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The Budget Measures Implementation Act, 2012 which was published on the 14th May 2012 introduced a number of important changes to Malta’s fiscal laws, namely the Income Tax Act (ITA), the Income Tax Management Act (ITMA), the Duty on Documents and Transfers Act (DDTA) and the Value Added Tax Act (VATA).

1. Changes to the ITA

   1. The concept of Participating Holding (PH) extended to Collective Investment Vehicles CIVs that provides for limited liability of investors

A participation exemption is applicable to a company registered in Malta in respect of capital gains and dividends derived from a participating holding which it owns in a company, partnership or any other body of persons. A PH is defined as an equity holding which satisfies one of a number of definitions under the ITA. Such a definition is also satisfied where the holding by a Maltese company is in a body of persons constituted, incorporated or registered outside Malta which is similar to a partnership ‘en commandite’ the capital of which is not divided into shares. The definition has now been extended to apply to the holding by a Maltese company in an overseas Collective Investment Scheme which is similar to a partnership ‘en commandite’ the capital of which is not divided into shares, which provides for the limited liability of investors.

2. Definition of a partnership improved and extended to include EEIG

The definition of a partnership for the purposes of the taxation of gains or profits derived from the transfer or a deemed transfer of any rights over interests in a partnership has been extended to include:

• Bodies of persons constituted, incorporated or registered outside Malta that are of a similar nature to a commercial partnership ‘en nom collectif’, a commercial partnership ‘en commandite’ the capital of which is not divided into shares or a civil partnership; and

• A European Economic Interest Grouping (EEIG). An EEIG is legal entity based on European law to facilitate and encourage cross-border cooperation. An EEIG is fiscally transparent for income tax purposes and its members do not enjoy limited liability.

3. The de-grouping charge

The de-grouping tax charge applies when two companies cease to be members of the same group of companies as defined, within six years from the date of an exempt intra-group transfer of immovable property or shares in a property company. Such provision constitutes an anti-avoidance rule, which seeks to ensure that immovable property or shares in a property company are not transferred to third party without the payment of tax. The tax is paid by the transferee company upon a change in ownership, irrespective of whether this arises due to a change at the level of the transferee or transferor.

The new amendment seeks to limit the applicability of the de-grouping charge. If the two companies cease to be members of the same group within six years from the date of the exempt intra-group transfer, simply due to a change in the direct or indirect individual shareholders of the transferor company, the de-grouping charge will not apply and it shall be deemed that such change did not take place.

4. Transfer of immovable property from a company to the shareholder on winding up

Gains derived from the transfer of immovable property consisting of one transferrable unit, being either a dwelling house, garage, shop, office, store or warehouse, by a company to the shareholder/s or to person/s related to the shareholder/s upon winding up, are exempt from tax provided that the individual shareholder (or his spouse) owned all the shares of the company except for one share with no preferential rights.

The exemption has been amended to apply where the individual shareholder (or his spouse) holds at least 95% of the share capital and voting rights of the company. Furthermore the exemption has been widened and is no longer limited to one transferrable unit.

5. Income derived from part-time work

The deadline for the payment of the tax due on income derived from part-time self employment is no longer 15th February. The new deadline has not yet been announced and amendments will be made to the existing regulations. In November 2011, the Minister had announced in his budget speech that the new deadline will be 30th June.

6. Benefits to investment and insurance expatriates introduced on an optional basis

Investment and insurance expatriates were for ten consecutive years of assessment exempt from tax on the following fringe benefits received: removal costs, accommodation expenses, travel costs, provision of a car, medical expenses and insurance, school fees and a subvention of €7,200 p.a. This was automatically applicable and has now become an option so that such expatriates can benefit from a flat rate of 15% tax on their employment income in terms of the Highly Qualified Persons Rules (HQPR). Such expatriates are not in a position to benefit from the 15% flat rate of tax under the HQPR if they also benefit from the tax exemption applicable to the above mentioned fringe benefits.

7. Exemption on copyright

The exemption on royalties and similar income derived from patents in respect of qualifying inventions, designed with the intention of motivating further investment in research and development has been extended to royalties and similar income derived from copyright. Advances received from these sources are also exempt from income tax.

8. Increase in amounts of ‘personal deductions’

The ITA provides for a number of personal deductions to be deducted against the individual’s annual taxable income. The changes are:

• Deduction for school fees paid has been increased from €1,600 to €2,300 in respect of children attending secondary schools;

• Deduction for school fees paid has been increased from €1,200 to €1,600 in respect of every child attending primary schools

• Deduction for school fees paid has been increased from €1,000 to €1,300 in respect of every child attending kindergarten schools;

• Deduction for fees paid to child care centres in respect of every child has been increased from €1,000 to €1,300

• Deduction in respect of fees paid for every elderly person making use of a private home for the elderly has been increased from €2,000 to €2,500

• New deduction of €100 in respect of fees paid for every child attending cultural activities

9. New rates of tax on gross rental income received

Income derived from the rental of immovable property when such property is rented out to a person benefitting from a rental subsidy is taxable at final flat rate of tax of 10%.

Income derived from immovable property which has been restored in accordance with schemes issued by the Maltese Planning Authorities or immovable property situated in an urban conversation area will be taxable at a final rate of tax of 10% when the property is used for residential purposes and 15% when used for commercial purposes.

10. Tax on capital gains derived from the transfer of certain immovable property

Owners of immovable property which has been restored in accordance with schemes issued by the Maltese Planning Authorities or immovable property situated in an urban conversation area will be subject to tax at a maximum rate of 10% on the transfer value (in lieu of 12%) upon the disposal of such properties.

If the property is transferred within seven years from date of acquisition, the vendor may opt to be taxed at a rate 30% of the gain instead of 35%. Such income or gains constitutes the last part of that person’s chargeable income for that year.

11. 15% final withholding tax becomes a refundable withholding tax

Investment income such as for example bank interest is subject to a final withholding tax of 15% (unless the recipient opts to be paid investment income gross without deduction of tax) and the recipient will not be required to declare such income in his personal tax return. With effect from year of assessment 2013, such tax is no longer final and the recipient will be able to declare such income in his personal tax return and claim a credit of such tax deducted at source against the tax liability. The recipient of investment income will thus be entitled to a refund of tax withheld at source by the payor if his income falls within the tax free bracket. A claim for withholding tax must be made within 2 years from the end of the year in which the tax was withheld.

12. Parental tax rates

Parents having within their custody or paying maintenance in respect of children who are not over 18 years of age (or if over 18 years of age but less than 21 years of age still receiving full time education at a tertiary level) shall be subject to tax at beneficial rates of tax. The children can be gainfully occupied but their income cannot exceed €2,400. The new parental tax rates are as follows:

13. Individuals established in a field of excellence

Such individuals who were ordinarily residents of Malta for at least 20 years and who return back to Malta as ordinarily residents may opt to be taxed at the reduced rate of 15% (in lieu of the progressive rates of tax applicable to individuals) on their income derived from employment in Malta. Such individuals must not have been ordinarily residents of Malta for the ten consecutive years prior to their return. Regulations are expected to be published soon defining the conditions under which the flat rate of 15% may be availed of and the procedure to be adopted.

2. Changes to the ITMA

   1. Official receivers

A liquidator is personally liable, jointly and severally with any other responsible person if he distributes any assets of the company to the shareholders without making a provision out of the assets of the company for the payment of any tax due by the company.

With the new amendments, an official receiver is no longer jointly and severally liable with the liquidator.

2. Partnerships

Partnerships which are engaged in a trade, business, profession or vocation are considered to be transparent entities for tax purposes and profits derived by the partnership are deemed to be the profits of the partners. The see through nature of such partnerships has also been extended to a European Economic Interest Grouping (EEIG).

3. Changes to the DDTA

   1. Transfer of immovable property from a company to the shareholder on winding up

The transfer of immovable property consisting of one transferrable unit, being either a dwelling house, garage, shop, office, store or warehouse by a company to the shareholder upon winding up are exempt from duty provided that the individual shareholder (or his spouse) owns all the shares of the company except for one share with no preferential rights.

The exemption has been amended to apply where the individual shareholder (or his spouse) holds at least 95% of the share capital and voting rights of the company. Furthermore the exemption has been widened and is no longer limited to one transferrable unit

4. Changes to the VATA

   1. New administrative penalty

A new administrative penalty has been introduced for persons registered under Article 12 of the VATA. Registration under Article 12 applies to persons who make exempt without credit supplies (such as gaming and financial services companies) and persons registered under Article 11 of the VATA. Such persons are required to report purchases of goods and services on which they are required to account for vat under the reverse charge mechanism.

The administrative penalty is of 20% of the understated tax when such a person submits a VAT form which contains an understatement of the VAT due.

2. Clarification of Article 10 of the VATA

A clarification has been added to the VATA to ensure that in no way should it be understood that the Director General – VAT is prevented from enforcing his obligations under the EU Directive on administrative cooperation and combating fraud in VAT matters.

3. Notification obligations of any changes

Persons registered under Articles 11 and 12 are also required now to notify the VAT department of any changes in circumstances to the particulars declared in the application for VAT registration. This ensures that each person is registered under the appropriate Article.

4. Limitation on interest

No further interest will be charged for a tax period where the total amounts appropriated to that period is equivalent to or exceeds the amount of tax payable for that tax period.

Information current as at 16th June 2012

This article contains information of a general nature only and by means of this publication, EMD is not rendering any professional advice. Thus EMD will not be held responsible for any loss incurred by any person who relies on this publication. Please consult your professional adviser before taking any decisions which may effect your finances and business.