On 14 October 2019, the Honourable Minister for Finance, Professor Edward Scicluna, presented the Budget for the coming year. In his introduction, he summarised the most salient features in relation to the performance of the Maltese economy with the main points being the following:

• The economic growth for the first six months of 2019 was 4.7% in real terms and 7.3% in nominal terms;
• GDP increase in real terms is expected to be 4.3% for 2020;
• Unemployment stood at 3.3% in August 2019 and it is expected to be around 3.5% in 2020;
• Inflation rate is expected to be 1.6% for 2020;
• Government debt as a percentage of GDP is expected to be 43.1% at end of 2019 and this should go down to 40.4% in 2020.

The Cost of Living Adjustment (COLA) for 2020 will amount to €3.49 per week which will be given in full to pensioners and persons on social benefits. Employees will also be entitled to an additional day of vacation leave which is added to their annual leave entitlement.

Fiscal measures

• 15% tax rate on the first 100 hours of overtime for persons earning less than €20,000 per annum;
• The maximum tax-free pension income will be increased to €13,798 whilst the maximum tax-free income for retired couples earning only one pension will increase to €15,798;
• A tax refund to employees will be granted and will be based on the employee’s income. The tax refund varies between €40 and €68;
• Tax incentives under the Voluntary Occupational Pension Scheme are being extended;
• VAT exemption on education related services;
• VAT refund (capped to €1,000) granted to persons with disabilities who purchase medical equipment.

Tax Administration

• Registration and deregistration of VAT numbers and PE applications may now be done online;
• Married couples may now opt for separate tax returns and assessment;
• The Inland Revenue Department will generate provisional assessments in lieu of the tax return to reduce the need for individuals filing of an income tax return;
• The Inland Revenue Department will issue tax statements and refunds within a period of six months from the submission date.

Property Related Measures

• The existing reduction in duty on documents (to 1.5%) upon the transfer of business to family members is being extended by another year;
• Extension of the current schemes for the reduction of duty on documents for first time buyers, second time buyers, purchase of property in UCA and purchase of property in Gozo. The first €175,000 (previously €150,000) of the value of property bought by first time buyers is now exempt from duty on documents;
• Duty on documents on residential property acquired through causa mortis will be taxed at the rate of 3.5% (instead of 5%) on the first €175,000;
• Gains made on the sale of a promise of sale agreement will be subject to tax at the rate of 15% on the first €100,000. This tax is a final tax and the gain made from the transfer of the promise of sale agreement will not form part of the chargeable income of the person.

Social Measures

• Various tax refund to low income earners;
• Increase in pension income for persons opting to work after retirement age;
• Increase in social security payments to persons and pensioners suffering from disabilities;
• Assistance to parents whose children suffer from rare diseases, persons suffering from certain conditions and persons under cancer treatment;
• Assistance to persons under the age of 40 who do not have enough funds for the deposit on the purchase of residential property;
• The subsidy for low income earners to assist in the payment of rent on residential property is being extended and the criteria to qualify for such subsidies will be widened.

Environment Friendly Measures

• A Commission will be set up to determine the date after which no polluting engine cars may be imported;
• Reduction in the electricity tariff for persons opting to charge their electric car at home;
• Introduction of the Beverage Container Recycling Scheme for the collection of certain waste;
• Abolition of single use plastic as from 1 January 2022;
• Grants will be available to persons in the construction industry who opt to replace their polluting machines with environmentally friendly ones. The grant is capped to €200,000;
• A Grant of €1,000 for persons purchasing batteries for the storage of electricity generated by photovoltaic panels. This is only available to persons who no longer benefit from feed-in tariffs;
• Extension of the exemption from registration taxes on electric and hybrid cars;
• Extension of the VAT refund upon purchase of bicycles and electric motors, scooters and bicycles;
• Extension of the current grant of a maximum of €1,500 given to persons opting to change their car to one which is more environment friendly.

Investments

• Additional investments allocated to Artificial Intelligence (AI) which will place Malta with the top 10 countries in this field. Such investments include educational programmes, the inauguration of an AI Innovation Hub, implementation of pilot projects in the public sector utilising AI and additional technological infrastructure;
• The Government will be implementing assistance measures for sectors such as digital arts, games programming and production media in order to attract additional foreign investments relating to the game productions;
• To further diversify the Maltese economy, a legislative framework for the space industry is planned to be introduced. A consultation document will be drafted as a basis for a national strategy which will also tackle research and development in this field;
• Malta will also explore a new economic sector in the aviation industry relating to Drones (Remotely Piloted Aircraft Systems) in order to attract foreign investors for research, technological experiments and education in this area;
• Schemes such as the Micro Invest, Business START and Start-Up Finance will be extended;
• Malta Enterprise will be introducing incentives for businesses to employ people with special needs;
• Additional investment in the gas pipeline between Malta and Sicily of €400 million till 2024;
• Consultation for the revision of the current aviation rules to incentivise further investment in the sector.

Gozo

• Introduction of the Film Fund during 2019 to incentivise cinema productions;
• A new fund will be launched so that Gozo may become a destination for Meetings, Conferences and Events;
• The Gozo Business Scheme will continue. This scheme assists start-ups in Gozo;
• Fiscal incentives for companies to relocate to Gozo;
• A tendering process for the forth ferry will start to enable the Gozo Channel to acquire a new ferry;
• Studies such as the preliminary designs and environmental impact assessment in connection to the bridge between Malta and Gozo are to be concluded in the coming months.

Strategy against fiscal evasion and money laundering

The Minister announced that a report issued by the European Commission’s Directorate General for Taxation and Customs (TAXUD) noted that Malta is the fourth country within the EU Member States with the least evasion in VAT collection.

Following the issuance of the Moneyval recommendations, the National Coordination Committee is coordinating a detailed plan for the implementation of these recommendations.

The Minister further announced that a new agency known as the ‘Financial Organised Crimes Agency’ will be set up and will be complimentary to the Economic Crimes Unit.

As from next year, cash payments exceeding €10,000 for the purchase of property, cars, boats, yachts, diamonds, precious stones and works of arts will not be allowed.

Conclusion

During the budget speech, the Minister noted that Malta’s success is being recognised by international agencies. Indeed, The World Economic Forum rated Malta in the first place for two consecutive years. Furthermore, he noted that this is the third budget in a row with no increase in taxes and based on the Government’s estimates, the year 2020 will be the fifth year with a budget surplus.

Rather than introducing new measures, this budget was an extension of existing measures focusing on the social aspect and low-income earners, property related measures and environment friendly measures. The Minister made references to plans to develop new areas like Artificial Intelligence and Digital Arts in order to attract further foreign direct investment.

As from year of assessment 2020, any person incurring qualifying IP expenditure and from which qualifying IP income is derived, may claim a deduction which may reduce the chargeable income from qualifying IP by 95%.  The assets that are considered as qualifying IP are defined in the Rules and include registered patents and assets covered by protection rights, however, exclude brands, trademarks and trade names.  Every item of qualifying IP in relation to which income is derived and against which the Patent Box Regime Deduction is claimed, need to be vetted and approved by the Malta Enterprise.  The deduction is aimed for assets which are developed by the person rather than for acquired assets.  The deduction is however not limited to assets developed in Malta but require that the beneficiary maintains sufficient substance as is commensurate with the type and extent of activity being carried out.    The Rules also require that the income brought to charge is in line with the Transfer Pricing Method in terms of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

The introduction of the Patent Box Regime is particularly interesting for persons investing in the development of patents or other innovative products from which income or gains arise.  Indeed, this regime may drastically reduce the taxable income of the person and may also be applied upon the disposal of the relevant asset.

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: