Budget 2014 brought in changes to the taxation system applicable to income from the letting of immovable property in Malta for residential purposes.
Prior to this change, tenants were subject to tax on the rental income less the deductions provided for by Maltese tax legislation at their marginal rates of tax in the case of individuals, and at the rate of 35 per cent in the case of corporate lessors.
It is believed that this system might have not managed to capture all rentals occurring on the island. To rectify this, and to incentivise the inclusion of all rental activity, the Budget Measures Implementation Act, 2014, provides for a reduced flat rate of 15 per cent on the rental of residential property.
This is believed to produce an ‘honest’ response in terms of the declaration of income and thus having a double effect, being that of regularising the market and incentivising it at the same time.
The 15 per cent flat rate on the gross rental income is optional and applicable only to the rental of residential tenements by a person when such person is renting to an individual or individuals who occupy such tenement as a home or residence.
When the lessors are individuals, such income need not be further declared in the personal income tax return.
Holders of more than one residential tenement must tax all the tenements at the same option, meaning that if the 15 per cent flat-rate option is chosen, it must be used for all tenements, otherwise the previous system would apply to all.
Given that the 15 per cent flat rate on residential tenements is optional, the previous system can still be applied in those cases where there are expenses to be deducted against the rental receipts, as provided for by law.
This is usually the case where the allowable expenses – such as bank interest on loans acquired to finance the property being rented out – are to such extent that the profit from the lease is minimal, and thus the 15 per cent flat rate would result in a higher tax to be paid.
The previous system can also prove to be more beneficial in case of individuals whose rental income is their only source of income, since in that case, by the application of the progressive tax system applicable to Maltese resident individuals, the tax to be paid may result in a lower tax charge compared to the 15 per cent flat rate option.
Residential tenements are defined as being non-commercial tenements consisting of a dwelling house or part thereof that is to be or is occupied as a home or residence, excluding tenements which when rented are required to be licensed in terms of the Malta Travel and Tourism Act.
A dwelling house for this purpose consists of an apartment, flat, villa, maisonette, townhouse, farmhouse, terraced house, and a garage. The garage must be attached to or underlying such dwelling house or situated in the same block of which the residence forms part, or a garage of not more than 30m2 situated within 500m2 of such residence, where such garage has been let out together with such dwelling house on the same contract of letting.
The 15 per cent tax shall be paid by not later than June 30 of the year following the calendar year, in respect of the gross rental income received during the period January to December. This payment shall be accompanied by the relevant form which the Commissioner may prescribe, indicating the gross rental income received for the relevant calendar year.
The Budget Measures Implementation Act, 2014, also provides that notwithstanding whether the 15 per cent flat-rate tax option is taken, where the Commissioner determines that any rental income which should have been declared was not so declared, such income shall be charged to tax at the rate of 35 per cent on the gross rental receipt in addition to any interest and additional tax applicable under the Income Tax Act.
This material has been prepared by professionals at Nexia BT. It is intended as a general guide only, and its application to specific situations will depend on the particular circumstances involved. This information should not be relied upon as a substitute for such advice.
Antoinette Scerri is a tax advisory services manager at Nexia BT.