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.

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.

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.

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.

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.

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.

VAT thresholds

Persons eligible for registration under Article 11 of the VAT Act has been widened by means of Legal Notice 163 of 2018 whereby the provisions of Council Implementation Decision (EU) 2018/279 of the 20^th February 2018 have been implemented.

Article 11 exempts taxable persons carrying on a small undertaking from charging VAT thus reducing the VAT compliance and costs associated with normal registration under Article 10. However, Persons registered under Article 11 may not claim any input tax incurred.

By way of an EU derogation, taxable persons whose economic activity consists principally of supplies of services with high value added, thus, with relatively low-cost base, may register under Article 11 if their annual turnover does not exceed €20,000. The entry and exit threshold in Schedule 6 has been updated to reflect the revised entry and exit threshold (now revised to €17,000) for such undertakings.

Such derogation is applicable from 1 July 2018 until 31 December 2020.

Notional Interest Deduction Rules 2018

Malta has very recently introduced the concept of a notional interest deduction (NID). The recently published rules come into effect from year of assessment 2018 (basis year 2017) and they are aimed at mitigating the differences in the tax treatment between equity and debt financing. 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. These new rules entitle companies with an option 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.

Salient features of these rules:

NID is optional and may only be claimed if all shareholders of an undertaking approve the claim for such a deduction.
These rules are applicable to Malta registered companies, permanent establishments situated in Malta as well as partnerships.
NID is determined by multiplying the reference rate by 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 remaining 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 an any contributions made by the shareholder/s. Any capital directly employed in the production of income which is exempt from tax does not fall part of the invested risk capital.
NID is limited to 90% of chargeable income. Any excess above the capped amount may be carried forward for deduction in future years.
When an undertaking claims NID, the shareholder / partner is deemed to have received income equal to the NID and the provisions relating to the taxation of interest income shall apply with the option to apply NID against the deemed interest brought to charge.
An amount equal to 110% of the profits relieved from tax through the NID shall be allocated to the undertaking’s final tax account. The amount allocated to the final tax account is limited to the total profits of the undertaking an any such excess shall be ignored for allocation of tax profits.

Undertakings are advised to seek for professional tax advice in determining whether these rules would result in the most optimal scenario for the said undertaking and shareholders / partners.

Update to the NID news item

The NID must be calculated before taking into account any adjustments for the Flat Rate Foreign Tax Credit (FRFTC). This clarification was embedded in Act VII of 2018 and is applicable from year of assessment 2018.

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.

Download our Budget 2018 newsletter

Malta signs a tax treaty with Mauritius

On 15 October 2014 Malta signed a tax treaty with Mauritius. The treaty was published by means of legal notice 409 of 2014.

The tax treaty is modelled on the OECD model convention. However, it is interesting to note that no withholding tax is levied on dividends, interest and royalties and therefore the source state will not tax dividend income, interest or royalties and the residence state will have exclusive jurisdiction to tax such income. The treaty provides that the source state will have taxing rights with respect to capital gains on immovable property and movable property.

The tax treaty also contains ‘standard articles’ with respect to the elimination of double taxation (under the credit method), mutual agreement procedure, exchange of information and a rather detailed article with respect to assistance in the collection of taxes.

Archives for News