Corporate tax in Malta: the 6/7 system and the effective 5%

Corporate tax in Malta: the 35% rate and the 5% reality

When an investor first sees Malta's figures, a legitimate question arises: how does a country with one of the highest nominal rates in the EU - 35% - end up on the list of the most favorable jurisdictions for business? The answer is that 35% isn't the amount ultimately retained by the Maltese treasury. It's only the first step of the calculation.

Malta's profit tax is built on the full imputation principle. The company does pay 35% on its profit. But when it distributes dividends, the shareholder gets the right to reclaim a significant part of that tax. For classic trading income the refund is six-sevenths of the amount paid - hence the name of the 6/7 system. As a result, of the original 35%, about 5% remains in Malta's budget.

This isn't a gray scheme or a loophole. Malta's tax refund system has been in effect since the country joined the EU in 2004, and has passed the EU Code of Conduct on Business Taxation and OECD requirements. It remains fully functional in 2026 too. More on related regimes - in our article ontax residency in Malta.

How Malta's full imputation tax system works

To understand the logic, recall that in many countries dividends are taxed twice: first the company pays profit tax, then the shareholder pays tax on the dividend received. Malta took a different path - the full imputation system. The tax paid by the company is treated as if paid in advance on behalf of the shareholder.

When profit is distributed, the company's tax is credited against the shareholder's tax liability. Since the dividend rate for a foreign shareholder is effectively lower than the 35% already paid by the company, an overpayment arises. The state refunds this overpayment - in the form of that same 6/7, 5/7, or 2/3 refund, depending on the nature of the income.

The key principle: the refund is due specifically to the shareholder, not the company itself. So the right ownership structure isn't a formality, but the foundation of the whole construction. The refund doesn't happen automatically along with the tax payment: first the company pays 35%, then distributes a dividend, and only after that does the shareholder file a refund claim. With correctly filed documents, Malta's tax administration transfers the refund within roughly 14 working days - up to a few weeks.

The 6/7 refund: where the effective 5% rate comes from

The most common question is: where exactly does the 5% come from? We'll show it with figures, because it's the arithmetic that removes all doubt.

Say a Maltese company earned 100,000 euros of trading profit. It pays tax at the 35% rate - that is, 35,000 euros. After paying the tax it has 65,000 euros left, which it distributes to the shareholder as a dividend.

Now the refund comes into play. For trading income the shareholder gets back six-sevenths of the tax paid by the company. Six-sevenths of 35,000 euros is 30,000 euros. This money is refunded to the shareholder. In total, only 35,000 minus 30,000 = 5,000 euros remained in Malta's treasury. On the original profit of 100,000 euros, this is exactly Malta's famous effective 5% rate.

• Company profit: 100,000 euros
• 35% tax: 35,000 euros paid
• 6/7 refund to shareholder: 30,000 euros
• Actually retained by the state: 5,000 euros
• Effective rate: 5%

Important: the 6/7 refund is a rule for active trading income. For other types of profit the refund rates differ, and the effective burden will be different.

Table of refund rates by income type

Malta applies not one but several refund rates - depending on exactly what income is being distributed and whether double-taxation relief mechanisms have already been applied. This is essential for planning: confusing trading income with passive income is a common and costly mistake.

Interest and royalties are considered passive if they didn't arise directly or indirectly from trading activity and weren't taxed abroad at a rate of at least 5%. If there's doubt about which category income falls into, it's better to sort it out in advance - before distributing profit.

The refund mechanics: the company pays, the shareholder gets a refund

It's worth walking through the steps again, since the sequence of actions is what most often confuses those used to jurisdictions with a low nominal rate.

• Step 1.The company closes the financial year, calculates taxable profit, and pays corporate tax at the 35% rate.
• Step 2.After-tax profit is distributed to the shareholder as a dividend. Without distribution there's no refund - this is a mandatory condition.
• Step 3.The shareholder (usually through a tax advisor) files a claim for a refund of the corresponding share of the tax paid.
• Step 4.The tax administration checks that the company's tax has been paid, reporting filed, and the refund claim is correct, then transfers the funds - usually within 14 working days.

The main practical drawback of the classic scheme is the cash-flow gap: time passes between paying the 35% and receiving the 6/7 refund, and money is temporarily frozen. This is inconvenient for a business with large turnover. The solution - a two-company structure or tax consolidation, covered below.

A two-company structure: holding and operating

Most international groups in Malta use not one but two companies - an operating one (OpCo) and a holding one (HoldCo). The logic is simple and elegant.

The operating company runs the business, earns trading profit, and pays 35% tax. Then it distributes the dividend not to the individual beneficiary, but to the Maltese holding company that owns its shares. The holding receives the dividend and files a claim for the 6/7 refund. The refund accumulates at the holding level, without creating immediate tax for the ultimate owner.

This structure gives flexibility: the profit and refunded tax stay within the corporate perimeter, and the decision to pay out funds to the beneficiary is made separately, whenever convenient. Registration details - in our guide onregistering a company in Malta, and the specifics of holding structures - in our article ona holding company in Malta.

Tax consolidation: how to remove the cash-flow gap

Since 2019 Malta has allowed forming a fiscal unit - that is, consolidating a group of companies for tax purposes. This is a direct answer to the system's main complaint: having to pay out 35% first and wait weeks for the refund.

When the parent company and its subsidiaries form a fiscal unit, the group files a single consolidated return. The tax is calculated right away at the net effective rate - that is, the group pays about 5% directly, rather than 35% first followed by a 6/7 refund. The cash-flow gap disappears, and money isn't frozen.

Conditions: the parent company must hold a sufficient stake (usually at least 95% of rights) in the subsidiaries within the unit. For a business with large turnover and a stable ownership structure this is a serious advantage - it turns the theoretical 5% into a real rate without tying up working capital.

The participation exemption for holdings

A separate and very powerful tool is the participation exemption. It works not through a refund, but through a direct exemption from tax.

If a Maltese holding company owns a qualifying stake in a subsidiary, the dividends and capital gains from that stake can be fully exempt from Maltese tax. That is, the burden isn't 5%, but zero. This makes Malta an attractive platform for building international holdings that own stakes in companies worldwide.

For a stake to be considered qualifying, one of the criteria usually has to be met: holding at least 5% of shares with rights to profit and assets, or an investment above a certain threshold, or holding the stake for a set period. Plus anti-abuse conditions apply - the holding must not be used merely to channel lightly taxed passive income. Each structure should be calculated individually.

The impact of the global minimum tax, Pillar Two

The most important change of recent years is the OECD's global minimum tax, known as Pillar Two. It introduces a minimum effective rate of 15% for large international groups. Full honesty is needed here, because the question directly concerns the 5% rate.

Pillar Two applies to groups with consolidated global revenue above 750 million euros. Malta used its right to defer and postponed the introduction of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). At the same time, from January 1, 2026, Malta introduced a Qualified Domestic Minimum Top-up Tax (QDMTT) and a final 15% tax option for Pillar Two compliance purposes.

What this means in practice:

• For groups with revenue above 750 million euros, the effective 5% may not survive a Pillar Two check - a top-up to 15% arises, and the final 15% tax becomes the more logical route.
• For private investors and small and medium companies with revenue below the 750-million-euro threshold, the 6/7 refund system and the effective 5% rate keep working unchanged.

In other words, the classic 5% Maltese model is still relevant for the vast majority of businesses - but large multinational groups need a separate calculation.

Why this isn't an offshore: genuine substance is mandatory

The temptation to see Malta as an offshore is strong, but it's a mistake that can be costly. Malta is a full EU member, and its tax system rests on the principle of genuine economic activity.

Simply registering a company and waiting for the 5% rate no longer works. The tax administration and banks require proof of substance:

• a physical office in Malta, not a virtual address or a mailbox;
• at least one Malta-resident director with real authority;
• board meetings held in Malta, with documented minutes;
• a local bank account used for operational settlements;
• staff proportionate to the scale of activity;
• key strategic and financial decisions made in Malta.

Failing to comply with economic substance rules carries fines - initially from 10,000 to 50,000 euros, and further violations can lead to stricter measures, up to removal of the company from the register. So the right approach is to build a genuine presence, not an imitation.

Who a Maltese corporate structure suits

Corporate taxation in Malta isn't a tool for everyone, but for specific business profiles. Let's break down who it genuinely benefits.

• International trading and service companies.Active income from trading goods and services is taxed at the effective 5% rate through the 6/7 refund - this is the base scenario.
• Holding structures.Groups holding stakes in companies worldwide benefit from the participation exemption (zero tax on dividends and gains from qualifying subsidiaries).
• IT, licensing, digital business.An English-speaking jurisdiction, EU membership, and access to the European market. For royalties, remember the 5/7 refund rate.
• Investors planning to relocate.The corporate structure is often paired with a personal tax regime - for example, non-dom status, covered separately in our article onthe non-dom regime in Malta.

Who it doesn't suit: businesses with no genuine activity and those seeking anonymity - Malta operates under tax information exchange and full beneficiary transparency.

VAT, other taxes, and important details

Corporate tax isn't the only item to account for when planning. The picture is incomplete without related taxes.

• VAT.The standard rate in Malta is 18%, one of the lowest in the EU. Reduced and zero rates apply to certain categories.
• Inheritance and wealth tax.Absent - this is an important advantage for family and capital planning.
• Notional Interest Deduction (NID).The Notional Interest Deduction lets the company deduct a notional interest on equity, which for foreign shareholders can further reduce the burden.
• Withholding tax.In most cases Malta doesn't levy withholding tax on dividends, interest, and royalties paid to non-residents.

All these elements combine into the overall picture, and the effective burden depends on the specific structure. There's no universal answer - the calculation is always individual, based on the income profile and the beneficiary's country of tax residency.

How the final burden is calculated: a breakdown with figures

Let's put it all together in one running example, to show how the elements of the system interact. Take an international trading group with a two-tier structure in Malta.

The operating company earned 1,000,000 euros of trading profit. It pays 35% - 350,000 euros. It distributes 650,000 euros as a dividend to the holding company. The holding claims a 6/7 refund of the tax paid: 6/7 of 350,000 = 300,000 euros. This money is refunded to the holding. In total, the real burden at Malta's level is 50,000 euros, or 5% of the original million.

If the group has formed a fiscal unit, it pays 50,000 euros (5%) right away without needing to temporarily freeze 350,000 euros. The difference is a net gain to working capital.

Now let's add participation: if the holding has qualifying subsidiaries abroad, dividends and gains from them come into the holding with no Maltese tax at all, thanks to the participation exemption. And if the group's revenue exceeds 750 million euros, on top of all this you need to check Pillar Two and a possible top-up to 15%. This is exactly why the final figure is always calculated for the specific situation.

Common mistakes and structure checks before launch

Experience shows investors' problems arise not from the system itself, but from misapplying it. Here's a list of typical mistakes.

• Expecting 5% on any income.The 6/7 rate is for active trading income. Passive interest and royalties give a 5/7 refund and an effective burden of about 10%.
• Ignoring substance.A company without an office, a resident director, and genuine activity risks additional assessments, frozen accounts, and fines.
• Distributing a dividend directly to the individual beneficiary.This can create tax in the owner's country of residence earlier than needed. The holding level gives control over timing.
• Underestimating the cash-flow gap.Without a fiscal unit, the 35% is frozen for weeks - critical for a business relying on working capital.
• Forgetting about Pillar Two in a large group.For revenue above 750 million euros the calculation is fundamentally different.

Each of these mistakes is fixable at the planning stage. So the structure should be designed before registration, not patched up after the fact.