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Treatment Of Royalty Income From Patents
Malta offers a number of different favorable tax treatments for royalty income. Mainly, the tax treatment of royalty income depends on its classification as active or passive income;
Active royalties are royalties which are derived, whether directly or indirectly, from trade or business. Normally, a company is deemed to be deriving active royalty income when it has three or more separate streams of royalty income.
Where a Malta Company receives royalty income as part of its business of licensing patents, and none of the exemptions outlined further below apply, 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 dividends or bonus shares, the shareholder (normally an offshore company) would be in a position to claim a tax refund of 6/7ths (30%) of the Malta tax, thus effectively reducing taxation in Malta to 5%.
Passive royalties are royalties which are not derived, directly or indirectly, from a trade or business. Normally, a company is deemed to be deriving passive royalty income when it has two or less separate streams of royalty income.
Where a Maltese company derives royalty income which is of a passive nature, and none of the exemptions outlined further below apply, initially this income suffers tax at 35%. Once again, upon the distribution of this income as dividends or bonus shares, the shareholder would become entitled for a tax refund. However, in this case rather than a 6/7ths (30%) refund, the shareholder could claim a 5/7ths (25%) 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
Before being subject to the aforementioned tax treatment, there are possibilities that royalty income is not subject to tax in the first place. Fundamentally there are two relevant exemptions:
- no Maltese tax is levied on royalty income arising from patents registered in Malta as long as both the following two conditions are satisfied:
- the royalty income is of a passive nature (as defined above); and
- the royalty income is derived by non-Maltese resident persons.
- a more general exemption is possible as this applies to both residents and non-residents, and irrespective if the income is active or not. However, this exemption is only possible in respect of inventions (intellectual property) which are patentable or copyrightable under Maltese law or are the result of fundamental research, industrial research or experimental development defined below:
‘Fundamental Research’ means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct practical application or use in view;
‘Industrial Research’ means planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It comprises the creation of components of complex systems, which is necessary for the industrial research, notably for generic technology validation, to the exclusion of prototypes as covered by ‘experimental development’ (see below);
‘Experimental Development’ means acquiring, combining, shaping and using of existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services.
last updated on: 18th February, 2014