The long-awaited new double taxation avoidance agreement between the USA and Malta was signed this morning after having been ratified by the US Senate and signed by President Obama.
It will take effect on January 1, 2011.
The agreement is intended to eliminate barriers to trade and investment while preventing offshore tax evasion. It is designed to ensure that US and Maltese citizens are taxed only once on their profits and income, and to limit withholding payments on dividends, royalties and other unearned income.
Under the agreement pensions and similar payments are taxable only by the country which pays them, even if the person is resident in the other country. Some payments, such as dividends and royalties, are taxable by either country, but there is a maximum withholding of 10 per cent. However, a tax credit must be allowed in the other country if, for example, the county which is the sources of a dividend assesses tax at the times it is paid.
The double taxation agreement cannot be applied in a way which will deny any taxpayer of either country any benefits he would have been entitled to under the domestic law of his country or under any other treaty between Malta and the US.
The agreement stipulates that countries cannot discriminate, i.e. they cannot tax a resident of the other country at a higher rate than they would have taxed their own citizens under the same circumstances.
It also contains strong provisions to prevent businesses or individuals from third countries from setting up a “shell” entity in either Malta or the US which is used to pass income through – thereby avoiding taxation – but does not have any other substantial business or activity in the country.
The double taxation agreement replaces an earlier agreement which was terminated in 1997 by the US.
American Ambassador Douglas Kmiec and Finance Minister Tonio Fenech signed the agreement this morning at the Excelsior Hotel.
The ambassador said it would expand opportunities for people from the two countries to trade and increase investment.
He said that Malta could be attractive to US investors in view of its EU membership, location and accessibility.
Mr Fenech said this agreement reflected the excellent relationship between the two countries and recognition of Malta's transparent taxation system.