Real Estate Taxes in Malta
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 shall uphold his obligation to pay stamp duty and in turn the seller shall pay 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 foreign individuals who are willing to invest in Malta’s alluring real estate market.
Duty on Documents Transfers Act
Transfers of immovable property from one party to another upon the drawing up of a public deed shall be subject to duty under the Duty on Documents 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 alternatively on the value of the immovable, however the duty must be paid on the highest possible value.
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 Inland 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, a prospective buyer may avoid incurring the 5% stamp duty if the sale of immovable property is between:
- Persons who are married;
- Consequent to a separation or to a divorce between such persons; or
- On the dissolution of the community of acquests existing between; or
- 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.
Furthermore, duty is not charged upon a division of company where the shareholders of the companies’ recipient companies are the same shareholders of the company undergoing the division and each shareholder has the same amount of shares in each recipient company.
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 €117,000 of the price and the remaining amount which exceeds the first €117,000 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.
- 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 stamp duty reduction to 1.5% due on transfers of business by parents to children in 2017.
- A stamp duty exemption for first time buyers on the first €150,000 of the value of the property has been extended until end of 2017 .
- Stamp duty on acquisitions of immovable property in Gozo executed under 2018 shall be reduced to 2% in cases where the promise of sale agreement is concluded and registered with the IR Department during 2017.
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 property 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
On the contrary, with regards to property transfer tax, the seller plays an important role since he is subject to a final withholding tax on the value of the transfer of the immovable property.
The old regime has been phased out and as the 1st of January 2015 the option of taxing a transfer of property at the rate of 12% on capital gains has been done away with. Currently, the income tax act provides a lower rate of final withholding tax at the rate of 8% which is calculated on the value of the property. It is important to note that a property which was acquired before the 1st of January 2004 is subject to a final withholding tax of 10% on the value of the property.
The law has also catered 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 acquisition. Furthermore, 2% withholding tax applies upon a transfer of property that was immediately before the transfer owned by an individual or co-owned by an individual, provided that the transfer is not made later than 3 years. A 5% final withholding tax is also applicable when a transfer pertains to a property located in Valletta. Such properties must have been acquired before the 31st December 2018 and it must have been restored or rehabilitated.
Outright Exemption from Property Transfer Tax
A seller may also benefit from an outright exemption of tax in the following cases:
- donations in favour of spouse/descendants or ascendants;
- donations to philanthropic institution;
- transfer of property owned and occupied by transferor as own residence for a period of at least three consecutive years;
- 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 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.
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 donee 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.
As announced in the last budget speech during October 2016, Judicial sale by auction of immovable property inherited after November 1992 will be subject to a 7% final withholding tax.
A rate of 15% tax is charged on the rent of immovable property which consists of a dwelling house or a part of which is utilised by a person/s as his place of residence. This rate was introduced to encourage investment within the property market and to dishearten tax evaders.
The regulation of rental income from residential tenements has been complimented by recent budget amendments. Currently, the law caters for a deduction of interest allowable, any rent, license fees and a 20% deduction with regards to maintenance on outstanding income with the result taxed at the individual’s applicable rate of income tax.
Notwithstanding the latter an individual may elect to tax the gross rental income at a flat rate of 15%. The following are the most significant features of the final withholding tax on rental income:
- A qualifying property is a property which comprises of a dwelling house or part thereof which is to be occupied or is inhabited as a home or residence by the occupier, exclusive of a tenement which, for the purpose of the said letting, is required to be registered under the Malta Travel and Tourism Services Act and which is being rented out to an individual or individuals who occupy such property as a home or residence;
- Additionally, a landlord may opt to tax rental income derived from the qualifying property at the rate of 15% of the gross rental income earned;
- 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 individual undertaking this option is not obliged to declare such income in any return filed according to the Income Tax Act.
- If on the other hand, an individual is earning rental income from more than one residential property, the options must be applied to the total rental income earned within that year from all the residential tenements let out by such individual;
The 30th of June of the year following the relevant year has been set as a deadline for the payment of tax due if an individual decides to avail of this option.
As from 1st January 2017 the lessor or lessee will be required to register with the IRD, rental agreements ( and renewals) covering a period of 3 months or more.
VAT 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 thus the following exceptions may apply:
- In the case of properties which must be licensed by the regulatory authority, namely the Malta Tourism Authority (“MTA”). In such a scenario an individual letting out of a tenement would subsequently incur a VAT rate of 7%.
- The renting out of selected parking areas; and
- The renting out of property by a limited liability company to an individual who is registered under article 10 of the VAT Act, and which property is being rented for the ultimate purpose of the latter’s economic activity.