What is Double Taxation?
Double taxation is often an involuntary consequence of tax legislation. Businesses involved in international dealings are frequently burdened by double taxation. Double taxation occurs when income taxed in the jurisdiction where the income was generated is taxed again in the jurisdiction where the business is registered. It is a situation which any country in the world aiming to create investment wants to avoid.
Malta and the Republic of Kosovo have recently entered into a double taxation relief agreement. This is intended to further their economic relationship and enhance cooperation in tax matters. This, while minimising opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
The double taxation agreement is applicable in relation to the following taxes:
- Under the laws of Kosovo:
- Personal Income Tax
- Corporate income Tax
- Under the laws of Malta:
- Income Tax
The convention will also apply to any identical or substantially similar taxes imposed after the date of signature of the convention. It applies to persons who are resident in one of the states or both.
The profits of an enterprise of one of the states will only be taxable in the state where the enterprise carries out its business. If the enterprise carries out business in the other state through a permanent establishment, such profits may be taxed within that other state.
Where a state adjusts the profits of a permanent establishment, and taxes profits that have already been charged to tax in the other state, double taxation will arise. In such case, the other state shall make an appropriate adjustment to the amount of tax charged in order to eliminate double taxation.
Dividends paid by a company resident within one of the states to a resident of the other may be taxed in such other state. However, in certain cases, those dividends may also be taxed by the state where the company paying the dividends is resident.
If the beneficial owner is resident of one of the states and carries out business in the other state where the company paying out dividends is resident, the dividends will be treated in the same manner as Business Profits (mentioned above) rather than as income being derived from dividends.
What if a company resident in one of the states derives profits or income from the other state? In such case, the other state will be unable to impose tax on the dividends of such company. Certain conditions would of course apply depending on the case at hand.
Interest arising within a state and paid to a resident of the other, may be taxable in such other state. The interest may however also be taxed in the state where it arises. The amount charged cannot exceed 5% of the gross amount of the interest. However, this would only apply if the beneficial owner of the interest is a resident of the state where such interest did not arise.
- With respect to indebtedness arising due to the sale on credit of any equipment, merchandise or services;
- On a loan granted by a bank;
- To a collective investment scheme;
- To that other state or central bank or authority of such state;
- On intercompany loans.
Royalties arising in a state and beneficially owned by a resident of the other state will only be taxable in that other state. This will not apply however, if the beneficial owner of the royalties, resident in a state, carries on business in the other where the royalties arise. In such case the royalties would be treated in the same manner as Business Profits would.
Capital gains received by a resident of a state from the transfer of immovable property situated in the other state may be taxed by the state it is situated in. On the other hand, gains from the transfer of movable property forming part of the establishment’s property, which an enterprise of a contracting state has in the other may be taxed in that other state.
Gains from an enterprise of a contracting state which operates ships and aircraft will only be taxable in that state.
Capital gains made by a resident of a contracting state from the transfer of shares or interests may be taxed in the other contracting state, if a year prior to the transfer of such shares, these derived more than 50% of their value from immovable property situated within the other state.
Gains from the transfer of any other property will only be taxable in the state where the person transferring the property is resident.
Income from Employment
Salaries, wages or other similar remuneration paid to a resident in a state will be taxable in that state unless employment is exercised in the other. If employment is exercised elsewhere, it may be taxed there.
Remuneration in respect of an employment exercised in one of the states will not be taxable by the contracting state where the employment was carried out if:
- In total such person did not spend 183 days in any 12-month period of a fiscal year;
- Remuneration is paid by or on behalf of an employer who is not resident of the other state;
- The remuneration is not borne by a permanent establishment which the employer has in the other state;
What if a person was employed on a ship or aircraft which is operated solely within the other state? That income shall be taxable only by the state in which he is resident.
Elimination of Double taxation
In Malta the tax on income paid in Kosovo shall be allowed as a credit against the relative Malta tax payable. In Kosovo the tax will be eliminated by deducting from the tax on the income of that resident or deducting from the tax on the capital of that resident.
Both deductions will be of an amount equal to the relative tax paid in Malta.
Furthermore, the deduction will not exceed the Kosovo income or capital tax which is attributable to the tax paid in Malta