Taxation on Rental Income

Taxation on Rental Income in Malta: A Practical Guide for Property Owners

Rental property remains one of the most popular investment vehicles in Malta. However, the taxation of rental income is not always straightforward. The applicable tax treatment depends not only on the rate selected, but also on whether the activity is classified as passive investment income or trading income.

Taxation Options for Individuals

Rental income derived from immovable property may be taxed under one of the following methods

Option 1 – Progressive Income Tax Rates (0%–35%)

Under this method:

• Rental income is added to your personal income (e.g. salary, business income, pensions).
• Tax is calculated at the applicable progressive personal income tax rates.
• Tax is charged on the net profit (after allowable deductions).

However, allowable deductions depend on the nature of the rental activity (see section below).

This option may be beneficial where:

• The taxpayer falls within a lower tax bracket.
• Significant deductible expenses are incurred

Passive vs Trading Rental Activity: Why It Matters

A key consideration in determining the appropriate tax treatment of rental income is the classification of such income as:

• Passive income, or
• Trading income arising from a business activity

This classification directly affects deductibility and loss treatment.

Passive Rental Income

Where a property is held as a long-term investment and rented without substantial additional services, the income is generally treated as passive rental income.

In this case, tax is charged on the net rental profit, after deducting the following allowable expenses as per S.L. 123.26 Deduction of Expenses in respect of Immovable Property:

• Interest on loan used in relation to the immoveable property in question
• Rent, ground rent payable
• Licence payable
• 20% further deduction after deducting rent, ground rent and licence payable

Losses arising from passive activities may only be set off against passive profits and cannot be offset against active trading profits. Any unutilised passive losses may be carried forward to subsequent tax years for set-off against future passive profits.

Trading Rental Activity

Rental income may be treated as trading income where the activity goes beyond passive investment.

Indicators may include:

• Letting multiple properties in an organised, commercial manner
• Short-term or holiday rentals involving services
• Frequent acquisition of property for rental purposes

In such cases:

• Expense incurred in the production of the income are deductable
• Capital allowances are allowable
• Trading losses may be carried forward and allowed against any source of income
• VAT and licensing obligations may arise

Short-let and tourism-related rentals may also require registration with the Malta Tourism Authority.

The classification is highly fact-dependent and must be assessed carefully.

Option 2 – Final Withholding Tax (15% Flat Rate)

As per Article 31D of the Income Tax Act Malta offers an attractive alternative: a 15% final withholding tax on gross rental income.

Key Features:

• 15% tax on gross rental income
• No deductions allowed
• Tax is final (not added to your other income)
• Must be declared in the specific rental income form

When is this beneficial?

• If you are in a higher income tax bracket (25%–35%)
• If your rental property has minimal expenses
• If you prefer administrative simplicity

⚠️ Important: Once selected for a particular property in a year of assessment, this method must be applied for any other rented property during that year. However, you can switch methods from one year to the next.

Rental Income Derived by Companies

Where a company holds rental property, it may either be taxed under the standard corporate tax system (35%) or opt for the 15% final tax regime on gross rental income.

Option 1 – Standard Corporate Tax System (35%)

Under this method:

• Rental profits are taxed at 35% at company level.
• Deductions allowed depending whether the trading is of a passive or trading nature, as explained above.
• Upon distribution, shareholders may claim a tax refund under Refundable Tax Credit System

This option may be beneficial where:

• The company incurs substantial deductible expenses.
• Losses are to be carried forward.
• The activity amounts to trading.

Option 2 – 15% Final Tax on Gross Rental Income

Companies may also opt for the 15% final withholding tax on gross rental income.

Where this option is exercised:

• Tax is charged at 15% on gross rental income.
• No deductions are allowed.
• The tax is final.
• The income does not form part of the company’s chargeable income for corporate tax purposes.
• No tax refunds apply because the tax is final.

This can be attractive where:

• If the company has high rental margins and very few deductible expenses.
• The company does not require loss utilisation.
• Simplicity is preferred.

⚠️ Important: Once selected for a particular property in a year of assessment, this method must be applied for any other rented property during that year. However, you can switch methods from one year to the next.

Summary

Special Rental Tax Regimes

Malta provides additional reduced-rate regimes in specific circumstances.

10% Final Tax – Housing Authority Schemes

Where property is leased to the Housing Authority under approved schemes:

• 10% tax on gross rental income
• No deductions allowed
• Tax is final

This regime is separate from the 15% option and is designed to support social housing initiatives.

5% Final Tax – Restored and Qualifying Properties

Rental income derived from qualifying restored properties (including certain properties in Urban Conservation Areas or scheduled properties) may qualify for:

• 5% tax on gross rental income
• No deductions allowed
• Tax is final

The restoration must meet statutory conditions and planning requirements, and the regime must be properly elected.

VAT Considerations for 2026

While residential letting remains generally exempt from VAT, landlords should be aware of specific exceptions:

• Short-term/Tourist Lets: Subject to 7% VAT (and the increased €1.50 per night Eco-Contribution as of 2026).
• Commercial Lets: Often subject to 18% VAT if the tenant is a taxable person using the premises for economic activity.