The European Union’s Anti-Tax Avoidance Directive has been transposed into Maltese legislation via Legal Notice 411 of 2018 issued in early December 2018. The regulations come into force on the 1st January 2019. Regulation 5, relating to exit taxation will however come into force on the 1st January 2020.
The regulations implement the provisions of Directive (EU) 2016/1164 of 12 July 2016 adopted by the Council of the European Union laying down rules against tax avoidance practices that directly affect the functioning of the internal market. The regulations apply to all companies as well as other entities, trust and similar arrangements that are subject to tax in Malta in the same manner as companies, including entities that are not resident in Malta but have a permanent establishment in Malta provided that they are subject to tax in Malta as companies.
The Regulations include aspects of taxation that were to-date absent in the local scenario. These include:
- Interest Limitation Rule – Regulation 4
This Regulation seeks to discourage practices by groups of companies that have in the past engaged in base erosion and profit shifting via excessive interest payments. The Regulation limits the deductibility of the taxpayer’s exceeding borrowing costs (as defined). Such costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA), with a maximum deduction of Eur3,000,000.
- Exit taxation – Regulation 5
The purpose of this regulation is to ensure that a state is able to tax the economic value of any capital gain created by an asset in the territory of that state when such asset is moved by the taxpayer from said state to another state, or when the taxpayer changes tax residency. This, notwithstanding the fact that the gain would not have been realised at the time of the exit. The Regulations list the circumstances whereby this provision is to be applied in practice.
- General Anti-Abuse Rule (GAAR) – Regulation 6
These rules seek to provide anti-abuse provisions to cater for abusive tax practices that are generally not dealt with through specific regulations. GAARs therefore aim to fill in the possible gaps, whilst not affecting the applicability of the specific anti-abuse provisions. Thus any arrangement or series of arrangements which have been put into place in order to obtain a tax advantage and not created for valid commercial reasons reflecting economic reality, shall be considered as non-genuine. Such arrangement or arrangements shall be ignored for the purposes of calculating the tax liability in accordance with the Income Tax Acts.
- Controlled Foreign Company (CFC) Rule – Regulation 7
These rules seek to limit and avoid the artificial deferral of tax by creating subsidiaries in low tax jurisdictions. The CFC rules will oblige holding companies within the EU to tax certain profits earned by the subsidiaries situated in the low tax jurisdictions.
A subsidiary will be considered to be a CFC in the instance whereby a Maltese parent company holds a control of 50% or more and the actual corporate tax paid by the CFC is lower than the difference between the tax that would have been paid on the same profits in Malta and the actual corporate tax paid in the low tax jurisdiction.
Regulation 7 lists the below exclusions, whereby the subsidiary would not be treated as a CFC:
- In the instance that the accounting profits do not exceed Eur750,000, and the non-trading income does not exceed Eur75,000; or
- In the instance that the accounting profits do not exceed 10% of its operating costs for the tax period. In this case, operating costs may not include the cost of goods sold outside the country where the entity is resident, or the permanent establishment is situated, for tax purposes and payments to associated enterprises.
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Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department