Maltese income tax system offers two different types of taxation of rental income.
The most commonly applied method for taxing rental income is the 15% final withholding tax. Under this system, rental income is taxed at a flat rate of 15%, and this tax is considered final. Although this may initially appear attractive to taxpayers, opting for the withholding tax is not always the most beneficial choice.
There are several situations where applying the standard tax rates instead of the final withholding tax can lead to significant tax savings. One such example involves pensioners who receive rental income in addition to their pension. A pensioner may assume that taxing rental income at 15% yields a lower tax liability, but this is often not the case. This is because pension income benefits from a substantial exemption—80% (increasing to 100% from 2026)—which leaves a considerable portion of other income that can be declared without incurring any tax.
The following simplistic example will help to illustrates this:
Pension income: €12,000
Rental income: €14,000
Tax under the 15% final withholding tax:
14,000 × 15% = €2,100
Tax under the standard tax rates:
Pension income: €12,000
Less exempt portion: (€9,600)
Taxable pension: €2,400
Rental income: €14,000
Less 20% deduction: (€2,800)
Taxable rental income: €11,200
Total taxable income:
€2,400 + €11,200 = €13,600
Tax due: €240
This example demonstrates that opting for the standard tax rates instead of the 15% final withholding tax can result in a tax saving of €1,860 on rental income.
There are other situations where the same advantage arises. For this reason, it is advisable to consult a tax professional to ensure that taxpayers consistently minimise their tax liability.