Legal Notice 419 of 2021: Exemption from Tax on Property Transfers (Set-off of Tax Arrears) Rules, 2021

10 November 2021

BDO-Malta-Legal-Notice-419-of-2021

Legal Notice 419 of 2021 introduces Exemption from Tax on Property Transfers.

Scope

The legal notice is applicable to:

  • transfers of immovable property subject to tax under Article 5A (default 8% tax on the transfer value of the property) of the Income Tax Act (ITA) which was originally acquired before 31st March 2021 and which is transferred by the 31st December 2022,
  • by a person (an individual, company or any other entity) who owes relevant tax arrears.

Relevant tax arrears are the below and due as at the date of a qualifying payment:

  • income tax and tax on capital gains due and payable in terms of articles 4 and 5 ITA for year of assessment 2020 or any previous year of assessment;
  • tax  deducted at source or that should have been deducted at source that was due to be remitted to the Commissioner (CfR) on or before 31 January 2021;
  • social security contributions due and payable by an employer in respect of employed  persons that was due to be remitted to the CfR before 31 January 2021;
  • VAT due and payable in respect of any tax period that ended on or before the 31 December2020
  • interest, additional tax and administrative penalties due and payable in terms of the provisions of the Income Tax Acts, the Social Security Act and the Value Added Tax Act in respect of any arrears mentioned above.

Benefits

The legal notice refers to an exemption but in reality the benefit arising from the legal notice is a deemed payment of tax arrears, which payment would not have effectively been made. In a nutshell, the legal notice provides that when subsequent to a property transfer taxed under Article 5A of the ITA, the transferor applies the net proceeds from the transfer to settle any tax arrears, the amount of property transfer tax would be deemed to be an additional payment of tax arrears.

By way of an example, a taxpayer has tax arrears of €500,000. The taxpayer transfers an immovable property for  €200,000 and pays a default 8% property transfer tax of €16,000 resulting in a net proceeds from the sale of €184,000. The taxpayer will utilise in our example the full net proceeds to settle his tax arrears. Despite making a payment of €184,000 against tax arrears, the deemed payment would be increased by the property tax of €16,000, thereby resulting in a balance of tax arrears of €300,000 (Original €500,000 less actual payment of €184,000 less deemed additional payment of €16,000).

The legal notice contains formula rules to establish the amount of the additional allocated payment when the net proceeds exceed the tax arrears or if only a portion of the net proceeds is utilised to offset tax arrears.

Conditions and procedure

A person who makes a transfer to which the rules apply shall be entitled to an exemption from tax (deemed payment of tax arrears) if a payment is made against his relevant tax arrears when all the following conditions are satisfied:

  • that person has submitted all returns he was required to submit in terms of the Income Tax Management Act, the Final Settlement System (FSS) Rules and the Value Added Tax Act;
  • the gross tax and the duty on documents and transfers chargeable in respect of that transfer have been remitted to the CfR;
  • that person gives notice to the CfR of his claim for an exemption under these rules, within 3 months from the date of the property transfer on such form and in such manner as the CfR may approve.
  • that person provides such further information and produces such documents and evidence as the CfR may consider necessary for the proper application of these rules;
  • the payment against relevant tax arrears is made on or after the date of that transfer and, when the CfR issues a request for payment for the purpose of these rules, not later than the time (would be a minimum of 30 days) allowed in that request.

The total of a qualifying payment and of the amount of the respective exemption allowed under these rules shall constitute a payment by the person who makes the transfer in question which shall be set off against the relevant tax arrears of that person. The exemption allowed under the rules shall not give rise to any refund, credit or other right except for the set-off mentioned above.

These  rules  are  without  prejudice  to  the  provisions  of Article 51 of ITA and of regulation 6 of the European Union Anti-Tax Avoidance Directives Implementation Regulations.

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