend payments

At Monday’s press conference, Caruana had said the new 25% rate “applies to the so-called retained profits of a company, meaning the profits that remain within the company”.

A Finance Ministry spokesperson repeated the point when contacted yesterday, saying the 25% tax rate will apply as long as the company holds on to its profits.

Once the profits are distributed as dividends, “the personal income tax rate applies", the spokesperson said.

In practice, this means that if a shareholder falls within the 35% personal income tax bracket, they will have to fork out the 10% difference between their personal tax rate and the 25% corporate tax already charged to the company.

Likewise, if they fall within the 15% personal income tax bracket, they will be refunded the 10% difference.

Changing Malta’s corporate tax rate has long been on the political agenda.

Labour’s 2022 electoral manifesto had promised to lower the rate to 25% for a company’s first €250,000 profits earned in a year, but the measure never came to pass.

Meanwhile, the PN last year proposed a flat 15% corporate tax rate for businesses in the hospitality and catering industry.

Developers had also lobbied for a harmonised 15% rate across all local and foreign businesses, with some foreign multinationals currently effectively paying just 5% in corporate income tax.

According to the OECD, Malta’s corporate tax rate of 35% was among the highest in Europe.