Transposition of ATAD into Maltese tax Law

Milena Palikarova |

17 December 2018

On the 11th of December 2018 the Maltese Government published Legal Notice 411 transposing into Maltese law, Directive (EU) 2016/1164 of 12th July 2016, the Anti-Tax Avoidance Directive (ATAD).

These implementing Regulations will become effective on 1st January 2019, with the exit taxation rules coming into force on the 1st January 2020. The Regulations lay down rules against tax avoidance practices and will affect all companies and permanent establishments subject to tax in Malta, referred to in the Regulations as taxpayers.

The following provisions have been transposed into Maltese law with effect from 2019 (exit taxes from 2020):

 

1.       Interest Limitation Rule

The interest limitation rule provides that when interest and similar borrowing costs of a company exceed interest receivable, the maximum tax deduction that can be claimed in a tax period in respect of the excess borrowing costs will be capped at 30% of the Earnings before interest, tax, depreciation and amortisation (EBITDA).

However, the new restrictions will not apply in cases where the exceeding borrowing costs do not exceed €3,000,000. This applies also to an entire group when the said group is treated as a taxpayer and the €3,000,000 shall apply for the entire group.

In case the taxpayer is a standalone entity, the latter will have the right to fully deduct the exceeding borrowing costs. A company can qualify as a standalone entity if it is not part of a consolidated group for financial accounting purposes and has no associated enterprises and permanent establishments.

The interest limitation rule will not apply in cases of loans used to fund long-term public infrastructure, EU projects or loans concluded before 17 June 2016.

In line with the ATAD, the Regulations provide for the possibility of the interest limitation to be calculated and applied at a group level. The taxpayer group member entity may apply the group ratio rather than the fixed ratio provided that it can demonstrate that the ratio of its equity over its assets is equal to or higher than the equivalent ratio of the group. The ratio of taxpayer’s equity over the total assets is considered to be equal to the equivalent ratio of the group if the ratio of its equity over its assets is lower by up to two percentage points. Moreover, all assets and liabilities are valued using the same method as in the consolidated financial statements.

Unutilised exceeding borrowing costs may be carried forward without time limitation and any unused interest capacity which cannot be deducted in the current tax period may be carried forward for a period of five years.

It is to be noted that the limitation will not apply to financial undertakings, including where such are part of a consolidated group.

 

2. General abuse provision

The Regulations provide also for a general anti-abuse provision which states that for the purpose of calculating the tax due all arrangements put in place for the purpose of obtaining a tax advantage shall be ignored. Such arrangements will be disregarded where it is considered that they are not put into place for valid commercial reasons.

Malta already has similar provisions to the general abuse provision in its domestic law. Article 51 of the Income Tax Act, Chapter 123 of the Laws of Malta, provides that where a scheme, which reduces the amount of tax payable by a company, is considered to be artificial or fictitious, the Commissioner of Inland Revenue may disregard it and the taxpayer shall be subject to tax accordingly.

Moreover, Article 51 also provide for where a taxpayer has or will obtain an advantage which has the effect of avoiding, reducing or postponing tax liability, or obtained or will obtain any refund or set-off of tax, the Commissioner of Inland Revenue may determine the liability to tax the taxpayer for any year of assessment and in such amount as may be necessary.

 

3. Controlled Foreign Company rule

In terms of the Regulations an entity or a permanent establishment shall be treated as a controlled foreign company (CFC) of a Maltese company (herein after referred to as the taxpayer), if the taxpayer holds a 50% shareholding or more (directly or indirectly) in the CFC, and where the actual corporate tax paid by the CFC is lower than the difference between the tax that would have been charged in the country of the taxpayer and the actual corporate tax paid.

The definition of a CFC excludes a permanent establishment of a CFC, which is not subject to tax in the country where the CFC is established.

Where a company is considered to be a CFC, in calculating the tax charge of the taxpayer, there shall be included the non-distributed income of the entity arising from non-genuine arrangements. However, there are few exceptions to this rule as per below:

  • Where the entity or permanent establishment derives accounting profits of not more that €750,000 and non-trading income of not more than €75,000; and
  • Where the accounting profits of the entity or permanent establishment does not exceed 10% of the operating costs.

In computing the income of the taxpayer, the income of the controlled foreign company to be included shall be calculated in proportion to the taxpayer’s participation and shall be included in the tax period in which the tax year of the CFC ends.

Moreover, any dividends paid by the controlled foreign company to the taxpayer shall be excluded in order to avoid double taxation. Any disposal by the taxpayer of participations in the CFC shall also be excluded from the computation of the tax base if any proceeds from such disposal were already included previously.

A credit of the tax paid by the controlled foreign entity will be allowed as a deduction against the tax liability of the taxpayer.

 

4. Exit taxation

This rule introduces a tax on capital gains arising at the time of exit of the assets, or transfer of business and tax residency. A transaction will become taxable on transferring assets between entities in different countries in any of the below listed circumstances:

  • Where taxpayer transfers assets from its head office in Malta to its permanent establishment in another country provided that it no longer has the right to tax any future capital gains from the transfer of such assets;
  • Where taxpayer transfers assets from its permanent establishment in Malta to its head office in another country provided that Malta no longer has the right to tax any future capital gains from the transfer of such assets;
  • Where a taxpayer transfers its tax resident from Malta to another country, except for the assets which remains connected with Malta;
  • Where a taxpayer transfers its business to another country provided that Malta no longer has the right to tax any future capital gains from the transfer of such assets;

 

The tax payment should be processed by not later than the taxpayer’s tax return’ due date. However, a tax payment may be deferred by paying the exit tax over a period of 5 years in certain circumstances. Certain conditions or guarantees may apply where there is a risk of non-recovery.

The Regulation provides for possible recoverability of tax paid/discontinuation of deferred payments in cases such as bankruptcy, winding up, or assets are sold to third party.

Where an asset, tax residence or business is transferred to Malta, the starting value in Malta for tax purposes will be determined by the other EU Member State. The Regulations grant powers to the Commissioner to contest the value when it does not reflect the market value.

The provisions of this Regulation do not apply to assets transfers related to financing of securities or used as collateral or used to meet prudential capital requirements when such assets are set to revert back to Malta with a period of 12 months from the time of exit from Malta.

Should you require any further information, please get in touch with Milena Palikarova