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Anti-Tax Avoidance Directive (ATAD)

During the Budget speech for 2019 presented on 22 October 2018, it was announced that Malta, like other EU Member States, will be implementing the EU Directive on Anti-Tax Avoidance, more commonly known as ATAD1.

 

Although no detailed provisions are available yet, the following is a brief summary of the expected changes which will be introduced with effect from 1 January 2019 as a result of ATAD1.

  

Interest Limitation

 

When interest and similar borrowing costs of a company exceed interest receivable, the maximum tax deduction that can be claimed in a tax period in respect of the excess costs will be 30% of EBITDA (that is, earnings before interest, tax, depreciation and amortisation). Unutilised costs may be carried forward (subject to any further limitations that may be applicable under the normal provisions of the Income Tax Act). The new restrictions will not apply in cases where the exceeding borrowing costs do not exceed €3,000,000 (three million Euros).

 

In line with the EU Directive, the regulations envisage the possibility of this limitation being calculated and applied at group level.

 

The limitation will not apply to financial undertakings. Nor will it apply to costs on loans used to fund long-term public infrastructure EU projects or loans concluded before 17 June 2016.

 

Exit Tax

 

A change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event. In such a case, the company will become subject to tax in the same manner as if it has disposed of its assets. The accrued gains will be calculated by reference to the market value of the asset at the time of the exit. Where the country of the new residence of the taxpayer or of the new location of the assets is another EU Member State, the payment of the tax can be deferred.

 

No exit tax will be chargeable in the case of a temporary movement of assets that is linked to certain financial transactions as long as the assets are returned within 12 (twelve) months.

 

Controlled Foreign Company (CFC) Rules

 

An entity will be considered a CFC where it is subject to more than 50% (fifty per cent) control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in Malta.

 

The measure will not apply:

 

  • To a CFC with accounting profits of no more than €750,000 (seven hundred and fifty thousand Euros), and non-trading income of no more than €75,000 (seventy-five thousand Euros); or
  • To a CFC whose accounting profits amount to no more than 10% (ten per cent) of its operating costs for the tax period.

 

The parent company will be entitled to double taxation relief for the tax paid by the CFC on the included income. The regulations should also provide for the avoidance of double taxation that could arise if the CFC subsequently distributes its profits or the parent company disposes of its interest in the CFC.

 

General Anti-Abuse Rule (GAAR)

 

The Income Tax Act already contains a general anti-abuse provision (article 51) that empowers the Commissioner for Revenue to ignore tax avoidance schemes. The new regulations will add to this rule by applying the definition of tax avoidance schemes as used in the Directive. The measure will accordingly apply to arrangements which are not genuine, meaning that they are not put into place for valid commercial reasons that reflect economic reality, and which have been put in place with a main purpose of obtaining a tax advantage that defeats the object or purpose of tax law.

 

EU Dispute Resolution Mechanism (DRM)

 

The EU Directive on ERM will be implemented by the end of June 2019 and it will be instrumental in providing Maltese taxpayers with access to a new dispute resolution framework in relation to disputes with other EU tax authorities that may come about given the changes that are being implemented in the international tax arena.

 

EU Mandatory Disclosure Directive (DAC 6)  

 

Regulations for the transposition of DAC 6 are being prepared and will meet the implementation deadlines set out in the Directive but no further details are available yet.

 

ATAD 2 effective as of 1 January 2020 and 1 January 2022

 

Apart from ATAD1, Malta will also have to implement the provisions of ATAD2 although these will take place on 1 January 2020 and 1 January 2022.

 

ATAD 2 will replace the original anti-hybrid provisions of ATAD 1 by extending them to include mismatches involving third countries and expanding the definition of hybrid mismatches to include hybrid permanent establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.  It is still premature to make any further comments on ATAD2.

 

 Patent Box Regime

 

Malta will introduce a new patent box regime that complies with the EU Code of Conduct (Business Taxation) and the OECD proposals on preferential intellectual property regimes (the so-called Modified Nexus approach).  Once again, no further details are available at this stage.

 

Conclusion

 

ATAD will introduce new concepts into the Maltese tax legislation such as exit taxes and CFC rules.  However, the changes should not have a dramatic effect to the tax system especially the principles of the full imputation system and the tax refunds which shareholders may claim upon a distribution of certain taxed profits.  We expect no changes to the participation exemption regime and we’ll have to see whether the step-up provisions already contained in our tax legislation will be affected.  If not, the step-up provisions and the participation exemption should continue to provide interesting opportunities.

 

It will be interesting to see how the interest limitation provisions will ‘interact’ with the newly introduced rules on Notional Interest Deduction which had an extremely positive effect on a number of Maltese companies

 

Very limited amendments are expected for the implementation of GAAR as required by the Directive since it is very similar to that already included in the Maltese Income Tax Act.

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Budget Newsletter 2019

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.

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Budget Newsletter 2018

On 9 October 2017, the Honourable Minister of Finance, Professor Edward Scicluna, presented the Budget for 2018. As has become customary, the introductory part of the budget speech was dedicated to the salient features of the Maltese economy, highlighting the achievements for 2016 and those underway for 2017 and the projections for the current year and 2018.

 

The Budget for 2018 contains the introduction of no new taxes for 2018, whilst aiming to assist vulnerable people in the Maltese society, especially due to the increase in the rent of immovable property which has increased substantially in the last few years.

 

The budget lacks incentives aimed at increasing investments.  The budget only targets new employments in Gozo and small enterprises who may avail themselves from better tax credits under the MicroInvest scheme.

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