Transfers of Partnership Interests
Act IV of 2011 was published in the Government Gazette on the 22nd March 2011 which amongst others included partnership interests as one of the assets to which tax on capital gains in terms of Section 5 of the Income Tax Act Cap. 123 (ITA) will apply as from 1 January 2011
In fact Article 5(1)(a)(v) of the ITA states that ‘gains or profits arising from the transfer of the ownership or usufruct of or from the assignment or cession of any rights over any interest in a partnership’ will with effect from 1 January 2011 be subject to income tax. Transfer means a transfer of a full or partial interest and any alienation of any such full or partial interest in a partnership, together with a deemed transfer of an interest in a partnership. This means that where a person acquires or increases a partnership share there is a deemed transfer of an interest in the partnership to that partner from the other partner/s.
Partnerships to which the new taxation on transfer of partnership interest apply are
- a commercial partnership en nom collectif;
- commercial partnership en commandite the capital of which is not divided into shares and,
- any other partnership having a legal personality distinct from that of its members other than a commercial partnership en commandite , the capital of which is divided into shares.
- The new provisions regulating the taxation on the transfer of partnership interests specifies the methods to be used in calculating the cost of acquisition of partnership interests.
The cost of acquisition will be determined as follows:
- the acquisition cost of an interest acquired from an existing partner shall be the actual purchase price;
- the acquisition cost of an interest acquired ‘causa mortis’ shall be the lower of the value declared in a deed of transfer ‘causa mortis’ and the price which that interest would have fetched had it been sold on the open market on the date of that acquisition;
- the acquisition cost of an interest acquired by way of a capital contribution made to a partnership shall be the amount or value of such contribution;
- the acquisition cost of an interest resulting from a conversion of a company into a partnership shall be the cost of acquisition of the shares (representing that interest) held in the company that had been converted into the said partnership. Where the said shares consist of shares whose return is limited to a fixed rate of return, the acquisition cost shall be taken to be zero.
Transfers consisting of an exchange shall be considered as if two separate transfers were taking place. The provisions regulating contracts of partition and donations which applied to other chargeable assets (example shares and immovable property) also apply to transfers of partnership interests.
Exemptions from income tax equally apply on:
- transfers of partnership interests between spouses consequent to a judicial or consensual separation; and
- transfers of property between spouses upon dissolution of the community of acquests; and
- partitioning of property between the spouses or the surviving spouse and the heirs of the deceased spouse.
The exemption section in the ITA was also amended to include gains or profits accruing to or derived by any person not resident in Malta on a transfer of any interest in a partnership which is not a property partnership. The gain has to be derived by a person not resident in Malta and such person is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.
A Property Partnership is
- a partnership which owns immovable property situated in Malta or any real rights thereon;
- a partnership which directly or indirectly, holds shares or other proprietary interests in any entity or person, which owns immovable property situated in Malta, or any real rights thereon, where five per cent or more of the total value of the said shares or other proprietary interests so held is attributable to such immovable property or rights.
Trade or Business exception applies. Where a partnership, entity or person carrying on a trade or business owns immovable property situated in Malta, or any real rights thereon, consisting only of a factory, showroom, warehouse or office used solely for the purpose of carrying on such trade or business, such partnership, entity or person will be treated as not owning immovable property if not more than 50% of the value of its assets consist of immovable property situated in Malta, or any real rights over such property, and it does not carry on any activity the income from which is derived directly or indirectly from immovable property situated in Malta.
As a result of the changes made to the ITA, the Duty on Documents and Transfers Act (DDTA) was also amended whereby a new Article 42C was introduced whereby a 2% duty is now being charged on the amount or value of the consideration or the real value, whichever is the higher, of an interest in a partnership on
- every document whereby an interest in a partnership, other than in a foreign partnership, is transferred to or by any person in Malta;
- every deemed transfer of an interest in a partnership, other than in a foreign partnership;
- every notice of the transfer ‘causa mortis’ of an interest in a partnership.
A foreign partnership is a partnership which satisfies ALL of the following conditions:
- It is not a property partnership;
- It does not hold marketable securities in a company registered in Malta;
- It is not constituted, incorporated or registered under the any legislation applicable in Malta.
The duty will increase to 5% where
- it results that 75% or more of the assets, excluding all current assets other than immovable property, of the partnership an interest in which is being transferred or is deemed to be transferred consists of immovable property or any right over an immovable; or
- the partnership an interest in which is being transferred or is deemed to be transferred holds, directly or indirectly, shares in a company having more than 75% or more of its assets, consisting of immovable property or any right over an immovable.
For the purposes of determining the amount or value of the consideration or the real value of an interest in a partnership, no deductions in excess of the value of all assets excluding the value of an immovable property or any real right thereon is allowed other than:
- a bank loan relating to the cost of acquisition and improvements of the immovable property or real right thereon; or
- a debt registered at the Public Registry relating to the acquisition cost of the aforesaid immovable, where such debt is registered within three months from the date of acquisition of the said immovable.