Alternative systems for the taxation of dividend income : an appraisal of the Maltese system in the light thereof

Abstract

This qualitative research focuses on the alternative systems for the taxation of dividend income; namely the classical tax system, partial relief systems and the full imputation system. The intention of this study was to explain the mechanisms and the economic effects of each respective system and their implications on Malta. Research included an in-depth analysis of the Maltese Companies Act 1995, the Maltese Income Tax Act and Income Tax Management Act and other legislation including the EU Treaty, together with a number of writings and reports on the subject. Moreover interviews were carried out with a number of tax consultants in Malta to obtain their views on the subject. This study revealed that the full-imputation system in Malta is part of a package promoting Malta as a :financial services centre. Malta's wide network of double taxation agreements as well as other methods for relieving double taxation on cross border transactions provide an excellent basis for establishing tax efficient structures including international trading and holding companies, thus enhancing Malta's financial growth potential and international competitiveness. This study also reveals the economic implications of each corporate tax regime. Proponents of corporate integration claim that the classical tax system would distort three economic and financial decisions and would impair international competitiveness. On the other hand proponents of a two-tier tax system claim that the classical tax system enhances governments revenue and is justified since economic units are merely taxed as payment for their consumption of public goods. Besides the economic implications inherent within the imputation and classical tax regimes, Member States in the EU, including Malta, must evaluate the compatibility of their respective national tax provisions with EU law. This study thus examines recent case law within the European Court of Justice and examines the implications that these cases might have on the Malta's tax regime. From the research carried out its seems that Malta's full-imputation system is in line with the EU principles since credit is also extended to foreign source dividends received by Maltese residents. However, as revealed by this study, credit available to Maltese residents is limited to tax payable on that income in Malta. As a result in some circumstances when the foreign tax suffered exceeds the tax liability in Malta on the same income, the double taxation of dividends will not be eliminated but only reduced. As a result this might lead to an impediment on the free movement of capital. As a result the Maltese tax system might not be consistent with the EU principles after all, and in tum may be forced to change in the future.