Up until 31st December 2013, rental income could be taxed as trading income (typically rental income derived by a person who habitually rents out immovable property) or non-trading rental income.
Whilst rental income derived from a trading activity attracts most allowable deductions available to trading activities, non-trading rental income would qualify for the following deductions:
- Interest payable on loans used to acquire the subject property;
- Rents, ground rents or similar burdens;
- Any applicable licence fees; and
- A maintenance allowance equivalent to 20% of the residual income after taking deductions for b and c above.
Tax on rent of immovable property is at the rate of 15%. This was introduced through a recent amendment which brought about a new withholding tax on rent. While serving as an attempt to discourage tax evasion in this area, it encourages investment in immovable property in Malta.
Rental Income from residential tenements
On the 7th November 2014, the Government has published the forms pertaining to the final withholding tax on rental of residential tenements as announced in last year’s budget. This system is currently complimenting the current legislation which allows for the deduction of interest allowable, any rent, licence fees and a 20% maintenance deduction on the income remaining with the result taxed at your applicable rate of income tax.
Alternatively, subject to the following conditions, one may OPT to tax the gross rental income (i.e. no deductions allowed) at a flat rate of 15%. The following are the salient features of the final withholding tax on rental income:
- A qualifying property is a property which consists of a dwelling house or part thereof which is to be occupied or is occupied as a home or residence by the occupier, excluding a tenement which, for the purpose of the said letting, is required to be under the Malta Travel and Tourism Services Act and which is being rented out to an individual or individuals who occupy such tenement as a home or residence;
- The landlord has the option to tax rental income derived from the qualifying property at the rate of 15% of the gross rental income received;
- Such tax shall be final and no set-off or refund shall be granted to any person in respect of the tax so charged;
- The person exercising the option shall not be required to declare such income, in any return made pursuant to the Income Tax Acts;
- If the person is deriving rental income from more than one residential property, the option shall be applied to the total rental income received in the said year from all the residential tenements let out by such person;
Payment of tax due under this option shall be made by not later than the 30 June of the year following the relevant year, in which the relevant rental income received during the period January to December of the relevant year. This payment shall be accompanied by the relevant form.
VAT on Rent
Rental of immovable property is generally considered as an exempt without credit supply (i.e. no VAT is charged to the tenant but the landlord does not have the option to reclaim input VAT on expenses related to the property). This exemption is subject to the following relevant exceptions:
- The letting of property, which for the purpose of the said letting, the property is required to be licensed by the Malta Tourism Authority (“MTA”). This type of letting would attract VAT at a rate of 7% for the first 12 months of residence of the individual in Malta;
Note: The MTA requires a property to be licensed, if it is being rented to an individual who has not resided in Malta for a period which exceeds 12 Months at the time of the letting.
- The letting of designated parking areas; and
- The letting of property by a limited liability company to a person who is registered under article 10 of the VAT Act, and which property is being rented for the purpose of the latter’s economic activity;
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