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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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Taxand Global Guide To M&A Tax: 2018 Edition

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.

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MDIA Officially Set-Up

Following the approval by Maltese Parliament of the cryptocurrency related bills on the 4th July 2018, through Legal Notice 250 of 2018 the Minister for the Digital Economy has established the 15th July 2018 as the date on which the provisions of the Malta Digital Innovation Authority (MDIA) Act shall be deemed to have come into force and hence the MDIA is now officially set-up. The Authority shall now commence the process of staff on-boarding and regulatory functions in terms of the MDIA Act.

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Approval of DLT Bills

On 4 July 2018, the Maltese Parliament has unanimously approved a trio of cryptocurrency related bills as follows:

  1. The Malta Digital Innovation Authority Act which shall provide for the establishment of an authority to be known as the Malta Digital Innovation Authority.
  2. The Virtual Financial Assets Act which shall regulate the field of Initial Virtual Financial Asset Offerings, or as more commonly referred to Initial Coin Offerings, Virtual Financial Assets and cryptocurrency currency exchanges whilst outlining the licensing requirements, the application, granting and cancellation of such licenses and provide for other matters ancillary thereto or connected therewith.
  3. The Innovative Technology Arrangements and Services Act which shall mainly provide for the regulation of designated innovative technology arrangements as well as of designated innovative technology services.

Malta is one of the first jurisdictions worldwide having in place specific legislation regulating this technology thus making Malta, an EU Member State, attractive to blockchain based companies and Initial Coin Offering (ICO) issuers.   Indeed, Malta has already seen several large cryptocurrency exchanges moving operations whilst the crypto friendly legislation was progressing.

Through the certification of technology arrangements, registration of service providers and regulation of ICOs, Malta will provide legal certainty and integrity to the industry and protection to both companies and investors.

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Final Withholding Tax

Financial institutions who deduct the final withholding tax (FWT) of 15% on payment of interest and other investment income are now obliged to disclose the recipient’s name, address and the income tax registration number together with the amount of investment income paid and tax paid on such income to the tax authorities. Such information may not be requested by the tax authorities after the lapse of nine years. Such disclosure is to be made by financial institutions with effect from year of assessment 2019.

 

The FWT of 15% has been extended and now also applies to income from ground rents related to urban and rural tenements.

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Intellectual Property

A tax deduction has been introduced on the exploitation of qualifying intellectual property (such as royalties) based on a percentage of qualifying income.  The deduction has been introduced with effect from 29 March 2018 however further details are expected to be issued in this regard to clarify when such deductions made be availed of.

 

The legislation has been also amended so that it is in line with the guidelines issued by the tax authorities on expenditure of a capital nature on intellectual property or any intellectual property rights. It is now clear that such expenditure may be amortised over a period of at least three years which shall not be less than a minimum period of three consecutive years, the first year being that in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights is / are first used or employed in producing the income. Such change is effective from year of assessment 2017.

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Participation Exemption

The applicability of the participation exemption on dividend income and capital gains from participating holding investments has been widened by reducing the ‘qualifying’ percentage or minimum equity threshold from 10% to 5%.

 

The type of entities in which the ‘participating holding’ is held has also been widened and now includes not only companies, partnerships, collective investment schemes (CIS) or other bodies of persons but also EEIGs (European Economic Interest Grouping).

 

These amendments make the participation exemption for Maltese companies more accessible especially when one considers that there are various other conditions which may be satisfied apart from the minimum 5% equity investment.

 

These changes are effective from 29 March 2018.

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Remittance Basis

Individuals who are ordinarily residents but non-domiciled will, as from year of assessment 2019 or basis year 2018, be subject to a minimum tax of €5,000 per annum before any double taxation relief. The minimum tax is applicable to individuals and married couples whose foreign income exceeds €35,000.

 

This minimum tax is not applicable to individuals who are tax residents under The Residence Programme, the Global Residence Programme, the Malta Retirement Programme and the Residents Scheme Regulations. Therefore, the minimum tax of €5,000 introduced earlier on this year will primarily apply to EU citizens who are tax resident in Malta and do not enjoy a special tax status under any programme.

 

Also, long-term residents or permanent residents who have a permanent residence certificate or a permanent residence card in terms of the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order, are not eligible to benefit from the remittance basis of taxation.

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Distributed Ledger Technology (DLT) Bills

The Maltese Government published the three bills which will be implementing a framework for DLT. These legislative initiatives will make Malta one of the first countries in the world regulating this technology thereby providing a level of certainty to the industry and attracting businesses to ‘The Blockchain Island’.

The Innovative Technology Arrangements and Service Bill shall provide for the regulation of designated innovative technology arrangements as well as of designated innovative technology services, and for the exercise by or on behalf of the Malta Digital Innovation Authority of regulatory functions in that regard.

The Virtual Financial Assets Bill shall regulate the field of Initial Virtual Financial Asset Offerings, or as more commonly referred to Initial Coin Offerings, Virtual Financial Assets and cryptocurrency currency exchanges. The Bill shall outline the licensing requirements, the application, granting and cancellation of such licenses and provide for other matters ancillary thereto or connected therewith.

The Malta Digital Innovation Authority Bill shall provide for the establishment of an Authority to be known as the Malta Digital Innovation Authority, to support the development and implementation of the guiding principles and to promote consistent principles for the development of visions, skills, and other qualities relating to technology innovation, and for the exercise by or on behalf of that Authority of regulatory functions regarding innovative technology arrangements including distributed or decentralised ledger technology, and related services and to make provision with respect to matters ancillary thereto or connected therewith.

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VAT Grouping

Following the announcement made by the Minister of Finance during the budget speech in October 2015, a legal notice (L.N. 162 of 2018) was finally published to introduce VAT Grouping. However, this new concept is not being made available to all groups which may exist for other purposes, such as the Income Tax Act.

 

VAT Grouping is quite common in other EU Member States however, it appears that Malta is reluctant to introduce this concept across the board and therefore the new regulations are only applicable to groups wherein at least one member is a licensed or regulated entity within the gaming sector or the financial services industry such as banks, financial institutions, insurance, investment services, securitisation etc, the services of which are usually exempt without credit.

 

To form a VAT Group, the following conditions must be satisfied:

 

  • All members of the VAT Group are legal persons established in Malta;
  • At least one of the members of the VAT Group is a taxable person licenced or regulated under any of the following Acts:
    • The Banking Act;
    • The Financial Institutions Act;
    • The Gaming Act;
    • The Insurance Business Act;
    • The Insurance Intermediaries Act;
    • The Investment Services Act;
    • The Lotteries and Other Games Act;
    • The Retirement Pensions Act;
    • The Securitisation Act.
  • Members of the VAT Group are financially, organisationally and economically linked to each other.  A financial link exists when two or more entities are directly or indirectly held by at least 90% by the same person or persons.   The financial link may be established on the basis of voting rights, profit entitlement or access to winding up distributions.  An organisational link exists when two or more entities share their management structure whilst an economic link exists when entities are linked to each other by virtue of the industry they operate in, or provide services which are interdependent or complementary to each other.  An economic link also exists when group members carry out activities which are wholly or substantially carried out for the benefit of the other Group Members.
  • All Members of the VAT Group are up to date with their VAT filing requirements and VAT payments.

 

Members of a VAT Group may only form part of one VAT Group.  Approval must be obtained from the VAT Department and such approval may be done by any member.  An application may also be made by a person to join an existing VAT Group.

 

Application for the registration of a VAT Group as well as the addition of new members must be made electronically however, the details are not yet available.

 

Members within a VAT Group must nominate a Group Reporting Entity. Such entity is responsible of fulfilling all the obligations arising under the regulations.   Once an entity forms part of the VAT Group, any supply (including supplies and/ or Intra-community acquisitions as well as any importation made under Article 4 of the VAT Act) made by the members are deemed to have been supplied made by the Group Reporting Entity and therefore reported as such.  The VAT status of members within the group (whether taxable persons or non-taxable legal persons) becomes irrelevant as the VAT Group itself is regarded as a taxable person.

 

Approved VAT Groups are notified by the VAT Department with the date from when the VAT Group is deemed to have been formed. The Group Reporting Entity and the other members of the group are also approved by the VAT Department.  The VAT Group will also have a separate Group VAT number.

 

The VAT registration number of the members of a VAT Group is cancelled once a member becomes an approved member of a VAT Group.  This is done because all the transactions entered into by any of the VAT Group Members is deemed to be made by the Group Reporting Entity.   The regulations contain provisions to regulate the cancellation of the VAT number of individual VAT Group Members where the assets of the economic activity include capital goods.

 

Members within the same VAT Group have joint and several liability for the payment of any tax as well as any administrative penalties and interest due.    Such liability will continue to apply even after a Member leaves the VAT group if such payments arose during the period when such Member was still part of the VAT Group.

 

The Group Reporting Entity is required to inform the Commissioner for Revenue should any of its members cease or will cease to satisfy the conditions to form part of the VAT Group.  Such notification should be made within 15 days from the changes in circumstances.

 

The VAT Group may also be dissolved after the lapse of 24 months from its registration.  The members of a ‘former’ VAT Group may reconstitute the VAT Group only after the lapse of 24 months from the cancellation of such VAT Group.

 

Supplies between members of a VAT Group

 

Any supplies made between VAT Group Members are disregarded for VAT purposes.   The regulations include an anti-abuse provision whereby the Commissioner for Revenue is granted the necessary powers to bring to tax supplies made within the VAT Group should the transactions be deemed as being tax avoidance or tax evasion.

 

The ‘exemption’ for intra-group supplies does not apply when the supply of services is made by or to an establishment situated outside Malta (including for example a branch or a permanent establishment of a Maltese company which forms part of a Maltese VAT Group), if that establishment forms part of a foreign EU VAT Group.

 

Through the introduction of VAT Grouping provisions, separate legal entities may now operate as a single taxable person thus reducing the administrative burden on the various group companies as well as reducing cash flow issues associated with the payment and recovery of VAT.  It is a pity that the group definition for VAT grouping is very restrictive and not all groups may benefit from such provisions.

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