Login to 'Block Chain Island': encryption taxation and regulation in Malta

Author | TaxDAO

1. Introduction

Malta is located in the central Mediterranean, with a strategic geographical position, serving as a hub connecting Europe, North Africa, and the Middle East. In terms of the economy, Malta’s service sector is dominant, particularly with advanced tourism, finance, and information technology industries. In recent years, Malta has actively promoted the development of the blockchain and cryptocurrency industry, earning the reputation of being a ‘Blockchain Island.’ Its financial and legal environment has attracted a significant number of international investors and businesses. As a member of the European Union, Malta has adopted a proactive regulatory approach in the cryptocurrency and blockchain field, becoming a global leader in this area. This article will analyze Malta’s cryptocurrency asset regime from four perspectives: basic taxation system, cryptocurrency taxation system, cryptocurrency regulatory policies, and provide a summary and outlook, as well as predictions for its future development direction.

2. Malta’s Basic Tax System

2.1 Maltese Tax System

Malta has a progressive tax rate, with personal income tax rates ranging from 0% to 35%. The government taxes its residents on worldwide income, while non-residents are taxed only on their income generated in Malta. The definition of resident status is primarily based on the principle of the individual’s length of residence in Malta and the centre of economic interests. Malta also offers special tax schemes for expatriate residents and high net worth individuals, such as the Malta Retirement Plan and the Global Resident Plan, which offer fixed tax rates and tax relief benefits. According to the Malta Constitution, taxation power is mainly concentrated at the national level, while local governments have limited taxation power. In addition, Malta’s tax system is dominated by income tax and VAT. Other major taxes include capital gains tax, property tax, import and export duties, and payroll tax. Local governments have the right to levy real estate tax, business tax, and license and registration fees. Special taxes, such as excise and environmental taxes, are levied on the protection of specific goods, services and the environment, and the government aims to secure fiscal revenues through comprehensive taxes, support socio-economic development, and attract foreign investment and promote international business activities through preferential tax policies.

2.2 Income Tax

According to Maltese tax laws, a Maltese tax resident enterprise refers to a legal entity whose primary place of business or effective management is located in Malta. In tax treaties, Malta generally follows the concept of a resident enterprise as defined in the OECD Model Tax Convention. In this Model Convention, a resident enterprise refers to a person who is taxable in that country on the basis of its location, residence, management, establishment (with respect to the tax treaty with Malta), or other similar criteria under the laws of that country, but does not include a person whose income is derived solely from that country. In principle, if a legal entity does not meet the definition of a Maltese tax resident enterprise, it is considered a Maltese non-resident enterprise. The object of corporate income tax collection is a legal person such as an enterprise or company that is engaged in business activities within Malta. Non-resident enterprises with a permanent establishment in Malta need to pay corporate income tax on the income of that permanent establishment and income derived from Malta within Malta. Non-resident enterprises without a permanent establishment in Malta only need to pay corporate income tax on income derived from Malta. The income of non-resident enterprises is subject to different tax rates depending on their source and nature, but net taxable gains from the sale of real estate and shares and short-term income from construction installation and similar projects are subject to high tax rates. In specific cases, if such companies are identified as having income in the income tax item and have established permanent or fixed operations in Malta, they must follow the tax rules of Maltese resident companies and be taxed according to the situation of registered branch offices of foreign companies in Malta. Capital gains from the sale of fixed assets, stocks and real estate by enterprises are considered ordinary income and subject to corporate income tax. The corporate income tax rate in Malta is 35%, but the actual tax burden can be reduced through tax credit mechanisms, so compared with most countries, Malta’s corporate income tax rate is lower.

According to Maltese tax law, individuals who have a permanent residence in Malta are considered residents of Malta. If a person also has a permanent residence abroad, the main factor determining their tax residency is the location of their center of vital interests. If an individual’s income from Malta exceeds 50% of their total income in a calendar year, or if the main location of their professional activities is in Malta, they should be considered residents of Malta. Individuals who do not meet the above conditions are non-residents. Maltese residents are required to pay personal income tax on their worldwide income. Non-resident individuals who fall into the following two categories are also required to pay personal income tax: those operating through a permanent establishment in Malta and earning income, or those earning income from Malta. Foreigners residing in Malta are only taxed on their income within Malta. Personal income tax is levied at progressive rates, with a maximum tax rate of 35%.

It is important to note that Malta taxes capital gains, which mainly applies to the proceeds from the sale of fixed assets, stocks, and other capital assets. The tax rate for capital gains may vary depending on the type of asset and the holding period. Generally, the tax rate is lower for long-term held assets, while it is higher for short-term held assets. When calculating the taxable capital gains, the selling price of the asset minus the original purchase price and related expenses is considered, and only the actual appreciation portion is taxed. Malta also provides some tax incentives and exemptions, such as specific transactions for internal company restructuring and international investors may enjoy preferential treatment or exemptions.

2.3 Value-Added Tax

Malta’s value-added tax applies to the income from the sale of goods, provision of services, rental income, and the import of goods and services. When determining the applicable tax rate, non-value-added tax taxable income is taken into account together with value-added tax taxable income as the basis for determining the tax rate. The tax borne by consumers due to investment expenditure must be adjusted in subsequent tax years when taxpayers fulfill their tax obligations and enjoy their exemption rights. Currently, Malta’s standard VAT rate is 18%, with a reduced rate of 5% or zero rate applicable to certain specific goods and services. Malta’s VAT system aims to ensure the fairness and effectiveness of taxation, while also encouraging the development of specific industries and the improvement of social welfare.

2.4 Other Taxes

Most countries impose property taxes on their citizens for public services and infrastructure development. However, as a small open economy, Malta relies on attracting foreign investments and businesses, and therefore chooses to exempt property taxes to enhance its international competitiveness. By exempting property taxes, Malta hopes to attract more foreign capital and affluent individuals to purchase real estate and promote economic development. To offset the loss of property taxes, Malta’s tax structure mainly relies on other forms of taxation, such as income tax, property transfer tax, and stamp duty.

For real estate transfers, Malta has implemented a withholding tax (WHT) system. Starting from January 1, 2015, for real estate transfers within Malta, a withholding tax of 8% or 10% is generally levied based on the property transfer value, depending on the acquisition time of the real estate. In certain specific cases, the withholding tax rate may be different. In particular, a preferential tax rate of 5% can be enjoyed when the transfer value of the first €400,000 meets specific conditions. For real estate transfers acquired through inheritance or donation, a withholding tax of 12% on the difference between the transfer value and the acquisition value is required, or the default tax rate based on the transfer value as specified above. Any income generated from the transfer of rights or the termination or suspension of any rights related to the initial transfer of real estate up to €100,000 will be taxed at a rate of 15%.

Stamp duty is also an important part of Malta’s tax system. Stamp duty applies to real estate transfers and marketable securities transfers. For real estate transfers, residents and non-residents are taxed at a rate of 5%, while real estate transfers in the Gozo region are subject to a rate of 2%. For marketable securities transfers, the tax rate is 2%; if it involves the transfer of shares of a real estate company, the tax rate is 5%. Malta also provides various stamp duty exemptions, such as stamp duty exemption for shareholding restructuring. Stamp duty can also be exempted for the transfer of partnership interests from one company to another within the same group of companies or between partnerships. In addition, when donating marketable securities or commercial leases to close relatives through gratuitous transfer, stamp duty is levied at a preferential tax rate of 1.5%, which is applicable to donations made through a public contract before January 1, 2025.

Malta’s tax system is designed to ensure reasonable taxation of different incomes, promote market transparency and standardization, and provide a variety of tax incentives and exemptions to support the development of specific sectors and the healthy growth of the economy. Through these measures, Malta has not only maintained the fairness and transparency of the tax system, but also effectively attracted international investment and promoted the continuous rise of the economy.

3. The encryption tax system in Malta

Malta’s taxation system for Crypto assets is relatively clear, with the treatment of encryption assets mainly dependent on general tax law. Cryptocurrency exchange gains are treated as capital gains and are subject to individual income tax or corporate income tax. Profits generated by individuals and businesses from buying and selling Cryptocurrency should be subject to the corresponding tax payment based on Malta’s progressive tax rates, with specific rates depending on the trader’s total income.

Malta generally does not impose value-added tax on Cryptocurrency transactions because Malta is a member of the European Union, and according to EU law, Cryptocurrency is considered part of Financial Service, and the purchase and sale of Cryptocurrency do not require the payment of value-added tax. However, enterprises and individuals engaged in Cryptocurrency transactions must fulfill their respective tax declaration obligations, especially when enterprises are engaged in Cryptocurrency-related businesses, they must declare their transaction details to the Maltese Inland Revenue Department (IRD) and comply with relevant Anti-Money Laundering (AML) and Customer Due Diligence (CDD) regulations. Through these measures, the Maltese government ensures transparency and Compliance in the Cryptocurrency market, prevents tax evasion and Money Laundering, and protects the legitimate rights and interests of investors and consumers.

To promote the development of blockchain and Crypto enterprises, Malta offers a series of tax incentives. Eligible companies can enjoy lower corporate tax rates and effectively reduce their tax burden through the drop tax credit mechanism. Malta provides various tax incentives for companies using blockchain technology to encourage research and innovation. Specifically, eligible companies can receive a tax credit of up to 25% to 70% from R&D expenses, depending on the size of the company and the nature of the project. In addition, Malta offers favorable tax treatment for startups and early-stage companies, allowing them to benefit from the company’s drop tax rate and additional deductions from eligible expenses. In terms of intellectual property, Malta provides a preferential tax regime for income from qualified intellectual property, allowing investors to enjoy substantial tax reductions from income generated by patents, copyrights, trademarks, and other intellectual property.

To avoid double taxation of their global income by international investors, Malta has also signed an extensive network of double taxation treaties. These tax policies and incentives demonstrate Malta’s commitment to becoming a leading center for the blockchain and cryptocurrency industry, providing a favorable tax environment for global businesses and investors.

4. Malta’s Cryptocurrency Regulatory Policy

Malta is also one of the earliest countries globally to establish a comprehensive legal framework for regulating blockchain and Cryptocurrency. Its regulatory policies mainly revolve around the Virtual Financial Assets Act (VFAA), the Innovative Technology Arrangements and Services Act (ITAS), and the Malta Digital Innovation Authority Act (MDIA). In 2018, Malta passed the VFAA, which provides detailed definitions and classifications for Cryptocurrency and related activities, and sets specific regulatory requirements. According to this law, Virtual Financial Assets Service Providers (VASPs) engaged in Cryptocurrency trading, management, and custody must register with the Malta Financial Services Authority (MFSA) and adhere to strict regulatory standards. These standards include Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) measures, transparency requirements, and regular reporting.

In addition, companies conducting initial Token issuance (ICOs) in Malta are required to submit detailed White Papers to MFSA, disclosing detailed information about the project, including the function, risks, and funding usage plan of the Token. MFSA will review and approve these White Papers. All virtual financial asset service providers (VASPs) must comply with international AML/CFT standards, including conducting due diligence on customers, reporting suspicious transactions, and maintaining transaction records. Under the Innovative Technology Arrangements and Services Act (ITAS), Malta has also established the Malta Digital Innovation Authority (MDIA), which is responsible for certifying and regulating the application of blockchain and other innovative technologies to ensure the security and transparency of the technology. The Digital Innovation Authority Act establishes the Malta Digital Innovation Authority (MDIA), which is responsible for promoting and regulating the country’s digital innovation, including blockchain and cryptocurrency. Malta’s cryptocurrency regulatory framework ensures the transparency and safety of the cryptocurrency market, protects the interests of investors, and encourages financial technology innovation and industry development through strict laws and regulations. This comprehensive and rigorous regulatory approach not only ensures the healthy development of the market, but also provides a regulatory model for other countries around the world to draw upon.

5. Malta encryption asset system summary and outlook

Malta’s encryption asset tax system is relatively clear and forward-looking, with tax regulations mainly relying on general tax laws. Malta’s treatment of encryption assets mainly follows its legal characterization of virtual financial assets, treating Cryptocurrency exchanges as capital gains subject to individual income tax or corporate income tax, and exempting Cryptocurrency transactions from value-added tax. Malta imposes strict tax reporting and Anti-Money Laundering requirements on enterprises and individuals engaged in Cryptocurrency transactions to ensure compliance and market transparency. Although Malta’s tax system is primarily aimed at protecting investor interests and preventing financial risks, the Maltese government clearly encourages the development of the encryption asset field, actively attracting blockchain and Cryptocurrency enterprises through innovative technical arrangements and the Service and Other Benefits Act (ITAS) and other preferential policies, and promoting financial technology innovation and industry development.

Looking ahead, Malta will continue to play a leading role in global regulation and taxation of crypto assets. As the acceptance of cryptocurrencies increases globally, Malta may further improve its tax system to adapt to the development and changes of the cryptocurrency market. It is expected to find the best solution to balance economic development, financial security, and monetary sovereignty, and continue to maintain a leading position in the field of crypto assets. By constantly adjusting and optimizing tax policies, Malta can not only attract more blockchain and cryptocurrency enterprises, but also occupy a more favorable position in the international financial market, promoting sustained rise and innovation in the domestic economy.

References

.Malta Financial Services Authority. (2018). Virtual Financial Assets Act. Malta Financial Services Authority.[1]

.Malta Financial Services Authority. (2018). Innovative Technology Arrangements and Services Act. Malta Financial Services Authority.[2]

.Malta Digital Innovation Authority. (2018). Malta Digital Innovation Authority Act. Malta Digital Innovation Authority.[3]

.Malta Financial Services Authority. (2024). Regulation on cryptocurrencies and initial coin offerings. Malta Financial Services Authority.[4]

.Malta Digital Innovation Authority. (2024). Certification and regulatory requirements for innovative technology arrangements and services. Malta Digital Innovation Authority.[5]

.European Union. (2024). VAT regulations for cryptocurrencies. Official Journal of the European Union.[6]

Government of Malta. (2024). Tax Rates and Taxation 2024.[7]

.Malta Institute of Taxation. (2023, October 30). Malta Budget 2024.[8]

.PwC. (2024). Malta-Overview.[9]