We are approaching the end of 2018, with just a few days left. This year has been characterised by many new rules as well as amendments to the present rules, when it comes to tax and Value Added Tax (“VAT”). Below we present a summary of the most salient features:
Income Tax Act
- The New Malta Tonnage Tax Regime
2018 saw the re-introduction of a revised tonnage tax regime. The previous regime had been suspended by the European Commission a couple of years back (2012) and launched an investigation into this regime. After more than five years of discussion, the European Commission endorsed Malta’s tonnage tax regime subject to Malta committing itself to introduce certain amendments to clarify the applicability of its regime and limit it to core activities relating to maritime transport with the aim of ensuring a level playing field between Maltese and European shipping companies. The European Commission’s decision was transposed into Legal Notice 128 of 2018. The legal notice reflects the changes which Malta committed to implement in its laws so as to ensure clarity on the parameters to which the revised Tonnage Tax Regime extends. Naturally, there are certain conditions to be met in order for a company to avail itself of the new regime.
- Amendments to the Participating Holding Definition
The participating holding definition previously required, amongst other things, for the satisfaction of the most simple test (reword) a holding of 10% [by whom? And in whom?] for an equity holding to be deemed to constitute a participating holding. This percentage was reduced to 5% as from 2018.
In addition, European Economic Interest Groupings, partnerships en nom collectif and partnerships en commandite can also now constitute a participating holding.
- Notional Interest Deduction Rules
The Notional Interest Deduction (“NID”) Rules were issued in February 2018, through Legal Notice 37 of 2018. The NID rules allow entities to claim a notional interest deduction on the cost of their equity (risk capital, as defined). In practice, entities often prefer debt as opposed to equity mainly since the cost of debt (interest) may be deducted, whereas the cost of equity (dividends) is not deductible. Thus, the main aim of the NID Rules is that of aligning the tax deductibility of the cost of equity with the tax deductibility of the cost of debt.
The Risk Capital essentially includes items shown as equity in the company’s financial statements. It however excludes any risk capital that is not employed in the production of the income, or any risk capital employed in producing exempt income. The percentage rate to be taken against risk capital is calculated based on the rules and accompanying guidelines, which percentage is set at the risk free rate plus a premium of 5%.
The NID is claimed by the shareholder(s) of the company and said shareholder(s) is deemed to have received an amount of deemed income (interest). The NID rules are thus mainly beneficial for non-resident shareholders due to the exemption contemplated under article 12(1)(c)(i) of the Income Tax Act [which article requires what? Put a sentence briefing]. The NID rules are over and above the tax refund mechanism, which therefore may result into a further lowering of the effective tax paid in Malta by such non-residents.
- Changes to the remittance basis of taxation – minimum tax payment requirement
As from Year of Assessment 2019 (basis year 2018), individuals that are ordinarily resident but not domiciled in Malta shall be subject to a minimum tax of Eur5,000 if such individuals derive worldwide income of at least Eur35,000, which income would not necessarily? have been remitted to Malta. The main aim of this amendment was to curb any potential abuse by such individuals that more often than not did not have any tax due in Malta. Based on the fact that they would be residing in Malta, it is considered that they should contribute a minimum amount of tax in Malta.
Value Added Tax Act
- The VAT Gaming Guidelines
These Guidelines were published in November 2017 but were effective as from 2018. The guidelines sought to clarify the VAT treatment of gaming supplies in Malta, following the 2015 changes to the place of supply rules for electronically supplied services. In particular, the guidelines set out to distinguish between exempt and taxable supplies and also to establish how the taxable base of a supply is to be calculated. In addition, the guidelines have put some clarity to a very pertinent issue which was often debated prior to the introduction of these guidelines – the input VAT recovery. Gaming operators in Malta would now have to make reference to whether a supply is taxable or otherwise under the Maltese guidelines in order to establish the recoverability of input VAT. This, irrespective of whether the supplies are provided to Malta-established customers (gamers) or not.
- Introduction of VAT Grouping
VAT Grouping was introduced into our VAT law pursuant to Legal Notice 162 of 2018, after being announced in the Budget Speech for 2018. Prior to the introduction of VAT Grouping, companies forming part of a group had separate VAT Registrations, separate VAT returns and naturally separate compliance obligations. Any transactions between group companies were fully reported in the separate VAT Returns which often resulted in compliance and administrative burdens.
VAT Grouping aims to simplify the VAT compliance of these groups whereby they may be assigned one VAT registration for all companies within the group. Any transactions that occur intra-group are neutral and need not be reported in the VAT Return. Another benefit for the group as a whole is cash flow, whereby any VAT that was previously payable or refundable for intra-group purposes is now not required. All group members have joint and several liability.
For any queries relating to the above or regarding income tax or VAT in general, please send an email to firstname.lastname@example.org for assistance.
Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department