Analysis of Malta's Encryption Asset System

1. Introduction

Malta is an island nation located in the central Mediterranean, with a superior geographical position connecting Europe, North Africa, and the Middle East. The country's economy is primarily driven by the service industry, particularly in tourism, finance, and information technology. In recent years, Malta has actively promoted the development of the blockchain and encryption industry, earning the title of "Blockchain Island," with its financial and legal environment attracting a large number of international investors and companies. As a member of the European Union, Malta has taken a proactive regulatory stance in the field of encryption and blockchain, becoming a global leader in this sector. This article will analyze Malta's encryption asset system from four aspects: the basic tax system, the encryption tax system, encryption regulatory policies, and a summary and outlook, and will predict its future development direction.

2. Malta's Basic Tax System

2.1 Malta Tax System

Malta implements a progressive tax rate, with personal income tax rates ranging from 0% to 35%. The government imposes global income taxation on residents, while non-residents are taxed only on their income generated in Malta. The definition of residency is mainly based on the individual's time spent in Malta and the principle of economic interests. Malta also offers special tax schemes for foreign residents and high-net-worth individuals, such as the "Malta Retirement Program" and the "Global Resident Program," which provide fixed tax rates and tax reduction benefits.

According to the Constitution of Malta, the power to tax is mainly concentrated at the national level, with limited tax powers for local governments. Malta's tax system is primarily based on income tax and value-added tax. Other major taxes include capital gains tax, property tax, import and export tariffs, and payroll tax. Local governments have the authority to levy property taxes, business taxes, as well as 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 a comprehensive range of taxes, support socio-economic development, and attract foreign investment and promote international business activities through tax incentives.

2.2 income tax

According to Maltese tax law, a Maltese tax resident enterprise is a legal entity whose place of effective management or central management is located in Malta. In tax treaties, Malta generally follows the concept of resident enterprise as defined in the OECD Model Convention. In this model convention, a resident enterprise refers to a person who is taxed in that country due to their location, residence, management, establishment, or other similar conditions in that country, but does not include individuals whose income is solely derived from that country. In principle, if a legal entity does not meet the definition of a Maltese tax resident enterprise, it is considered a Maltese non-resident enterprise.

The object of corporate income tax is enterprises, companies, and other legal entities engaged in business activities within Malta. Non-resident enterprises with a permanent establishment in Malta are required to pay corporate income tax on the income of that permanent establishment as well as on income sourced from Malta. Non-resident enterprises without a permanent establishment in Malta only need to pay corporate income tax on income sourced from Malta. The income of non-resident enterprises is subject to different tax rates based on its source and nature, but net taxable gains from the sale of real estate and shares, as well as income from short-term construction and similar projects, are taxed at a higher rate.

In specific circumstances, if such companies are deemed to have income for income tax purposes and have a permanent establishment or fixed operations in Malta, from the time of determination, they must comply with the tax regulations applicable to Maltese resident companies, and be taxed in accordance with the situation of foreign companies registered as branches in Malta. Capital gains from the sale of fixed assets, stocks, and real estate by enterprises are considered ordinary income and are subject to corporate income tax. The corporate income tax rate in Malta is 35%, but the actual tax burden can be reduced through a tax credit mechanism, making Malta's corporate income tax rate comparatively lower than that of most countries.

According to Malta's tax laws, individuals who have a permanent residence in Malta are regarded as Maltese residents. If such an individual also has a permanent residence abroad, the primary factor determining their tax residency status is the location of their center of vital interests. If, within a calendar year, the individual's income sourced from Malta exceeds 50% of their total income, or if the main location of their professional activities is in Malta, they should be considered a Maltese resident. Individuals who do not meet the above criteria are non-residents. Maltese residents are required to pay personal income tax on their worldwide income; non-resident individuals are obliged to pay personal income tax in the following two situations: first, if they operate through a permanent establishment in Malta and generate income, and second, if they receive income sourced from Malta. Foreigners residing in Malta only pay tax on their income earned within Malta. Personal income tax is progressive, with a maximum rate of 35%.

It is important to note that Malta imposes taxes on capital gains, which primarily applies to the profits derived from the sale of fixed assets, stocks, and other capital assets. The tax rate for capital gains may vary based on the type of asset and holding period. Generally, the tax rate is lower for assets held long-term, while it is higher for assets held short-term. When calculating taxable capital gains, the selling price of the asset is considered minus the original purchase price and related expenses, and tax is only levied on the actual appreciation. Malta also provides certain tax incentives and exemptions, such as specific transactions for corporate internal restructuring and international investors that may enjoy benefits or exemptions.

2.3 value-added tax

The value-added tax in Malta applies to the income from the sale of goods, the provision of services, rental income, and the import of goods and services. In determining the applicable tax rate, non-VAT taxable income is considered along with VAT taxable income as a basis for determining the rate. When taxpayers fulfill their tax obligations and enjoy their exemption rights, taxes that are passed on to consumers due to investment expenditures must be adjusted in subsequent tax years. Currently, the basic VAT rate in Malta is 18%, with a reduced rate of 5% or zero rate applicable to certain specific goods and services. Malta's VAT system is designed to ensure the fairness and effectiveness of taxation while encouraging the development of specific industries and enhancing social welfare.

2.4 Other Taxes

Most countries impose property taxes on citizens to fund public services and infrastructure development. However, Malta, as a small open economy, relies on attracting foreign investment and businesses, and therefore chooses to exempt property taxes to enhance its international competitiveness. By exempting property taxes, Malta hopes to attract more foreign capital and wealthy individuals to purchase real estate, thereby promoting economic development. To fill the gap left by the absence of property taxes, Malta's tax structure primarily relies on other forms of taxation, such as income tax, property transfer tax, and stamp duty.

For real estate transfers, Malta has implemented a withholding tax (WHT) system. Since January 1, 2015, a withholding tax of 8% or 10% is generally levied on the value of real estate transfers within Malta, depending on when the property was acquired. In certain specific circumstances, the withholding tax rate may vary. In particular, a reduced tax rate of 5% can be enjoyed when the first €400,000 of transfer value meets specific conditions. For real estate transfers obtained through death or donation, a withholding tax of 12% on the difference between the transfer value and the acquisition value must be paid, or tax must be paid at the default tax rate based on the transfer value as mentioned above. Any gains from the first transfer of real estate commitments or the termination or suspension of any rights will be taxed at a rate of 15% for the first €100,000.

Stamp duty is also an important component of the Maltese tax system. Stamp duty applies to the transfer of real estate and market securities. For real estate transfers, both residents and non-residents are taxed at a rate of 5%, while the transfer of real estate in the Gozo region is subject to a rate of 2%. For market securities transfers, the tax rate is 2%; if it involves the transfer of shares in a real estate company, the tax rate is 5%. Malta also offers various exemptions from stamp duty, such as reorganizing shareholdings which can be exempt from stamp duty. The exchange of partnership interests from one company to another within the same group of companies, or the transfer of partnership interests between partnerships, can also be exempt from stamp duty. In addition, stamp duty is charged at a preferential rate of 1.5% for the gratuitous transfer (i.e., donation) of market securities or commercial lease rights to close relatives, and this preferential rate 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, while providing various tax incentives and exemptions to support the development of specific sectors and the healthy growth of the economy. Through these measures, Malta has not only maintained the fairness and transparency of its tax system but has also effectively attracted international investment, promoting sustained economic growth.

3. Malta's encryption tax system

Malta's cryptocurrency tax system is relatively clear, and the treatment of crypto assets mainly depends on general tax law provisions. Income from cryptocurrency transactions is considered capital gains and is subject to personal income tax or corporate income tax. The profits generated by businesses and individuals from buying and selling cryptocurrencies should be taxed according to Malta's progressive tax rates, with specific rates depending on the total income of the trader.

Malta does not typically apply value-added tax to cryptocurrency transactions, as Malta is a member of the European Union and, under EU law, cryptocurrencies are considered part of financial services, meaning that buying and selling cryptocurrencies is exempt from value-added tax. However, businesses and individuals engaged in cryptocurrency trading must fulfill their corresponding tax declaration obligations, especially when businesses are involved in cryptocurrency-related activities, they must report their transaction details to the Malta Revenue Authority 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, preventing tax evasion and money laundering activities, and protecting the legitimate rights and interests of investors and consumers.

To promote the development of blockchain and encryption enterprises, Malta offers a range of tax incentives. Eligible enterprises can enjoy a lower corporate tax rate and reduce their effective tax burden through a tax credit mechanism. Malta provides various tax incentives for companies using blockchain technology to encourage research and innovation. Specifically, eligible enterprises can receive tax credits of up to 25% to 70% on R&D expenditures, with the exact percentage depending on the size of the company and the nature of the project. In addition, Malta offers favorable tax treatment for startups and early-stage companies, which can benefit from a reduced corporate tax rate and additional deductions on eligible expenses. In terms of intellectual property, Malta provides a favorable tax regime for income derived from qualifying intellectual property, allowing investors to enjoy significant tax reductions on income generated from patents, copyrights, and trademarks.

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 encryption industry, providing a favorable tax environment for global businesses and investors.

4. Malta's encryption cryptocurrency regulatory policy

Malta is also one of the first countries in the world to establish a comprehensive legal framework to regulate blockchain and encryption. Its regulatory policies mainly revolve around laws such as the Virtual Financial Assets Act, the Innovative Technology Arrangements and Services Act, and the Digital Innovation Authority Act. In 2018, Malta passed the Virtual Financial Assets Act, which provided detailed definitions and classifications for encryption and related activities, and established specific regulatory requirements. According to this law, virtual financial asset service providers engaged in encryption trading, management, and custody must register with the Malta Financial Services Authority and comply with strict regulatory standards. These standards include anti-money laundering (AML) and combating 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 a detailed white paper to the Malta Financial Services Authority, disclosing detailed information about the project, including the functions of the tokens, risks, and plans for the use of funds. The Malta Financial Services Authority will review and approve these white papers. All virtual financial asset service providers must comply with international AML/CFT standards, including customer due diligence.