Tax authorities are becoming increasingly rigorous not only on compliance but they are taking a more investigate approach on aggressive tax planning, use of structures in other jurisdictions, transfer pricing, bench-marking and also on unexplained wealth. As tax legislation and regulations are becoming increasingly complex, there is also a drive for tax transparency, tax audits and investigations and unexplained wealth orders.   As a firm specialising in tax related matters, we offer our professional expertise and assistance to individual and corporate taxpayers facing tax disputes, tax audits or investigations.  Our tax professionals may assist in routine inspections which may be resolved without much difficulty as well as in-depth tax investigations requiring high expertise and knowledge to resolving such issues.  Our tax professionals may assist not only with the handling of such tax matters but may also represent individual and corporate taxpayers in resolving these tax audits and investigations with the Commissioner for Revenue.  Our goal is not only to minimise tax risks and exposures for the taxpayer whilst ensuring that our client maintains appropriate relations with tax authorities.   In this regard, we offer an extensive support service covering:

• Review of tax positions, tax returns and tax payments;
• Assessing tax risk profiles and exposure;
• Handling compliance checks;
• Handling tax interventions and enquiries;
• Detailed capital accretion exercises aimed especially at individuals facing unexplained wealth orders;
• Negotiation and resolution of disputes with tax authorities, and
• Advising on interest and penalties.

[vc_row][vc_column][vc_empty_space][vc_cta h2="How can we help you?" add_button="right" btn_title="Contact Us" add_icon="left" i_icon_fontawesome="fa fa-phone" btn_link="url:http%3A%2F%2Fwww.avanzia.com.mt%2Fcontact-us%2F|||"]Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority and may also act as tax representative with the Inland Revenue Department.  Tax advice and tax compliance remain our core focus and we ensure that clients are always in compliance with the myriad filing obligations and notifications.[/vc_cta][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]Malta has been an EU Member State since 1 May 2004 and the adoption of EU Directives coupled with a unique full imputation system of taxation as well as tax refunds has developed the country into an international financial centre.  Malta is the country of choice for foreign investments into the EU. However, several companies in a multitude of sectors have set up in Malta for several reasons. Although the country and the local market are small, companies have no restrictions in accessing the EU market and beyond.  Malta has developed an advanced IT infrastructure, very good telecommunications and connections, an extensive treaty network, a professional and business friendly atmosphere amongst professionals and regulators, and a can-do attitude all of which have contributed to Malta’s success beyond its relative size.  

Corporate taxation and the full imputation system

Maltese registered companies are subject to income tax on chargeable income at a standard rate of 35%. Companies incorporated in Malta are subject to tax on their worldwide income but companies incorporated outside Malta but are tax resident in Malta by virtue of their effective management and control are subject to tax on income arising in Malta and income remitted to Malta.  One may also claim that companies are not effectively subject to tax because of the full imputation system of taxation whereby the tax paid by the company is credited in full to the shareholder/s following a distribution of profits. This ensures that there is no double taxation as often happens under the classical system.  Moreover, a system of tax refunds which shareholders may claim depending on the source of income leads to an effective tax rate which may be well below the 35% tax rate applicable to companies.  

Tax accounting

Every Maltese company is required to allocate its profits to five tax accounts.  The allocation of profits to the tax accounts is a very important aspect of the Maltese tax system as it determines the tax treatment applicable to shareholders and the tax refunds which may be claimed upon a distribution of profits. The following is an overview of the five tax accounts, the type of income or gains allocated to each tax account and the tax refunds which may be claimed by shareholders: [wpdatatable id=30][/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Participating holding and the participation exemption

A comparative study shows that Malta has one of the best participation exemption regimes. A Maltese company in receipt of dividend income or capital gains from a participating holding may claim the participation exemption.  Alternatively, the company may elect to be subject and pay tax and this would enable the shareholder to claim a full refund. A participating holding must be an equity holding which is defined as a holding of the share capital in a company which is not a property company and entitles the shareholder to at least any two of the following rights:

1. A right to vote;
2. A right to profits available for distribution, and
3. A right to assets available for distribution on a winding up of that company.

A participating holding arises when any one of the following criteria is met:

1. A company holds directly at least 5% of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 5% of any two of the above-mentioned rights; or
2. A company is an equity shareholder in a company and is entitled at its option to call for and acquire the entire balance of the equity shares not held by that equity shareholder company; or
3. A company is an equity shareholder in a company and the equity shareholder company is entitled to a first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares of that company not held by that equity shareholder company; or
4. A company is an equity shareholder which holds an investment representing a total value of at least €1,164,000 (or the equivalent in a foreign currency) in a company and such investment is held for an uninterrupted period of not less than 183 days; or
5. A company is an equity shareholder in a company and where the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of trade.

A capital gain derived from a participating holding automatically qualifies for the participation exemption, however, in the case of dividends derived from a participating holding they will be exempt from tax provided that the body of persons in which the participating holding is held satisfies any one of the following three conditions:

1. it is resident or incorporated in the EU; or
2. it is subject to foreign tax of at least 15%; or
3. it does not have more than 50% of its income derived from passive interest or royalties.

Where none of the above three conditions are satisfied, then both of the following conditions must be satisfied:

1. the equity holding in the non-resident company is not a portfolio investment, and
2. the non-resident company or its passive interest or royalties are subject to tax of not less than 5%.

A portfolio investment is an investment in securities such as shares, bonds and such like instruments, held as part of a portfolio of similar investments for the purpose of risk spreading and where such an investment is not a strategic investment and is done with no intention of influencing the management of the underlying company.  Also, the holding of shares by a Maltese company in a foreign body of persons which derives more than 50% of its income from portfolio investments is deemed a portfolio investment. The participation exemption may also apply to a participating holding in certain partnerships, collective investment vehicles and European Economic Interest Groupings.  

Summary and illustrations

The mechanics of the full imputation system, the allocation of profits to the various tax accounts and the tax refunds and the overall effect of their interaction may be illustrated in the following examples: [wpdatatable id=16] [wpdatatable id=20] [wpdatatable id=25] [wpdatatable id=26][/vc_column_text][vc_empty_space][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]PH: Participating Holding TAS: Tax at Source. The credit of the tax paid by the company given to the shareholder is the effect of the full imputation system. COMET: Combined Overall Malta Effective Tax.  This is the net effect of the tax paid by the company and the tax refund received by the shareholder in Malta.   It is pertinent to point out that a tax refund becomes due to the shareholder by the Inland Revenue Department within 14 days from when the company’s audited financial statements (accounting for the dividend distribution) and a complete and correct income tax return are submitted to the tax authorities, the tax liability is paid in full and an application for refund on the prescribed form, together with the dividend certificate and other documents as requested by the International Tax Unit are submitted by the shareholder or his tax representative. Income tax is paid in the same currency as the company’s share capital, which is also the currency in which the company prepares and submits its audited financial statements.  The tax refund is also paid in the same currency, thus eliminating any forex risks.  

Branches and oversea companies

A branch or a permanent establishment (PE) of a foreign company is subject to tax at the standard rate of 35% on the profits attributable thereto.  It is interesting to note that the shareholders of the foreign company may still claim tax refunds provided the foreign company distributes profits which have been subject to tax in Malta (at the level of the branch or PE).  This may also apply to a foreign company which is tax resident in Malta by virtue of its effective management and control. Such foreign companies registered in Malta are referred to as an ‘oversea company’ because of the same terminology used in The Companies Act.  

Advance revenue rulings

Maltese legislation provides for Advance Revenue Rulings (ARR) which may be obtained by application from the International Tax Unit of the Inland Revenue Department.  ARRs are valid for a period of five years and are renewable. The ARR is still valid even if there is a change in legislation although in this case the ARR expires once two years are over from the legislative change. The attractiveness of ARRs has somewhat decreased following the EU Directive whereby the Maltese tax authorities provide information related to ARRs to the EU Commission and other EU Member States.  

Notional interest deduction

In 2018 Malta introduced the concept of a notional interest deduction (NID). Before the introduction of these rules, debt financed entities could claim a tax deduction equivalent to the interest however no similar deduction was available for equity financed companies.  The NID is optional and entitles companies to claim a tax deduction equivalent to the notional interest calculated on its equity thus making equity financing on the same level playing field as debt financing for taxation purposes. NID is determined by multiplying the reference rate to the invested risk capital.  The reference rate is the risk-free rate set by reference to the current yield to maturity on the Malta Government Stocks with a term of approximately 20 years plus a premium of 5%, and the invested risk capital of the undertaking is the share capital, share premium, positive retained earnings, non-interest-bearing loans and any other positive equity components. Any capital directly employed in the production of income which is exempt from tax does not fall part of the invested risk capital. One of the main advantages of the NID is that the combined overall Malta effective tax (COMET) may be reduced and reduces the need for the shareholder/s to claim tax refunds.  

The patent box regime

As from year of assessment 2020 (basis year 2019), any person incurring qualifying IP expenditure and from which qualifying IP income is derived, may claim a deduction which may reduce the chargeable income from qualifying IP by 95% thereby drastically reducing the taxable income of the person and may also be applied upon the disposal of the IP.  The assets that are considered as qualifying IP are defined in the Rules and include registered patents and assets covered by protection rights, however, exclude brands, trademarks and trade names.  The deduction is aimed for assets which are developed by the person rather than for acquired assets.  The deduction is however not limited to assets developed in Malta but require that the beneficiary maintains sufficient substance as is commensurate with the type and extent of activity being carried out. For further details, you may refer to the The Patent Box Regime news item.  

Tax consolidation in Malta

Following the publication of the Consolidated Group (Income Tax) Rules by means of Legal Notice 110 of 2019, Malta introduced fiscal unity rules providing for a consolidated tax group.  As a result, certain groups of companies may, from the year of assessment 2020 (basis year 2019), opt to be treated as one single taxpayer. The definition of a group in these rules is different and much wider than the definition contained in the Income Tax Act allowing both Maltese companies as well as foreign entities that fall within the definition of a company to form part of the consolidated group. The foreign entities need not be tax resident in Malta to form part of the fiscal unit, but it is necessary that they are tax registered in Malta. The Rules lay down the requirements relating to the formation of the Fiscal Unit and also discusses what shall constitute ignored transactions in determining the Group’s chargeable income and tax payable. The main benefit of the tax consolidation or fiscal unity is the cash flow advantage especially when compared to the current operation of the partial shareholder tax refunds upon a distribution of taxed profits. The new tax consolidation rules reduce the tax due to the combined overall effective tax rate without the need to wait for the income tax refund on distributed taxed profits. However, the tax consolidation may also be useful within a local context since it is wider in scope than the surrendering of tax trading losses.  Clearly, in view of the embedded anti-abuse provision, the purpose of these rules is not to provide a tax advantage. For further details, you may refer to the Tax Consolidation in Malta news item.  

Other benefits

The salient features highlighted above are coupled with other benefits including:

• No withholding taxes;
• No thin cap rules or debt-to-equity ratios;
• No capital duty and wealth taxes;
• No stamp duty on share transfers in companies whose activities are outside Malta;
• Non-resident persons are exempt from capital gains arising on certain share transfers;
• Participation exemption regime applicable to branches, certain partnerships and other entities;
• An extensive treaty network with over seventy treaties currently in force;
• Step-up upon an inward redomiciliation.

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_empty_space][vc_cta h2="How can we help you?" add_button="right" btn_title="Contact Us" add_icon="left" i_icon_fontawesome="fa fa-phone" btn_link="url:http%3A%2F%2Fwww.avanzia.com.mt%2Fcontact-us%2F|||"]Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority and may also act as tax representative with the Inland Revenue Department.  Tax advice and tax compliance remain our core focus and we ensure that clients are always in compliance with the myriad filing obligations and notifications.[/vc_cta][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]Malta, being an EU Member State since 1 May 2004, has established itself as an international financial centre.  The legislative framework is in conformity with EU law.  The Companies Act is modelled on the UK Companies Act and provides for various types of entities such as SICAVs, INVCOs, foundations, limited partnerships, general partnerships, single member companies, limited liability companies and public companies.   The most commonly used entity is the limited liability company which can be either private or public:

• A private company must include ‘Limited’ or ‘Ltd’ as the last word in its name. It may be exempt or non-exempt and it is also possible to have just one shareholder (referred to as a single member company).  A private company must have less than fifty shareholders and the company must prohibit invitations to the public to subscribe to any shares or debentures.
• A public company (Plc) is defined as a company that is not a private company and therefore it may offer its’ shares or debentures for subscription to the general public.

  The company incorporation and registration procedure is very efficient and the following three simple steps must be followed:

• Provide all the necessary information and documentation to satisfy the KYC or CDD requirements of EU Directives and the Prevention of Money Laundering and Funding of Terrorism Regulations;
• Establish a banking relationship and transfer the funds representing the initial paid up share capital of the company; and
• Draw up a Memorandum and Articles of Association which must include the company name, its registered address in Malta, its objects and powers, details of the share capital structure and the shareholders, details of the directors, legal and judicial representatives and company secretary. The Memorandum and Articles of Association must be signed by the promoters / shareholders and need not be executed in front of a notary.

  The following are a summary of the main statutory requirements relevant to companies:[/vc_column_text][vc_empty_space][table][table_head][table_row][table_heading_cell]Requirements [/table_heading_cell][table_heading_cell]Description[/table_heading_cell][/table_row][/table_head][table_body][table_row][table_cell]Share Capital[/table_cell][table_cell]The minimum authorised and issued share capital for private companies is €1,164.69 with at least 20% of the nominal value paid up, whilst that of a public company is €46,587.47 with at least 25% of the nominal value paid up. [/table_cell][/table_row][table_row][table_cell]Currency[/table_cell][table_cell]The company’s share capital may be denominated in any currency. The Companies Act requires that financial statements are prepared in the same currency in which the share capital is denominated whilst the Income Tax Act provides that the tax payment and any tax refunds are done in the same currency of the share capital.[/table_cell][/table_row][table_row][table_cell]Registered Address[/table_cell][table_cell]A company must have a registered address in Malta.[/table_cell][/table_row][table_row][table_cell]Objects and Powers[/table_cell][table_cell]The Company’s activities must be clearly laid down in the Memorandum of Association. A single member company must restrict its objects. Certain activities may require a license from the regulator, the Malta Financial Services Authority.[/table_cell][/table_row][table_row][table_cell]Shareholders[/table_cell][table_cell]There are no restrictions with respect to shareholders. Natural persons, corporate entities and trustees may all hold shares in a Maltese company. Malta has adopted the EU Directive on the Register of Beneficial Owners (RBO) and therefore a natural person having an ownership interest or voting rights of more than 25% or exercises control must be disclosed.[/table_cell][/table_row][table_row][table_cell]Board of Directors[/table_cell][table_cell]The Board may be composed of just one director. Directors may be natural persons or corporate entities and there are no restrictions with respect to nationality or residence. However, for substance requirements and management and control purposes, board meetings must be held in Malta, with the meetings properly minuted and decisions effectively taken in / from Malta.[/table_cell][/table_row][table_row][table_cell]Legal and Judicial Representative[/table_cell][table_cell]Maltese legislation provides that a company must have a legal representative/s who is empowered to represent the company on agreements, contracts etc. A judicial representative is empowered to represent the company in legal proceedings at the law courts etc. The directors, or any of the directors may occupy these posts.[/table_cell][/table_row][table_row][table_cell]Company Secretary[/table_cell][table_cell]A company must have a natural person occupying the post of company secretary. There are no restrictions with respect to residence or nationality.[/table_cell][/table_row][table_row][table_cell]General Meetings[/table_cell][table_cell]An Annual General Meeting (AGM) must be held every year to approve the audited financial statements. Such general meeting need not be held physically in Malta. In terms of the Companies Act, a resolution signed by all the shareholders is tantamount to a physical meeting.[/table_cell][/table_row][table_row][table_cell]Financial Year[/table_cell][table_cell] A company may opt for a financial year end other than 31 December as long as the period is not less than six months and not more than eighteen months. Approval must be sought from the tax authorities and notification given to the Registry of Companies.[/table_cell][/table_row][table_row][table_cell]Annual Accounts[/table_cell][table_cell]Companies must keep proper accounting records and have their accounts audited. Audited financial statements must be approved at the company’s AGM within ten months after the financial year end for private companies and within seven months after the financial year end for public companies. Licensed companies are required to submit their audited financial statements to the Malta Financial Services Authority within four months of the financial year end. All audited financial statements must be filed with the Registry of Companies and they are available online.[/table_cell][/table_row][table_row][table_cell]Form of Accounts[/table_cell][table_cell]Malta adopts International Financial Reporting Standards as adopted by the EU. However, a qualifying company may adopt the General Accounting Principles for Small and Medium-Sized Entities (GAPSME).[/table_cell][/table_row][table_row][table_cell]Annual Return[/table_cell][table_cell]All companies must submit an annual return to the Registry of Companies upon each anniversary of the company’s registration date. The annual return includes details of the capital, the shareholders, directors and company secretary and changes which took place during the year.[/table_cell][/table_row][table_row][table_cell]Registration Fees[/table_cell][table_cell]Upon incorporation, companies must pay a registration fee to the Registry of Companies which is calculated on the authorised share capital. The fee varies between €245 for an authorised share capital of up to €1,500 and a maximum of €2,250 for an authorised share capital of over €2.5 million. A registration fee is also payable annually together with the submission of the annual return. The annual registration fee varies between €100 for a company with an authorised share capital of up to €1,500 and a maximum of €1,400 for a company with an authorised share capital of over €2.5 million.[/table_cell][/table_row][table_row][table_cell]Exchange Control[/table_cell][table_cell] There are no exchange controls in place. As a result, companies may have bank accounts outside Malta.[/table_cell][/table_row][table_row][table_cell]Taxation[/table_cell][table_cell]Maltese incorporated companies are subject to tax at a standard rate of 35% on their worldwide income. Companies which are incorporated outside Malta but are tax resident in Malta are also subject to tax at a standard rate of 35% but on income arising in Malta and income remitted to Malta. Malta adopts the full imputation system of taxation and therefore the tax paid by companies is credited in full to the shareholders upon a distribution of profits. For more details refer to Corporate Taxation.[/table_cell][/table_row][table_row][table_cell]Redomiciliation[/table_cell][table_cell]Maltese legislation allows companies to change their domicile by migrating in or out of Malta. This enables companies to move from one jurisdiction to another without the need of going through a liquidation process. [/table_cell][/table_row][/table_body][/table][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]For more details on redomiciliations to and from Malta, you may wish to refer to Redomiciliation.[/vc_column_text][vc_empty_space][vc_cta h2="How can we help you?" add_button="right" btn_title="Contact Us" add_icon="left" i_icon_fontawesome="fa fa-phone" btn_link="url:http%3A%2F%2Fwww.avanzia.com.mt%2Fcontact-us%2F|||"]Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority and may assist clients not only to incorporate companies but also ensure compliance with the above statutory requirements and other obligations.[/vc_cta][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]

Even if the company has no deductible expenses, the rate of tax is reduced from 35% to an effective rate of 18.75%.  Upon a distribution of taxed profits, refunds will apply and so the net effective tax is reduced to 6.25% or lower.  The company may reduce the effective tax rate paid in Malta even further if it has any deductable expenses, or it claims the Notional Interest Deduction (NID) on the invested risk capital.  

Tax Treaties

Malta has an extensive double taxation treaty network with over 70 double taxation agreements most of which are based on the OECD model convention.  The reduced withholding tax rates on dividends, interest and royalties paid to residents of Malta are as indicated hereunder. Since Malta is an EU Member State, the Parent Subsidiary Directive and the Interest and Royalties Directive may also apply and the withholding tax rate could be reduced even further. [wpdatatable id=18][/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]

[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_empty_space][vc_cta h2="How can we help you?" add_button="right" btn_title="Contact Us" add_icon="left" i_icon_fontawesome="fa fa-phone" btn_link="url:http%3A%2F%2Fwww.avanzia.com.mt%2Fcontact-us%2F|||"]Avanzia Taxand is a corporate service provider licensed by the Malta Financial Services Authority.  We may assist in drafting all the necessary documentation necessary for an inward and an outward redomiciliation and liaise with the relevant authorities in order to complete all the necessary formalities.[/vc_cta][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]The Income Tax Act brings to charge “gains or profits from any employment or office, including the value of any benefit provided by reason of any employment or office”.  The legislation does not define ‘employment’ or ‘office’ but with the introduction of the Fringe Benefits Rules in 2001 we now have a definition of ‘officer’ which means the holder of an office and includes an individual who is a director of a company, or holds directly or indirectly more than 5% of the ordinary share capital or of the voting rights in a company or is a partner in a partnership.  The said rules also define ‘employee’ and ‘employer’ and therefore one can easily deduce what constitutes employment – the provision of any service under a contract, whether written or not.

Income tax implications for individuals

Subject to treaty provisions, employment income arising in Malta is subject to income tax in Malta at the following progressive rates: [wpdatatable id=54]

Resident and domiciled individuals

The Income Tax Act defines a ‘resident in Malta’ as being any individual who resides in Malta.   Although not clearly defined, the Income Tax Act makes distinctions between ordinarily residence, residence and temporary residence.  The distinction is primarily based on the intention to stay in Malta as well as the duration of such stay. Chargeability to tax depends on the residence and domicile of the taxpayer.  Domicile is not defined in Maltese legislation. The concept of domicile is a legal concept and generally refers to the place where a person was born, lives and establishes his home and intends to live indefinitely.  Maltese law adopts the UK approach to domicile whereby a person previously not connected to Malta who establishes residence here will not be easily deemed to have attained a Maltese domicile. Such a Maltese domicile will only be attained if such an expatriate has, and circumstances show, that he has lost his foreign domicile and intends to indefinitely and permanently establish Malta as his home.  Married persons may opt for a joint tax computation or a separate tax computation using either parent rates or single tax rates. No deductions are given against the gross employment income which is brought to charge to tax except for specific deductions such as, a deduction in respect of private school fees, alimony payments, childcare fees, homes for elderly fees and sports fees. Different deduction cappings apply as set in the respective subsidiary legislation. (more…)

[vc_row][vc_column][vc_column_text]Taxand launched their latest Economic Employer survey 2022.  This survey explores the attitudes of tax advisors across global tax jurisdictions in their engagement with the concept, as well as what nuances apply to corporates engaging with local tax authorities. The administrative burden and complexity of tax reporting will always be viewed as a necessary evil to businesses, especially those who operate across multi-market jurisdictions.   One of the most labour intensive is perhaps the Economic Employer concept, due to its reliance on granular, non-conformative employee data and nuanced interpretation across the different borders in which it applies.   Read the full survey here.[/vc_column_text][vc_empty_space][/vc_column][/vc_row]

Malta will be introducing transfer pricing rules with effect from 1 January 2024 following the publication of Legal Notice 284 of 2022 on 18 November 2022.

 

The rules apply to cross-border arrangements entered between associated enterprises.   The term associated enterprises includes the relationship between a permanent establishment and the company. In terms of the Rules, bodies of persons will be considered associated enterprises when there is direct or indirect control through a holding of more than 75% of the voting rights or ordinary share capital.  However, in the case of a MNE group which is subject to the CbCR obligations, the threshold for voting rights or ordinary share capital is 50% and not 75%.

 

Cross-border arrangements entered on or after 1 January 2024 or any arrangements which were entered into before 2024 but materially altered after 1 January 2024 are all subject to the TP Rules.  However, the Rules are not applicable to:

 

• Micro, small or medium-sized enterprises as defined in Annex I of Commission Regulation (EU) No 651/2014 of 17 June 2014,
• An arrangement which comprises a securitisation transaction in terms of the Securitisation Transactions (Deductions) Rules,
• Entities whose aggregate arm’s length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in a year does not exceed €6 million and the aggregate arm’s length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in a year does not exceed €20 million.

 

Entities subject to the TP Rules must ensure that the income accrued and/or received from cross border arrangements with associated enterprises are all at arm’s length.  If the income received under such arrangement is lower than arm’s length income, the entity is required to account for notional income to top up any discrepancy between the arm’s length amount and amount accounted for by the entity.  The Rules do not define or delve into the concept of arm’s length but simply state that the arm’s length amount shall be determined based on such methodologies as shall be designated by the Commissioner in guidelines (which are yet to be issued).

 

Entities will have the option to request a unilateral transfer pricing ruling from the Commissioner for Revenue against a non-refundable fee of €3,000 or an advance pricing arrangement against a non-refundable fee of €5,000.  Both will be valid for a period of five years.  A unilateral transfer pricing ruling may be renewed but the renewal must be made six months before the expiry and subject to a non-refundable fee of €1,000.

 

The Rules set out that a company, in relation to an arrangement to which the Rules apply, is to prepare on a timely basis and retain such records as may be reasonably be required. Further guidance on documentation requirements is expected to be included in the guidelines.

 

Introduction 

The budget speech for 2023 was presented by the Minister of Finance and Employment yesterday evening with the promise of yet another year without the introduction of any new taxes despite the economic uncertainties.  Most of the measures are aimed to assist vulnerable persons who are struggling due to the high inflation.  

The Economy

Despite the economic challenges the world is facing, the Government is still forecasting an increase in the GDP by 6% in real terms for 2022 and 3.5% for 2023.  The annual inflation for this year is expected to reach 5.7% and then to fall to 3.7% in 2023 as long as the government manages to contain and absorb the increase in costs related to the energy sector.  The government is indeed estimating that the investment necessary to absorb the increase in cost of energy and cereal prices is €600 million or around 10% of the budget. Expected economic growth for next year is expected to be 3.5% in real terms and 7.3% in nominal terms.  Employment rate is expected to increase by 4% whereas the unemployment rate is expected to by around 3.1%. National debt is expected to amount to 57% and 59.1% of the GDP in 2022 and 2023 respectively.  

COLA

The Cost of Living Adjustment (COLA) announced for 2022 for all employees, pensioners and people on social benefits is one of the highest ever announced and amounts to €9.90 per week.  Students’ stipends will also be increased pro-rata.  Pensioners will also have an additional COLA of €2.60 per week to help mitigate the hardship they may encounter.  

Income Tax

• The tax-free bracket for pensioners will once again increase so that pensioners will not be subject to income tax even after the increase in pensions and COLA announced during this budget.
• Qualifying pension income derived by pensioners remaining active after retirement age will be exempt from tax. The gradual exemption will amount to 20% of the pension income during 2022, 40% in 2023 until becoming fully exempt by 2027.
• An annual tax credit of €200 will be granted to parents who have children with a disability.
• Increase in the tax deduction to parents for children’s sports, arts and cultural activities to €300.
• The tax refund will be given once again this year.  Persons earning less than €60,000 will be entitled to a refund ranging between €60 and €140.
• The royalty income to authors and co-authors will be subject to a reduced income tax rate of 7.5%.
• Extension of the Micro Invest scheme to social enterprises.
• Possible changes to certain individual residency programmes such as the Global Residence Programme (GRP) and the Malta Residence Programme (MRP).

 

Social measures

• Increase in paternity leave.
• Extension of the In-work benefit of €150 to employees working in certain sectors of the economy whose income does not exceed €20,000.
• Increase in children’s allowance by €90 per child.
• Tax credit of €200 for parents of children with special needs.
• Additional grants for low-income earners.

 

Immovable Property

• Qualifying first time buyers may benefit from a grant of €10,000 receivable over a period of 10 years.
• Extension of the reduction in duty on documents upon the purchase of immovable property for first time buyers, second time buyers and purchase of immovable property in Gozo.
• Extension of the VAT scheme for the restoration of qualifying properties introduced in the previous budget.

 

Environment

• Extension of the fiscal incentives for persons opting to purchase electric vehicles.  The capping of the grant on such purchases has been increased to €12,000 and also applies to motors, mopeds, pedelecs and motorised bicycles.
• Extension to the exemption from registration tax and licence fees for the first five years upon the purchase of electric and plug-in hybrid cars.
• Extension of grants for the installation of PV panels on coaches and minibuses.
• Increase in the charging points for electric cars around the island.

 

Businesses

• ‘Start in Malta’, a one stop shop for start-ups was announced to assist start-ups.
• Increase in cash grants provided by the Malta Enterprise to companies investing in digital and sustainable projects up to a maximum of €100,000.
• Additional financial assistance in form of a 10% tax credit to start ups and Gozitan businesses.  The tax credit will increase to 20% if the investment reduces the carbon footprint.
• The introduction of a masterplan for further growth within the aviation sector with the aim to develop economic niches like leasing and cargo, drones and electric vertical take-off and landing aircraft.
• Extension of the possibility to transfer unabsorbed capital allowances in YA2023 to another company within the same group which accumulated during 2020 and 2021 due to losses suffered as a result of the COVID-19 pandemic.
• Extension of the reduction in Duty on Documents (at 1.5%) upon the inter-vivos transfer of family businesses.

 

Conclusion

The budget for 2023 does not introduce any new taxes but it also lacks new incentives since most of the incentives are an extension of existing ones.  It is clear that the main aim is to control inflation primarily through hefty energy subsidies and assist vulnerable people through social measures.     Whilst the national debt is still within acceptable limits, given the global uncertainties the world is experiencing, one may wonder whether the budget is sustainable and whether Malta will indeed experience positive growth even if the prospects within the Eurozone are not so bright.                                                        

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Following the introduction of Article 51A of Income Tax Act as an enabling provision for the introduction of the transfer pricing and Advance Pricing Agreements, the Office of the Commissioner for Revenue published the draft Transfer Pricing Rules for public consultation. 

 

The following are the highlights of the draft Transfer Pricing Rules:

 

• It is proposed that the rules will be applicable to cross-border arrangements entered into between associated enterprises on or after 1 January 2024 or are entered into before 1 January 2024 but are materially altered on or after that date;

 

• Bodies of persons are anticipated to fall within the ambit of associated enterprises when there is a direct or indirect control through a minimum holding of more than 50% of voting rights or ordinary share capital or by virtue of any powers contained in the articles of association or document regulating the controlled body of persons.

 

• The proposed rules will also contain specifics provisos for permanent establishments both in Malta and outside Malta;

 

• The rules will only apply for large companies having cross border arrangements. A de minimis threshold which is yet to be determined, will also apply for such arrangements;

 

• It is expected that that methodology applied by the Commissioner for Revenue for the ‘arms’ length amount’ will be based on the OECD Transfer Pricing Guidelines;

 

• The concept of ‘arrangement’ means any kind of transaction entered into by associated enterprises including modifications to existing arrangements.

 

• A Company will be expected to keep proper records in connection with the determination of whether the total income of the company is in line with the Transfer Pricing Rules.

 

• The Commissioner for Revenue may also issue Unilateral Pricing Rulings in order to provide certainty in relation to the application of these rules to a transaction or a series of transactions. Such rulings will be subject to a non-refundable fee which is yet to be determined.   The ruling will remain binding for a period of five years unless indicated otherwise. 

 

• The proposed rules also cater for the possibility obtain Advance Pricing Agreements. The Competent Authorities may enter into an Advance Pricing Agreement with the relevant foreign competent authority which may be of a bilateral or multilateral nature.    Such agreements may be entered into for a period not exceeding five years.

 

The Transfer Pricing Rules were issued on the 18 November 2022.  

 

Introduction 

The budget speech for 2022 was read by the Minister of Finance and Employment last night and as previously announced no new taxes were introduced.  Instead, various measures were proposed to assist low-income earners and persons in the brink of poverty together with other environmentally friendly measures and immovable property related measures.  

The Economy

Despite the adverse economic impact of the COVID-19 pandemic, it was announced that the rate of employment during the first three months of 2021 increased when compared to 2019 figures to 77.3%.  Unemployment rate stood at 3.2% in August of 2021 whilst average unemployment rate in EU stood at 6.8% during the same period. Expected economic growth for next year is expected to be 6.5% in real terms and 8.6% in nominal terms.  Unemployment rate is expected to remain 4%. Deficit for 2021 is expected to be 11.1% of the GDP which is in line with the estimations made last April but higher than what was anticipated last year.  National debt is expected to increase to 61.8% of the GDP whilst the annual deficit is expected to go down to 5.6%.  It is envisaged that by 2024, the national debt will stand at 62.4% whilst the deficit will go down to 2.9% of the GDP.  

COLA

The same Cost of Living Adjustment (COLA) as 2021 was announced for 2022 and thus will be €1.75 per week which will be given to all employees, pensioners as well as those on social benefits. Students receiving a stipend will receive a pro-rata COLA.  

Income Tax

• The tax-free bracket for pensioners will increase so that pensioners will not be subject to income tax even after the increase in pensions and COLA announced during this budget.
• The tax refund will be extended and increased.  Persons earning less than €60,000 will be entitled to a refund ranging between €60 and €140.
• Overtime annual income not exceeding €10,000 will be subject to 15% tax rather than being added to the employment income of the individual.  This only applies if the basic annual employment income does not exceed €20,000.
• Part-time income will be subject to 10% tax rate instead of 15%.
• Artists will be subject to an income tax rate of 7.5%.
• As from 1 June 2022, the rate of interest on unpaid taxes will increase to 7.2% per annum.  Whilst it will still be possible to request for a remission of interest due on unpaid taxes, this will only be granted in exceptional cases.

 

Immovable Property

• The tax on the first €200,000 of the transfer value of immovable property acquired or disposed that has been rented out for at least 10 years to persons eligible for rent benefit will be subject to a reduced rate of tax. If the property is sold to the tenants, then no tax will be paid by either the buyer or seller.
• Increase in subsidy to €25,000 for structural works carried out on rented property which is subject to controlled rental law.
• Removal of Capital Gains tax and Duty on Documents upon the transfer of qualifying immovable property situated in a UCA zone, houses which are older than twenty years and have been vacant for at least seven years or new developments built using traditional Maltese style. This exemption is applicable on the first €750,000 of the value of the property.
• First time buyers will also be eligible for a grant of €15,000 if the qualifying immovable property is in Malta and €30,000 if the qualifying immovable property is in Gozo.
• VAT refund of up to €54,000 on restoration expenses incurred on the regeneration of qualifying immovable property.
• Extension of the reduction in duty on documents upon the purchase of immovable property for first time buyers, second time buyers and purchase of immovable property in Gozo.

 

Environment

• Free public transport for residents in Malta and Gozo as from 1 October 2022.
• Fiscal incentives for persons opting to purchase an electric vehicle or Plug-In Hybrids increased to €11,000 and if used together with motor vehicle scrappage scheme to €12,000.
• Motor vehicles scrappage scheme increased to €2,000 in Gozo.
• Extension of the exemptions from registration tax and annual licence fee for a period of five years on electric vehicles and plug-in vehicles.
• Extension of VAT refund on bicycles and electronic bicycles as well as motor bikes, scooters, motor assisted bicycles as well as grants for vehicles which are upgraded to work on gas.

 

Employment

• Discussions are being held for the implementation of the EU directives concerning parental leave and work-life balance.
• Possible changes to the national minimum wage.

 

Businesses

• Extension of rental subsidy for qualifying businesses to lighten the burden on importers and businesses who are facing increasing costs because of the increase in transportation costs.
• Entities with unabsorbed capital allowances during 2020 and 2021 due to losses suffered as a result of the COVID-19 pandemic, may transfer such capital allowances to other companies within the same group to offset them against any chargeable income.
• Malta Enterprise will launch a new scheme whereby it will be possible to obtain a tax benefit if a percentage of business profits is reinvested within a two-year period.
• Extension of the reduction in Duty on Documents upon the intervivos transfer of family businesses to younger family members.
• Malta will start offering iStart-up Visa to attract foreign start-ups and entrepreneurs. Malta Enterprise will launch a program to attract certain non-EU residents wishing to set up stop in Malta.

 

Social Security

It will now be possible to pay social security contributions on more than one part-time income up to a maximum of 40 hours per week.  This will enable persons approaching pension age to ensure they will have more social security contributions for a better pension.  

Conclusion

The budget presented for 2022 is in line with most of the other budgets announced under this administration.  As with previous budgets, no new taxes were announced despite the disruption caused by the COVID-19 pandemic and the economic set back such pandemic caused.  The Maltese government seems to be confident that the economy will recover and we will see better years despite the fact that very little mention was made to new economic sectors.  Much of the focus remains on immovable property which proved to be an economic generator in the last few years.   Furthermore, environmental incentives are mostly an extension on existing schemes with no new incentives being launched.  No incentives were launched to address the shortfall in adequate education in certain professions which will ultimately affect the country’s future.