Tax Benefits of Partnerships in Malta

In terms of Maltese Income Tax Act, a partnership is treated as transparent for tax purposes, unless it elects to be treated as a company in terms of the Income Tax Management Act. The profits and gains of a tax transparent partnership are taxed in the hands of the partners at their applicable personal tax rate. Partnerships in Malta enjoy several tax benefits that can make this business structure appealing for entrepreneurs and investors. These benefits vary slightly between general partnerships (GPs) and limited partnerships (LPs), but both types share several common advantages. We will give you here an overview of the key tax benefits available to partnerships in Malta:

Tax Transparency

1. Pass-Through Taxation:
- Partnerships are typically not taxed at the entity level. Instead, profits and losses are passed through to the individual partners.
- Each partner reports their share of the partnership’s income or loss on their personal tax return, which is then taxed at their individual income tax rates.

Tax Deductions

2. Business Expenses:
- Partnerships can deduct ordinary and necessary business expenses from their gross income. These deductions can include costs related to salaries, rent, utilities, office supplies, travel, and other operational expenses.
- Deductions reduce the taxable income of the partnership, thereby lowering the overall tax liability for the partners.

3. Interest and Depreciation:
- Partnerships can deduct interest paid on business loans and other debt instruments.
- Depreciation of business assets, such as equipment, machinery, and buildings, can also be deducted over the useful life of the assets, providing further tax relief.

Incentives and Allowances

4. Investment Aid:
- Malta offers several investment aid schemes through Malta Enterprise, which can benefit partnerships making capital investments, creating jobs, or engaging in research and development (R&D).
- Tax credits and cash grants are available for qualifying projects.

5. MicroInvest Scheme:
- Small and micro-enterprises, including partnerships, can benefit from tax credits on eligible expenses such as wages, capital investments, and R&D.
- This scheme provides a tax credit of up to 45% of eligible expenditure, capped at €50,000 over three consecutive years.

Capital Gains

6. Capital Gains Taxation:
- Capital gains realized by a partnership are allocated to the partners and taxed at their individual rates.
- Certain capital gains may qualify for exemptions or reduced tax rates under specific conditions, such as gains from the transfer of qualifying intellectual property or shares in companies.

VAT Considerations

7. VAT Grouping:
- Partnerships can form VAT groups with other related entities, simplifying VAT administration and improving cash flow.
- Transactions within the VAT group are disregarded for VAT purposes, potentially reducing the overall VAT liability.

8. Input VAT Recovery:
- Partnerships can recover input VAT on business-related expenses, subject to the standard rules and conditions set by the Maltese VAT Act.

Social Security Contributions

9. Flexible Contributions:
- Partners in a partnership are subject to social security contributions, but these can be more flexible compared to those of a company’s employees.
- Self-employed partners can benefit from the lower Class 2 social security contribution rates, which are generally lower than Class 1 rates applicable to employees.

Double Tax Treaties

10. Double Tax Treaties:
- Malta has an extensive network of double tax treaties with over 70 countries, reducing the risk of double taxation on income earned in foreign jurisdictions.
- These treaties provide mechanisms for tax credits, exemptions, or reduced withholding tax rates on cross-border income such as dividends, interest, and royalties.

Participation Exemption (for Limited Partnerships)

11. Participation Exemption:
- Limited partnerships (LPs) in Malta can benefit from the participation exemption on dividends and capital gains derived from qualifying participations.
- To qualify, the partnership must hold at least 10% of the equity shares in another company or have an investment of at least €1.164 million held for at least 183 days.
- Qualifying income is exempt from Maltese tax, providing significant tax savings.

Conclusion

Partnerships in Malta offer several tax benefits, including pass-through taxation, numerous deductions, and access to various incentives and allowances. These advantages can make partnerships an attractive choice for entrepreneurs looking to minimize their tax burden while maintaining flexibility in their business operations. Read more about Malta Corporate Tax: Malta Ranks Third in EU for Corporate Tax Revenue

Our qualified accountant (Member of the Institute of Financial Services Practitioners in Malta) will assist you in all aspects about tax benefits of partnerships in Malta.