Income Tax Act, articles 31C and 31D
Malta rental income tax: the 15% option and the alternative
Updated
A Maltese landlord has a genuine choice each year, and the flat option is not automatically the cheaper one, because it is charged on the gross with nothing deductible against it.
The 15% option
Article 31D of the Income Tax Act applies where a person rents a tenement. At that person's option the tax chargeable is fifteen cents on every euro of the gross rental income received. That tax is final, and no set-off or refund is granted in respect of it. Income taxed this way is separate chargeable income, does not form part of the person's other chargeable income, and an individual is not required to declare it in a return.
Three consequences people miss
- It is all or nothing for the year. Article 31D(4): where a person lets more than one tenement and exercises the option for a year, the option applies to the total rental income from all the tenements let by that person in that year.
- Nothing is deductible. The charge is on gross rent received, so interest, ground rent, maintenance, agency fees and insurance give no relief. A heavily geared or high-maintenance property can be better off outside the option.
- It is final in both directions. No set-off and no refund, and for a company the resulting distributable profits are allocated to the final tax account under article 31D(6), which puts them outside the shareholder refund system.
The alternative
Where the option is not exercised, rental income is part of the person's chargeable income and taxed at the ordinary rates in article 56, on the net after the deductions the Income Tax Acts and the rules made under them allow. For an individual whose total income sits in Malta's nil or 15% band, the ordinary route can produce a lower charge than a flat 15% on the gross; for an individual in the 25% or 35% band with few costs, the option usually wins. It is an arithmetic comparison to run each year on real figures, not a permanent decision.
Restored property: 10% and 15%
Article 31C applies to an owner of immovable property restored under a scheme for grade 1 or grade 2 scheduled property or property in an urban conservation area, who complies with the conditions imposed under that scheme. Where such a person rents the property out, the tax is 10% of the gross rental income for a residential letting and 15% for a commercial letting, again final and not available as a credit or refund. The tax is remitted with the required forms by 30 June of the year following that to which the income refers.
The penalty rate for undeclared rent
Article 31D(5) is deliberately harsh and applies whether or not the option was exercised. Where an enquiry has been conducted and the Commissioner determines that rental income which should have been declared was not declared, that income is charged at 35 cents on every euro of the gross rental income received, in addition to any interest and additional tax payable under the Income Tax Acts, and that charge is also final with no set-off or refund.
The letting of immovable property is also relevant for VAT: most letting is exempt without credit under Part Two of the Fifth Schedule to the VAT Act, but licensed accommodation, parking, letting by a company to a VAT-registered person for their economic activity and certain short lets are carved out. Get the income tax option and the VAT position looked at together rather than separately.