Before determining the tax treatment of rental income, one would have to look at the nature of the rental income and understand whether such rental income is considered to be active business profits, or passive income. Distinguishing between active (short term rentals) and passive (long term rentals) business lines may at times be difficult, yet such distinction is important given that the applicable deductions under the two scenarios differ.
The deductions that one can take against rental income which is treated as active business profits are those which are wholly and exclusively incurred in the production of income.
A recent amendment to the Income Tax Act gives an option to lessors to charge their gross rental income. However such an option can only be taken up by lessors of properties used as residential tenements for which a licence under the Malta Travel and Tourism Services Act is not required. This option can be taken on an annual basis, and once it is taken, it has to be applied for all the rents received from letting residential tenements in that particular year. This option is taken up by completing a specific form and paying the resulting tax by the 30th April following the year in which the rental income is received.
Other reduced tax rates also apply in exceptional cases, such as for example a 5% tax rate on the receipt of rental income from the Housing Authority.
From a VAT perspective, as a general rule, the renting of immovable property is classified as an exempt without credit supply, meaning that Maltese VAT is not due on the said supply and the lessor would not have the right to claim any VAT incurred on that purchase made in connection with the rental property. Two of the exceptions to this rule are:
- the letting of or the provision of accommodation in any premises which for the purpose of the said letting or accommodation is required to be licensed in virtue of the Malta Travel and Tourism Services Act; and
- the leasing of property by a limited liability company to a person who is registered under Article 10 of the Vat Act for the purpose of that person's economic activity.