On 22 October 2018, the Honourable Minister for Finance, Professor Edward Scicluna, presented the Budget for 2019.  The introductory part of the budget speech was dedicated to some features of the Maltese economy, which may be summarised as follows:

  • GDP increase in real terms – 6.7% in 2017 and an expected increase of 5.3% for 2018;
  • Unemployment stood at 3.8% in August 2018 and this is expected to be around 4.3% in 2019;
  • An expected budget surplus of 1.1% for 2018 and 1.3% for 2019;
  • Inflation rate of 1.9% for 2019;
  • Government debt as a percentage of GDP expected to be 46.8% at end of 2018 and this should go down to 43.8% in 2019.

 

The Cost of Living Increase (COLA) for 2019 will amount to €2.33 per week.  Social security pensions will be increased by an additional €2.17 per week and therefore the total weekly increase for pensioners will be €4.50.

 

Tax Incentives and Refunds

  • An increase in the tax deductibility / tax credit for Third Pillar Pension Plans and Voluntary Occupational Pension Plans.
  • Parents whose children attend private schools will benefit from an increase in tax credit of €300 per child. The revised tax deductions will be €1,600, €1,900 and €2,600 for each child attending kindergarten, primary school and secondary school respectively.
  • Employees earning less than €60,000 are entitled to a tax refund ranging between €40 and €68.
  • Non-Governmental Organisations (NGOs) whose annual income does not exceed €10,000 will be tax exempt.
  • Increase in the fiscal incentives to the film industry.
  • An extension to the reduction in the rate of Duty on Documents (Stamp Duty) from the normal 5% to 1.5% upon the transfer of shares and immovable business property from parents to their children.
  • The reduced VAT rate of 5% on books and other printed matter such as magazines and publications will now be extended to similar material which is made available electronically.
  • Individuals investing in a domestic Reverse Osmosis will benefit from a VAT refund capped at €70.
  • The refund capping on wedding expenses will be increased to €2,000.

 

International Taxation

  • Amendments to the tax legislation will be introduced on 1 January 2019 to implement Anti-Tax Avoidance Directive 1 (ATAD 1). These changes will introduce new concepts into our tax legislation such as interest deduction limitations, exit taxes and Controlled Foreign Company (CFC) rules.  Anti-Tax Avoidance Directive 2 (ATAD 2) will also require new legislative changes, however, these will come into effect on 1 January 2020 and 1 January 2022.  The focus of this EU Directive is to address hybrid mismatches.
  • Malta will be adopting the EU Mandatory Disclosure Directive (DAC 6) in relation to mandatory exchange of information and adoption of the EU Dispute Resolution Mechanism (DRM).
  • A patent box regime in line with the EU Code of Conduct on Business Taxation and the OECD BEPS standard will be introduced.
  • New rules will be published in relation to the taxation of the digital economy.

 

Social Measures

  • Low income earning families will benefit from an increase in the children’s allowance.
  • The minimum wage will be raised by €3 per week for employees in their second year of employment and by another €3 per week during their third year of employment.
  • Unemployment benefits will now be available to self-employed forced to close their business.
  • The maximum amount of exempt pension income will be raised to €13,434.
  • A grant of €300 per annum shall be provided to individuals over 75 years of age who continue to reside in their home.
  • Government Savings Bonds will be issued during the year for individuals over 62 years who wish to invest their savings at favourable interest rates.
  • Increase in maximum rent subsidy ranging from €3,000 and €5,000 per year will be granted to certain families.
  • The Government will also be assisting persons over 40 years of age wishing to buy their residence (for which they require financing for not more than 50% of the value of the property purchased) by paying the interest on such loan.

 

Gozo-related incentives

  • Gozitan employees employed in the private sector in Malta may apply for a refund of the ferry fare.
  • Gozitan government employees may also request a partial compensation of €1.50 per day when paying for pooled transportation.
  • The Government is also incentivising the creation of new jobs in Gozo by extending the partial refund of the wage paid to new employees with a three-year contract. The refund will amount to 30% of wage cost with a capping of €6,000 for every new employee.

 

Other non-financial measures

  • An additional day of leave entitlement will be added to the current 25 days of leave available to all full-time employees.
  • Following the publication of the White Paper to address issues in relation to renting of immovable property for residential purposes, it is now expected that the new law will address the current issues faced by various tenants and landlords alike.
  • Launching of the Fintech Accelerator by the Malta Stock Exchange with the objective of attracting further business within this sector to Malta.
  • Introduction of REITS (Real Estate Investment Trusts) to enable investors indirectly invest in real estate.
  • Further introduction of a legislative framework to attract additional investment in Digital Ledger Technology (DLT) and blockchain in connection to Artificial Intelligence (AI) and Internet of Things (IoT).
  • The setting up of a new entity, Tech.mt, to promote Malta’s potential within the Blockchain industry and the introduction of a legislative framework in connection with e-sports.
  • Introduction of a legislative framework to attract and assist foreign start-ups wishing to set up in Malta.

 

Immovable Property related measures

  • To incentivise affordable lease arrangements, the Government will introduce a reduction in the capital gains tax upon sale of immovable property if such property is rented out at affordable lease payments for a period of not less than 7 years. No details on such incentive were made available during the budget speech.
  • Further capital investments were announced for new social housing, the regeneration of government owned property that may be used for social housing and renovation of current social housing estates.
  • An extension to the reduction or exemption in the rate of Duty on Documents upon the purchase of immovable property for first time buyers, second time buyers, property situated in Urban Conservation Areas (UCA) and property bought in Gozo.
  • Property owners may also benefit from the extension of the scheme to claim back expenses in connection with restoration works.

 

Infrastructure and incentives to reduce traffic congestion issues

  • A further capital expenditure of €100 million on road infrastructure and another €1 million on soft landscaping and other embellishments.
  • The free public transport scheme for persons between 16 years and 20 years will be extended and full-time students aged 14 years of age and over may now benefit from free public transport.
  • Various schemes introduced during the last budget are being extended for another year. These include the VAT refund upon the purchase of bicycles and pedelec bicycles, the VAT refund upon purchase of motorbikes and scooters up to a maximum of €400, the grants available to companies and local councils upon the purchase of bicycle racks, the exemption from registration tax upon the purchase of eco-friendly cars and the car scrapping scheme and grant upon conversion of car from petrol to gas.

 

Conclusion

The Budget does not introduce any new taxes but the Minister’s commitment to implement the EU Anti-Tax Avoidance Directive (ATAD 1) with effect from 1 January 2019 is of interest to Maltese companies owned by non-resident shareholders or involved in cross border transactions since Malta will see the introduction of interest deduction limitations, exit taxes which may also apply on a change of tax residence of a company which is not temporary, and regulations with respect to anti-abuse provisions and the introduction of CFC rules.

During 2019, Malta will also implement the EU Directive on DRM and this should give Maltese taxpayers access to a new framework with respect to disputes involving other EU Member States.  Then in the year 2020, Malta will implement the DAC 6 as well as ATAD 2.  The provisions of ATAD 2 involving hybrid permanent establishment mismatches, hybrid transfers imported mismatches, reverse hybrid mismatches and dual resident mismatches will be introduced on 1 January 2020 and 1 January 2022 as set out in the directive.

These various measures will be dealt with in a separate newsletter since they may have a wide-ranging effect on foreign owned companies.  Although no detailed provisions are yet available, the information will highlight the expected changes particularly the ones coming into effect on 1 January 2019 as a result of ATAD 1.