The successful development and deployment of Intellectual Property leads to economic gain for the holder while offering benefits to society at large through the exploitation and utilisation of what has been created.
In order to encourage further development of Intellectual Property, it is crucial to protect it and offer incentives to companies that develop a concept and deploy it on the market.
In recognition of this, Malta provides very attractive fiscal incentives for companies to hold intellectual property including patents, trademarks and copyrights through Malta Enterprise and the Malta Taxation Department.
When a company registered in Malta generates royalty income from Intellectual Property, it is exempt from corporate tax.
This exemption extends to any other IP, even if they are developed and held outside of the country.
Malta is regarded as a solid jurisdiction for the structuring of intellectual property holding and licensing activities. In 2010 the Maltese Government approved the ‘Exemption on Royalties derived from patents rules’ issued as subsidiary legislation under the Malta Income Tax Act (Chapter 123 of the laws of Malta). This was revisited in 2012, when the national parliament approved amendments to the Income Tax law.
The new developments extended the scope of the royalty exemption for patents to cover income from some copyrights. This led to the exemption of royalties derived from qualifying copyrights including art, sound and screen production, literary and musical works.
The legislation also covered copyrights which may be directly relevant to the gaming industry.
The Royalty Exemption is optional. The option exists for the taxpayer to subject the income generated to tax. In the case of a company, the shareholder has the right to claim a refund of tax ranging between 5/7 or 6/7 of tax paid on dividends.
Determining the type of income: Passive or Active
The short answer to whether royalty income is passive or active is that it comes in both forms.
There are differences between the two forms, however, the major takeaway is that Royalty Income is exempt from tax regardless of whether the income gained is passive or active.
If the company in question is engaged in marketing and generating income from the Intellectual Property in question, it is regarded as trading in the field, which means that the income is classified as active. A practical example of this could be the development, marketing and promotion of a new software package.
Whether levied directly or indirectly or through the withholding tax mechanism, if the royalty income is subject to at least 5 percent tax, it is classified as Active royalty income.
Passive royalty income, however, is when a company holds Intellectual Property that is not registered or being marketed or traded.
When taxed at a rate of less than 5 percent in any form, royalty income is also regarded to be passive in nature.