Entering Malta, the "Blockchain Island": Crypto Taxation and Regulation

Author: TaxDAO

1. Introduction

Malta is located in the central Mediterranean Sea, with a superior geographical location. It is a hub connecting Europe, North Africa and the Middle East. In terms of economy, Malta is mainly based on the service industry, especially tourism, finance and information technology industries. In recent years, Malta has actively promoted the development of blockchain and cryptocurrency industries and is known as the "Blockchain Island". Its financial and legal environment has attracted a large number of international investors and enterprises. As a member of the European Union, Malta has taken a positive regulatory attitude in the field of cryptocurrency and blockchain and has become a global leader in this field. This article will analyze Malta's crypto asset system from four aspects: basic tax system, cryptocurrency tax system, cryptocurrency regulatory policy, summary and outlook, and predict its future development direction.  

2. Malta's Basic Tax System 

2.1 Malta's Tax System 

Malta has a progressive tax rate, with personal income tax rates ranging from 0% to 35%. The government taxes residents on their global income, while non-residents are only taxed on their income generated in Malta. The definition of residency is mainly based on the length of an individual's residence in Malta and the principle of the center of economic interests. Malta also provides special tax programs for foreign residents and high net worth individuals, such as the "Malta Retirement Program" and the "Global Residence Program", which provide fixed tax rates and tax exemptions. According to the Maltese Constitution, taxation power is mainly concentrated at the national level, and local governments have relatively limited taxation power. In addition, the tax system in Malta is mainly based on income tax and value-added tax. Other major taxes include capital gains tax, property tax, import and export tariffs and wage and salary tax. Local governments have the right to levy real estate tax, business tax and license and registration fees. Special taxes such as consumption tax and environmental tax are levied on specific goods, services and environmental protection. The government aims to ensure fiscal revenue through comprehensive taxation, support socio-economic development, and attract foreign investment and promote international business activities through tax incentives.  

2.2 Income Tax 

According to the Maltese tax law, a Maltese tax resident enterprise refers to a legal entity whose main place of business management or effective management is located in Malta. In tax treaties, Malta generally follows the concept of resident enterprises stipulated in the OECD Model Agreement. In the Model Agreement, a resident company is a person who is taxed in that country by virtue of its location, residence, place of management, place of establishment (tax treaty with Malta) or other similar conditions 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 company, it is considered a Maltese non-resident company. Corporate income tax is levied on legal persons such as enterprises and companies that carry out business activities in Malta. Non-resident companies with a permanent establishment in Malta are required to pay corporate income tax in Malta on the income of the permanent establishment and income derived from Malta, while non-resident companies without a permanent establishment in Malta are only required to pay corporate income tax on income derived from Malta. Different tax rates apply to the income of non-resident companies according to their source and nature, but net taxable gains from the sale of real estate and shares and income from short-term construction, installation and similar works are subject to higher tax rates. In certain circumstances, if such companies are deemed to have income for income tax purposes and have a permanent establishment or fixed business in Malta, they will be subject to the tax rules for Maltese resident companies from the time of such determination and will be taxed in the same manner as a branch of a foreign company registered in Malta. Capital gains arising from the sale of fixed assets, shares and immovable property are considered ordinary income and are subject to corporate income tax. The corporate income tax rate in Malta is 35%, but this can be reduced through a tax credit mechanism, making it a relatively low rate compared to most other countries.  

Under Maltese tax law, a person who has a personal permanent residence in Malta is considered to be a Maltese resident. If such a person also has a personal permanent residence abroad, the main factor determining his tax residency is the location of his centre of vital interests. An individual is considered a resident of Malta if, in a calendar year, his income from sources in Malta exceeds 50% of his total income or if his main place of professional activities is in Malta. Individuals who do not meet the above criteria are non-residents. Maltese residents are subject to personal income tax on their worldwide income; non-resident individuals are subject to personal income tax if they operate through a permanent establishment in Malta or if they derive their income from sources in Malta. Foreigners resident in Malta are taxed only on their income from Malta. Personal income tax is taxed at progressive rates, with a maximum rate of 35%. It should be noted that Malta taxes capital gains, which mainly apply to gains arising from the sale of fixed assets, shares and other capital assets. The capital gains tax rate may vary depending on the type of asset and the holding period. Generally, assets held for the long term are taxed at a lower rate, while assets held for the short term are taxed at a higher rate. When calculating taxable capital gains, the asset's sale price minus the original purchase price and related expenses is taken into account, and only the actual increase in value is taxed. Malta also offers some tax incentives and exemptions, for example, intra-company restructurings and certain transactions by international investors may be subject to incentives or exemptions. Malta's VAT applies to income from the sale of goods, provision of services, rental income and the importation of goods and services. In determining the applicable tax rate, non-VAT taxable income is used together with VAT taxable income as the basis for determining the tax rate. When taxpayers meet their tax obligations and enjoy their exemption rights, the taxes passed on to consumers due to investment expenditure must be adjusted in subsequent tax years. Currently, Malta's basic VAT rate is 18%, with a preferential rate of 5% or zero tax rate applicable to certain specific goods and services. Malta's VAT system is designed to ensure fair and effective taxation, while encouraging the development of specific industries and the improvement of social welfare. Most countries impose property taxes on citizens to pay for public services and infrastructure construction. However, as a small open economy that relies on attracting foreign investment and businesses, Malta has chosen to exempt property taxes to enhance its international competitiveness. By exempting property taxes, Malta hopes to attract more foreign investment and wealthy individuals to purchase real estate and promote economic development. To fill the gap in wealth tax, Malta's tax structure relies on other forms of taxation, such as income tax, immovable property transfer tax and stamp duty. Malta has implemented a withholding tax (WHT) system on transfers of immovable property. With effect from 1 January 2015, transfers of immovable property in Malta are generally subject to a withholding tax of either 8% or 10% on the value of the property transferred, depending on when the property was acquired. In certain specific cases, the withholding tax rate may be different. In particular, a preferential rate of 5% may apply to the first €400,000 of the transfer value, provided that certain conditions are met. Transfers of immovable property acquired by death or donation are subject to a withholding tax of 12% on the difference between the transfer value and the acquisition value, or to the default rate of transfer value as set out above. The first €100,000 of gains arising from the first transfer of any rights promised in immovable property or the termination or suspension of any rights will be taxed at 15%. Stamp duty is also an important part of the Maltese tax system. Stamp duty applies to transfers of immovable property and transfers of market securities. For transfers of immovable property, both residents and non-residents are taxed at 5%, while transfers of immovable property in Gozo are taxed at 2%. For transfers of market securities, the tax rate is 2% and if it involves the transfer of shares in a real estate company, the tax rate is 5%. Malta also offers a number of stamp duty exemptions, such as exemptions from stamp duty for the reorganization of shareholdings. Stamp duty is also exempted for the exchange of partnership interests from one company to another within the same group of companies, or for the transfer of partnership interests between partnerships. In addition, stamp duty is levied at a preferential rate of 1.5% for the gratuitous transfer (i.e. donation) of market securities or commercial lease rights to close relatives. This concession applies to donations made through public contracts before January 1, 2025. Malta's tax system is designed to ensure reasonable taxation of different incomes, promote market transparency and regulation, and provide a variety of tax incentives and exemptions to support the development of specific areas and the healthy development 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 sustained economic growth.  

3. Malta's Crypto Tax System 

Malta's cryptocurrency tax system is relatively clear, and the treatment of crypto assets is mainly subject to general tax laws. The income from cryptocurrency transactions is regarded as capital gains and is subject to personal income tax or corporate income tax. The income generated by companies and individuals when buying and selling cryptocurrencies should be taxed according to Malta's progressive tax rates, which depend on the total income of the trader.  

Malta generally does not apply VAT to cryptocurrency transactions because Malta is a member of the European Union. Under EU law, cryptocurrencies are considered part of financial services and the purchase and sale of cryptocurrencies are not subject to VAT. However, businesses and individuals engaged in cryptocurrency transactions must fulfill the corresponding tax reporting obligations. In particular, when businesses engage in cryptocurrency-related businesses, they must report their transaction details to the Malta 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.  

In order to promote the development of blockchain and cryptocurrency enterprises, Malta provides a series of tax incentives. Qualified enterprises can enjoy a lower corporate income tax rate and reduce the actual tax burden through a tax credit mechanism. Malta provides a variety of tax incentives for enterprises using blockchain technology to encourage research and development and innovation. Specifically, eligible enterprises can obtain tax credits of up to 25% to 70% on research and development expenditures, depending on the size of the enterprise and the nature of the project. In addition, Malta provides favorable tax treatment for start-ups and early-stage companies, which can benefit from reduced corporate tax rates and additional deductions for qualified expenditures. In terms of intellectual property, Malta provides a preferential tax system for income from qualified intellectual property, and investors can enjoy significant tax reductions on income generated from intellectual property such as patents, copyrights and trademarks.  

In order to avoid double taxation of international investors on their global income, Malta has also signed an extensive network of double taxation treaties. These tax policies and incentives demonstrate Malta's intention to become 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 in the world to formulate a comprehensive legal framework to regulate blockchain and cryptocurrency. Its regulatory policy mainly revolves around laws such as 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 Virtual Financial Assets Act (VFAA), which detailed the definition and classification of cryptocurrencies and related activities, and established specific regulatory requirements. Under the law, virtual financial asset service providers (VASPs) engaged in cryptocurrency trading, management and custody must register with the Malta Financial Services Authority (MFSA) and comply with strict regulatory standards. These standards include anti-money laundering (AML) and countering the financing of terrorism (CFT) measures, transparency requirements and regular reporting. In addition, companies conducting initial coin offerings (ICOs) in Malta are required to submit detailed white papers to the MFSA, disclosing details of the project, including the functions of the tokens, risks and plans for the use of funds. The 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 Innovative Technology Arrangements and Services Authority (MDIA), which is responsible for certifying and supervising the application of blockchain and other innovative technologies to ensure the security and transparency of the technology. The Digital Innovation Agency Act established the Malta Digital Innovation Agency (MDIA), which is responsible for promoting and supervising the country's digital innovation, including blockchain and cryptocurrency. Malta's cryptocurrency regulatory framework ensures the transparency and security of the cryptocurrency market and protects the rights and interests of investors through strict legal and regulatory measures, while encouraging financial technology innovation and industry development. This comprehensive and strict regulatory approach not only ensures the healthy development of the market, but also provides a regulatory model for other countries around the world to learn from.  

5. Summary and Outlook of Malta's Crypto-asset System 

Malta's crypto-asset tax system is relatively clear and forward-looking, and its tax provisions are mainly attached to general tax laws. Malta's treatment of crypto-assets mainly follows its legal characterization of virtual financial assets. It regards the proceeds from cryptocurrency transactions as capital gains, which are subject to personal income tax or corporate income tax, and exempts cryptocurrency transactions from value-added tax. Malta imposes strict tax declaration and anti-money laundering requirements on companies and individuals engaged in cryptocurrency transactions to ensure compliance and market transparency. Although the main purpose of Malta's tax system is to protect the interests of investors and prevent financial risks, the Maltese government is clearly encouraging the development of the crypto asset sector and actively attracts blockchain and cryptocurrency companies through the Innovative Technology Arrangements and Services Act (ITAS) and other preferential policies to promote financial technology innovation and industry development. Looking ahead, Malta will continue to play a leading role in the global regulation and taxation of crypto assets. As countries around the world become more accepting of cryptocurrencies, Malta may further improve its tax system to adapt to the development and changes in the cryptocurrency market, and is expected to find the best solution between balancing economic development, financial security and monetary sovereignty, and continue to maintain its leading position in the crypto asset field. By continuously adjusting and optimizing tax policies, Malta can not only attract more blockchain and cryptocurrency companies, but also occupy a more advantageous position in the international financial market, and promote the continued growth and innovation of the domestic economy.

References

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

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

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

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

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