Rules were implemented by means of Legal Notice 411 of 2018 “European Union Anti-Tax Avoidance Directives Implementation Regulations, 2018” and apply from 1 January 2019 (and from 1 January 2020 in the case of exit taxation) to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies.
The following measures have been introduced:
Interest deductibility limitation rule (BEPS Action 4):
Regulation 4 in the legal notice draws heavily from article 4 of the ATAD 1.
As was recommended in the final report on BEPS Action 4 (interest deductions and other financial payments), such rule limits the deductibility of a taxpayer’s “exceeding borrowing costs”being. The amount by which the deductible borrowing costs of a taxpayer in terms of the Malta Income Tax Act, were it not for the provisions of the new regulations, exceeds taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives.
As from 1 January 2019, exceeding borrowing costs shall be deductible only up to 30% of the taxpayer’s EBIDTA (earnings before interest, depreciation, tax and amortisation) or up to an amount of EUR 3 million, whichever is higher.
Subject to certain limitations, corporate taxpayers which are members of a consolidated group for financial accounting purposes and 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.
Standalone entities, a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment can fully deduct exceeding borrowing costs.
Costs incurred on loans concluded before 17 June 2016 or used to fund certain long-term public infrastructure projects should be excluded when calculating the exceeding borrowing costs. Also excluded from the scope of the regulations are financial undertakings including where such are part of a consolidated group for financial accounting purposes.
Rules on exit taxation are addressed in article 5 of the ATAD 1 and have been transposed in a very similar manner in regulation 5 of the legal notice.
On 1 January 2020, Malta will levy an exit tax charge when assets owned by a taxpayer are transferred outside of Malta in the following circumstances:
- a taxpayer transfers asset from its head office in Malta to its permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- a taxpayer transfers asset from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- a taxpayer transfers its tax residence from Malta to another EU Member State or to a third country, except for those assets which remain effectively connected with a permanent establishment in Malta; and
- a taxpayer transfers the business carried on by its permanent establishment from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.
In the occurrences mentioned above, a taxpayer may be subject to tax on capital gains that are to be calculated at an amount equal to the market value of the transferred assets at the time of exit less their tax base cost. Taxpayers may request to defer the payment of exit tax by paying in equal instalments over 5 years possibly providing a guarantee.
General anti-abuse rule (GAAR):
Article 6 of the ATAD 1 puts forward a new anti-avoidance provision that overlaps with Article 51 of the Maltese Income Tax Act. The GAAR added by the Directive and transposed in regulation 6 the legal notice re-emphasises the GAAR already existing in Maltese tax legislation.
The rules provide that for the purposes of calculating the tax liability in according with the Income Tax Acts, 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.
Controlled foreign company rules (CFC):
Article 7 of the ATAD 1 sets forth a CFC Rule. Article 7 has been transposed via regulation 7 of the legal notice. Under the ATAD 1, Member States can either tax:
- undistributed passive income (interest, royalties, dividends, etc.) of the CFC with a carve-out for CFCs with a substantive economic activity; or
- undistributed income of the CFC arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage.
Malta has through regulation 7 introduced the concept of CFC legislation through the non-genuine arrangements method, hence taxing the non-distributed income of an entity or PE which qualifies as a CFC as from 1st January 2019.
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 permanent establishment 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.
Where an entity / permanent establishment is considered to be a CFC, the Regulations require the non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage to be included in the tax base of the Maltese resident entity.
The CFC rule applies only if:
- the CFC’s accounting profits exceed EUR 750,000 and non-trading income exceeds EUR 75,000, or
- the CFC’s accounting profits amount to more than 10% of its’ operating costs.
Antoinette Scerri – Director – Tax Advisory Service
Nexia BT Malta