Implementation of the Anti-Tax Avoidance Directive into Maltese tax law
On 11 December 2018, the Minister for Finance published legal notice 411 of 2018 containing The European Union Anti-Tax Avoidance Directives Implementation Regulations. The purpose of the legal notice is to transpose the provisions of EU Directive 2016/1164 of 12 July 2016 adopted by the Council of the European Union laying down rules against tax avoidance practices that directly affect the functioning of the internal market (“ATAD”) into Maltese income tax legislation.
The key components of the Regulations consist of the following:
- Borrowing costs limitation rule – effective on 1 January 2019
- Exit tax – effective on 1 January 2020
- General anti-abuse rule (“GAAR”) – effective on 1 January 2019
- Controlled foreign company (“CFC”) rules – effective 1 January 2019
Borrowing costs limitation rule – effective on 1 January 2019
The rule introduces a capping on the amount of borrowing costs which a taxpayer may claim as deductible. “Borrowing costs” are widely defined in the Regulations and include interest expenses on all forms of debt, payments under profit participating loans, imputed interest, the finance costs element under finance lease arrangements and other types of costs that are economically equivalent to interest.
The rule applies to borrowing costs that exceed interest income – referred to in the Regulations as “exceeding borrowing costs”. The exceeding borrowing costs that a taxpayer may deduct are capped at 30% of tax-adjusted EBITDA. No capping applies where exceeding borrowing costs fall below €3m, subject to certain conditions.
Any exceeding borrowing costs that cannot be deducted may be carried forward by the taxpayer and deducted in future periods. Furthermore, any interest capacity that a taxpayer has in a particular year can be carried forward for a maximum 5 year period.
The interest limitation rules do not apply to standalone entities (i.e. entities that do not form part of a group and do not have any associated enterprises or permanent establishments) nor to financial undertakings (e.g. banks, insurance companies, certain types of funds, etc).
Where a taxpayer forms part of a group, the taxpayer may, subject to certain conditions, fully deduct exceeding borrowing costs if it can demonstrate that the ratio of its equity to its assets is equal to or higher than that of the group of which it forms part.
Certain other exceptions to the capping requirement also apply.
Exit tax – effective on 1 January 2020
With effect from 1 January 2020, a taxpayer may be subject to tax on capital gains where assets are owned by the taxpayer and are transferred outside the Maltese income tax net in the following circumstances:
(a) the assets are transferred from the the head office in Malta to its permanent establishment outside Malta, in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
(b) the assets/business of a non-resident are transferred from its permanent establishment to the head office/ another permanent establishment outside Malta in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer; or
(c) transfer of tax residence from Malta to a place outside Malta except for those assets which remain effectively connected with a permanent establishment in Malta.
In the circumstances outlined above, the taxpayer is deemed to have transferred those assets and may be considered to have derived a capital gain. The capital gain is calculated by reference to an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their base cost for tax purposes.
The income tax that may become chargeable on the deemed transfer becomes payable by not later than the taxpayer’s subsequent tax return date. This said, the payment may, in certain circumstances and subject to certain conditions, be deferred by paying it in instalments over five years.
General anti-abuse rule (“GAAR”) – effective on 1 January 2019
The ATAD also requires Member States to introduce a GAAR.
The GAAR introduced by the Regulations re-emphasises the GAAR already existing in Maltese tax legislation for decades.
In this regard, the Regulations provide that for the purposes of calculating the tax liability of a taxpayer, an arrangement or a series of arrangements can be ignored where it has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not genuine having regard to all relevant facts and circumstances.
An arrangement or a series thereof can be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
Controlled foreign company (“CFC”) rules – effective 1 January 2019
As a result of ATAD, Malta has introduced the concept of CFC legislation into Maltese tax law.
A CFC is defined in the Regulations as:
(a) an entity in which a Maltese resident taxpayer alone or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly, more than 50% of the capital or is entitled to receive more than 50% of the profits of that entity, and
(b) the actual corporate tax paid by the entity is lower than the difference between the tax that would have been charged on the entity under the Income Tax Acts and the actual foreign corporate tax paid.
A CFC also includes the permanent establishment situated outside Malta of a Maltese resident taxpayer where the condition set out in paragraph (b) applies.
Where an entity/permanent establishment is considered to be a CFC, the Regulations require the non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage to be included in the tax base of the Maltese resident entity.
The Regulations (in line with the ATAD) provide that an arrangement or a series thereof are to be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out in Malta and are instrumental in generating the controlled company's income.
The Regulations also provide for the manner and amount of CFC profit to be included in the tax base of the Malta resident entity.
CFCs whose profits fall within certain minimum thresholds are excluded from the application of this regulation.
How can we help?
The Regulations have general application across all industries and business. Our team is willing to assist you in determining the extent to which these new Regulations may impact your business. For further assistance please contact any of the below.
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