Introduction The budget for 2024 was presented by the Minister of Finance and Employment yesterday evening.  In his introduction the Minister indicated that notwithstanding the global turmoil the Government was committed to maintain the energy subsidies to curb inflation.  Cereals will also be subsidised.   The Economy Despite the global challenges, the Government is forecasting an increase in the GDP in real terms of 4.1% for 2023 and 4.2% for 2024.  The annual inflation for the current year is expected to reach 5.7% and then to fall to 3.7% in 2024.  The unemployment rate is expected to be around 2.7%.   The national debt as a percentage of the GDP is expected to be 52.8% for 2023 and 55.3% for 2024 and therefore below the 60% threshold required by the EU.  The deficit is set to decrease from 5% in 2023 to 4.5% in 2024 and further down to 3% by 2027 in compliance with EU regulations.   COLA The Cost-of-Living Adjustment (COLA) announced for 2024 for employees, pensioners and those on social benefits amounts to €12.81 per week.  Students’ stipends will also be increased pro-rata.  As from 2024, the national minimum wage will be increasing gradually up to 2027 and is set to increase to €213.54 per week including COLA for 2024.   Income Tax Measures The main income tax measures include:

• Malta will apply a six-year derogation with respect to the EU Minimum Tax Directive (also known as Pillar 2) which introduces a global minimum tax of 15% applicable to multinationals. This effectively means that the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and the Qualified Domestic Minimum Top-Up Tax (QDMTT) will not apply for the time being.
• No changes are envisaged to Malta’s full imputation system. The Government is also committed to the introduce Qualified Refundable Tax Credits (QRTCs) which are compliant with EU regulations and the OECD framework.
• Tax exemption applicable to widows and widowers’ pensions even when the recipient is under the age of 61.
• The income tax exemption applicable to pensioners who earn income from employment will increase from 40% of such income in 2023 to 60% of such income for 2024. Income from pension will remain tax exempt.
• Tax deductions of up to €500 with respect to donations made to certain voluntary organisations.
• Extension of tax credits for continued education under the Get Qualified and Higher Education Qualification schemes.
• Extension of tax credits under the Seed Investment Scheme.
• The reduced tax rate of 7.5% applicable on income derived from sporting activities will be extended to apply to more athletes and sports persons.

  Social measures The main social measures include:

• Tax refunds ranging between €60 and €140 to eligible individuals earning less than €60,000.
• Childrens Allowances to increase by €250 per child.
• Increase in the tax credits for parents of children with disabilities and attending therapy.

  Immovable Property Various measures related to immovable property will be available and these include:

• The reduced stamp duty rate of 1.5% applicable on the transfer of family businesses will be extended for another year.
• The exemption from capital gains and duty on documents applicable on the transfers of qualifying vacant property and property in a UCA will continue to apply.  This exemption is capped at property value of €750,000.
• The exemption from stamp duty for first time and second time buyers’ schemes is being extended whilst the Gozo Property Scheme providing for a reduced duty rate will not be extended for 2024.
• Exemption from capital gains and stamp duty upon certain transfers of immovable property to tenants benefitting from subsidised rent will be available. The exemption is limited to the first €200,000 of the property value.
• The annual grant of €1,000 for ten years given to first time buyers is also being extended. Grants will be available if the immovable property is situated in a UCA.
• Extension of VAT refund available to first time buyers who are building or renovating their homes.

  Environment Environmental measures include:

• New schemes will be announced to encourage the installation of renewable energy sources such as photovoltaic systems, renewable power storage batteries, heat pumps and restoration of wells.
• Installation of more electric vehicle charging stations.
• Extension of current schemes to encourage the purchase of electrical vehicles, plug-in hybrids, motorcycles and e-bikes, pedelecs, and e-scooters.
• An extension to the scheme for the installation of water purifying equipment.
• Initiation of plans to work on a strategy introducing the use of hydrogen.

  Proposals for Businesses A number of proposals were announced which are relevant to businesses in Malta:

• Revision to the Highly Qualified Persons Rules with the possibility of widening its scope.
• More tax credits available to businesses registered with the Family Business Office and fiscal incentives for family businesses who innovate and digitalise.
• The creation of a Common Central Data Repository to facilitate the process of identifying applicants doing business in Malta.
• Less onerous audit requirements for small companies.
• Initiatives and extension of current schemes to assist companies including start-up companies, especially those within the technology sector.
• Regulatory changes to attract Family Offices, wealth and asset management, REITs and aircraft leasing.
• Changes to the Merchant Shipping Act to attract more superyachts to Malta.
• Increase in the application fees for new work permits.

  Conclusion The budget speech indicates that the Government’s attention is to alleviate the burden of inflation especially on those who are vulnerable.  Whilst there are a number of social measures and primarily extensions of existing ones, the budget lacks detail on how the country will attract new business to Malta and change its strategy on importation of cheap labour, control excessive construction and tackle a number of environmental and health issues or concerns.   Unfortunately, there are no indicative timelines and details with respect to changes to Malta’s tax system, but this seems to have been postponed thus creating uncertainty to attract foreign direct investment and international businesses to Malta.  

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Malta will be introducing transfer pricing rules with effect from 1 January 2024 following the publication of Legal Notice 284 of 2022 on 18 November 2022.

 

The rules apply to cross-border arrangements entered between associated enterprises.   The term associated enterprises includes the relationship between a permanent establishment and the company. In terms of the Rules, bodies of persons will be considered associated enterprises when there is direct or indirect control through a holding of more than 75% of the voting rights or ordinary share capital.  However, in the case of a MNE group which is subject to the CbCR obligations, the threshold for voting rights or ordinary share capital is 50% and not 75%.

 

Cross-border arrangements entered on or after 1 January 2024 or any arrangements which were entered into before 2024 but materially altered after 1 January 2024 are all subject to the TP Rules.  However, the Rules are not applicable to:

 

• Micro, small or medium-sized enterprises as defined in Annex I of Commission Regulation (EU) No 651/2014 of 17 June 2014,
• An arrangement which comprises a securitisation transaction in terms of the Securitisation Transactions (Deductions) Rules,
• Entities whose aggregate arm’s length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in a year does not exceed €6 million and the aggregate arm’s length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in a year does not exceed €20 million.

 

Entities subject to the TP Rules must ensure that the income accrued and/or received from cross border arrangements with associated enterprises are all at arm’s length.  If the income received under such arrangement is lower than arm’s length income, the entity is required to account for notional income to top up any discrepancy between the arm’s length amount and amount accounted for by the entity.  The Rules do not define or delve into the concept of arm’s length but simply state that the arm’s length amount shall be determined based on such methodologies as shall be designated by the Commissioner in guidelines (which are yet to be issued).

 

Entities will have the option to request a unilateral transfer pricing ruling from the Commissioner for Revenue against a non-refundable fee of €3,000 or an advance pricing arrangement against a non-refundable fee of €5,000.  Both will be valid for a period of five years.  A unilateral transfer pricing ruling may be renewed but the renewal must be made six months before the expiry and subject to a non-refundable fee of €1,000.

 

The Rules set out that a company, in relation to an arrangement to which the Rules apply, is to prepare on a timely basis and retain such records as may be reasonably be required. Further guidance on documentation requirements is expected to be included in the guidelines.

 

Introduction 

The budget speech for 2023 was presented by the Minister of Finance and Employment yesterday evening with the promise of yet another year without the introduction of any new taxes despite the economic uncertainties.  Most of the measures are aimed to assist vulnerable persons who are struggling due to the high inflation.  

The Economy

Despite the economic challenges the world is facing, the Government is still forecasting an increase in the GDP by 6% in real terms for 2022 and 3.5% for 2023.  The annual inflation for this year is expected to reach 5.7% and then to fall to 3.7% in 2023 as long as the government manages to contain and absorb the increase in costs related to the energy sector.  The government is indeed estimating that the investment necessary to absorb the increase in cost of energy and cereal prices is €600 million or around 10% of the budget. Expected economic growth for next year is expected to be 3.5% in real terms and 7.3% in nominal terms.  Employment rate is expected to increase by 4% whereas the unemployment rate is expected to by around 3.1%. National debt is expected to amount to 57% and 59.1% of the GDP in 2022 and 2023 respectively.  

COLA

The Cost of Living Adjustment (COLA) announced for 2022 for all employees, pensioners and people on social benefits is one of the highest ever announced and amounts to €9.90 per week.  Students’ stipends will also be increased pro-rata.  Pensioners will also have an additional COLA of €2.60 per week to help mitigate the hardship they may encounter.  

Income Tax

• The tax-free bracket for pensioners will once again increase so that pensioners will not be subject to income tax even after the increase in pensions and COLA announced during this budget.
• Qualifying pension income derived by pensioners remaining active after retirement age will be exempt from tax. The gradual exemption will amount to 20% of the pension income during 2022, 40% in 2023 until becoming fully exempt by 2027.
• An annual tax credit of €200 will be granted to parents who have children with a disability.
• Increase in the tax deduction to parents for children’s sports, arts and cultural activities to €300.
• The tax refund will be given once again this year.  Persons earning less than €60,000 will be entitled to a refund ranging between €60 and €140.
• The royalty income to authors and co-authors will be subject to a reduced income tax rate of 7.5%.
• Extension of the Micro Invest scheme to social enterprises.
• Possible changes to certain individual residency programmes such as the Global Residence Programme (GRP) and the Malta Residence Programme (MRP).

 

Social measures

• Increase in paternity leave.
• Extension of the In-work benefit of €150 to employees working in certain sectors of the economy whose income does not exceed €20,000.
• Increase in children’s allowance by €90 per child.
• Tax credit of €200 for parents of children with special needs.
• Additional grants for low-income earners.

 

Immovable Property

• Qualifying first time buyers may benefit from a grant of €10,000 receivable over a period of 10 years.
• Extension of the reduction in duty on documents upon the purchase of immovable property for first time buyers, second time buyers and purchase of immovable property in Gozo.
• Extension of the VAT scheme for the restoration of qualifying properties introduced in the previous budget.

 

Environment

• Extension of the fiscal incentives for persons opting to purchase electric vehicles.  The capping of the grant on such purchases has been increased to €12,000 and also applies to motors, mopeds, pedelecs and motorised bicycles.
• Extension to the exemption from registration tax and licence fees for the first five years upon the purchase of electric and plug-in hybrid cars.
• Extension of grants for the installation of PV panels on coaches and minibuses.
• Increase in the charging points for electric cars around the island.

 

Businesses

• ‘Start in Malta’, a one stop shop for start-ups was announced to assist start-ups.
• Increase in cash grants provided by the Malta Enterprise to companies investing in digital and sustainable projects up to a maximum of €100,000.
• Additional financial assistance in form of a 10% tax credit to start ups and Gozitan businesses.  The tax credit will increase to 20% if the investment reduces the carbon footprint.
• The introduction of a masterplan for further growth within the aviation sector with the aim to develop economic niches like leasing and cargo, drones and electric vertical take-off and landing aircraft.
• Extension of the possibility to transfer unabsorbed capital allowances in YA2023 to another company within the same group which accumulated during 2020 and 2021 due to losses suffered as a result of the COVID-19 pandemic.
• Extension of the reduction in Duty on Documents (at 1.5%) upon the inter-vivos transfer of family businesses.

 

Conclusion

The budget for 2023 does not introduce any new taxes but it also lacks new incentives since most of the incentives are an extension of existing ones.  It is clear that the main aim is to control inflation primarily through hefty energy subsidies and assist vulnerable people through social measures.     Whilst the national debt is still within acceptable limits, given the global uncertainties the world is experiencing, one may wonder whether the budget is sustainable and whether Malta will indeed experience positive growth even if the prospects within the Eurozone are not so bright.                                                        

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Following the introduction of Article 51A of Income Tax Act as an enabling provision for the introduction of the transfer pricing and Advance Pricing Agreements, the Office of the Commissioner for Revenue published the draft Transfer Pricing Rules for public consultation. 

 

The following are the highlights of the draft Transfer Pricing Rules:

 

• It is proposed that the rules will be applicable to cross-border arrangements entered into between associated enterprises on or after 1 January 2024 or are entered into before 1 January 2024 but are materially altered on or after that date;

 

• Bodies of persons are anticipated to fall within the ambit of associated enterprises when there is a direct or indirect control through a minimum holding of more than 50% of voting rights or ordinary share capital or by virtue of any powers contained in the articles of association or document regulating the controlled body of persons.

 

• The proposed rules will also contain specifics provisos for permanent establishments both in Malta and outside Malta;

 

• The rules will only apply for large companies having cross border arrangements. A de minimis threshold which is yet to be determined, will also apply for such arrangements;

 

• It is expected that that methodology applied by the Commissioner for Revenue for the ‘arms’ length amount’ will be based on the OECD Transfer Pricing Guidelines;

 

• The concept of ‘arrangement’ means any kind of transaction entered into by associated enterprises including modifications to existing arrangements.

 

• A Company will be expected to keep proper records in connection with the determination of whether the total income of the company is in line with the Transfer Pricing Rules.

 

• The Commissioner for Revenue may also issue Unilateral Pricing Rulings in order to provide certainty in relation to the application of these rules to a transaction or a series of transactions. Such rulings will be subject to a non-refundable fee which is yet to be determined.   The ruling will remain binding for a period of five years unless indicated otherwise. 

 

• The proposed rules also cater for the possibility obtain Advance Pricing Agreements. The Competent Authorities may enter into an Advance Pricing Agreement with the relevant foreign competent authority which may be of a bilateral or multilateral nature.    Such agreements may be entered into for a period not exceeding five years.

 

The Transfer Pricing Rules were issued on the 18 November 2022.  

 

Introduction 

The budget speech for 2022 was read by the Minister of Finance and Employment last night and as previously announced no new taxes were introduced.  Instead, various measures were proposed to assist low-income earners and persons in the brink of poverty together with other environmentally friendly measures and immovable property related measures.  

The Economy

Despite the adverse economic impact of the COVID-19 pandemic, it was announced that the rate of employment during the first three months of 2021 increased when compared to 2019 figures to 77.3%.  Unemployment rate stood at 3.2% in August of 2021 whilst average unemployment rate in EU stood at 6.8% during the same period. Expected economic growth for next year is expected to be 6.5% in real terms and 8.6% in nominal terms.  Unemployment rate is expected to remain 4%. Deficit for 2021 is expected to be 11.1% of the GDP which is in line with the estimations made last April but higher than what was anticipated last year.  National debt is expected to increase to 61.8% of the GDP whilst the annual deficit is expected to go down to 5.6%.  It is envisaged that by 2024, the national debt will stand at 62.4% whilst the deficit will go down to 2.9% of the GDP.  

COLA

The same Cost of Living Adjustment (COLA) as 2021 was announced for 2022 and thus will be €1.75 per week which will be given to all employees, pensioners as well as those on social benefits. Students receiving a stipend will receive a pro-rata COLA.  

Income Tax

• The tax-free bracket for pensioners will increase so that pensioners will not be subject to income tax even after the increase in pensions and COLA announced during this budget.
• The tax refund will be extended and increased.  Persons earning less than €60,000 will be entitled to a refund ranging between €60 and €140.
• Overtime annual income not exceeding €10,000 will be subject to 15% tax rather than being added to the employment income of the individual.  This only applies if the basic annual employment income does not exceed €20,000.
• Part-time income will be subject to 10% tax rate instead of 15%.
• Artists will be subject to an income tax rate of 7.5%.
• As from 1 June 2022, the rate of interest on unpaid taxes will increase to 7.2% per annum.  Whilst it will still be possible to request for a remission of interest due on unpaid taxes, this will only be granted in exceptional cases.

 

Immovable Property

• The tax on the first €200,000 of the transfer value of immovable property acquired or disposed that has been rented out for at least 10 years to persons eligible for rent benefit will be subject to a reduced rate of tax. If the property is sold to the tenants, then no tax will be paid by either the buyer or seller.
• Increase in subsidy to €25,000 for structural works carried out on rented property which is subject to controlled rental law.
• Removal of Capital Gains tax and Duty on Documents upon the transfer of qualifying immovable property situated in a UCA zone, houses which are older than twenty years and have been vacant for at least seven years or new developments built using traditional Maltese style. This exemption is applicable on the first €750,000 of the value of the property.
• First time buyers will also be eligible for a grant of €15,000 if the qualifying immovable property is in Malta and €30,000 if the qualifying immovable property is in Gozo.
• VAT refund of up to €54,000 on restoration expenses incurred on the regeneration of qualifying immovable property.
• Extension of the reduction in duty on documents upon the purchase of immovable property for first time buyers, second time buyers and purchase of immovable property in Gozo.

 

Environment

• Free public transport for residents in Malta and Gozo as from 1 October 2022.
• Fiscal incentives for persons opting to purchase an electric vehicle or Plug-In Hybrids increased to €11,000 and if used together with motor vehicle scrappage scheme to €12,000.
• Motor vehicles scrappage scheme increased to €2,000 in Gozo.
• Extension of the exemptions from registration tax and annual licence fee for a period of five years on electric vehicles and plug-in vehicles.
• Extension of VAT refund on bicycles and electronic bicycles as well as motor bikes, scooters, motor assisted bicycles as well as grants for vehicles which are upgraded to work on gas.

 

Employment

• Discussions are being held for the implementation of the EU directives concerning parental leave and work-life balance.
• Possible changes to the national minimum wage.

 

Businesses

• Extension of rental subsidy for qualifying businesses to lighten the burden on importers and businesses who are facing increasing costs because of the increase in transportation costs.
• Entities with unabsorbed capital allowances during 2020 and 2021 due to losses suffered as a result of the COVID-19 pandemic, may transfer such capital allowances to other companies within the same group to offset them against any chargeable income.
• Malta Enterprise will launch a new scheme whereby it will be possible to obtain a tax benefit if a percentage of business profits is reinvested within a two-year period.
• Extension of the reduction in Duty on Documents upon the intervivos transfer of family businesses to younger family members.
• Malta will start offering iStart-up Visa to attract foreign start-ups and entrepreneurs. Malta Enterprise will launch a program to attract certain non-EU residents wishing to set up stop in Malta.

 

Social Security

It will now be possible to pay social security contributions on more than one part-time income up to a maximum of 40 hours per week.  This will enable persons approaching pension age to ensure they will have more social security contributions for a better pension.  

Conclusion

The budget presented for 2022 is in line with most of the other budgets announced under this administration.  As with previous budgets, no new taxes were announced despite the disruption caused by the COVID-19 pandemic and the economic set back such pandemic caused.  The Maltese government seems to be confident that the economy will recover and we will see better years despite the fact that very little mention was made to new economic sectors.  Much of the focus remains on immovable property which proved to be an economic generator in the last few years.   Furthermore, environmental incentives are mostly an extension on existing schemes with no new incentives being launched.  No incentives were launched to address the shortfall in adequate education in certain professions which will ultimately affect the country’s future.

On 8 October 2021, the Organisation for Economic Co-Operation and Development (OECD) announced that a landmark reform in the international taxation sphere was agreed between 136 countries, including Malta, out of the 140 members of the OECD/G20 Inclusive Framework on BEPs.  Effective from 2023, certain Multinational Enterprises (MNEs)  with revenue exceeding €750 million will be subject to a minimum tax rate of 15%. The proposed approach does not seek to eliminate tax competition but rather addresses the tax challenges arising from digitalisation ensuring that the largest MNEs pay a fair share of tax to the countries in which they operate and generate profits. A multilateral convention is expected to be signed during 2022 to be effectively implemented in 2023.

Since the start of the COVID-19 pandemic, the Government announced additional measures to alleviate the financial burden brought about by this pandemic. Malta Enterprise has been entrusted with the processing of most of the applications related to various measures introduced to mitigate the impact COVID-19.  

Tax Related Incentives

  The following tax related incentives have been introduced in Malta:

• A tax deferral scheme applicable to Provisional tax, Employee taxes, maternity fund payments and social security contributions, social security contributions of self-employed persons and Value Added Tax due between the period between August 2020 and December 2021 may be settled after May 2022. Businesses experiencing a significant downturn in turnover had the opportunity to apply for such derogation by the 15 May 2021.
• Reduction of stamp duty on immovable property. The stamp duty rate on the purchase of immovable property was reduced from 5% to 1.5% on contracts signed by August 2021 on the first €400,00 of the consideration or market value of the property.
• The Final Tax due by sellers of property under development or those contracts made by 31 March 2021 was reduced from 8/10% to 5%.
• The first time buyers scheme was modified for all contracts after 9 June 2020, unless a person has benefitted from the scheme since 2013.

 

Grants

  The following grants have been introduced in reaction to the COVID-19 pandemic:

• A one-off lump sum grant of €350 to employers having staff on mandatory quarantine leave. Employers may request a grant of €350 in respect of any member of staff who have/had to take mandatory quarantine leave. Applications need to be submitted within 30 days from the start of the quarantine of the individual.
• Grants ranging between €100 and €800 per employee to certain businesses on the wage cost. As from January 2021 the grant will be calculated on the decrease in sales as declared in the VAT returns of the company.
• A grant of up to €2,500 on the rent paid by qualifying businesses for applications filed before the 14 October 2020. This scheme is being extended to cover those businesses who were also ordered to close in 2021 by granting a further grant equivalent to 50% over and above the rent assistance provided for in 2020.
• A grant of up to €1,500 covering 50% of the electrical power costs covering any period in July, August and September 2020 for applications filed before the 30 September 2020. This scheme is being reissued in 2021 and will cover the months of June, July and August 2021.
• Grant of up to €5,000 to businesses embarking on a reengineering exercise with approved companies. This incentive shall be available until the 31 December 2023.
• A cash grant of €1,000 for those businesses that remained closed beyond 10 May 2021.

 

Other measures

  Other measures introduced which seek to support economic growth are as follows:

• A refund of 33% in port charges for those ships that bring cargo to Malta in order to support the supply chains of the economy. A 10% refund will also be given on container discharge fees for import and export but not transhipment.
• Up to 80% refund of the costs incurred by businesses participating in international fairs which where cancelled.
• Export credit guarantees to enterprises venturing into new markets.
• Assistance to small and medium-sized companies employing less than 50 to up-skill their workforce. Further information, guidelines and applications are still to be made available.
• Possibility of converting micro-invest tax credit into a cash grant giving the opportunity to businesses struggling for cash to forego their tax credit for a cash grant. A maximum support of €200,000 to enterprises in the construction industry opting to modernise their equipment. Furthermore, the periods for the utilisation of certain tax credits issued under the Micro Invest Scheme may be extended for 3 years.
• A funding mechanism to public, academic and private entities under R&D on COVID-19 with outcomes not only addressing innovative and/or improved approaches related to the current pandemic, but also potential future waves and other antiviral relevant research. Eligible projects, including those projects having received a COVID-19 specific Seal of Excellence, are those projects that have started on or after 1 February 2020, but not later than 31 December 2020. The duration of the project should be a maximum of 18 months.
• A Restart Incentive Scheme is being launched to support enterprises who faced serious challenges to their going concern. Enterprises will be offered the possibility to engage a professional business advisor. The scheme will finance advisory costs for up to €5,000 which could be increased to €10,000 to also support the implementation phase of the new business initiative.
• Incisive aid intensity in the form of a cash grant of up to €50,000 and additional 20% support in form of tax credits will be given to companies who opt to invest in new economic niches which are in line with the European Green Deal.

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[vc_row][vc_column][vc_column_text]A new article has been introduced in the Income Tax Act which paves the way to the introduction of transfer pricing rules in Malta.  The new article empowers the Minister responsible for finance to make rules in relation to transfer pricing and may also provide for the determination of the arm’s length pricing of a transaction or a series of transactions and advance pricing agreements.

 

The Transfer Pricing Rules were issued on the 18 November 2022.

 [/vc_column_text][/vc_column][/vc_row]

Article 12(1)(u) of the Income Tax Act has been amended to limit the applicability of the participation exemption to income received from a participating holding which is not in a company resident in a country listed in the EU list of non-cooperative jurisdictions.  Indeed, the new proviso to Article 12(1(u) states that income derived from a participating holding in a body of persons resident for tax purposes in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for a minimum period of three months during the year immediately preceding the year of assessment may not benefit from the participation exemption unless it proved to the satisfaction of the Commissioner that the said body of persons maintains sufficient significant people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom.  The proviso further clarifies that where the three month period during which a participating holding is resident in an county which is listed in the EU list of non-cooperative jurisdictions are consecutive and fall in two subsequent consecutive basis years, the participation exemption will not apply for both years.

As from 1 January 2021, royalties received by an individual in his capacity as author of a qualifying literary work may be taxed at a final tax rate of 15%.  If an individual opts to have such royalties taxed under Article 31F of the Income Tax Act, then the tax paid under this Article is final, meaning that no set-off or refund on such tax is granted, however it also means that this income is deemed to constitute separate chargeable income and will not form part of the total income of that individual.

The tax treaty between Malta and Poland will be amended and the main changes will include:

• Widening of the definition of dividends in Article 10 to include other forms of income which is similar in nature to dividend income;
• Reduction in the Polish withholding tax rate on interest from 5% to 4%;
• Article 12 on “Royalty income” will be replaced to also include payments for technical services;
• Changes to Article 13 on “Capital Gains” to widen the scope of this article to other investment vehicles which are comparable to the transfer of shares;
• Article 16 on “Director fees” will be replaced so as to widen the scope of this article to include members of a supervisory board or other similar organs;
• Paragraph 1 of Article 23 on “Elimination of double taxation” will be replaced.  Poland will no longer exempt Malta taxed income but instead will give credit of the Malta tax paid;
• Paragraph 2 of Article 25 on “Mutual Agreement procedure” will include procedures in connection with arbitration;
• Article 26 on “Exchange of information” will be widened and a new article inserted on the Prevention of Treaty Abuse.

 

As from 1 July 2021, a number of amendments to Directive 2006/112/EC (the VAT Directive) will start to apply affecting the VAT rules applicable to cross-border business-to-consumer (B2C) e-commerce activities.   The changes are aimed at addressing challenges arising from the VAT regimes for distance sales of goods and for the importation of low value consignments, namely:

• To reduce the administrative burden imposed on EU businesses selling goods online to final consumers located in other Member States when their sales exceed the distance sales threshold;
• To reduce abusive practices resulting from the VAT exemption granted for the import of low value goods;
• To remove the commercial advantage for non-EU businesses selling goods from 3rd countries to consumers in the EU.

  The EU have issued Explanatory Notes on VAT e-commerce rules and Importation and exportation of low value consignments – VAT E-Commerce Package – “Guidance for MSs and Trade” to provide further guidance on the implantation of these changes.   These changes have been incorporated in the Maltese VAT legislation through the publication of various legal notices.

Malta has established the National Foreign Direct Investment Screening Office as required by the EU.  The purpose of the FDI Screening Office is to screen foreign direct investment into the EU on grounds of security or public order.    Foreign direct investors and their service providers are now required to inform the Office when;  

• there is an ultimate beneficial owner, whether existing or new, holding more than 10% of a Maltese company; and
• the activity is one as described in the Schedule to the Act; and
• there is a foreign direct investment of any kind by a foreign investor from a third country aiming to establish or to maintain lasting and direct links in order to carry on an economic activity in Malta.

  Foreign investors and all people involved in the foreign direct investment are obliged, prior to carrying out the investment, to notify the Office by submitting a notification form providing various information to obtain the necessary approval from the Office before the investment is made.

The Commissioner for Revenue published guidelines on the Mandatory Automatic Exchange of Information in relation to Cross-Border Arrangements to compliment Subsidiary Legislation 123.127,  Cooperation with Other Jurisdictions on Tax Matters Regulations which in return transposed the tax initiatives taken at an EU level for more tax transparency as detailed in the ‘Directive on Administrative Cooperation’ or ‘DAC’.  The guidelines provide a further insight to intermediaries and taxpayers alike with clarifications on the implementing regulations.  These guidelines will be reviewed and updated regularly with the revised version to be made available online.   The main objective of DAC6 is to discourage intermediaries and taxpayers from designing, marketing and implementing harmful tax structures. Under DAC6, cross-border arrangements involving at least one EU Member State, and which feature one or more ‘hallmarks’ which are considered to be indicative of potentially aggressive tax arrangements are to be identified and reported.   Reporting entities may now also register online for the DAC6 Reporting requirements.

In line with the announcement made during the Budget Speech for 2021, legal notice 463 of 2020 was published to amend the ‘small undertaking’ thresholds in Article 11 of the VAT Act.  Once the legal notice becomes effective, the period to change from Article 10 registration to Article 11 registration will be reduced to 24 months (previously 36 months) with the possibility to request a change after 6 months.   Furthermore, the sixth schedule will be amended with one of the categories defining the exit and entry threshold being removed.  The entry threshold for economic activities consisting principally in the supply of services with a relatively low value added has been removed.  Entry threshold for other economic activities has been amended to €30,000 and the exit threshold to €24,000.

By virtue of L.N. 428 of 2020, the Double Taxation Agreement (DTA) with the Russian Federation was amended and entered into force with effect from 1 January 2021.  The changes relate to Article 10  on ‘Dividends’, Article 11 on ‘Interest’, Article 23 on ‘Non-Discrimination’ and Article 25 on ‘Exchange of Information’.

These changes include a change in the withholding tax applicable on dividend payments which increased to 15% (previously 10% with the possibility of a 5% if the holding exceeds 25%).  The reduced rate of 5% has been limited to holdings exceeding 15% in a company registered under a registered stock exchange and payments made to insurance institutions, pension funds certain state bodies and to local central banks.  Similar changes were made to withholding tax on interest

The VAT treatment on reimbursements has always presented challenges as to whether reimbursements are subject to VAT or whether these fall outside the scope of VAT since this matter is not directly addressed in the VAT Act.

Recently, the Court of Justice of the EU (CJEU) issued its decision in case C-94/19, San Domenico Vetraria SpA v Agenzia delle Entrate, providing guidelines on the VAT treatment on the reimbursement of employee costs.  In its judgement, the CJEU essentially confirmed that the lending or secondment of staff by a parent company to its subsidiary, carried out in return for the mere reimbursement of the related costs, generally constitutes a taxable supply for consideration falling within the scope of VAT.  Case C-94/19 concerned the secondment of an employee by one company (Avir) to a subsidiary (San Domenico Vetraria). The secondment was carried out on the basis of a legal relationship of a contractual nature between Avir and San Domenico Vetraria, in the context of which there was reciprocal performance, namely the secondment of an employee (a Director) from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other.  This was considered as being a transaction to be carried out for consideration, thus deemed a supply of a service which was subject to VAT.

It is understood that unless staff (employee or holder of an office) are in effect jointly employed by two or more companies forming part of the same corporate group where employee costs are being shared on a pure cost basis, reimbursement of staff costs is regarded as giving rise to a supply of service for Malta VAT purposes and therefore subject to VAT in Malta.

The Malta Business Registry (MBR) issued a guidance document with respect to the Register of Beneficial Owners (RBO) to assist with the identification of the Beneficial Owner/s (BO) or Senior Management Officials (SMO).   Please be informed that any changes in the BO or SMO of a company must be notified to the MBR within 14 days.  It is therefore of paramount importance that you keep us informed of any changes in the structure which affects the BO or SMO of the Maltese company.  Heavy fines and penalties are imposed by the MBR for failure to notify the MBR within the stipulated time period.

Introduction and the economy

The Minister of Finance, Economic Development and Planning announced that this year the GDP is expected to decrease by 7.4%.  However, the government is anticipating a recovery next year of 5% in real terms and 6.4% in nominal terms.  The growth is expected to be generated from a 7.5% growth in investment and 3.7% in private consumption. Exports are expected to increase by 5.5%.  These forecasts mean an increase of 2.3% in jobs next year with unemployment to remain around 4%.  Inflation rates should remain very low.  Deficit is expected to be 9.4% this year but it will go down to 5.9% of GDP in 2021 while debt will be 55% of GDP this year and increase to 58.6% of GDP in 2021.  

COLA and Vacation Leave

• The Cost of Living Adjustment (COLA) for 2021 will be €1.75 per week which will be given to all employees, pensioners as well as those on social benefits. Students receiving a stipend will receive a pro-rata COLA.  Pensioners will also receive an increase of €3.25 so that the total increase received by pensioners will amount to €5 per week.
• Vacation leave will increase by an additional day.

 

Income Tax

• Tax free bracket for pensioners will increase to €14,058 so that pensioners will not be subject to income tax even after the increase.
• Tax exemption for third pillar pensions will be increased by €1,000 to €3,000.
• Tax refunds ranging between €45 to €95 will be given to all taxpayers earning less than €60,000.
• Royalties received by publishers will be subject to a final tax of 15%.
• Tax on gains arising upon the assignment or cessation of any rights acquired under a promise of sale agreement is subject to tax at 15%.
• Extension of the reduction of property transfer tax to 5% if the promise of sale agreement is signed by 31 March 2021 and the final deed is signed by 31 December 2021.

 

Duty on Documents

• The property value eligible for a reduced duty is being increased from the current €175,000 to €200,000 for first time buyers.
• Reduction in the stamp duty upon the purchase of a residential home in Gozo to 2% and on property located in an Urban Conservation Areas to 2.5%.
• Reduction in stamp duty rate on the first €200,000 for non-first-time buyers upon the purchase of a residential home to 3.5% and on inherited immovable residential property.
• Extension of the reduction of stamp duty upon the acquisition of immovable property to 1.5% on the first €400,000 if the promise of sale is signed by 31 March 2021 and the deed is signed by 31 December 2021.
• The exemption from duty on documents on property donations to descendants is being increased from €200,000 to €250,000. The property must be used by the descendants for residential purposes.
• The reduced stamp duty of 1.5% on the transfer of a business by parents to their children is being extended by another year.
• Extension of duty refunds of €3,000 (or €5,000 for persons with special needs) for individuals who sell their first residential property to acquire another residential property during 2021.

 

Value Added Tax (VAT)

• The only new VAT measure announced in the budget is the VAT exemption threshold which is being increased from €20,000 to €30,000.
• The VAT refund scheme on the purchase of bicycles, e-bikes, electric motorcycles and scooters will be retained. The refund is capped to €400.

 

Social Measures

• The COVID-19 wage supplement will be extended to at least 31 March 2021 but the eligibility criteria will be revised.
• Tax deferrals, moratoriums and guarantees are all being extended to 31 March 2021.
• All residents over 16 years of age will receive vouchers totalling €100 with €60 may be used on accommodation and entertainment whereas €40 may be used in retail outlets and services.
• Children’s Allowance will increase by €70 per child per annum if the household income is less than €25,318 per annum. If the annual income exceeds the stipulated amount, the children’s allowance will increase by €50 per child per annum.
• The threshold for the eligibility of the in-work benefit will increase to €35,000 for working couples, €23,000 for single working parents and €26,000 for couples with a single working parent.
• Foster care allowance will increase by €520 to €5,720.
• Definition of widow and widower will be amended to cater for those who in civil unions or are cohabitating.
• The grant to couples adopting a local child will increase up to a maximum of €1,000.
• The annual subsidy for expenses incurred by the elderly who employ a full-time or part-time carer will increase from €5,291 to €6,000.
• Free public transport for those over 70 years (reduced from 75 years).
• People aged 62 years and over will be able to subscribe to Government savings bonds yielding a more favourable return than traditional bank deposits.

 

Environment

• Single use plastics will no longer be imported after 1 January 2021 and cannot be sold after 1 January 2022.
• Extension of the exemption from registration tax and annual licence fees for the first five years on electric vehicles (EVs).
• Extension of vehicle scrappage scheme with the maximum grant amounting to €7,000.
• Revision to registration tax and licences on motor vehicles such that there are no increases due to the revision introduced by EU on emission tests.
• A grant of €400 for those who convert their car to run on gas provided the emissions are reduced by at least 25%.

 

Innovation

 Malta Enterprise will introduce a new scheme to enterprises with less than 50 employees who undertake ‘transformation projects’. The scheme will cover a maximum of 50% of the investment and capped at €200,000.  

Conclusion

This year’s budget has been drawn up in extraordinary circumstances. The COVID-19 pandemic strained the world’s economy and Malta is no exception.  Before the start of the pandemic, the Maltese economy was doing well, with low unemployment, a budget surplus and decreasing debt.  This allowed the Maltese government to avoid the introduction of new or increased taxes and focus on social measures as well as the extension of the COVID-19 measures introduced in the Economic Regeneration Plan. However, the budget did not introduce any incentives for corporate investment other than the incentives to invest in digitalisation.  Nor are there any ideas or incentives to diversify the local economy which is heavily dependent on tourism and to a lesser extent, on financial services.

[vc_row][vc_column][vc_column_text]The Management of Avanzia Taxand is pleased to announce that for the second consecutive year, The World Tax ranked the firm as Tier 1 for Private Clients.  The firm is also ranked as a Tier 2 firm in Tax and Tax Controversy.  Details of the 2021 rankings may be accessed through the following link: www.itrworldtax.com/Firm/Avanzia-Taxand/Profile/1075#rankings The World Tax 2021 is a comprehensive guide to the world’s leading tax firms covering almost 90 jurisdictions located in every continent and is produced in association with the International Tax Review.

Following the implementation of the EU Directive 2016/1164 (ATAD1) by means of Subsidiary Legislation 123.187, the Maltese tax authorities issued official guidelines with respect to the Interest Deduction Limitations, CFC and Exit Tax.   The guidelines also include examples and illustrations with respect to Interest Deduction Limitations and CFC provisions.  As regards Exit Tax, the guidelines make it clear that this new concept has to be interpreted by keeping in mind local tax provisions such as certain capital gains exemptions.   The guidelines are available on the website of the Office of the Commissioner for Revenue.

Since the start of the COVID-19 pandemic, the Maltese Government launched €900 million worth of fiscal incentives to stimulate the economy and mitigate as much as possible the negative impact of this pandemic on the local economy.   The incentives are primarily aimed at reducing business costs and to incentivise consumption in view of the reduced influx of tourists. 

 

The following are the incentives announced on the 8 June 2020:

 

• Extension of COVID-19 Wage Supplement until the end of September 2020. As from 1 July 2020, the benefit rate of €800 for full-timers and €500 for part-timers will be maintained in areas involved with tourist accommodation, travel agencies, language schools, event organisation and air transport.  Those who up to June 2020 were assisted under Annex A but do not feature in the categories listed above shall be kept within the parameters of Annex A but will however move to a tapered aid of €600 for full-timers and €375 for part-timers. Students and pensioners who are in employment shall fall within this new category.  Personal services and other businesses/self-employed who depend on local consumption will benefit from the partial supplement under Annex B. Companies and self-employed who were being assisted under the partial supplement (Annex B) will retain this aid until 30 September 2020;

 

• A grant of up to €2,500 to cover rental costs  for businesses eligible for a wage supplement (click here for further information);

 

• A subsidy equivalent to 50% of the electricity commercial consumption costs (capped at €1,500) will be paid to businesses eligible for a wage supplement and this for the months of July, August and September;

 

• Business eligible for the Micro Invest Credit may opt to receive up to 30% of the Micro Invest tax credits during 2020 in form of a grant which is however capped at €2,000 or €2,500 for undertakings operating in Gozo and for female-owned undertakings;

 

• Malta Enterprise will be providing up to €5,000 for businesses, allowing them to embark on a reengineering exercise with approved companies;

 

• An export credit guarantee scheme will be available for businesses exporting their goods;

 

• Further funds will be allocated to the Skills Development Scheme for the benefit of businesses employing less than 50 employees. This will provide assistance to businesses wishing to further develop the skills of their employees;

 

• Businesses in the construction industry will be eligible to a grant of up to €200,000 to modernise their machinery and equipment;

 

• Reduction of stamp duty due upon the purchase of immovable property by the end of the current year. The stamp duty rate will be reduced from 5% to 1.5% on contracts to be signed between 9 June 2020 and 31 March 2021;

 

• The final tax due upon the sale of immovable property under development or those contracts made between 1 June 2020 and March 31 March 2021 will be reduced from 8% to 5%;

 

• The first time buyers scheme will be modified for all contracts taking place from 9 June 2020, unless a person has benefitted from the scheme since 2013;

 

• €100 worth of vouchers per person aged 16 and over that can be used in a licensed accommodation, restaurant or business that had to close during the pandemic;

 

• With effect from 15 June 2020, petrol and diesel prices will be reduced by 7 cents per litre;

 

• The tax payment deferral scheme will be retained until September 2020, with the deferred payments to be settled over a period of 12 months. As from 1 July 2020 no deferral will be allowed for the settlement of FSS tax and social security contributions withheld from wages and salaries;

 

• Refund of 33% in port charges for those ships that bring cargo to our country in order to support the supply chains of our economy;

 

• A 10% refund will also be given on container discharge fees for import and export but not transhipment;

 

• Support for export promotion. A budget of €400,000 has been allocated to Trade Malta to reimburse half of the costs involved, with a maximum of €10,000 for local businesses to invest in campaigns aimed at foreign markets;

 

• Up to 80% refund of the costs incurred by businesses participating in international fairs which were cancelled;

 

• A full refund of trade licence / permits paid during 2020 by businesses that were forced to close during the pandemic;

 

• A new underwriting facility for private enterprise bonds will be set up through the Malta Development Bank;

 

• €5 million to help Maltese and Gozitan businesses promote themselves and help will be provided for the production of local produce;

 

• Improvement in the in-work benefit and a special supplement of €250 will be given for each family that benefits from the same scheme;

 

• A grant (capped at €2,000 per couple) to fund certain forfeited deposits on wedding expenses;

 

• Financial assistance to old people’s homes.

 

Most of the incentives are managed by Malta Enterprise and details of the incentives are still to be published. 

 

The COVID-19 pandemic continues to spread in various countries around the globe and Malta is no exception.   The hit on the economy is expected to be significant given that one of the main drivers of the Maltese economy, tourism, is currently at a standstill and it is still unknown how long this situation will prevail.   Last week, the Government announced a Tax Deferral Scheme to postpone the payment of taxes payable in March and April 2020 by submitting an application before the 15 April 2020 to Malta Enterprise.  The taxes due must however be paid within the end of August 2020.  Whilst this may alleviate some of the cash burden on taxpayers and particularly employers for the months of March and April 2020, it is unlikely that businesses will be in a better cash position in the months to follow given the effects of this pandemic will continue to be felt for various months.  Full details are available online.  https://cfr.gov.mt/en/News/Pages/2020/Fiscal-Assistance-Postponement-of-Payment-of-Certain-Taxes.aspx   

Following the closure of various outlets as well as a number of offices, various employers felt the need to strengthen their resources to ensure that their employees may continue working remotely.  The Government recognised that this resulted in additional costs for employers and therefore Malta Enterprise launched a call under the Business Development and Continuity Scheme which may provide a cash grant of up to €500 per teleworking agreement with a limit of €4,000 per undertaking.  The grant shall be awarded against 45% of the eligible cost which must be incurred after the 1st of March 2020.  Applications must be submitted by 30 March 2020.  Full details are available on https://www.maltaenterprise.com/sites/default/files/Call%20for%20the%20Facilitation%20of%20Teleworking%20Activities%2015-03-2020_0.pdf.

  Earlier this month, the Government also announced the introduction of quarantine leave which adds additional paid leave days to the employee should mandatory quarantine be imposed on the employee.  This adds to the financial burden most businesses are facing and therefore it was announced that a €350 cash grant will be given for each employee on Quarantine leave.  An application for such grant is to be launched online through the Malta Enterprise website as from 25 March 2020.   The Malta Financial Services Authorities have informed regulated entities that they will consider extending the deadlines for the submission of regulatory reporting falling due in March and April 2020.  This extension will be made by case by case basis and therefore regulated entities must contact the appropriate unit within the Authority to submit their request for an extension.  Full details are available on https://www.mfsa.mt/news-item/mfsa-extends-regulatory-reporting-deadlines-for-firms-due-to-outbreak-of-covid-19/.   Malta Enterprise has extended the deadline for the submission of the Mirco Invest Applications for self-employed persons to 30 April 2020 due to the disruptions caused by the COVID-19.  Full details are available on https://www.maltaenterprise.com/extension-microinvest-submission-deadline-self-employed.   It is expected that other support measures will be announced in the coming weeks due to the disruptions caused by the pandemic.

[vc_row][vc_column][vc_column_text]Malta signed a tax treaty with Armenia and provides for the following withholding tax rates in the case of payors resident in Armenia: Dividends – 10% reduced to 5% if the investment in the Armenian entity exceeds 10% Interest and Royalties– 5% The treaty provides for the usual articles related to Mutual Agreement Procedures and Exchange of Information.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]Malta signed a tax treaty with Ghana and provides for the following withholding tax rates in the case of payors resident in Ghana:   Dividends – 6% Interest – 7% Royalties – 8% Services fees – 12%   Malta does not impose any withholding taxes.  Elimination of double taxation is under the credit method.   The treaty provides for the usual articles related to Mutual Agreement Procedures and Exchange of Information.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]By virtue of two separate legal notices, the interest on late payments of income tax and VAT has been reduced from 0.54% to 0.33% per month.  The change is effective from 1 January 2020.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]Avanzia Taxand is pleased to announce that The World Tax 2020 edition ranked the firm as Tier 1 in Private Client and Tier 2 in General Corporate Tax. The details of these rankings may be accessed through the following link: https://www.itrworldtax.com/Firm/Avanzia-Taxand-Malta/Profile/1075#rankings The World Tax 2020 is a comprehensive guide to the world’s leading tax firms covering more than 60 jurisdictions and is produced in association with the International Tax Review.[/vc_column_text][vc_empty_space][/vc_column][/vc_row][vc_row][vc_column][vc_single_image image="5743" img_size="medium" alignment="center"][/vc_column][/vc_row][vc_row][vc_column][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][vc_column_text][/vc_column_text][/vc_column][/vc_row]

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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.

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The tax treaty between Malta and the Republic of Kosovo has been published in Legal Notice 168 of 2019. As most other tax treaties, this tax treaty is also modelled on the OECD model convention.  No withholding taxes apply on dividends paid by a company resident in Kosovo if the holding percentage of the Maltese tax resident exceeds 10% and the shares are held for more than a year.  In other cases, the withholding tax rate on dividends is 10%.   Withholding tax on interest paid in Kosovo is limited to 5% of the gross amount of interest whereas no withholding tax applies on royalty payments. Elimination of double taxation is provided for under the credit method.   As with other tax treaties, the treaty also contains the standard articles with respect to the Mutual Agreement Procedure and Exchange of Information. [/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

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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.

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[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]Malta implemented the EU Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD) by means of Legal Notice 411 of 2018 EU ATAD Implementation Regulations, 2018.  The below provides an overview of the different new tax measures which will become applicable as from 1 January 2019, except for the exit taxation rule which will become applicable as from 1 January 2020.   Introduction   The aim of ATAD is to implement at EU level the BEPS (Base Erosion and Profit Shifting) recommendations made by the OECD and the G20 in October 2015. ATAD lays down anti-tax avoidance rules in the following fields:

• Deductibility of interest payments,
• General anti-abuse rule (“GAAR”),
• Controlled foreign companies (“CFCs”), and
• Exit taxation.

  The regulations apply to taxpayers including companies as well as other entities such as trusts and similar arrangements that are subject to tax in Malta in the same manner as companies.  The definition also applies to entities that are not resident in Malta but have a permanent establishment (PE) in Malta provided these are subject to tax in Malta as companies.   Limitation to the Tax Deductibility of Interest Payments (Rule 4)   Regulation 4 of L.N. 411 aims at limiting the deductibility of interest payments as it was recommended in the Final Report on BEPS Action 4 (interest deductions and other financial payments) and included as a minimum standard in ATAD. The objective of this rule is to discourage multinational groups from reducing their overall tax base through financing group companies in high-tax jurisdictions with debt. Notably, the scope of the interest limitation rule encompasses both related party borrowing and third party borrowing.   As from 1 January 2019, subject to certain conditions and limitations, “exceeding borrowing costs” shall be deductible only up to 30% of the corporate taxpayers’ earnings before interest, tax and amortization (“EBITDA”) or up to an amount of EUR 3 million, whichever is higher. Corporate taxpayers who can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can fully deduct their exceeding borrowing costs (so called “escape clause”).   “Exceeding borrowing costs” correspond to the amount by which the deductible “borrowing costs” of a taxpayer exceed taxable “interest revenues and other economically equivalent taxable revenues” that the taxpayer receives. Thus, in order to determine the amount of exceeding borrowing costs, it is necessary to understand which costs fall within the scope of borrowing costs and what is considered as interest revenues and other economically equivalent taxable revenues.   Borrowing costs to take into account are interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance, including, without being limited to:  

• payments under profit participating loans,
• imputed interest on instruments such as convertible bonds and zero coupon bonds,
• amounts under alternative financing arrangements, such as Islamic finance,
• the finance cost element of finance lease payments,
• capitalised interest included in the balance sheet value of a related asset, or the amortisation of capitalised interest,
• amounts measured by reference to a funding return under transfer pricing rules where applicable,
• notional interest amounts under derivative instruments or hedging arrangements related to an entity's borrowings,
• certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance,
• guarantee fees for financing arrangements, and
• arrangement fees and similar costs related to the borrowing of funds.

  As far as interest revenues and other economically equivalent taxable revenues are concerned, neither ATAD nor the LN 411 of 2018 clarifies what is to be considered as revenues which are economically equivalent to interest. However, since the definition of borrowing costs also refers to “other costs economically equivalent to interest”, there should be a symmetry in the interpretation of the two concepts.   The optional provision of ATAD according to which EBITDA and exceeding borrowing costs can be determined at the level of the consolidated group (in case of tax consolidation) has also been introduced in this regulation.   Entities which are out of the scope of the rule   Financial undertakings are out of the scope of the interest limitation rule. Financial undertakings are the ones regulated by the EU Directives and Regulations and include among others credit institutions, investments firms, insurance and reinsurance companies, certain pension institutions, alternative investment funds (“AIF”), undertakings for collective investment in transferable securities (“UCITS”), as well as central counterparties and central securities depositories.   In addition, standalone entities, i.e. entities that are not part of a consolidated group for financial accounting purposes and have no associated enterprise or PE are able to fully deduct their exceeding borrowing costs. In other words, these entities are not subject to the new interest limitation rule.   Loans which are out of the scope of the rule    Malta chose to limit the scope of the new rule through the inclusion of the following two optional provisions under ATAD:  

• loans which were concluded before 17 June 2016 (i.e. a grandfathering rule) are excluded. However, the exclusion does not apply to any subsequent modification of such loans. Accordingly, when the nominal amount of a loan granted before 17 June 2016 is increased after this date, the interest in relation to the increased amount would be subject to the interest deduction limitation rule. Likewise, when the interest rate applicable on a loan granted before 17 June 2016 is increased thereafter, only the original interest rate would benefit from the grandfathering rule. Nevertheless, when companies are financed by a loan facility that determines a maximum loan amount and an interest rate, the entire loan amount should be excluded from the scope of the interest deduction limitation rule, irrespective of when the drawdowns have been made;
• loans used to fund long-term public infrastructure projects (where the project operator, borrowing costs, assets and income are all in the EU) are also excluded.

  Carry forward of unused exceeding borrowing costs and unused interest capacity    Exceeding borrowing costs which cannot be deducted in one tax period because they exceed the limit set in the rule, can be carried forward in whole or in part without any time limitation. In addition, unused interest capacity can be carried forward over 5 tax years.  The regulations do not define what falls under unused interest capacity.   Exit Taxation Rules (Rule 5)   As from 1 January 2020, re-domiciliation’s and shift of tax residency to other jurisdictions will trigger exit taxes.  The aim is to even out discrepancies in the valuation of assets in the country of origin and the valuation of assets in the country of destination.   The exit rules transposed through rule 5 of L.N. 411, provide for tax on capital gains which are triggered when a taxpayer:

• transfers assets from its head office in Malta to a PE in another country;
• transfers assets from its PE in Malta to its head office or another PE in another country;
• transfers its tax residence from Malta to another country, or
• transfers its activities made through a PE in Malta to another country.

  The capital gain will be equivalent to the difference between the market value of the assets at the time of the exit and their value for tax purposes.  The capital gain will be subject to the provisions of the Income Tax Act.    The income tax on the capital gain becomes payable by not later than the taxpayer’s subsequent tax return date.  In case of transfers within the EU or European Economic Area (“EEA”), the taxpayer may request to defer the payment of exit tax by paying in equal installments over 5 years.   Exit taxes do not apply if the assets are set to revert back to Malta within a period of 12 months and the assets relate to the financing of securities, assets posted as collateral or an asset transfer that takes place in order to meet prudential capital requirements or for the purpose of liquidity management.   General Anti-Abuse Rule (Rule 6)   Any arrangements put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law shall be disregarded. Arrangements are considered as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.   Article 51 of the Income Tax Act already includes general anti abuse provisions which explicitly states that any series of arrangements which are put up solely for taking benefit of any tax advantage is ignored for tax purposes.  The GAAR transposed in regulation 6 of L.N. 411 prescribes that, for the purposes of calculating the corporate tax liability, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series thereof is regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.   CFC Rule (Rule 7)   ATAD provides for CFC rules to discourage the attribution of income in a low-taxed jurisdiction.  Malta opted to adopt the non -genuine arrangement CFC rule, thus, as from 1 January 2019, Malta will tax the non-distributed income of an entity or PE which qualifies as a CFC.   The income of a CFC will be taxed in Malta if, and to the extent that, the activities of the CFC that generate this income are managed by the Maltese corporate taxpayer as the people functions in relation to the activities of the CFC are performed by the Maltese corporate taxpayer.   An entity or a PE will qualify as a CFC if the following conditions are met:

• The taxpayer by itself, or together with its associated enterprises, holds directly or indirectly more than 50% in the entity.  Holding includes equity holding, voting rights and right to profit; and
• The actual corporate tax paid by the entity or PE is lower than the difference between the tax that would have been charged on the entity or PE computed in accordance with the Maltese Income Tax Act and the actual corporate tax paid on its profits.

  If an entity or PE is deemed to be a CFC, then the non-distributed income arising from non-genuine arrangements of a CFC which are put in place for the purpose of gaining a tax advantage shall be included in the tax base of the taxpayer and hence will be brought to charge in Malta.    The CFC rule applies only if:

• The CFC’s accounting profits exceed €750,000 and non-trading income exceeds €75,000, or
• The CFC’s accounting profits amount to more than 10% of its’ operating costs.

  Allocation rules and methods to avoid double taxation   The income of the CFC to be included in the tax base of the Maltese taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling Maltese corporate taxpayer. The attribution of CFC income shall be calculated in accordance with the arm's length principle.   The income to be included in the tax base shall be computed in proportion to the taxpayer's participation in the CFC and is included in the tax period of the Maltese taxpayer in which the tax year of the CFC ends.   Any tax paid by the CFC is allowed as a tax credit to the taxpayer in accordance with the provisions of articles 77 and 82 of the Act.  Whilst the legislation provides for general guidelines as to how the income to be brought to charge will be calculated, in practice, various issues may arise which may require further clarifications from the tax department.   Conclusion   Following the launch of the BEPS recommendations by the OECD and the G20 in 2015,  Malta has now implemented the EU directive to address tax avoidance schemes though ATAD.  This follows the implementation of the MLI and the end of the single malt structures.   Most measures introduced through ATAD are new concepts to the Maltese tax framework.  For the first time, Malta has interest deduction limitations, CFC rules and within two years, exit taxes.  Being a new tax framework, various clarifications will be necessary to ensure that the rules are properly adhered to.  It is indeed unfortunate that these rules have been released only a few days before these enter into effect as this gives very little time to taxpayers to assess the impact of these rules on current structures and assess whether changes are needed to mitigate the impact of these rules.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]On 18 December 2018 Malta ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, more commonly referred to as the Multilateral Instrument (MLI).  Malta has expressed a number of reservations and these may be viewed by accessing  http://www.oecd.org/tax/treaties/beps-mli-position-malta.pdf   The MLI is an OECD initiative with the objective of providing concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.  The MLI covers topics from transparent entities, dual resident entities, methods for elimination of double taxation as well as treaty abuse.   As a result of Malta's implementation of the MLI, double taxation treaties must now be interpreted in light of the MLI provisions.  Counties adhering to the MLI provisions will have greater powers in ensuring that treaty abuse is limited and double non-taxation avoided.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]On the 27 November 2018, it was announced that an agreement was reached between Malta and Ireland which ends the Single Malt structures.  These were being used through the transfer of the management and control of Irish incorporated entities to Malta.   Through a Competent Authority Agreement, Malta and Ireland agreed that the purpose of the Double Taxation Convention (DTC) is to eliminate double taxation and not create the opportunity for double non-taxation.  Thus, deeming a company incorporated in Ireland but managed and controlled in Malta to be tax resident only in Malta, does not serve the purposes of the Double Taxation Convention as income was not being brought to charge in neither Malta nor Ireland when the income was not remitted to Malta.  Accordingly, such an Irish-incorporated company will be tax resident in Ireland and the relevant payments to it will come within the charge to Irish corporation tax.   The agreement will come into force with effect from taxable periods beginning on or after the expiration of a period of six months from the later of the dates on which the Multilateral Instrument (MLI) enters into force in Ireland and Malta.  Malta endorsed its agreement with reservations to the MLI through Subsidiary Legislation 123.183 and ratified the MLI on the 18th December 2018.   The Agreement provides the following: From the coming into effect of the MLI with respect to the DTC between Ireland and Malta (the "Contracting States" in relation to that DTC), where - 

• for the purpose of avoiding double taxation, under paragraph 3 of Article 4 of the Ireland-Malta DTC a company would be deemed to be only resident in one of the Contracting States, but
• in the circumstances concerned - 
  • there is no double taxation to be avoided, and
  • it is reasonable to conclude that an opportunity for double non-taxation would otherwise arise,

then any such deeming of the company to be resident only in one of the Contracting States shall not be for the purposes of the Ireland-Malta DTC - as it would serve no such purposes.  It would be superfluous to, and redundant for, those purposes.   The Competent Authorities shall notify each other in a timely manner where they become aware of circumstances to which this Competent Authority Agreement refers.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text][/vc_column_text][vc_column_text]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: [wpdatatable id=42 table_view=regular]  

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: [wpdatatable id=45 table_view=regular]   The following is a summary of the income tax treatment of transactions in coins: [wpdatatable id=46 table_view=regular]   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: [wpdatatable id=47 table_view=regular]   The following outlines the tax treatment arising from the transfers of financial and utility tokens: [wpdatatable id=52 table_view=regular]   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: [wpdatatable id=53 table_view=regular]  

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: [wpdatatable id=43 table_view=regular]   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: [wpdatatable id=44 table_view=regular]   The guidelines provide clarification as to whether initial offerings are subject to VAT or not: [wpdatatable id=51 table_view=regular]   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: [wpdatatable id=50 table_view=regular][/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]Through Legal Notices 306 and 307 of 2018 the Minister for the Digital Economy has established the 1 November 2018 as the date on which the provisions of the Innovative Technology Arrangements and Services (ITAS)  Act and of the Virtual Financial Assets (VFA) Act, respectively, shall be deemed to have come into force.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text][/vc_column_text][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text][/vc_column_text][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]Following the approval by Maltese Parliament of the cryptocurrency related bills on the 4^th July 2018, through Legal Notice 250 of 2018 the Minister for the Digital Economy has established the 15^th 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.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_empty_space][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][vc_empty_space][vc_cta h2="Download "]Taxand Global Guide to M&A Tax 2018[/vc_cta][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_empty_space][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row equal_height="yes" content_placement="top"][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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.[/vc_column_text][/vc_column][/vc_row]

[vc_row][vc_column][vc_column_text]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. [/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_empty_space][vc_cta h2=""]Download our Budget 2018 newsletter[/vc_cta][/vc_column][/vc_row]

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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.

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Malta and Moldova signed a double taxation agreement.  The agreement was signed on 10 April 2014 between Foreign Minister George Vella and his Moldovian counterpart Natalia Gherman.

Malta and Moldova also signed a joint declaration on European Integration.  Malta promises to offer Moldova its assistance in many areas including tourism, education, and ICT based on its own experience of recent European integration.

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[vc_row][vc_column][vc_column_text]The Taxand Global Survey 2014 provides insight into the outlook and concerns of multinationals in relation to corporate taxation.[/vc_column_text][vc_empty_space][vc_cta h2="Download survey" add_icon="right" i_icon_fontawesome="fa fa-download" i_link="url:http%3A%2F%2Fwww.avanzia.com.mt%2Fwp-content%2Fuploads%2F2018%2F05%2FTaxand-Global-Survey-2014.pdf|title:http%3A%2F%2Fwww.avanzia.com.mt%2Fwp-content%2Fuploads%2F2018%2F05%2FTaxand-Global-Survey-2014.pdf||"][/vc_cta][/vc_column][/vc_row]

[vc_row][vc_column][vc_empty_space][vc_column_text]Malta signed intergovernmental agreements with the US Treasury Department to implement the Foreign Account Tax Compliance Act (FATCA).  Malta signed the Model 1A agreements.  Under these agreements, Foreign Financial Institutions (FFIs) will report the information required under FATCA about US accounts to their home governments, which in turn will report the information to the IRS.  These agreements are reciprocal, meaning that the United States will also provide similar tax information to these governments regarding individuals and entities from their jurisdictions with accounts in the United States.[/vc_column_text][/vc_column][/vc_row]

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Malta and Macau agreed to work together to prevent tax evasion and tax avoidance.  Macau’s Secretary for Economy and Finance Francis Tam Pak Yuen and the Maltese ambassador to China, Joseph Cassar, signed a tax treaty in Beijing on May 30.

All the legal arrangements between both jurisdictions have been completed and the treaty is likely to come into force in January 2014.

The treaty allows the authorities in Macau and Malta access to other’s data on the financial position and income of their citizens that owe tax, and may reveal undeclared assets and earnings.  Such data will include information relevant “to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters”, the treaty says.  The authorities may share information held by banks or other financial institutions.  They may share information about the direct or indirect ownership of companies, trusts and foundations, and about partnerships.

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[vc_row][vc_column][vc_column_text]Malta signed a tax information exchange agreement with the Cayman Islands.  The two countries are Global Forum members and the TIEA was completed ahead of the Joint Ministerial Conference meeting of British Overseas Territories in London.[/vc_column_text][/vc_column][/vc_row]

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Legal Notice 282 of 2013 entitled JOINT COUNCIL OF EUROPE/OECD CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS ORDER, 2013 brings into force the Joint Convention on Mutual Assistance ratified by Malta on May 23.

The Convention provides that state parties to the Convention must provide each other with administrative assistance in tax matters. Administrative assistance comprises exchange of information, assistance in recovery including measures of conservancy and service of documents.

The Convention applies to taxes on profits and capital gains, taxes on wealth, compulsory social security contributions.   It provides for exchange of information on request, automatic exchange of information and spontaneous exchange of information.  It also provides for simultaneous tax examinations, tax examinations abroad, assistance in recovery measures of conservancy, time-limits and service of documents.

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Malta and the USA concluded negotiations with respect to an Intergovernmental Agreement (IGA) in relation to US Foreign Account Tax Compliance Act Regulations (FATCA).

FATCA was enacted in 2010 by the US Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires non-US financial institutions to report to the US Internal Revenue Service (IRS) information about financial accounts held by US taxpayers, or by non-US entities in which US taxpayers hold a substantial ownership interest.

The IGA has been negotiated on the basis of the latest Model 1 IGA (reciprocal version) issued by the US. The basic purpose of this IGA is to ensure that financial institutions which are resident (or carrying on business) in Malta or the US, will comply with certain prescribed reporting obligations. The IGA will require financial institutions in both Malta and the US to submit the required information to their own tax authorities, which in turn will automatically share such information with the other tax authority. Such shared information will be used by the tax authorities to ensure that the relevant tax laws of the two countries are being complied with.

As a consequence of compliance with the IGA, financial institutions that are resident or operating in Malta and that comply with the terms of the IGA will benefit in that they will not be subject to the FATCA 30 per cent withholding tax on the payments they receive. The IGA is also intended to reduce the administrative burden of complying with the FATCA regulations as well as to provide a mechanism for Malta financial institutions to comply with their obligations without breaching the data protection laws.

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[vc_row][vc_column][vc_column_text]An income tax treaty for the avoidance of double taxation between Malta and Turkey, which was signed in 2011, come into force on 13 June 2013. The treaty provides for a 10% withholding tax on dividends paid by a Turkish resident company to a Maltese company in which it has at least a 25% stake. In all other cases a maximum withholding tax of 15% will be applied.  Malta will not tax dividends paid by a Maltese resident company to a Turkish resident company. A maximum Turkish withholding tax of 10% will apply to interest and royalties paid by a Turkish resident to a Maltese resident beneficial owner of the interest or royalties.[/vc_column_text][/vc_column][/vc_row]

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Liechtenstein's Foreign Minister Aurelia Frick and the Maltese counterpart George Vella signed a bilateral double taxation agreement (DTA) between the two countries in respect of taxes on income and on wealth.  The DTA was signed in New York.

The treaty is based on the Organisation for Economic Cooperation and Development's (OECD) Model Convention.

Both countries have agreed to waive withholding taxes on dividends, interest, and royalties.  The treaty also contains provisions clarifying and governing the entitlement to tax treaty benefits of Liechtenstein pension funds, charitable organisations, and investment funds.  In addition, the treaty guarantees national taxing rights for the taxation of natural persons, and includes an information exchange clause. The residency of trusts is regulated separately.  Finally, the DTA makes provision for an arbitration clause to ensure that within the framework of a specified process, a binding solution is achieved for both treaty partner states in the event of an interpretation or application dispute.

The treaty requires the parliamentary approval of both jurisdictions and is expected to apply from January 1, 2014.

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