The year 2022 has been a year of significant updates in the field of the direct tax law, with various changes and developments at both the national and international level. In this article, we shall retrograde to some of the most significant developments over the past year, aimed at both businesses and individuals.
Recognized Stock Exchange Guidelines
A guidance note identifying the main three stock exchanges that are recognized for the purposes of the Income Tax Act and the Duty on Documents and Transfers Act, has been released by the Commissioner for Revenue (CfR). These stock exchanges are:
- The Stock exchanges that are members of the World Federation of Stock Exchanges
- The New York Stock Exchange
- Stock exchanges that are included in the register of regulated markets within the European Economic Area maintained by the
- European Securities and Markets Authority (ESMA)
This amendment affects different provisions of the law, hence various areas of the law have been amended. For instance, the Income tax exemption for transfer of shares is now open to all shares of Companies listed on the above exchanges .
The main aim is to eliminate the exclusivity of the Maltese Stock Exchange by extending the exemption on capital gains attained on a stock exchange to all international stock exchanges .
Capital Expenditure on IP
For the purpose of eliminating the practice of claiming multiple deductions for Intellectual Property transferred between group companies, the Income Tax Act has been amended with the addition of a new provision, Article 14(1)(m), The available deductions for the company acquiring the IP are now limited, and the claim can be calculated by subtracting any tax deductions claimed by the transferring company from the lower of the cost of acquisition or market value.
Removal of Deemed Distributions Rule - NID (Removal of Art 43(6)(c) and Article 43(6)(e) ITA)
Another amendment is the abolition of the Article 43(6)(c) and Article 43(6)(e) of the ITA, concerning the deemed distribution rule.
In accordance with this rule, deemed distribution applied to a Res, Non-Dom individual in Malta who is entitled, to the profits of a company that claimed a Notional Interest Deduction.
This claw-back rule will no longer be applicable as from tax year 2021 (year of assessment 2022).
Definition of “Industrial Building or Structure”
For the purposes of the ITA, the definition of "car park" as an "industrial building or structure" has been broadened. It now includes car parks whose operation entails considerable activity, taking into account the capital employed, the organization of the operation, and the revenue it generates. As a result, the wear and tear limits on industrial parking lots have also been raised, as they were previously only allowed in the instance of solely a parking lot business.
Clarification on the Tax Exemption on Gains or Profits Derived by Non-residents
The exemption from income tax under article 12(1)(c) of the Income Tax Act (ITA), which applies to gains or profits made by non-residents on the transfer of units in collective investment schemes, units related to long-term insurance policies, interests in partnerships, and shares or securities in companies, has been modified to include the "transfer of any rights over" these assets.
This change is effective unless the assets in question are immovable property located in Malta. This amendment to the ITA expands the scope of the exemption to cover not just the transfer of the assets themselves, but also any rights related to them.
Clarification on Trusts Electing to be Treated as a Company
Pursuant to the Budget Measures Act, Article 27D of the ITA has been amended to further clarify that resident trustees who elect to be considered as companies for income tax purposes, now includes trustees who do not need to obtain an authorisation in terms of article 43(6) of the Trust and Trustees Act.
This amendment to the ITA clarifies that resident trustees who are not subject to certain authorization requirements can still be considered as companies for income tax purposes, provided they meet other necessary criteria.
Clarification Regarding the Reduced Tax Rate of 15% Applicable to Overseas Employment
Further conditions have been added concerning income tax on remuneration generated by overseas employment.
In summary, the reduced income tax rate of 15% will no longer be applicable to contractual employment stating that such work will be performed for a period of less than 12 months. This applies to income generated through employment performed entirely or mainly outside of Malta.
Additionally, an individual cannot benefit from such reduced income tax rate if, during the year preceding the year of assessment, he spent more than 30 days in Malta. The 30-day period does not include any days spent in Malta on leave, including sick leave. Any days preceding the contract and any period after the contract has been terminated is not accountable for such purposes either.
New 7.5% Personal Income Tax Rate on Income Derived by Individuals from Artistic Activity
Individuals who work in the art industry should declare their income for tax purposes. A new income tax rate of 7.5% has been introduced to individuals who derive their income from art, as long as such income has been certified by the Arts Council of Malta in a statement to the CfR.
From basis year 2022, recipients of income generated from artistic activity may elect to pay tax on their gross income at the rate of 7.5%, regardless of whether one is a full-time or part-time artist. This tax should be final and no set-off or tax refund shall be granted to any person.
This new tax rate applies only to income generated from artistic activity and it may be applicable to a wide range of individuals in the art industry, including visual artists, producers, and other creative professionals .
Other Tax Measures Related to an Employment Income
- L.N. 28 of 2022 - Tax free bracket increase for individuals generating employment income of not more than €10,020 (previously €9,930) .
- L.N. 68 of 2022 – Qualifying overtime emoluments capped at €10,000. The applicable 15% tax is capped at €1,500.
- L.N. 104 of 2022 – Beneficiaries of qualified employment in Aviation can apply for another extension (previously one extension was allowed).
- L.N. 27 of 2022 – Tax rabe increase for qualifying pensioners.
- L.N. 98 and 220 of 2022 – Full or gradual exemption of pension income derived by a qualifying individual.
Amendment of L.N. 461 of 2021 Rules, Governing Relief from Income Tax and from Duty on Documents and Transfers on Certain Property Transfers by virtue of L.N. 11 of 2022
The applicability of measures introduced by the Government of Malta for the 2023 budget are the following:
- i) Applicable to transfers on or after the 12th of October 2021 and before the 31st of December 2024;
- ii) Not applicable for persons needing an AIP; and
- iii) If property is in an SDA, but the person would have required an AIP had a property which was not in a SDA, then the exemptions are still not applicable.
Transfer of property in UCA, Vacant Property and “Traditional” Property
Legal Notice 461 of 2021 has introduced additional income tax and stamp duty exemptions for the transfer of properties. Under this legal notice, transfers of properties that occur between October 12, 2021 and December 31, 2024 will be exempt from income tax and stamp duty.
This tax relief applies to the transfer of properties in Urban Conservation Areas (UCAs), old vacant properties, and properties developed in accordance with approved criteria. However, the exemption only applies to the first €750,000 and the rest will be taxed at normal rate of 5%.
It is important to note that individuals will not be eligible for this tax exemption if an Acquisition of Immovable Property Permit (AIP) is required. This legal notice aims to encourage the development and preservation of certain types of properties in Malta by offering tax incentives to those who transfer them.
Surrendering of Capital Allowances - Group Deduction
In light of the COVID-19 pandemic repercussions, LN 205 of 2022, titled, Group Deductions (Income Tax) Rules, 2022 was introduced. As evident in the title, these amendments concern group relief provisions and are applicable solely to companies who are beneficiaries of the COVID-19 Fiscal Assistance - Postponement of Payment of Certain Taxes Tax Deferral Scheme
Companies that are members of a group, as defined in article 16 of the Income Tax Act (ITA), can transfer allowable deductions to another company within the same group. These allowable deductions refer to unabsorbed capital allowances from the tax years 2020 and 2021. Allowable deductions can be used to set off not just trading income, but any taxable income of the claiming company. However, there is a cap of €1,000,000 on the total allowable deductions that a group of companies can claim .
This provision allows companies to carry over and utilize capital allowances that were not fully utilized in previous tax years and hence maximise their tax benefits.
Transfer Pricing Rules
Legal notice 284 of 2022 introduced the awaited Transfer Pricing Rules in Malta, applicable only for basis years commencing on or after the 1st of January 2024, in relation to any arrangement entered into on or after that date . By ‘arrangement’ the Rules refer to cross-border arrangements, between associated enterprises and exclude micro, small or medium-sized enterprises.
The Rules outline three conditions that must be met for arrangements between associated enterprises to be considered cross-border arrangements. At least one of these conditions must be fulfilled for the arrangements to fall within the definition. The three conditions are:
(a) At least one party to the arrangement who is not resident in Malta and at least one company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;
(b) at least one party to the arrangement maintains a permanent establishment outside Malta and at least one party to the arrangement is a company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;
(c) at least one party to the arrangement is not resident in Malta and at least one other party, not being resident in Malta, is a company which maintains a permanent establishment situated in Malta to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and the arrangement is relevant in ascertaining the total income of that company
Additionally, the rules shall not be applicable in cases where the total arm's length value of all cross-border agreements does not exceed a future de minimis threshold. The "arm's length amount" is also defined in the regulations, which allow for its calculation using methods specified by the Commissioner of Revenue in unreleased guidelines .
A holding of more than 75% of the voting rights or ordinary share capital, or the exercise of any authority granted by the articles of association or another document governing the controlled body of individuals, constitutes direct or indirect control under the Rules.
The rules also apply to bodies of persons who are under common control because they meet this 75% threshold. It is worth noting that in the draft rules, this threshold was proposed to be "more than 50%," but it was ultimately kept at 50% for constituent entities that are part of a multinational enterprise group subject to the country-by-country reporting (CbCR) duties.
EU Directives - Pillar II
Multinational enterprises with an annual revenue of a minimum €750 million will be subject to a minimum effective corporate tax rate of 15%. Certain exemptions apply.
Multinational companies will need to calculate their GloBE effective tax rate for each location where they do business and determine which locations have tax rates lower than 15% (i.e., low-tax jurisdictions). The parent company of these companies will then be required to pay an additional "top-up" tax for any low-tax jurisdiction.
Two initiatives have been suggested by the OECD in order to increase taxation on income that is currently taxed at a rate lower than 15%. The first is the Income Inclusion Rule (IIR), which would require the parent company of a foreign subsidiary with low taxes to pay an additional tax. The second is the Undertaxed Payments Rule (UTPR), which would prevent companies in a group with low taxes that are not subject to the IIR from claiming deductions.
It has also been proposed by the EU, that by the end of the year of 2023, that these measures be implemented in the national laws of each Member State. Regardless of this, some countries have indicated that they will introduce these measures (Pillar 2) by end of the year 2022, even if no agreement is reached at the between the EU member states.
Shell Co Directive - ATAD 3
This Directive remains at a proposal stage and given the deferral proposal by the European Parliament to 1st January 2025 (proposal not yet approved by the EU Commission), we can only speculate on the developments this Directive will introduce in due course.
Corporate entities tax resident in the EU, eligible to obtain a certificate for tax residency will be subject to this Directive. Certain exemptions shall apply.
Deminimis substance requirements will be outlined in this Directive. Initially, the subject persons would need to be analysed on whether they are meeting a set of gateway criteria, so as to determine if low-substance risk exists which may be deemed as misused for tax purpose.
The criteria refer to geographically mobile entities having 75% relevant income of their total revenue in the preceding 2 years; entities which are operating in cross-border activities and entities whose decision-making functions and day-to-day administration is outsourced.
The year 2022 has been a year of significant updates in the field of the direct tax law, with various changes and developments at both the national and international level. In this article, we shall retrograde to some of the most significant developments over the past year, aimed at both businesses and individuals.
Recognized Stock Exchange Guidelines
A guidance note identifying the main three stock exchanges that are recognized for the purposes of the Income Tax Act and the Duty on Documents and Transfers Act, has been released by the Commissioner for Revenue (CfR). These stock exchanges are:
- The Stock exchanges that are members of the World Federation of Stock Exchanges
- The New York Stock Exchange
- Stock exchanges that are included in the register of regulated markets within the European Economic Area maintained by the
- European Securities and Markets Authority (ESMA)
This amendment affects different provisions of the law, hence various areas of the law have been amended. For instance, the Income tax exemption for transfer of shares is now open to all shares of Companies listed on the above exchanges .
The main aim is to eliminate the exclusivity of the Maltese Stock Exchange by extending the exemption on capital gains attained on a stock exchange to all international stock exchanges .
Capital Expenditure on IP
For the purpose of eliminating the practice of claiming multiple deductions for Intellectual Property transferred between group companies, the Income Tax Act has been amended with the addition of a new provision, Article 14(1)(m), The available deductions for the company acquiring the IP are now limited, and the claim can be calculated by subtracting any tax deductions claimed by the transferring company from the lower of the cost of acquisition or market value.
Removal of Deemed Distributions Rule - NID (Removal of Art 43(6)(c) and Article 43(6)(e) ITA)
Another amendment is the abolition of the Article 43(6)(c) and Article 43(6)(e) of the ITA, concerning the deemed distribution rule.
In accordance with this rule, deemed distribution applied to a Res, Non-Dom individual in Malta who is entitled, to the profits of a company that claimed a Notional Interest Deduction.
This claw-back rule will no longer be applicable as from tax year 2021 (year of assessment 2022).
Definition of “Industrial Building or Structure”
For the purposes of the ITA, the definition of "car park" as an "industrial building or structure" has been broadened. It now includes car parks whose operation entails considerable activity, taking into account the capital employed, the organization of the operation, and the revenue it generates. As a result, the wear and tear limits on industrial parking lots have also been raised, as they were previously only allowed in the instance of solely a parking lot business.
Clarification on the Tax Exemption on Gains or Profits Derived by Non-residents
The exemption from income tax under article 12(1)(c) of the Income Tax Act (ITA), which applies to gains or profits made by non-residents on the transfer of units in collective investment schemes, units related to long-term insurance policies, interests in partnerships, and shares or securities in companies, has been modified to include the "transfer of any rights over" these assets.
This change is effective unless the assets in question are immovable property located in Malta. This amendment to the ITA expands the scope of the exemption to cover not just the transfer of the assets themselves, but also any rights related to them.
Clarification on Trusts Electing to be Treated as a Company
Pursuant to the Budget Measures Act, Article 27D of the ITA has been amended to further clarify that resident trustees who elect to be considered as companies for income tax purposes, now includes trustees who do not need to obtain an authorisation in terms of article 43(6) of the Trust and Trustees Act.
This amendment to the ITA clarifies that resident trustees who are not subject to certain authorization requirements can still be considered as companies for income tax purposes, provided they meet other necessary criteria.
Clarification Regarding the Reduced Tax Rate of 15% Applicable to Overseas Employment
Further conditions have been added concerning income tax on remuneration generated by overseas employment.
In summary, the reduced income tax rate of 15% will no longer be applicable to contractual employment stating that such work will be performed for a period of less than 12 months. This applies to income generated through employment performed entirely or mainly outside of Malta.
Additionally, an individual cannot benefit from such reduced income tax rate if, during the year preceding the year of assessment, he spent more than 30 days in Malta. The 30-day period does not include any days spent in Malta on leave, including sick leave. Any days preceding the contract and any period after the contract has been terminated is not accountable for such purposes either.
New 7.5% Personal Income Tax Rate on Income Derived by Individuals from Artistic Activity
Individuals who work in the art industry should declare their income for tax purposes. A new income tax rate of 7.5% has been introduced to individuals who derive their income from art, as long as such income has been certified by the Arts Council of Malta in a statement to the CfR.
From basis year 2022, recipients of income generated from artistic activity may elect to pay tax on their gross income at the rate of 7.5%, regardless of whether one is a full-time or part-time artist. This tax should be final and no set-off or tax refund shall be granted to any person.
This new tax rate applies only to income generated from artistic activity and it may be applicable to a wide range of individuals in the art industry, including visual artists, producers, and other creative professionals .
Other Tax Measures Related to an Employment Income
- L.N. 28 of 2022 - Tax free bracket increase for individuals generating employment income of not more than €10,020 (previously €9,930) .
- L.N. 68 of 2022 – Qualifying overtime emoluments capped at €10,000. The applicable 15% tax is capped at €1,500.
- L.N. 104 of 2022 – Beneficiaries of qualified employment in Aviation can apply for another extension (previously one extension was allowed).
- L.N. 27 of 2022 – Tax rabe increase for qualifying pensioners.
- L.N. 98 and 220 of 2022 – Full or gradual exemption of pension income derived by a qualifying individual.
Amendment of L.N. 461 of 2021 Rules, Governing Relief from Income Tax and from Duty on Documents and Transfers on Certain Property Transfers by virtue of L.N. 11 of 2022
The applicability of measures introduced by the Government of Malta for the 2023 budget are the following:
- i) Applicable to transfers on or after the 12th of October 2021 and before the 31st of December 2024;
- ii) Not applicable for persons needing an AIP; and
- iii) If property is in an SDA, but the person would have required an AIP had a property which was not in a SDA, then the exemptions are still not applicable.
Transfer of property in UCA, Vacant Property and “Traditional” Property
Legal Notice 461 of 2021 has introduced additional income tax and stamp duty exemptions for the transfer of properties. Under this legal notice, transfers of properties that occur between October 12, 2021 and December 31, 2024 will be exempt from income tax and stamp duty.
This tax relief applies to the transfer of properties in Urban Conservation Areas (UCAs), old vacant properties, and properties developed in accordance with approved criteria. However, the exemption only applies to the first €750,000 and the rest will be taxed at normal rate of 5%.
It is important to note that individuals will not be eligible for this tax exemption if an Acquisition of Immovable Property Permit (AIP) is required. This legal notice aims to encourage the development and preservation of certain types of properties in Malta by offering tax incentives to those who transfer them.
Surrendering of Capital Allowances - Group Deduction
In light of the COVID-19 pandemic repercussions, LN 205 of 2022, titled, Group Deductions (Income Tax) Rules, 2022 was introduced. As evident in the title, these amendments concern group relief provisions and are applicable solely to companies who are beneficiaries of the COVID-19 Fiscal Assistance - Postponement of Payment of Certain Taxes Tax Deferral Scheme
Companies that are members of a group, as defined in article 16 of the Income Tax Act (ITA), can transfer allowable deductions to another company within the same group. These allowable deductions refer to unabsorbed capital allowances from the tax years 2020 and 2021. Allowable deductions can be used to set off not just trading income, but any taxable income of the claiming company. However, there is a cap of €1,000,000 on the total allowable deductions that a group of companies can claim .
This provision allows companies to carry over and utilize capital allowances that were not fully utilized in previous tax years and hence maximise their tax benefits.
Transfer Pricing Rules
Legal notice 284 of 2022 introduced the awaited Transfer Pricing Rules in Malta, applicable only for basis years commencing on or after the 1st of January 2024, in relation to any arrangement entered into on or after that date . By ‘arrangement’ the Rules refer to cross-border arrangements, between associated enterprises and exclude micro, small or medium-sized enterprises.
The Rules outline three conditions that must be met for arrangements between associated enterprises to be considered cross-border arrangements. At least one of these conditions must be fulfilled for the arrangements to fall within the definition. The three conditions are:
(a) At least one party to the arrangement who is not resident in Malta and at least one company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;
(b) at least one party to the arrangement maintains a permanent establishment outside Malta and at least one party to the arrangement is a company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;
(c) at least one party to the arrangement is not resident in Malta and at least one other party, not being resident in Malta, is a company which maintains a permanent establishment situated in Malta to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and the arrangement is relevant in ascertaining the total income of that company
Additionally, the rules shall not be applicable in cases where the total arm's length value of all cross-border agreements does not exceed a future de minimis threshold. The "arm's length amount" is also defined in the regulations, which allow for its calculation using methods specified by the Commissioner of Revenue in unreleased guidelines .
A holding of more than 75% of the voting rights or ordinary share capital, or the exercise of any authority granted by the articles of association or another document governing the controlled body of individuals, constitutes direct or indirect control under the Rules.
The rules also apply to bodies of persons who are under common control because they meet this 75% threshold. It is worth noting that in the draft rules, this threshold was proposed to be "more than 50%," but it was ultimately kept at 50% for constituent entities that are part of a multinational enterprise group subject to the country-by-country reporting (CbCR) duties.
EU Directives - Pillar II
Multinational enterprises with an annual revenue of a minimum €750 million will be subject to a minimum effective corporate tax rate of 15%. Certain exemptions apply.
Multinational companies will need to calculate their GloBE effective tax rate for each location where they do business and determine which locations have tax rates lower than 15% (i.e., low-tax jurisdictions). The parent company of these companies will then be required to pay an additional "top-up" tax for any low-tax jurisdiction.
Two initiatives have been suggested by the OECD in order to increase taxation on income that is currently taxed at a rate lower than 15%. The first is the Income Inclusion Rule (IIR), which would require the parent company of a foreign subsidiary with low taxes to pay an additional tax. The second is the Undertaxed Payments Rule (UTPR), which would prevent companies in a group with low taxes that are not subject to the IIR from claiming deductions.
It has also been proposed by the EU, that by the end of the year of 2023, that these measures be implemented in the national laws of each Member State. Regardless of this, some countries have indicated that they will introduce these measures (Pillar 2) by end of the year 2022, even if no agreement is reached at the between the EU member states.
Shell Co Directive - ATAD 3
This Directive remains at a proposal stage and given the deferral proposal by the European Parliament to 1st January 2025 (proposal not yet approved by the EU Commission), we can only speculate on the developments this Directive will introduce in due course.
Corporate entities tax resident in the EU, eligible to obtain a certificate for tax residency will be subject to this Directive. Certain exemptions shall apply.
Deminimis substance requirements will be outlined in this Directive. Initially, the subject persons would need to be analysed on whether they are meeting a set of gateway criteria, so as to determine if low-substance risk exists which may be deemed as misused for tax purpose.
The criteria refer to geographically mobile entities having 75% relevant income of their total revenue in the preceding 2 years; entities which are operating in cross-border activities and entities whose decision-making functions and day-to-day administration is outsourced.