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Budget Measures Implementation Act - Tax Measures

Josef Mercieca , Tax Partner |
Milena Palikarova , Assistant Tax Manager |

20 March 2020

On the 20th March, the Maltese Government enacted the Budget Measures Implementation Act, 2020, Act VIII of 2020. Below are the changes to the Income Tax Act, the Duty on Documents and Transfers Act, the Value Added Tax Act, the Immovable Property Act and the Income Tax Management Act.

 

Changes to the Income Tax Act

 

  1. Changes to the definition of a company to provide that cells of all cell companies (not restricted to Insurance cell companies) shall be treated as separate companies for tax purposes.

 

  1. The assignment of any right obtained in terms of a promise of sale of immovable property (konvenju), is no longer taxable under Article 4 (1) (a) (and still not subject to tax under Article 5A).  The ITA now provides that the Minister may, by rules, prescribe:
  • the conditions for the validity of any such assignment;
  • the deductions that may be allowed for the purpose of determining the income resulting from any such assignment;
  • the tax chargeable on the income determined as aforesaid;
  • the time within which and the manner in which the tax so chargeable shall be paid.

Quick reminder: Budget 2020 measure: Transfers of rights obtained in terms of a promise of sale of immovable property will no longer be subject to tax at 35% but will instead be subject to a reduced tax rate of 15% on the first €100,000, which will be collected by notaries.

 

  1. Transfers of immovable property within 5 years from the date of acquisition are subject to a 5% property transfer tax. A new proviso to Art 5A (5) (e) provides that the 5% tax will no longer apply (and 8% would by consequence apply), unless the transferor had  acquired  the  property  for  the  purpose  of establishing  therein  or  constructing  thereon  his sole  ordinary  residence  and  declared  such intention  in  the  deed  of  acquisition, if at any time during the period of five  (5)  years  preceding  the  transfer,  the transferor (or a person related to the transferor), carried out on that property any works for which a development permission was required in terms of the Development Planning Act (DPA) but excluding any works for which a permission is granted without the need for an application in terms of the DPA.

 

  1. Amendments to Article 14 ITA (These changes are effective as from 1 January 2019):
  • Art 14 (1) (a) - replacement the deduction of interest by a deduction for borrowing costs, presumably meant to cover NID and IFRS deductions. This is subject to guidelines to be issued by CfR.
  • Art 14 (1) (h) – allowed a deduction for scientific research. Such deduction, at the option of the person, was allowed to be increased to 150% of the actual amount of the expenditure incurred up to a maximum of 5% of the turnover of the person for that year. The additional 50% deduction is no longer available.

 

  1. The 15% final tax on rental income on long private residential leases shall now be abated in such circumstances and by such amounts as may be prescribed in line with the changes to the Private Residential Leases Act.

 

  1. The Maltese version of the ITA has been amended to provide that the couple may appoint one of the spouses (as opposed to the man or the woman) as the responsible spouse.

 

  1. New Art. 49A has been added to the ITA, which provides for the possibility for a married couple to submit separate tax returns.

 

  • In  the  case  of  a  married  couple, where  both  spouses  are  living  together,  any  of  the spouses may make an election referred  to  as  "a  separate  return election" where:
  1. during the year in which the election is made, each of the spouses derives either:

i) income from a pension received in view of a past employment, or

ii) income from a trade, profession, business or vocation, or

iii) income from employment other than any fees derived from the holding of an office of a director,

 

  1. in terms of a public deed concluded by the spouses, the property they acquire during their  marriage  is  governed  by  the  system  of separate property or by the system of community of  residue  with  separate  administration  as provided in article 1237(2) of the Civil Code or in terms of a foreign law that may be applicable to the property of the spouses that provides for any similar system, and that system still applies to them at the time that the election is made.

 

  • A separate return election shall be made on such form and in such manner as the Commissioner may direct.

 

  • Unless   the   CfR approves otherwise, a separate return election applies from the year of assessment commencing on 1 January of  the  year  immediately  following  that  in which the election is made and continues to have effect in respect of each subsequent year of assessment unless and until it is revoked. Provided that an election submitted to the Commissioner before 1 January 2020 shall have effect as from the year of assessment 2021.

 

  • When a separate return election applies:

 

  1. the income of each spouse shall be charged  to  tax  in  the  name  of  the  respective spouse separately from the income of the other spouse, and each spouse shall be responsible for complying with the provisions of the ITA relating to the submission of returns of his or  her  income  and  the  ascertainment  of  that income;

 

  1. the income  of  a  spouse  shall comprise  all  income  derived  by  that  spouse regardless of any right which the other spouse may have in respect of that income in virtue of the provisions of any law regulating the rights of the spouses over their property and income;

 

  1. when establishing  the  deductions  allowable against the income of a spouse, expenses shall be deemed to have been incurred by the spouse in whose name the relative receipt is issued, and where a receipt is issued in the joint name of the spouses, the relative expense shall be deemed to have  been  incurred  by  the  spouses  in  equal portions; and

 

  1. any  amounts  of  unabsorbed  losses, unabsorbed capital allowances or unabsorbed tax credits  brought  forward  from  previous years  of assessment  shall be  accounted for in the computation of the income of the spouse in whose name the income derived from the source that had given rise to the losses, capital allowances or tax credits in question is chargeable.

 

Provided that any unabsorbed capital loss that had been incurred in a transfer made by a spouse shall be available as a deduction from any capital gains that may be derived by that spouse, and if the transfer had been made by the spouses jointly, the unabsorbed capital loss shall be available to the two spouses in proportion to the undivided shares transferred by them respectively.

 

(a) when, in the year immediately preceding a year of assessment in respect of which a separate return election is effective:

  • a spouse derives rental income eligible for the 15% final tax, that  spouse shall  be  deemed  to  have  exercised  the option for the final tax and  shall consequently be liable for the payment of the final tax in accordance with sub-article(7) of article 31D; or

 

ii) a spouse derives investment income as defined in article 41(a) ITA without deduction of tax, that spouse shall be required to report that income in his tax return. However, tax would be payable on such income at the rate applicable to investment income under Art 33 ITA which in many cases is 15%. 

 

  1. Therefore, the provisions of article 31D and the investment  income  provisions providing for a final tax option, shall become obligatory unless the spouse’s income for that year of assessment, disregarding the rental and investment income in question, is in the 0% presisive tax rates band.

 

A  married  couple  living  together  may revoke a separate return election by means of a notice in  writing  to  the  Commissioner  subject  to  the following conditions:

  • the  notice  of  revocation  shall  be made on such form and in such manner as maybe approved by the Commissioner and shall be signed by both spouses; and

 

  1. unless  the  Commissioner  approves otherwise, the separate return election shall cease to have effect as from the year of assessment commencing  on  1  January  of  the  year immediately following that in which the notice of revocation is delivered to the Commissioner, and shall not be available again to the spouses in respect of that year or any one of the four (4) succeeding years of assessment.

 

  • If any of the spouses makes a separate return election, the joint tax computation would automatically not apply. In the separate returns, the spouses would be able to apply only the single (or the parent rates if eligible) rates.

 

  • If the spouses opt for a separate return, in order for a spouse to be eligible to pay tax at 15% on part time income that spouse himself or herself must be the spouse who is deriving full time employment income or income from a trade or business or income from a pension or a full time student or apprentice. 

 

Practical example:

Spouses A and B are married and living together but have a separation of the community of acquests. Spouse A derives full time employment income whereas Spouse B derives part time income from a trade or business. If none of the spouses makes a separate return election, Spouse B can benefit from the 15% flat tax rate on part time income. If however, one of the spouses makes a separate return election, Spouse B would no longer be eligible for the 15% flat tax rate on employment income and such income would be taxable automatically at B’s progressive tax rates.

 

  1. Tax on overtime income - With effect from 1 January 2020, income derived by an individual that represents qualifying overtime income shall be subject to tax at the rate of 15%. Except where the individual deriving qualifying overtime income elects otherwise, the 15% tax shall be final and shall not be available as a credit or set off against the tax liability of any person or as a refund. The Minister may, by rules, prescribe:

(a)  the circumstances in which, the limits up to which and the conditions under which, income shall represent qualifying overtime income for the purposes of this article; and

(b)   the manner in which the election referred to above is exercised.

Quick reminder: Budget 2020 measure: 15% tax rate for the first 100 hours of overtime carried out by workers, who earn less than €20,000 basic salary per year.

 

Changes to the Immovable Property (Acquisition by Non-Residents) Act 

The Budget Measures Implementation Act, 2020 also provided for changes to be made to the Immovable Property (Acquisition by Non-Residents) Act, Chapter 246 of the Laws of Malta, hereinafter referred to as the ‘Act’.  

 The number of changes were made to Article 2 of the Act, as listed below:  

  1. The definition of ‘residence permit’ has been removed 

 

  1. The definitions of ‘non-resident person’ and ‘resident of Malta’ has been amended and a third country national who has a long-term resident status in terms of the Immigration Act, Chapter 217 of the Laws of Malta, and its subsidiary legislation, is now considered to be a resident of Malta for the purposes of this Act.  

 

  1. A citizen of Malta or a citizen of another EU Member State, who has a valid residence permit, but who was not a resident in Malta for a minimum period of 5 years preceding the date of the acquisition of the property is now considered to be a resident of Malta for the purposes of this Act.  

 

As a result of the above changes, two categories of individuals previously classified as not being residents of Malta for the purposes of this Act, shall now be classified to be Maltese residents, namely:  

  1. A third country national who has a long-term resident status in Malta- This refers to a third country national who has resided legally and continuously in Malta for five years immediately prior to the submission of his/her application for long term resident status.  

  1. A citizen of Malta or a citizen of an EU Member State who has a valid residence permit, but who was not a resident in Malta for a minimum period of five years preceding the date of the acquisition of the property.  

Amongst other benefits stipulated by the Act, the main benefits which such individuals shall enjoy by virtue of the mentioned amendments, are the following: 

Given that such individuals shall now be eligible for the provisions related to residents of Malta, such individuals are now able to acquire, by an act inter vivos, immovable property in Malta by or under any title without the necessity of obtaining a permit under this Act.  

Further to this, the second category of individuals shall also be able to acquire immovable property in Malta for secondary residence purposes, by an act inter vivos, without the necessity of obtaining a permit under this Act.  

 

Changes to the Duty on Documents and Transfers Act (DDTA)

  1. Changes to Article 10 of the DDTA:

 

  • the value based on which the duty is calculated shall no longer be deemed to be the real value at the time of the execution of the document, but the real value according to the other provisions of the DDTA and DDTR. Refer to separate legal update earlier this month on DDTR:

“At present, the value of an immovable property on which duty is assessed is the value on the date of the transfer inter vivos and the value on the date of death of the person from whom the transfer causa in the case of transfers causa mortis. The legal notice changes this rule significantly as follows:

In the case of a promise of sale made for a period not exceeding one (1) year, or three(3) years in the case of a property consisting of a unit in a project acquired on plan, the relevant date shall be the date of the promise of sale. Provided that, where improvements are made between the date of the promise of sale and the date of transfer, the relevant date shall be the date of transfer. This rule applies retrospectively from 15th October 2019 (Budget 2020 date).”

 

  • The penalty for under declared duty has been reduced from 100% of the duty assessed by the Commissioner for Revenue to 20% of the duty assessed by the Commissioner for Revenue. However, an interest on such assessed duty has been introduced at a rate as prescribed by the Minister.

 

  1. Changes to Article 30 of the DDTA – Introduction of interest on unpaid duty on insurance contracts.

 

  1. Changes to Article 32 of the DDTA - the reduced duty rate of 3.5% on the acquisition inter vivos, of any immovable property or any real right over such property for the purpose of establishing therein or constructing thereon the individual’s sole, ordinary residence is now applicable on the first €175,000 (previously €150,000). Equivalent provision for acquisition of residence is acquired by an emphyteutical or sub-emphyteutical grant. This is effective from Budget 2020 date.

 

  1. Causa mortis immovable property transfers:
  • where  such  property  consists  of  a  dwelling house,  being  the  ordinary  residence  of  the person from whom the transfer originates, and where such dwelling house is also occupied at the time of such transfer causa  mortis by anyone or more of the transferees causa mortis, duty shall be charged at the rate of 3.5% of  the  value  of  such  dwelling  house  which exceeds €35,000 but not one €175,000 (previously €150,000);

 

  • where  such  property  consists  of  a  dwelling house  which is the ordinary residence occupied by any one or more of the transferees (but not the  ordinary  residence  of  the person from whom the transfer originates) duty shall be charged at the rate of 3.5% of the value of such dwelling  house  as represents the first €175,000 (previously €150,000).

 

  1. Removal of 8% p.a. interest for late payment of causa mortis transfers, to be replaced by an interest rate to be established from time to time by the Minister.

 

  1. Introduction of an exemption from duty in Malta on transfers where duty has been paid outside Malta in the country where the transfer is executed or where the company is registered.

 

  1. The duty value shifting provisions are now applicable also to value shifts in partnerships.

 

  1. Introduction of an exemption from duty on mergers, restructurings, reorganisations, de-mergers and amalgamations involving partnerships. Upon any restructuring of holdings through mergers, de-mergers, amalgamations and reorganisations, of partnerships, no duty shall be chargeable on:

 

  • the  transfer  by  an  individual  of  a partnership interest, held in his own name, where had such partnership been a company, it would have been considered as forming part of a group of  companies,  in  exchange  of  shares  in  a company  or  companies  or  interests  in  another partnership or partnerships, that would have been considered to form part of the same group had the partnership or partnerships referred to above been a company or companies;
  • the exchange of a partnership interest for shares from one company to another where the company receiving the shares and the company whose shares are being exchanged are companies forming part of the same group of companies;
  • the transfer of a partnership interest for consideration from a company or partnership to  another  company  or  partnership,  where  the transferor  and  the  transferee  form  part  of  the same group of companies or where any or both of  them  are  partnerships,  would  have  been considered to form part of the same group if they had been a company or companies.

 

However, in the case of property partnerships (as defined in Art 2 of the ITA but without the definition proviso),  exemption shall only apply where the individual, direct or indirect, beneficial owners of the companies/partnerships are  the  same  and  each  such individual  holds,  directly  or  indirectly,  substantially the  same  percentage  interest  in  the  nominal  share capital and voting rights in each of the said companies both before and after the transfer or exchange. However, this restriction and stricter condition shall not apply where the companies/partnerships are, directly or indirectly, owned as to 80% or more by a company whose securities are listed on a stock exchange recognised under the Financial Markets Act.

 

  1. DDT10A and DDT10B exemptions are now applicable also to transfers of an interest in a partnership with the same applicability and restrictions.

 

  1. Other changes to the DDTA are the removal of the specific percentage interest established in the DDTA itself and empowering the Minister to establish interest rates for late payment of duty.

 

  1. Commissioner to allow a 30-days’ time window (previously 15 days) prior to enforce an executive title. Moreover, upon the lapse of the period of two days from the service of an intimation for payment made by means of a judicial act, the Commissioner shall be entitled to register in the public registry or land registry, as the  case  may  be,  a  note  of  privilege  for  the  amount demanded in the judicial act.

 

Changes to the Income Tax Management Act (ITMA)

 

  1. In order for the Commissioner to treat shares as beneficially held on behalf of a non-resident/s, the Commissioner will now require the Trustee, CSD or MFSA licensed under the Investment Services Act, to provide a certificate  which  includes  the  names  and  taxpayer identification numbers of the person or persons for the benefit of which the share is held and of their ultimate beneficial owners, and any other details as the Commissioner may require.

 

  1. Important changes to tax collection on share transfers: In the case of a transfer of securities in a property company or of an interest in a property partnership (as defined in Art 2 ITA but without the definition proviso), the provisional tax payment shall be equivalent to the amount determined under the ITA or the ITMA but not exceeding 35% of the higher of the market value and the consideration for the transfer.

 

  1. Tax refunds to be paid within 6 months as opposed to the previous 12 months.

 

Changes to the VAT Act

In the case of electronic filling of VAT returns or declarations, the seven-day extension to the submission deadline required the payment of the VAT also within the seven-day time frame in order to avoid penalties for later filing. The payment requirement has now been removed so that the penalty will not be imposed if submission happens within seven days but without payment.

 

Get in touch with BDO Malta's Tax Team to Learn more. 

 

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