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.

Unlike the group relief provisions already contained in the Income Tax Act which provide for the surrendering of tax losses to other members of the same group, the fiscal unity rules provide for a consolidated tax group.

Also, 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.

It is interesting to note that certain trust arrangements as well as certain foundations may also form part of the consolidated tax group. This will give flexibility to certain structures.  On the other hand, the rules exclude certain types of foundations, securitisation vehicles and finance leasing companies.

Requirements for the Formation of a Fiscal Unit

 A parent company, as the principal taxpayer, may make an election for itself and its one or more subsidiaries to form a fiscal unit provided that in the year prior to the year of assessment it holds at least 95% of two of the following rights in each subsidiary (hereinafter refer to as 95% subsidiary):

• voting rights;
• profits available for distribution; or
• assets available for distribution upon winding up.

Where the election is made, each 95% subsidiary will form part of the same fiscal unit of its parent company, with such subsidiaries being referred to as “transparent subsidiaries.” Where the transparent subsidiary is itself a parent company, its 95% subsidiaries will also join the fiscal unit.  The principal taxpayer’s election becomes effective as from the year of assessment in which it is made, provided that it is made prior to tax return submission due date of the transparent subsidiaries.

Such an election is possible provided that the accounting periods of all the members within the fiscal unit are the same and subject to the consent of any minority shareholders. Naturally, no company shall form part of more than one fiscal unit at any one time.

Upon registering as a fiscal unit, the principal taxpayer assumes the rights, duties and obligations under the Income Tax Acts relative to the fiscal unit.  The subsidiaries within the fiscal unit shall be deemed to be transparent entities for Malta income tax purposes. Balances of items allowed to be carried forward, tax credits, tax account balances (excluding the untaxed account) of the transparent subsidiaries at the end of the basis year preceding the year in which the election is made are considered to be balances of the principal taxpayer.  Such carryforward is subject to the consent of the minority shareholders and if minority shareholders do not approve, then such balances will be suspended for as long as the transparent subsidiary remains part of the fiscal unit.

The Fiscal Unit’s Chargeable Income and Tax Payable

 Intra-group transactions or transactions between members of the fiscal unit are referred to as “ignored transactions” and are disregarded for tax purposes. An exception relates to transfers of immovable property situated in Malta and transfers of property companies.

A property company is defined in the Income Tax Act as a company which owns immovable property situated in Malta or any real rights thereon or a company which holds, directly or indirectly, shares or other interests in any entity or person, which owns immovable property situated in Malta or any real rights thereon where 5% or more of the total value of the said shares or other interests so held is attributable to such immovable property or right.

Naturally, transfers of immovable property and property companies cannot be characterised as ignored transactions as otherwise such transfers would become exempt when transferred within a fiscal unit.

Given that the subsidiaries are deemed to be transparent subsidiaries, any income and gains which is not regarded as ignored transactions derived by such transparent subsidiaries, is directly allocated to the principal taxpayer.

Income or gains allocated to the principal taxpayer retain their character and source. The rules however contemplate a number of deemed source rules. For example, income or gains derived by a non-Malta tax resident transparent subsidiary is deemed to be attributable to a permanent establishment of the principal taxpayer situated outside Malta insofar as the transparent subsidiary maintains sufficient substance therein.

Similarly, expenditure and capital allowances incurred by transparent subsidiaries and which is not regarded as an ignored transaction, is directly allocated to the principal taxpayer or the parent company.

This tax consolidation provides for a full integration of the tax position of its members and hence is different in scope than the group relief provisions referred to above.

Furthermore, any foreign income tax suffered by a company forming part of the fiscal unit is deemed to have been incurred by the principal taxpayer, and relief from double taxation in accordance with the Income Tax Act is allowed accordingly.

The main advantage of the tax consolidation or the fiscal unity is that a group may achieve the same effective tax rate without the need for the distributing company or transparent subsidiary to pay the relevant tax and also avoid the need to make claims and await the receipt of the refunds.

The tax consolidation regime is optional, but should a fiscal unit be formed, the principal taxpayer is required to prepare, on a yearly basis, a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit accompanied by an audit report. Given the criteria described above to form a fiscal unit, the companies included in the consolidated accounts for the tax consolidation regime may differ from thse included in the consolidated accounts as required in terms of the Companies Act.

The principal taxpayer is responsible for filing the tax return/declaration of the fiscal unit, with other members of the fiscal unit being exempted from filing their respective tax returns. However, members of the fiscal unit are jointly and severally liable for the payment of tax, additional tax and interest. The tax liability by the fiscal unit may be apportioned between the principal taxpayer and the transparent subsidiaries.

These tax consolidation rules provide for an anti-abuse rule where the tax payable by the principal taxpayer cannot be lower than 95% of the aggregate tax that would have been payable by the companies within the fiscal unit had an election under these rules was not applied for.

Benefits of Tax Consolidation

As highlighted earlier on, 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.

It is evident that the tax consolidation rules will bring further compliance obligations, particularly the need to prepare and submit consolidated financial statements.  Additionally, tax computations will still be required for each company and also for the fiscal unit as a whole in order to compare the tax liabilities and satisfy the anti-abuse provision. On the other hand, there is less compliance with respect to the filing of the income tax returns or declarations as only one return or declaration is submitted by the principal taxpayer.

The Notional Interest Deduction (NID) has already eased the number of tax refund claims filed by shareholders upon a receipt of taxed dividends but we expect that these rules will be availed of by large groups. The introduction of tax consolidation rules is long-awaited and is welcome as it brings Malta at level with other financial centers.

Malta published the tax treaty with the Principality of Monaco by means of Legal notice 70 of 2019.

The tax treaty is modelled on the OECD model convention, but there are no withholding taxes on dividends, interest and royalties given that both countries do not levy any withholding taxes.   The residence state will have jurisdiction to tax such income according to the tax legislation.  The treaty also provides that the source state will have taxing rights with respect to capital gains on immovable property and capital gains on shares whose value is derived as to more than 50% from immovable property.

The tax treaty also contains ‘standard articles’ with respect to the elimination of double taxation (under the credit method), mutual agreement procedure (MAP) and exchange of information.

The Maltese Tax Authorities issued guidelines in connection with the income tax, VAT and duty on documents implications arising from transactions or arrangements involving DLT assets.

The following is a list of definitions included in the guidelines:

Taxation

The general income tax principles contained in the Income Tax Act apply to transactions involving DLT assets.  The guidelines serve to provide clarifications regarding the income tax treatment of a number of transactions or arrangements involving DLT assets.

The following is a summary of the tax treatment of transactions involving DLT Assets:

The following is a summary of the income tax treatment of transactions in coins:

Coins fall outside scope of Article 5 of the Income Tax Act and therefore they are not considered to give rise to any capital gain for income tax purposes.

The following summarises the tax treatment for the return on financial tokens:

The following outlines the tax treatment arising from the transfers of financial and utility tokens:

The distinction between trading income and non-trading income may not always be evident.  It may therefore be necessary to refer to the badges of trade to determine whether the income received falls within the definition of trading income or not.  Such determination is crucial to assess the tax treatment of transferred tokens.

The following portrays the tax treatment applicable for initial offerings:

Value Added Tax (VAT)

The general VAT principles applicable to taxable events also apply to transactions or arrangements involving DLT assets.  Maltese VAT rules apply only if the place of supply of a transaction or arrangement is deemed to be Malta.  Furthermore, the chargeable event would only arise where a supply of service is made for a consideration by a taxable person acting as such and there is a direct link between the consideration payable and the supply made and where there is reciprocal performance between the suppliers and the recipient of the service.

The following is a general overview of the VAT treatment of transactions involving DLT assets:

If a token contains features of both a financial and a utility token (also referred to as a hybrid token),  then the VAT treatment depends on the use of such token.  A hybrid token used as a utility token then it is to be treated as such, while if in another occasion the same token is used as a coin, then it needs to be treated as such.

When treated as a voucher, the consideration paid for a utility token shall be deemed to be gross of VAT due.  Another important issue to determine is when the token is subject to VAT:

The guidelines provide clarification as to whether initial offerings are subject to VAT or not:

In case of electronically supplied services rendered to non-taxable persons established in other Member States, the supplier may opt to register and account for VAT through the Mini-One-Stop-Shop system (MOSS) to facilitate the administration for the payment of the VAT within the EU.

Duty on Documents and Transfers Act (DDTA)

The following is a summary of the DDTA implications arising with respect to transactions involving DLT assets:

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.

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.

This week, Taxand published its annual Global Guide to M&A Tax. It provides insight into the tax treatment of global mergers and acquisitions in 33 countries and an introduction to M&A tax planning in each of the diverse fiscal environments in its scope.

The unprecedented M&A cycle in which we find ourselves shows no signs of slowing halfway through 2018. Although global economic strength clearly is providing fuel to this hot deal market, the following key factors are also fanning these flames, encouraging active market participants to continue engaging in M&A and those sitting on the sidelines to abandon their wait-and-see approaches. These are:

• United States Tax Reform
• Private Equity Dry Powder
• Brexit and European Elections
• Base Erosion Profit Shifting Initiative (“BEPS”)
• Shareholder Activism

The strong global economy and the factors mentioned above should continue to fuel global M&A activity in the short term. Cross-border M&A should continue to expand at a faster pace than purely domestic M&A as developing countries participate to a greater extent than ever in global markets. All indicators point toward a strong 2018 in M&A activity.