Tax

Tax measures in relation to COVID-19

In light of the recent events surrounding the COVID-19 outbreak and recent announcements made by the Prime Minister in relation to aid made available to employers, business owners and self-employed people, whose trade has been most affected by a coronavirus-sparked drop in economic activity will have all tax and social security payments due for March and April postponed. The payments will instead be deferred to a later, as yet undefined date.

According to the Prime Minister the businesses eligible for the payment holiday are those engaged in tourism, hospitality, recreation, transport and some manufacturing sectors.

In addition, companies that have invested in teleworking systems would also be eligible for a 45 per cent refund of up to €500 for each worker. For further information, kindly contact us on taxenquiries@fenlex.com

Malta Budget 2020 – Main highlights

Written by Stephanie Aquilina Galea and William Cassar

Date: 15.10.2019

The Budget Speech for 2020 was held on the 14 October 2019 in Parliament whereby the Minister for Finance, Prof. Edward Scicluna delivered his annual speech.

The main highlights of the budget speech are listed below.  One will notice that the 2020 Budget did not incorporate any major fiscal measures, unlike in prior years.

Measures relating to Income Tax

  • As from 2020, a special reduced rate of 15% shall apply for the first 100 hours of overtime work. This measure is applicable to workers who are not in a managerial position and with a basic salary of not more than €20,000 in a calendar year.
  • Tax refunds shall be granted once again to employees earning less than €60,000. These refunds range between €40 and €68.
  • The introduction of more efficient tax compliance procedures. These will include increased online facilities and the set-off of provisional tax for pensioners.
  • With effect from 1 January 2020, a final tax of 15% will apply on the €100,000 of gains or profits derived from the transfer of a promise of sale. Any gains or profits over and the above the €100,000 will remain taxed at 35% in terms of the Property Transfers Tax.
  • The extension of fiscal incentives relating to contributions made to Third Pillar Pension Scheme and / or voluntary Occupation Pension Scheme by individuals.

Measures relating to Duty on Documents and Transfers Act

  • The extension of the reduced rate of duty of 1.5% applicable on the transfer of a family business or immovable property used in a family business donated to close family members.
  • The extension of the reduced rate of duty of 2.5% in relation to the acquisition of vacant immovable property situated within an Urban Conservation Area.
  • The extension of the reduced rate of duty of 2% in relation to the purchase of residential immovable property situated in Gozo.
  • The extension of the scheme whereby a refund of a portion of the duty paid by second time buyers upon the acquisition of their second immovable property situated in Malta.
  • The extension of the first-time buyers scheme, whereby first time buyers of immovable property are able to benefit from an exemption on duty on the first part of the consideration of the immovable property being purchased. The exempt portion has been increased to €175,000 from €150,000.  In addition, individuals acquiring property to establish their own residence and such property is acquired either by inheritance or when such individuals are not first-time buyers will now be able to benefit from the reduced rate on the first €175,000 (up from €150,000).

Measures relating to VAT and other indirect taxes

  • The VAT exemption on education shall as from 2020 be extended to cover a wider range of services including vocational training and other educational services.
  • A grant of 25% on the purchase of renewable energy battery storage shall be introduced in order to promote the use of renewable energy resources.
  • The extension on the scheme relating to the acquisition of bicycles, electric bikes and motorcycles.
  • Grant on the purchase of specialised apparatus bought for person with disabilities.
  • Investment to improve the Malta Customs, with a view to increase efficiency and improve processes.

Measures relating to Pensions and Social Security

  • No tax shall be due for pension income amounting to less than €13,798. Furthermore, any other income received by couples on a single pension up to €2,000 shall be exempt.  This means that the tax-free portion for such couples will be of €15,798.
  • Pensioners shall benefit from a weekly increase of €3.51 as from 2020. This increase is in addition to the COLA, resulting in an increase of €7 per week (or €364 per year).
  • A one-time bonus of €300 for each child born or adopted in 2020 shall be given to eligible families.

Other measures

  • The Cost of Living Adjustment (COLA) has been increased to €3.49 per week.
  • An additional day of leave to cater for public holidays falling on weekends.
  • A special grant to youths of €850 to study a foreign language overseas.
  • Assistance in real estate down payments whereby loans of up to €17,500 may be granted to qualifying buyers with initial down payments. The interest on such loans will be borne by the Government on the condition that the loan is repaid within 15 years.
  • Property rental subsidies introduced during 2019 shall be extended in 2020.
  • A €60 million investment is planned for the development of an additional 1,700 new units of social housing.
  • Maintenance of housing estates.
  • A dedicated authority to oversea the regulation of the construction sector.
  • The scheme of the restoration of one’s home shall be extended to 2020.
  • A plan to phase out the importation and eventually the use of vehicles propelled by pollutive engines.
  • Incentives for the use of electric cars.
  • As from 1 January 2021, the importation and manufacture of single use plastic shall be banned. The sale of such products shall be prohibited as from 1 January 2022.
  • Increase in the weekly allowance paid to widowers.
  • It is expected that an educational campaign on Artificial Intelligence (AI) shall be introduced, along with study grants to students seeking to specialise in AI, among other incentives.
  • Measures shall be introduced to assist operators within the video game development and Esports industry.
  • During 2020, Malta Enterprise shall introduce scheme targeting employers who hire persons with disabilities through the provision of grants.
  • Micro-invest, Business Start and Start-Up Finance schemes will continue to be available in 2020.
  • The existing vehicle scrappage scheme will be available for another year and capped at €1,500.
  • The Government has announced the setting up of a Financial Organised Crimes Agency to combat money laundering and tax evasion.
  • A cash limited of €10,000 shall be imposed on the acquisition of real estate, vehicles, boats, precious stones and works of art.
Tax Consolidation Rules in Malta

Introduction to the Rules

The Tax Consolidation Rules in Malta have been recently introduced via Legal Notice 110 of 2019, Subsidiary Legislation 123.189.

The Rules aim to simplify the tax compliance obligations of companies forming part of a Group (as defined under the rules), whilst arriving at the same tax charge for the Group as a whole. These rules introduce the formation of a tax Group in Malta.

For the purposes of the Rules, the Parent Company of the Group (the Principal Taxpayer) must hold in its subsidiaries at least 95% of either:

  • Voting Rights
  • Profits Available for Distribution
  • Assets Available for Distribution upon Winding Up

The subsidiaries forming part of the Group (Fiscal Unit) would be considered as transparent for tax purposes.

Forming part of a Group and the application of these rules is optional and the choice to form a Fiscal Unit is to be made via an election made at the level of the parent company (holding 95% shareholding in its subsidiary), but must regardless be subject to the consent of the minority shareholders, if applicable.

The Rules in Practice

The Main outcome of the application of the Rules is the fact that intra-group transactions are ignored for tax purposes, and thus not included in the tax computation of the group, except for transfers related to Immovable Property situated in Malta. Based on the fact that it generally takes months for a shareholder to receive a refund, the main aim of these Rules is to provide a cash flow advantage in the instance where shareholder refunds may be claimed by non-resident shareholders. This is achieved by having the tax computation factor into the possibility of a refund and arriving at the net effective tax without having to claim the refund.

The Rules also have an affect on the Notional Interest Deduction (NID), whereby the application of the NID must be taken for the group as a whole, including the fact that the Risk Capital of the Group would be aggregated, whilst eliminating any intra-group debt.

With respect to Groups wholly owned by Maltese Resident shareholders, and thus with no tax refund availability, the rules are nonetheless beneficial in that they simplify the tax obligations without having to claim the imputation credits.

The Rules naturally include a number of obligations which need to be adhered to in order for a Group to be able to apply the said Rules. For example, the Principal Taxpayer shall be responsible for the payment of the tax and for the submission of the annual tax return. Furthermore, the Principal Taxpayer will be required to prepare an audited consolidated balance sheet and consolidated profit and loss account covering all the companies in the Fiscal Unit. On the other hand, the transparent subsidiaries will be exempt from preparing audited financial statements. It is important to note however that every entity forming part of the Fiscal Unit shall be jointly and severally liable for the payment of the tax.

Conclusion

Whilst the Rules seem to be providing a practical solution for the current cash flow disadvantage in claiming tax refunds, it is important to ensure that the benefits outweigh the costs applicable to create a Fiscal Unit. Furthermore, several aspects in the Rules are open to diverging interpretations and thus the Revenue may be issuing guidelines some time in the future for a better application of these Rules.

Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department

Multilateral Instrument comes into force in Malta

Following the ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘MLI’) back in end of 2018, the MLI came into force in Malta on the 1 April, 2019.

The MLI is an OECD project with the main objective being that of providing tangible solutions for governments to eliminate the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI aims to lessen the opportunity for tax avoidance by multinational companies.

The MLI has resulted into modifications of some of the double tax treaties that Malta has entered into over the years. In this regard, the Commissioner for Revenue has already indicated which of the Double tax Treaties have so far been modified as a result of the MLI. Kindly refer to the below link indicating which treaties have been modified:

https://cfr.gov.mt/en/inlandrevenue/itu/Pages/Double-Taxation-Conventions.aspx

Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department

Anti-Tax Avoidance Directive (ATAD)

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.

For any queries or assistance on any of the above, please feel free to contact taxcompliance@fenlex.com.

Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department

2018 – An eventful year in tax and VAT in Malta!

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 taxcompliance@fenlex.com for assistance.

Author: Stephanie Aquilina Galea, Tax Supervisor, Tax Compliance Department