Residence status and tax implications

Permanent Residency, Ordinary Residency or Temporary Residency? It depends on your financial circumstances, not on how much time you will spend in Malta. Getting it wrong could cost you dearly!

Residence status and tax implications

Postby oceangoing » Wed 06 Jul 2005 10:51

[IMPORTANT ---even if you have already read this thread, you might want to read it again! I've updated the message 2 posts down taking into account the newish minimum level of tax payable by permanent residents, which is Lm1800 --- Tim]

[Thank you to Oceangoing for posting this message on another thread. I have moved it here because I think it deserves greater attention than it would have received there. Please see my response below and then join in with your own interpretations / experience / comments. However please stay true to the topic as this is a sticky thread.
Thanks, Tim]


Hi,

We're moving to Malta this October. I can assure you that as an EU national, you can stay/live in Malta for as long as you like. You do not need to apply for any permits, either. However, if you want to take advantage of the low Maltese tax, either for yourself or for your business, you will need to apply to become a permanent resident on Malta. To be able to do this, a number of conditions need to be fulfilled, all basically making sure that you will not be a burden on the Maltese economy. If you have enough capital or you can prove that you earn enough money, this shouldn't be a problem.

We found that these requirements are still true:

Applications for permanent residence permits, which must be made on appropriate forms, must also be accompanied by:

· A certificate from your bankers (or as applicable) showing either (i) that you have an annual income equivalent to Lm 10,000 or (ii) capital equivalent to Lm 150,000. It must also certify that you will be able to import into Malta a minimum annual income of Lm 6,000 plus Lm 1,000 for each dependent.
· A conduct certificate from the police authorities nearest to your place of residence. If this is not issued by the said authorities, character references would be required from any three of the following:
- bankers | solicitors | medical practitioner | Employer (or previous employer) | accountant | or a person of a similar standing
· A copy of the marriage certificate is required in the case of a married couple, a married woman who is applying on her own behalf, a divorced woman, or a widow. Otherwise full birth certificates should be submitted.
· Three passport-size photographs of each person whose name appears on the application form.
· A copy of either the deed of purchase or the lease/rent agreement if you own or rent/lease property in Malta.

General Information
· The processing of applications for permanent residence permits may take from 6 to 10 weeks.
· At the end of the first year of residence and subsequently at the end of ever calendar year, you will be required to complete an Annual Declaration from to confirm that you have fulfilled the conditions attached to your permit.


I've taken this from this website: http://malta.co.uk/malta/permres.htm but it's on many others, too.

You do not have to apply for permanent residency. You will not have to bother with visas or any forms if you do not - as long as you don't ask for any money from the Maltese authorities.

If you're self-employed or have your own business, though, you will want to take advantage of the 15% tax rate in Malta, and then you'll have to apply for residency, but you can do that once you're settled there - that's what we are doing.

HTH,

oceangoing
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Postby Tim » Tue 12 Jul 2005 20:13

Thanks, Oceangoing, that was a very useful post and can start off a discussion that should be useful to everybody who passes by this forum. I hope lots of people will share their thoughts here. Before making a substantive reply, let me just make the small print as big as I can:

This forum is open to the public and anybody can come here and post messages. So far, everybody who has posted has done so in good faith and with the desire to help others. But you never know... some scallywag might show up and deliberately put a spanner in the works. Also, people might - in all good faith - be wrong (shock, horror)!!

Most importantly of all, issues relating to taxation vary considerably depending upon individual circumstances - what's sauce for the goose is not necessarily sauce for the gander!

So use what is said in this thread and throughout the forum as friendly advice to help you make your own decisions, but do understand that nobody here is liable or responsible for the decisions you make. We are not profesional advisers and do not claim to be or pretend to be.

In case you are a professional adviser, or other service provider, and you do not really want to participate substantively in the forum, but you do want to advertise yourself, consider taking a classified ad at www.britishexpat.com . Don't consider advertising yourself by leaving a one-off message here, it will be sent to our spam dump... See the posting guidelines!

Tim
Last edited by Tim on Tue 12 Jul 2005 21:47, edited 2 times in total.
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Postby Tim » Wed 13 Jul 2005 20:29

It seems logical to assume that if you are going to move to Malta for good then you should become a Permanent Resident. It re-inforces the significance of your move, demonstrates commitment to your new country and perhaps even kicks sand in the face of the old country! And of course there are those famous tax advantages, better be sure to grab them!

But it ain't necessarily a good idea. The phrases 'Permanent Resident' and 'Temporary Resident' intuitively mean something very clear, obvious and simple to most of us but, as legal terms in the Maltese context, they can mean practically the opposite. You can land in the morning, sign a handful of papers, open a bank account and leave in the afternoon, with no intention of ever returning to Malta, yet as long as your agent buys a pad for you within a year, you will be a Permanent Resident! You've never seen your property and you've never spent a night in the country, but you get the tax breaks.

That's why so many sports and show-biz personalities have places here. It isn't to enjoy the secluded beaches and exclusive night clubs - there aren't any! In fact, it isn't to come here at all, it's just to be a Permanent Resident. For them it is worthwhile because they have very high incomes and this is a legitimate way to reduce their tax burden. That's the only reason to become a Permanent Resident here. There is no other advantage to it and it has nothing to do with whether you live here or not.

In fact there are two disadvantages to being a Permanent Resident. The first is hassle. You have to prove you're entitled to it, you have to demonstrate that you have qualified (by buying the property) and then each year you have to be sure that you transfer in the right amount of money, even if you don't need it all.

The second disadvantage is a 'stealth' one; being a Permanent Resident is, well... permanent! You can't shake it off, other than by selling up and leaving the country. That means that when you've finished earning all those bucks, have moved your nest-egg safely offshore (so don't need to avoid tax elsewhere) and only need a modest amount of living expenses over here, you're stuck with meeting the requirement to bring in LM6,000 + 1,000 per dependent every year, and paying tax on it. edited in the light of new info: And although there is touted to be a 'flat-rate' 15% tax, in fact there is a minimum payment of Lm1800, which is about 26% of Lm7,000 - you would have to bring in Lm12,000 or more to get the true 15% flat rate . There are cases of pensioners here on the island right now who are rueing the day they became Permanent Residents!

The default situation, ie if you don't initiate the process of becoming a Permanent Resident, is that you will become a Temporary Resident. By now you will have guessed that it is quite acceptable for you to arrive here and live here happily for 50 years without ever leaving the country, and be regarded as a Temporary Resident. There are no disadvantages to being a Temporary Resident over being a Permanent Reident as far as I can tell. I have seen it written that you can't import your used personal effects if you are only going to be Temporary, but that is incorrect and I am living proof of it! The importation procedure doesn't query your status, it only says that you have to be here for at least 180 days in the 365 days following the arrival of your goods if you want to get your LM500 deposit back (and they might have eased that now, since passports don't get stamped any more, so you can't prove it!).

I have also seen it written that Temporary Residents don't get the exemption from tax on the capital gain of their property when they sellt. Well, I hope somebody will post about that, but as far as my understanding goes, that is also incorrect.

As a Temporary Resident, you do have to fill in a Tax Return and you might have to pay income tax here. All I can say is I've done it twice now and paid LM 5 the first year (could easily have avoided it if I'd known the rules back then!) and nothing the 2nd year! You get taxed on the remittance basis. That means, on the money you transfer over to your bank account here. It doesn't include the amount you use to pay down payments on your property or mortgage payments. In the last 2 years the tax bands didn't change and were :


Single Married
Free allowance: 3,100 4,300
then 15% up to 4,100 6,000
then 20% up to 5,000 7,250
then 25% up to 6,000 8,500
then 30% up to 6,750 10,000
then 35% on any excess

[Sorry the tabs don't line up. The first figure in each row is for single people and the secnd is for couples!]

So to compare tax with a Permanent Resident, assume you're a married couple and you brought in LM7,000 last year (which is the minimum a Permanent Resident couple have to bring in). As a Temporary Resident you would pay LM455, whereas a Permanent Resident couple would pay LM1800.

But suppose a couple only needs LM6,000 pa, which would be regarded as a good salary for Maltese? Then the Permanent Resident still has to pay the minimum LM1,800 but the Temporary Resident couple would only pay LM 255!!

Ouch! Now you understand why those Permanent Resident pensioners are hurting!

Someone good at spreadsheets could work out and post the amount a couple would need to remit (bring over) that would be equal under both systems and therefore beyond which it would pay-off to be a Permanent Resident, assuming there are no tax issues
abroad.

So to make your decision, you need to figure out what advantage you would get to your tax liability in the UK or elsewhere from being a Permanent Resident here. Only if they are worth it, and will continue to be worth it for a long time, should you take out Permanent Residence. Don't forget that if you move over here full-time, as most users of this forum are, you will quickly become not- resident and not-ordinarily resident in the UK anyway.

I hope this is clear and helpful. It is the way I understand the system operates at present, and I would welcome lots of comments and feedback. Do you agree with my interpretation, or do you see it differently? Are you aware of any changes following EU Accession, or the latest budget?

Tim
Last edited by Tim on Thu 02 Feb 2006 20:22, edited 1 time in total.
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Postby oddis » Thu 26 Jan 2006 08:21

Hi Tim,

Thanks for your answer. Seems like my consultant is not aware that temporary residents also only get tax on income remitted to Malta (or he didn't want me to know...they demand a high for helping out with the permanent residence application). I thought temp.residents got taxed on worldwide income, just like in Norway. Are you sure about this? Am I missing something here? I will contact PwC in Valletta when I get there in February. What kind of "proof" do you get from the Maltese authorities that you're a taxpayer on Malta? The Norwegian authoroties are like Gestapo when moving abroad, they want every penny from you whereever you live.

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Postby Tim » Thu 26 Jan 2006 09:08

Yep, I'm sure! The first year I was eligible for tax in Malta (2003) I visited the tax office in Gozo and had a thorough discussion. All they need, attached to your tax-return, is a photocopy of your Maltese bank statements for the year, showing the amount of money you have transferred in from overseas and details of mortgage payments.

You have to calculate your own tax liability on the tax form and it gets checked after submitting. You get a tax advice and receipts for payment etc.

I assume you have checked whether there is a double taxation agreement between Norway and Malta? If so, it might pay you to become a permanent resident depending on your anticipated tax liability for a number of years in the future. Just be prepared to continue paying a higher than necessary amount after you retire, or to leave Malta and hence renounce your residence status at that time!

Tim
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Postby oceangoing » Thu 26 Jan 2006 09:42

Tim, that was an excellent summary! We were just about to apply for permanent residency but might well change our minds now. We'll enquire about the capital gains exemption on the property (after three years), but like you I don't believe it makes a difference at all, since there is no actual requirement to be a permanent resident. We'll post more as we find out.
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Postby oddis » Fri 27 Jan 2006 10:16

Tim,

Thanks for info.

Yes, there is a tax treaty betwee Norway and Malta. I have most things sorted out, just need to get the internet connection sorted out (I dont like taking days off waiting for this.....).

I have one question for you. Under the permanet residence scheme I get taxed at 15% only on INCOME remitted to Malta. From what you write it seems like this is not the case with temp. residents. Am I correct? I will bring in more than 10 000 LM so permanent is better for me.

Anyway, I will have a lawyer to check all this for me as I have income (this is no retirement for me, too early, LOL).

Oddis
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Postby Tim » Fri 27 Jan 2006 13:14

Hi Oddis,

In both cases - temporary and permanent - you get charged only on the funds you remit to Malta. The difference is that with temporary residence you get charged on a sliding scale (detailed above) and you don't have any minimum remittance requirement whereas with permanent you do have a minimum remittance - Lm6,000 plus an extra Lm1k per dependent) - and there is a flat rate 15%.

If you bring in Lm10k, then (as long as my mental arithmetic hasn't mutated to mental arthritis!) you would have to pay Lm1500 (edit: the minimum is Lm1800 now) in tax as a permanent resident and Lm 2335 as a temporary resident. If you bring in more than 10k the difference becomes greater because of the very high 35% tax rate for temporary residents and you would be a lot better off as a permanent resident.

I assume you would bring all this money into Malta to take advantage of the double-taxtion treaty and avoid paying the higher rates applicable in Norway. Once you've got it here, you'll have trouble spending it all and you'll probably want to invest most of it! There are some investment firms in Malta but I've never seen any really exciting products here - I don't think the market is big enough. So you'll probably want to send your investment funds back out of the country once they have been clocked in for tax purposes. I suggest you confirm with your advisers that it would be ok to do that from the point of view of the Norwegian authorities.

I'm not sure whether the authorities in Malta distinguish between investment income and employment income when looking at remittances made by permanent residents. I assume that you would have to pay 15% again when you eventually cash-in your investments if you remit the proceeds to Malta.

Tim
Last edited by Tim on Thu 02 Feb 2006 20:10, edited 1 time in total.
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Postby oddis » Fri 27 Jan 2006 16:20

Thanks Tim,

I had a chat with a Maltese lawyer, and he told me that is was only INCOME remitted to Malta that was taxable (as a permanent resident). If I bring in funds which is not income that year - no tax. Are you sure it is not the same as temp. resident?

The tax regime is very fortunate for me. I get most of my income from capital gains in the US (it is not taxed there) - that means zero tax as long as the income is kept outside Malta. Actually, it's much the same in the UK and Ireland. The UK would tax me just the same if I moved there, but that is not really an option.

Anyway, I'm not moving just because of the taxes. I would rather pay taxes and stay happy! It's more the climate. Right now it is six below freezing in Oslo. Not too warm in Malta either, but a lot better. At least you are guaranteed a warm summer (perhaps a bit too warm) and a very nice spring and fall.

Oddis
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Postby Tim » Fri 27 Jan 2006 18:58

Well, first an apology - my mental arithmetic might not be arthritic, but I've taken my eye off the ball regarding permanent residence as it isn't that common a topic! The 2003 budget changed things a bit. There is still a 'flat-rate' 15% tax, but with a minimum of Lm1800. Therefore if you bring in Lm10k you are effectively taxed 18% and you have to bring in at least 12K to get the 15% rate. You only have to actually transfer 6k + 1K per dependent as before.

So for retired couples who were used to the old system - finding Lm7k a year and paying 15% on it (Lm1050) the increase to a minimum tax of Lm1800 is a nightmare. It is an effective rate of about 26%!

Regarding the question of income as opposed to other funds, I think you need to be careful how the word income is interpreted. I think that if you transfer money into a personal current bank account in Malta, they will regard that as income unless you can clearly show it being transferred into an investment vehicle. It is true that you can invest capital amounts directly into Maltese investments and you don't pay tax on bringing the funds over (but the income from them attracts the 15% rate). I assume the same is true of temporary residents, but don't have chapter-and-verse on that. Since you might end up doing this (and I won't!!) please continue to investigate it and report back!

Tim
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Postby ladymuck » Mon 27 Mar 2006 10:35

Can I just check I've understood this correctly?

In the original post, the annual amounts to transfer in were as below:

A certificate from your bankers (or as applicable) showing either (i) that you have an annual income equivalent to Lm 10,000 or (ii) capital equivalent to Lm 150,000. It must also certify that you will be able to import into Malta a minimum annual income of Lm 6,000 plus Lm 1,000 for each dependent.


However, all the comments since have focussed on just Lm 6,000 annual income. Does this mean that you have to show you have the equivalent of Lm 150k (not necessarily banked in Malta) and only transfer in Lm 6,000 each year? What happens if your capital falls below this figure? Can the capital be in the form of property or does it have to be cash?

I'll probably go for the temp residency and just do a tax return each year, as that seems far more sensible but I just want to make sure I understand the options!

I'm meeting with some uk-based advisors soon in order to find out more and will post up any news if I receive information not already posted on this forum.

Louise
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Postby Tim » Mon 27 Mar 2006 10:58

Hi LadyMuck,

Welcome to the forum, and yes please do post back any new info you get after talking to your advisers!

The LM150k is a one-off certification requirement and I think the value can be from cash, investments or property etc. It doesn´t have to be in, or ever come to, Malta and you can spend it as soon as you´ve got the cert! The 6,000 is the required minimum annual remittance for people without dependents who are planning on the permanent residence scheme.

Al the best
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Postby peterj » Mon 08 May 2006 08:40

Hi Tim

This is of great interest to me as I am planning to come in as a long term temporary resident. I've been getting conflicting advice and it's good to hear something direct from someone with actual experience.

I understand that it all comes down to whether the "temporary resident" is considered to be "domiciled" outside Malta whether their worldwide income is taxed in Malta. It appears that "domicile" is not legally defined though, so I guess your experience confirms that the Maltese IRD don’t consider a “temporary resident” to be domiciled in Malta even if they stay there for years.

I'm also interested in how the "double tax treaties" work in practice given that income is taxed on receipt in your own country, and remittance in Malta. In my case I will be receiving income in Australia, some of which I will be sending on to Malta. I will still have to pay tax on the income received in Australia, but will presumably be able offset this by the amount tax paid on remitted income in Malta.

One thing I haven't been able to make sense of is Social Security payments, which I understand to be compulsory for all residents who paid Maltese tax in the previous year.

Have you got any personal experience?
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Postby peterj » Mon 08 May 2006 09:27

Just a follow up on the social security contributions. I checked back some advice I had from a maltese immigration lawyer last year and this is part of his reply:

"Ordinary EU residents: tax would be at the normal Maltese rates (see
attachment) but only on income you remit to Malta. You would also be
liable to pay social security and would get free health benefits."

He advised that the rate of Social Security contributions is about 15%, confirmed by the Malta IRD calculator which says that the contributions on "Investments, Rents, Capital Gains, other" income of 6000Lm would be over 900Lm.

He advised that PRP holders do not pay Social Security contributions (or receive any benefits inc health care).

If this is correct it would considerably reduce the effective overall rate for PRP holders, although they would have to provide for their own healthcare etc. I understand that the UK IHIC only covers you for the first year, although having lived away from the UK for 16 years, I can't get IHIC coverage anyway.

I've got so baffled that I've decided to try to sort it out once I get there, and have a default position of never spending more than 6 months in a calendar year to avoid the whole issue of Tax in Malta.
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Postby Tim » Mon 08 May 2006 19:14

Hi Peter,

Welcome to the forum!

You've asked some interesting questions here.

Regarding domicile, it's the first time I've heard it mentioned in the context of Maltese residency status. I know that UK domicile (which is what I think I've got) is practically impossible to lose, and you can only be domiciled in one place at a time.

Residency status here is very simple in my mind (but then I'm not an adviser looking to justify a fee by making things seem complicated!). If you choose to apply for Permanent Residency and are granted it, you're Permanent (and you can't rescind it later). If you don't, you're temporary.

I haven't heard of a requirement to pay Social Security on remitted income. I've never been asked to pay it, and I would have thought that a statement would automatically arrive once one is in the tax system, which I am. I'll keep my ears open about it, and hope others will too, as it would certainly make a difference to the calculations at the beginning of this thread!

I hope you've found lots of other useful info on the forum and I'm tryingto keep it nicely organised. Please would you post your question about double-taxation on the money matters board? And please feel free to post more questions (in their relevant places) as they arise!

All the best
Tim
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