On the 11th October 2021, the Minister for Finance and Employment Hon. Clyde Caruana has delivered the budget speech which was later followed by the publication of Bill No. 247 before Parliament. The principal aim of this Bill was to enforce some of the measures discussed in the Budget Measures Act, effective from financial year 2022, alongside other measures of an administrative nature.

Among the measures which culminated in legal amendments, one in particular attracts the interests of employees and/or employers whose employees’ contract of employment requires the performance of work or of duties mainly outside Malta. They ought to be become aware of the possibility to avail themselves of the optional 15% tax rate on employment income from such contracts in prior years. This can be evaluated in light of the amendments affected on Article 56(17) of the Income Tax Act (‘ITA’) (Chapter 123 of the Laws of Malta).

When an employee is required to work abroad for a mere period of time within a year, the amount of tax due is proportionately reduced. The tax estimated at special rates is further deducted by the amount of social security contributions paid in Malta throughout the term of overseas employment. If the individual has other sources of income, the emoluments from the foreign employment are assumed to be the final part of the total income, while the other sources of income are taxed at regular rates. Individuals can choose to have their foreign employment income added to their other earnings and taxed at their regular rates. Nonetheless, these special rules are not applicable to service on board a ship, airplane, or road vehicle chartered or leased by a Maltese firm, as well as any service for the Maltese Government.

Anyone who is an ordinarily tax resident in Malta may be subject to Maltese income tax on earnings earned outside the country. Additionally, under the Final Settlement System Rules, the employer may be expected to deduct tax on income from such employment contracts. If the individual’s employment income earned overseas is likewise subject to foreign tax, he or she may be eligible for double taxation relief, which prevents tax from being levied twice on the same income.

Article 56(17) of the ITA establishes a tax beneficial rate of 15% on income earned from overseas employment where the contract entails the execution of labor or obligations entirely or predominantly outside Malta. The Bill proposed an amendment to this provision to render the special rate inapplicable in two particular instances, namely:

  • when emoluments are due under a contract of employment for a duration of less than twelve (12) months or for a period of less than twelve (12) months
  • when the person in question was present in Malta for a duration that exceeds or for periods that in aggregate exceed thirty (30) days during the year immediately prior that year of assessment, discounting any timeframe during which that individual was present in Malta on vacation leave or sick leave, and discounting also any period preceding or following the onset or termination of the contract.

This provision is effective from the year of assessment 2023 onwards.

In this manner, the revisions limited the application of the optional 15% tax rate on earnings from such contracts and thus the optional 15% tax rate may not be applied unless the Maltese resident taxpayer additionally meets the new standards. The possibility of claiming the 15% tax rate under Article 56 (17) of the ITA on employment income earned primarily outside Malta was always laden with interpretational hazard. Although the new constraints alleviate some of these interpretational concerns, there are still some unanswered questions about how this reduced tax rate will be applied. It’s important to pay close attention to avoid undesirable situations involving unforeseen tax payments, as well as the risk of under-deducting tax through the Final Settlement System.

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