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Damien Fiott, partner in charge of tax, provides an overview of the main tax issues that foreign individuals should take into consideration when selling immovable property in Malta. The sale of real estate located in Malta is subject to a flat rate final tax of 12% calculated on the transfer value but the law provides for certain exceptions and exemptions.
The 12% final tax
As a rule, a transfer of immovable property situated in Malta is subject to a final tax of 12% charged on the transfer value (in addition to 5% stamp duty, which is normally pay- able by the buyer). This is not a tax on income or capital gains (if any) realised on the transfer of property but a flat rate tax imposed on the transfer value and payable on the deed of transfer.
The transfer value is deemed to be the higher of the consideration re- ceived and the market value of the property as at the date of transfer. A deduction is allowed in respect of any agency or brokerage fees that are payable by the seller – these are deductible as long as they are re- corded in the transfer deed. The 12% tax is due even where the sale produces a loss, although the law provides an alternative taxation method in certain cases as I explain in more detail below.
Exemptions & options
Certain transfers are exempt from the 12% tax regime. These include a transfer of property that had been owned and occupied for a period of at least three consecutive years as the transferor’s main or sole resi- dence immediately preceding the date of transfer and provided that the property is disposed of within 12 months of vacating the premises.
In certain other cases, the seller may opt out from the 12% tax charge. One such instance relates to a trans- fer of property made within the ‘opt -out’ period. In this case, the trans- feror may choose not to be taxed at 12% on the transfer value but to be taxed on the gain (if any) realised on the sale.
At present the opt-out period is five years (to be reckoned from the date of purchase) but this is being ex-
tended to seven years.
Another instance where a foreigner may opt out of the 12% final tax system is where he/she will be taxed on the gain from the transfer in his/ her country of residence. A person who is not resident in Malta may be subject to tax in his/her country of residence on his/her worldwide income, which would therefore include profits from the sale of property in Malta.
Double taxation relief is normally available in the country of residence when the same income is subject to tax in two different jurisdictions. Since the 12% final tax on property transfers is not a tax on income, it might not qualify for relief under the usual rules on double taxation relief.
The law therefore grants foreigners an option to pay tax on the gain (if any) instead of the 12% final tax on the full value. A foreigner exercising this option must produce evidence to the notary in charge of publishing the deed that he/she is resident for tax purposes in another country and that he/she will be subject to tax in that country on profits derived from the transfer of property in Malta. This option is not limited by the five - (seven-) year rule.
Computation of capital gains tax
Where the option is taken, a provi- sional tax of 7% on the selling price is charged at the time of the trans- fer. The capital gain on the transfer is reported by the transferor in his/ her tax return (in such a case, the foreigner will be required to submit a tax return in Malta) and taxed at the applicable individuals’ rates rang- ing from 0 to 35%.
The provisional tax is available as a credit against the resulting tax and any excess credit will be refundable. If it can be shown that the provisional tax of 7% will exceed the resulting tax liability on the capital gain, the transferor may request the Commissioner of Inland Revenue to authorize a reduced rate of provi- sional tax or no provisional tax at all.
The applicable individual tax rates are applied in respect of gains calculated as a difference between the selling price and the cost of acquisi- tion of the property and the cost of any improvements.
Other expenses may be deducted from the selling price – these consist of costs related directly to the acquisition, such as notarial fees and stamp duty, a deduction for mainte- nance of 0.4% per annum, a deduc- tion for inflation, any ground rent paid and costs directly related to the transfer, such as brokerage fees not exceeding 5% of the selling price.
Special procedure
Foreigners who do not reside in Malta or who are not citizens of Malta must take into account a special procedure when they are about to sell their property. The notary in charge of drawing up the deed of sale is required to notify the Commissioner of Inland Reve- nue in advance about the transfer. The Commissioner may impose conditions on the transfer to the extent that these are necessary to ensure that the tax that may be due on the sale of that property or any other tax that may be due by that foreigner is paid.
There is no restriction on the transfer outside Malta of proceeds from the sale of the property, sub- ject to the payment of any out- standing tax. No VAT is due on the transfer of property. There are no net worth, real estate tax or any local taxes in Malta.
For more information please contact Damien Fiott on This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Damien Fiott is partner at FFF Legal and in charge of taxation.
Contact Damien Fiott or see his full profile.