A double taxation treaty is an agreement between two countries. It regulates the payment of taxes when the source of income is in one country and the recipient is in the other. Let's look at an example.
Investor - the shareholder of a Russian company, receives income in the form of dividends. He lived in Malta for more than 183 days in a year and became a tax resident there. At the same time, he continues to receive dividends in Russia.
If Russia and Malta did not conclude a double taxation treaty, the investor would pay tax on dividends twice: first in Russia when paying dividends, and then in Malta when they are credited to an account in a local bank. But under the Double taxation treaty, an investor pays income tax once: in the source country at the rate specified in the Double taxation treaty.
In March 2021, Russia has double taxation treaties with 84 countries. But the Russian Ministry of Finance plans to review treaties with 34 states where transferred income from dividends and interest are taxed at a rate below 15%. Therefore, at the end of 2020 Russia ratified new double tax treaties with Cyprus and Luxembourg.
The budget of Russia will be replenished by 130-150 billion rubles a year by increasing the tax rate on the Double Tax Treaty, as estimated by the Ministry of Finance.
New tax rate and exemptions under the Double Tax Treaty with Malta
The treaty on amendments to the agreement between Russia and Malta was signed by representatives of the states on October 1, 2020. The amended Double Tax Treaty came into force at the beginning of 2021, but the final approval of the document by the Russian President is set by the Federal Law of 09.03.2021 № 32-ФЗ.
Under the new rules, all income that is transferred in the form of dividends or interest from one country to another is taxed in the source country at a rate of 15%.
A preferential tax rate of no more than 5% of dividends and interest applies if the income recipient is:
- An insurance institution or pension fund;
- A public company whose shares are listed on a registered stock exchange;
- The government of the treaty country, its political subdivision or local government;
- The central bank of the covenant country.
Public companies must meet three conditions in order to pay the tax at a reduced rate:
- A minimum of 15 percent of the company's voting stock is free to float.
- The free float is the shares of the company, not the depositary receipts.
- The company owns at least 15% of the capital, which paid dividends or interest during the year.
The reduced rate also applies to interest received on state, corporate and Eurobonds. The full rules are in the updated version of the Convention on Avoidance of Double Taxation with Malta.
The exceptions are explained by the absence of risks. The Russian Ministry of Finance notes that the listed companies and institutions are not known to use foreign jurisdictions for tax evasion.
Why Russians become tax residents in Malta
In 2019 Malta ranked second in the number of tax residents from Russia. The research was carried out by the international consulting agency E st&Young. The reason is the loyalty of the Maltese tax system.
Advantageous tax rates for individuals. Tax residents of Malta do not pay tax on inheritance, gift, estate and capital gains. Income tax is charged on a progressive scale from 0 to 35%. The rate depends not only on the annual income of the taxpayer but also on his marital status. At the same time, the tax resident has the right to apply for a tax deduction and return most of the money.
Personal income tax rate and deduction for a tax resident of Malta: Married and without children
|0—12 700 €||0%||0|
|12 701—21 200 €||15%||1905 €|
|21 201—28 700 €||25%||4025 €|
|28 701—60 000 €||25%||3905 €|
|60 001 и более||35%||9905 €|
Relief for legal entities. Maltese companies do not pay taxes on royalties, dividends and interest. The rate of VAT - 18%, one of the lowest in the EU. By comparison, in Russia, VAT is paid at a rate of 20%.
Income tax is levied at a rate of 35%, but the company can refund up to 100% of the payment.
How to change tax residency and pay taxes in Malta
Russian can become a tax resident of Malta if he lives in the country more than 183 days in a year. It is also mandatory to have a source of income in Malta.
Get the status of domicile - another way to change the tax residence in Malta. In this case, do not need to spend more than six months in the country. A domicile is a person who considers Malta as his or her principal place of residence and intends to spend the rest of his or her life in the country.
A person may become a Maltese domicile if he or she is:
- Is over 18 years of age;
- Has severed ties with other countries, i.e. does not live long in another state;
- Has provided evidence that he intends to live in Malta permanently or indefinitely in the future.
A residence permit or Maltese citizenship is required in order to live legally in the country for a long time. The fastest way to become a Maltese resident or citizen is through contributing to the country's economy.
A residence permit in Malta is issued if a cosmopolitan meets three conditions: buy or rent a house on the island, pay a one-time administrative fee and take out medical insurance. In the future, the resident pays tax on world income to the budget of Malta at a rate of 15%, but not less than € 15,000 per year.
Permanent residency in Malta is also obtained when several conditions are met. The investor buys or rents a house, pays administrative and governmental fees, makes a donation to a local nongovernmental organization and proves assets of €500,000 or more.
The minimum investment amount is €112,000. Applications for the renewed program are accepted from March 29, 2021.
Maltese citizenship is obtained by Naturalisation for Exceptional Services by Direct Investment. Applicants undergo a strict due diligence check. If the investor passes the check, he first receives a residence permit, and after one year he can apply for citizenship. If the application is approved, he invests in the Maltese economy from €690,000 and becomes a citizen.
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