Taxation: A recap and reflection of the budgetary provisions

The Government of Malta has, by means of ACT VIII of 2020 published various measures to address the annual needs of the small island state of Malta that where projected to arise throughout the year. The year 2020 has encountered unanticipated events due to the current circumstances, however the usefulness on the budgetary  measures for 2020 should not be overlooked. Three months from the start of the year a recap and reflection of the budgetary provisions will be addressed in this article summarising the budgetary provisions  hereunder. 

INCOME TAX ACT (ITA)

Allowable Deduction for Borrowing Costs

In view of the transposition of the EU Anti-Tax Avoidance Directive implementation regulations (ATAD I) in the ITA Article 14(1)(a) of the ITA has been amended so that the deduction for borrowing costs will be allowed in accordance with the interest limitation rule  compounded in Regulation 6.

5% Final Withholding Tax on transfers of Immovable Property

A proviso was introduced in the relevant cases where the 5% withholding tax applies on the transfer of immovable property situated in Malta. The ITA provides that the transferor will be subject to a 5% final withholding tax, payable on the transfer value, where a property is transferred within 5 years from its acquisition date, provided that the transfer takes place after 1st January 2015 and the property being sold does not form part of a project.

With effect from 20th March 2020, the new proviso will exclude from this article, the disposal of any immovable property made within five years from the date of acquisition, which is not the transferor’s sole ordinary residence and on which any construction works for which a development permission is required, have been carried on orders given by the transferor. This means that such a transfer will not benefit from the reduced rate of 5%.

Rental Income derived from Long Private Residential Leases

 A new proviso to Article 31D (2) of the ITA allows for a reduction of tax paid on rent derived from long private residential leases by such amounts as may be prescribed.  This amendment is effective as from 20th March 2020.  Article 31D (2) of the ITA provides for a reduced final rate of tax of 15% on rental income derived from a tenement.

Profits derived from the Assignment of Promise of Sale Agreements

The Budget Measures Implementation Act has amended the ITA, so that gains derived from the transfer of promise of sale agreements have now been excluded from the Property Transfers Tax regime as per Article 5A of the ITA. 

However profits derived from the assignment of a promise of sale agreement will be subject to a final tax of 15% as from 1st January 2020.  The 15% tax rate will be applicable on the first Eur100,000, while the remainder value will be subject to a 7% provisional tax. 

Cell Companies

Effective from the 20th March 2020, the definition of a company under Article 2 of the ITA has been amended so as to encompass within the new definition every cell of a cell company and that part of a cell company in which non-cellular assets are held shall be deemed to be a separate company.   This follows the amendment to Article 84E of the Companies Act, which empowers the Minister for Finance to legally publish regulations for the formation of cell companies and the imposement of varying regulation on cell companies carrying on engaged in the shipping or aviation sector.

This means that each cell and the non-cellular part of a cell company will be deemed as a taxable legal person. Therefore each cell and non-cellular part of a company would need and become subject to:

  • Being separately registered for income tax purposes,
  • Have a separate income tax registration number,
  • Chargeable income will need to be assessed and determined separately,

Therefor each newly identified entity will submit a separate income tax return and will pay tax and receive refunds of tax accordingly.

Income Tax Returns for Married Couples

Article 49A – separate income tax returns for married couples living together.

 With effect from base year 2020, each spouse may make an election to file a separate income tax return, which can be availed of, if:

  • During the year in which the election is made, the income of each of the spouse consists of income derived from a trade, business, profession or vocation, from employment income (excluding directors’ fees); or from a pension received in relation to past employment ; OR
  • The married couple has agreed by means of a public deed that any property they acquire during marriage will be governed by the system of separate property or by the system of community of residue with separate administration in terms of Maltese or foreign law and that system still applies to them at the time the election is made.

Where a separate tax return is filed:

  • The income of each spouse will be taxed separately, and each spouse will be separately responsible to comply with the respective provisions of the ITA, with respect to the submission of income tax returns, ascertainment of chargeable income and tax payment.
  • The income of a spouse shall comprise all income derived by that spouse, irrespective of any rights which the other spouse may have in respect of that income.
  • Any deductible expenses will be availed of by the spouse in whose name the respective receipt is issued.  Where a receipt has been issued in the name of both spouses, the expense shall be deemed to have been incurred by the spouses in equal proportions.
  • Any unabsorbed losses, capital allowances or tax credits bought forward from a previous year of assessment preceding that in which the couple opted for a separate tax return, shall be accounted for in the computation of the income of the spouse in whose name the income which had given rise to those losses, capital allowances and tax credits was chargeable to tax.
  • Any unabsorbed capital losses resulting from a transfer made jointly between the two spouses shall be divided between the spouses in proportion to the undivided shares transferred by them respectively.  If the transfer was made by one of the spouses, any unabsorbed losses shall only be available as a deduction against any capital gains derived by that spouse.  
  • The income of each spouse will be taxed at the single rates of tax.
  • A married couple living together may revoke this election, by means of a notice in writing to the Commissioner for Revenue, subject to certain conditions which may be imposed, including that the election will not be available again to the spouses for that year and for the four subsequent years of assessment

Income Tax on Overtime Income

With effect from 1st January 2020, a taxpayer may opt to have his/her qualifying overtime income subject to tax of 15%. Except where the individual elects otherwise, the tax shall be final and shall not be available as a credit, set off or refund. 

INCOME TAX MANAGEMENT ACT (ITMA)

Tax Refunds

Tax refunds due to tax payers which are determined on the basis of an income tax return which is filed late, shall become due on the later of 6 months after the furnishing of the income tax return or 6 months after the date on which the refund would have become otherwise due.  This has been reduced from 12 months. Such will be in effect from year of assessment 2021.

Trustees and Central Securities Depositories

A change brought about by the 5th AML Directive relative to the beneficial ownership register,resulted in an alteration as from 1st June 2020; the Commissioner for Revenue will treat licensed trustees and central securities depositories as the beneficial owners of the shares unless they provide the said Commissioner with a certificate which includes the names and income tax registration numbers of the person or persons for the benefit of whom they are holding the shares.

A change brought about by the 5th AML Directive relative to the beneficial ownership register, resulted in an alteration.

DUTY ON DOCUMENTS AND TRANSFERS ACT (DDTA)

New Exemptions from Stamp Duty Applicable to Transfers of Interest in a Partnership

So as to clarify a number of Stamp Duty anomalies with effect from 28th June 2019, the following is applicable to interests in partnerships:

  • The restructuring exemption from duty will also be applicable to transfers of interest in partnerships.
  • The blanket exemption from stamp duty found in Article 47 of the DDTA will also apply to transfers of interest in partnerships.  Article 47 of the Act, provides for an exemption from stamp duty on transfers of marketable securities held by or issued by certain companies,  which include amongst others companies that are owned as to more than 50% by non-residents and who have the majority of their business outside Malta.
  • The value shifting provisions applicable to reduction in the real value of marketable securities were extended to also cover reductions in the real value of an interest in a partnership.

Transfers of Foreign Marketable Securities held in Property Companies

With effect from 1st January 2020, no duty shall be due on transfers inter vivos of foreign marketable securities (whether executed in Malta or outside Malta) held in a property company, provided that duty on such transfer would have been paid in the country where the transfer is executed or in the jurisdiction where the company is registered.

Prior to this amendment, Malta stamp duty was chargeable on transfers inter vivos, whether executed in Malta or outside Malta.

Acquisition of Property for the Purposes of Establishing one’s Sole Ordinary Residence

Such a provision has been in effective as from the 15th October 2019, with respect to persons acquiring immovable property in Malta (who do not require an AIP permit) to establish therein their sole ordinary residence. In this case, the first EUR 175,000 of the value or consideration of the property will be subject to a duty 3.5% (rather than the standard rate of 5%). Any amount of value or consideration of the property over and above the amount of Eur175,000 will be subject to duty of 5%.

The increase to Eur175,000, being the value or consideration which will be subject to a reduced rate of duty of 3.5% has also been extended to cases of transfers causa mortis, where the inherited property consists of a dwelling house, being the ordinary residence of the transferor and where such dwelling house is also occupied by the transferee/s as their ordinary residence. In such cases the law also provides that the first Eur35,000 of the value or consideration of the property transferred causa mortis will be exempt from duty.

New Penalty Regime

As from 15th October 2019, certain omissions to pay duty will be subject to an additional duty equivalent to 20% of the amount of duty assessed by the Commissioner and an interest as prescribed by the Minister for Finance.

Interest on Late Payment of Duty

As from 1st January 2020, interest on late payment of duty has been introduced.  The rate of interest will be determined by the Minister for Finance and has not been publicised as at the date of this issue.

Tax Evasion

  • Malta ranked fourth amongst EU Member States in terms of lowest VAT evasion. Fiscal evasion was reduced by 8% during the course of one year.
  • In an effort to reduce tax evasion, as from next year, purchases of property, cars, boats and yachts, diamonds, precious stones and works of art cannot be made by means of cash payments exceeding € 10,000.
  • A new agency to be called the ‘Financial Organised Crimes Agency’ will be set up as part of the efforts to combat money laundering and financing of terrorism.

Social Security

  • Additional allowance for persons aged 65 years and over in risk of poverty shall increase by € 50.
  • The grant to persons aged 80 years and over who live in their homes or with relatives shall increase by € 50.
  • Persons residing in a home for the elderly shall receive a grant of € 300. This grant increases to € 350 for persons older than 80 years.
  • A € 300 bonus will be introduced upon the birth or adoption of a child.

Other Matters

  • The importation and production of certain single use plastics will be prohibited from 1st January 2021. The sale and distribution of same will be prohibited from 1st January 2022.
  • A gas pipeline project between Malta and Sicily to supply the Delimara Power Station is expected to be completed by 2024 through an investment of € 400 million.
  • Vehicle scrappage scheme will continue to be available with grants up to a maximum of € 1,500.

Edward Spiteri is Company Secretary of the Malta Academy for Taxation Services and may be contacted on info@taxacademy.mt

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