Malta Intellectual Property (IP) Holding

Malta has the lowest tax rates for income from intellectual property (IP) in Europe and is a popular destination for the outsourcing of valuable IP and research and development. Intellectual property can be protected upon demonstration of its originality for a number of years (which varies depending on the type of IP) and protected across a geographic area such as Malta or the European Union.

Holding of IP
IP as an asset can be held by any legal or natural person and the most appropriate vehicle will depend on the nature of the IP and the considerations of the beneficial owner of the Maltese vehicle. The most common vehicles for holding IP are Maltese private companies or Maltese private foundations. In addition foreign companies registered in Malta are also a popular choice as explained above.

Application from Tax Benefits
In Malta different types of intellectual property income are taxed differently. The applicable rates are explained below in the taxation section of this article.

Types of Intellectual Property

There are four kinds of intellectual property which can be protected in Malta. The type of intellectual property will determine the level of protection available, the duration of the protection, what recourse is available in case of an infringement of rights and the applicable local tax rate. In this article we examine the four types which are split into commercial property right and creative property rights.

Commercial Property Rights
The four main types of primarily commercial property right are the use of 1) patents, 2) designs, 3) trademarks and 4) protected processes, know-how and trade secrets. These can be protected by registration and can be contrasted with creative property rights which come into being without any formality and do not need to be protected.

Patents
A patent is issued to prevent others using, copying, making, distributing or importing a protected invention upon demonstration of its originality. In Malta it is possible to register a patent as either a national Maltese patent or an EU-wide patent, since the costs involved are approximately the same most clients will prefer an EU-wide patent. The relevant EU body is the European Patent Organisation and patents are protected for a period of 20 years. In Malta income from royalties are exempt from tax if they arise from a qualifying patent as determined by application to a local body responsible for awarding various tax benefits including tax credits for research and development and exemptions from tax. In most cases a tax exemption will be achievable. One circumstance where a local Maltese patent may be preferable to an EU-wide patent is where the sole purpose of the registration is to achieve tax exemption. In this case it may be possible to register a local patent with an invention which would be less likely to be approved by the European Patent Organisation.

Trademarks
Any original distinctive logo, mark, design, word or combination of words which distinguishes one brand from another can be protected as a trademark to prevent others from copying or mimicking and thereby benefiting from the reputation of another company. The first stage is to determine what category the goods or services fall into in accordance with the Nice criteria. Assistance in this area can be provided by local advisors. In Malta it is possible to register a patent as either a national Maltese trademark or an EU-wide trademark (sometimes called a CTM or Community Trade Mark) , since the costs involved are approximately the same most clients will prefer an EU-wide trademark. The relevant EU body is the Office for Harmonisation in the Internal Market. Trademarks are protected for a period of 10 years and this protection is renewable in ten year periods.

Designs
Designs are the distinctive properties of a product such as shape, appearance, texture etc and can also be protected nationally or EU-wide. The relevant EU body is the Office for Harmonisation in the Internal Market and these are protected for a period of 25 years.

Know How/Trade Secrets
Know-how or trade secrets may be protectable by registration in some circumstances. In order to be registrable trade secrets must be an original, valuable method or process of business which is not obvious and which is kept secret by the user.

Creative Property Rights
The fifth category of intellectual property is copyright (or author’s rights) which come into existence immediately upon the creation of an original work of authorship such as a literary, musical or artistic work. This can be either commercial or proprietary.

Copyright
Any original work of authorship (including computer source code) is automatically the property of its author without the need for registration however an action in copyright is likely to be evidence based so protection by registration may be desirable. This includes novels, videos, poems, website content, corporate publications and information sheets. Unless agreed otherwise any IP created by an employee in the course of their employment is the property of the employer. Malta provides for an exemption from tax for all income from copyright making it a highly popular choice for the holding of this type of IP.

Taxation

Various different types of intellectual property income attract different tax treatments and those various options are explained below. Given the flexibility of the IP holding infrastructure in Malta it is usually possible with proper planning to achieve a rate of 0% tax from IP income.

Tax Exemption
Income from artistic and creative royalties as well as income from qualifying patents may be exempt from tax. Income from copyright is exempt from tax. In addition all of the below types of income would not be subject to tax in Malta if they meet the following criteria: 1) are held by a foreign company registered in Malta; 2) do not derive the income from the IP from Malta; and, 3) do not remit the income to Malta.

5% Tax
Where the income from IP can be classed as trading income this would be taxed at an effective rate of 5% under the 6/7th refund system as explained in our main article on Maltese private companies. In general it is more likely that IP income would be passive (and therefore subject to an effective rate of tax at 10% which can be reduced to a little as 6.25% in some circumstances, as explained below).

6.25% Tax with Flat Rate Foreign Tax Credit (FRFTC)
The Flat Rate Foreign Tax Credit is an alternative taxation system to the 6/7th refund system (effective rate of 5% tax) and the 5/7th refund systems (effective rate of tax 10%) relating to foreign sourced income. Under this system a deduction is given for tax notionally paid elsewhere (though not necessarily paid). The formula for arriving at the correct amount of the deduction is esoteric since it requires first inflating the Maltese income to allow for a notional pre-taxed gross amount then deducting from this grossed amount from the tax notionally paid. The FRFTC is limited to reducing tax by no more than 85% meaning that the amount of tax due will always be more than 5%. The rate of tax due under the FRFTC therefore varies but since it will never be less than 5% it is not relevant where the more favourable (and simpler) 6/7th refund applies since that always results in an effective rate of 5% (for a full description of this system please see our main article on Maltese private companies). In any case the FRFTC system can be used to achieve an effective rate of tax as low as 6.25% (reduced from the standard rate of 10% for passive income) in respect foreign sourced income from intellectual property.

10% Tax
Where the income from IP is classed as passive income and the FRFTC is not applicable then the relevant rate of tax will be 10%.

Other taxes
Other taxes (such as capital gains tax and withholding tax) do not apply to companies with foreign shareholders.