Real Estate Tax
Once a person has acquired or has just disposed of immovable property in Malta, both the buyer and the seller are subject to taxation. The buyer is obliged to pay the Duty on Documents and Transfers (stamp duty) and in turn the seller pays property transfer tax. The laws of Malta do not provide for any local council or municipal tax. Beneficial tax rates have been promulgated not only to benefit Maltese citizens but also to attract non-Maltese individuals as well as third country nationals, who are willing to invest in Malta’s alluring real estate market.
DUTY ON DOCUMENTS AND TRANSFERS ACT
Transfers of immovable property from one party to another upon the drawing up of a public deed are subject to duty under the Duty on Documents and Transfers Act. The buyer must pay stamp duty at the rate of 5%. The chargeable stamp duty is calculated on the value of the consideration for the transfer of the immovable property or on the value of the immovable property, whichever is the higher.
Once the stamp duty is calculated it shall be paid upon the drawing up of the final deed which in turn signifies the acquisition of the immovable property by the buyer. However, a provisional payment of 20% of the stamp duty must be paid to the Commissioner for Revenue in order to uphold the validity and legality of the promise of sale agreement, which is locally referred to as the “konvenju”.
OUTRIGHT EXEMPTION FROM DUTY
Nonetheless, no duty should be charged on the assignment of immovable property and on the transfer of marketable securities between:
- Persons who are married;
- Consequent to a separation or to a divorce between such persons;
- On the dissolution of the community of acquests existing between such persons;
- On any partition of any property held in common between spouses; and
- On the death of one spouse between the surviving spouse and the heirs of the deceased spouse.
BENEFITING FROM REDUCED RATES OF STAMP DUTY
A citizen of the European Union wishing to purchase a property from Malta’s thriving real estate market may benefit from a favourable rate of 3.5% on the first €150,000 of the price and the remaining amount which exceeds the first €150,000 is then calculated at the rate of 5%. It is important to note that a buyer wishing to take advantage of this reduced rate must make a declaration on the deed that he intends to dwell in the property which is being purchased by him and thus taking up the status of a sole ordinary residence.
Additionally, an individual is also granted the possibility of avoiding stamp duty on the first €200,000 in the case of transferring an immovable property gratuitously to his descendants. Duty will then be due on the surplus at the rate of 3.5%, therefore also evading the higher rate of 5% stamp duty.
A contract of exchange shall be deemed to constitute one transfer and the duty chargeable thereon shall be calculated on the higher of the values of the properties being transferred. Provided that if different rates apply, duty shall be charged on the value of either of the properties being transferred at the rate or rates which attract the higher amount of duty.
PROPERTY TRANSFER TAX
The previous regime for property transfer consisting of both a 12% final withholding tax on the transfer value and 35% tax on the profit or gain has been phased out and as from 1st January 2015, and one final withholding tax of 8% calculated on the value of the property transferred has been enacted. It is important to note that a property which was acquired before 1st January 2004 in respect of which a notice of a promise of sale or transfer relating to that immovable property had not been given to the Commissioner of Revenue before 17th November 2014 the applicable final withholding tax rate shall be 10% on the value of the property transferred.
The law also caters for those transferors who do not habitually acquire and transfer properties. In fact, a transferor may benefit from the low rate of a final withholding tax of 5% upon transferring an immovable property within five years from the date of its acquisition. Furthermore, 2% final withholding tax applies upon a transfer of property that was, immediately before the transfer, owned by an individual or co-owned by two individuals, provided that the said property had been acquired for the purpose of their sole ordinary residence and that the transfer is not made later than 3 years from the date of the acquisition of said immovable property.
A special 5% final withholding tax rate is applicable when a transfer pertains to a property located in Valletta and which was acquired by the transferor before 31st December 2018 and such property has been restored or rehabilitated after the date of its acquisition. For this special 5% rate to apply, the property must be transferred by not later than 5 years from 31st December 2018.
Non-residents in Malta are still entitled to opt out of the final withholding tax system and be taxed under the general rules of Income Tax Act. However, once such choice is made the provisional tax paid relating to a transfer of an immovable property made on or after 1st January 2015, shall not be refunded and no claim can be made to reduce the provisional tax payable.
Furthermore, a seller is charged at the rate of 12% of the excess of the transfer value which has been declared on the deed of the transmission causa mortis and the sale price, if any, if the property was acquired by the seller by way of a donation which was made more than five years before the date of the said transfer. Notably, if the property is being listed on the real estate market and consequently sold by the done after the lapse of five years the cost of the acquisition shall be that particular value of the property as declared previously in the deed of donation.
In the case of inherited property, one has to keep in mind that if the property was inherited after the 24th of November 1992 a 12% final withholding tax on the difference between the transfer value and the cost of acquisition is applicable. On the other hand, a final withholding rate of tax at 7% is chargeable on the selling price if the property was inherited before the 25th of November 1992.
Upon further contemplation of property transfer tax and the calculation thereof, where an asset is reassigned from one company to another, and such companies are set up and operating in a group of companies or controlled and owned to the extent of more than 50% by the same shareholders, it is held that neither a loss or a gain has been incurred from the transfer between the companies.
Assets which are being transferred which have been previously utilised in a business for a time span of at least three years and which are subsequently substituted within a year by another asset utilised exclusively for a comparable purpose in the said business, any capital gains will not be taxed but the cost of acquisition of the newly acquired asset will be reduced to the said gain.
OUTRIGHT EXEMPTION FROM PROPERTY TRANSFER TAX
A seller may also benefit from the exemptions prescribed in the legislation as long as all the conditions are satisfied which exemptions include amongst others:
- Donations in favour of spouse, descendants or ascendants;
- Donations to philanthropic institutions;
- Transfers of property owned and occupied by transferor as own residence for a period of at least three consecutive years immediately preceding the date of the transfer;
- Assignment of property between spouses in a separation or divorce;
- Assignment of property after termination or dissolution of the community of acquests between spouses;
- Partition of property between spouses or partition of property between a surviving spouse and the heirs of the deceased spouse;
- Transfer from one company to another forming part of the same group;
- Transfer of property on the incorporation of a business or partnership en nom collectif as a going concern into a limited liability company;
- The settlement of property on trust;
- A transfer of property by a company to its shareholder in the course of a distribution of assets pursuant to a scheme of distribution.
A rate of 15% tax is charged on the gross rental income from immovable property and applies both to residential rental as from 1st January 2014 and commercial property as from 1st January 2016, should the requirements set in the legislation be met. The rates were introduced to encourage investment within the property market.
Currently, the law caters for a deduction of interest allowable, any rent, licence fees and a 20% deduction with regard to maintenance on outstanding income with the result taxed at the individual’s applicable rate of income tax.
Notably, such tax is deemed to be final and a set-off or a refund may not be granted to any person in respect of the chargeable tax.
The 15% flat rate tax is optional. The person undertaking this option is not obliged to declare such income in any return filed according to the Income Tax Act. However, one may choose to declare the gross rental income in his tax return and be charged with the normal rates rather than with the 15% flat rate. If such option is exercised it applies to the total rental income received in the said year from all the tenements let out by such person, subject that the tenements qualify for this rate.
VALUE ADDED TAX ON RENT
As a rule VAT is not chargeable to the tenant occupying the tenement, and furthermore the landlord may not recover input VAT on costs in relation to the said property.
However this exemption is not absolute and VAT is chargeable in the following cases:
- Properties licensed by the Malta Tourism Authority
- The renting out of selected parking areas
- The renting out of property by a limited liability company to a person who is registered under article 10 of the Value Added Tax Act, and which property is being rented for the ultimate purpose of the latter’s economic activity.