An ACT to implement the Budget Measures for the financial year 2021

The Malta Government has on the 16^th April 2021, by means of ACT XVIII of 2021 published and enacted a new Act which will be implementing the budget measures for the year 2021.  The budget measures  were announced by the Minister of Finance in his budget speech in October 2020.   The measures came into force on the 1^st January 2021 unless otherwise stated.  The following is a summary of the main changes to the Income Tax Acts as well as the Duty on Documents and Transfers Act.

Amendments to the Income Tax Act (Cap. 123 of the Laws of Malta)

• Exemption from income tax on transfer of one’s own residence

Article 5(5) of the Income Tax Act provides for an exemption from income tax on the transfer of one’s own residence which is defined as the principal residence owned by the taxpayer or his spouse being a dwelling house which has been the owner’s only or main residence and which has been owned and occupied for a period of at least 3 years as the transferor’s own residence immediately preceding the date of transfer.  It has now been clarified that the period of residence does not only include any absences from Malta such as on account of foreign employment, illness, holiday or study, but it also includes any absences due to illness or care in a hospital or home for the elderly, provided that the premises in question were not being used or employed for any other purpose during such absence.

• Participation exemption

Malta’s participation exemption exempts from Maltese income tax, dividends and capital gains derived from a participating holding, subject to the satisfaction of a number of conditions.  This exemption will no longer apply to dividends and capital gains derived from a participating holding in a body of persons which is resident for tax purposes in a jurisdiction that is included in the EU list of non-cooperative jurisdictions for a minimum period of three months during the year immediately preceding the year of assessment.  This exclusion will not be applicable if it is proved to the satisfaction of the Commissioner for Revenue that the said body of persons maintains sufficient people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom.  Where such three months are consecutive and fall in two subsequent consecutive basis years, the exemption will not apply in respect of dividends and capital gains received in any one of the two years.   

The EU list of non-cooperative jurisdictions can be found on the CfR website here.

• Payments not allowed as a deduction for tax purposes

Payments which constitute a criminal offence or, in the case of payments made outside Malta, would constitute a criminal offence if made in Malta will not be allowed as a deduction for Maltese income tax purposes.

• 15% tax rate  on royalty income derived from literary works

Individuals who are recipients of royalty income derived from qualifying literary works on or after 1^stJanuary 2021 may opt to be taxed at a reduced rate of 15%.  The tax will be final, wherein no set-off or refund will be possible and the recipient will not be required to report such income in his or her personal income tax return.  The 15% tax rate will be calculated on the gross royalty income and no deductions will be allowed.  Payment of tax is to be made by not later than the 30^th April of the relative year of assessment.

‘Qualifying literary work’ is defined as a publication which bears an ISBN and which is a novel, story, poetical work, text book, treatise, history, biography, encyclopaedia or dictionary that is eligible for copyright in terms of the Copyright Act.

• Transfer pricing

Article 51A grants powers to the Minister of Finance to make rules in relation to transfer pricing generally which may provide for the determination of the arm’s length pricing of a transaction or a series of transactions, any adjustments in relation to such transactions as well as for advance pricing agreements. The new enabling provision seems to indicate that Transfer Pricing Rules are likely to be introduced in the near future.  Malta does not have any Transfer Pricing Rules which regulate the pricing of transactions between related parties. Notwithstanding this, Malta has a general anti-abuse provision as well as a number of specific any-abuse provisions which are applicable to a limited number of scenarios.

Amendments to the Income Tax Management Act (Cap. 372 of the Laws of Malta)

• The filing of adjustment forms pursuant to a Mutual Agreement Procedure (MAP)

Malta has in 2018 ratified the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (BEPS). This has improved the access to and the operation of the MAP which is a procedure resorted to resolving international tax disputes pursuant to specific provisions in a double taxation agreement between Malta and another State and the EU Arbitration Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.

This amendment to the ITMA removes the five year prescription period for the filing of tax adjustment forms where the adjustment results in a reduction in the tax payable by or an increase in the tax refundable to the tax payer, where such forms are being filed pursuant to a MAP.

• Provision of information to the CfR for the purposes of exchanging it with foreign tax authorities

Prior to the amendments, taxpayers had 30 days to furnish information to the Commissioner for Revenue for the purposes of providing information to foreign tax authorities in jurisdictions which had a reciprocal exchange of information agreement with Malta.  The period of 30 days starts from the date of the Commissioner’s notice.  This 30 day period has been reduced to 20 days.

• Professional secrecy of certain licensed financial services entities

Article 17 of the ITMA has ben deleted.  This article limited the powers of the CfR to request information from certain licensed financial services entities except for a number of restricted and limited scenarios such as for the purposes of determining the taxable income of such entities, to ensure adherence with the Investment Income provisions, for the purposes of exchanging information with foreign tax authorities and in cases of suspected tax evasion by any person.   Licensed financial services entities include life assurance companies, banks, investment services providers, collective investment schemes and stockbrokers.

Amendments to the Duty on Documents and Transfers Act (Cap. 364 of the Laws of Malta)

• Definition of the words ‘document’, ‘cohabitant’ and ‘spouse’

Document – The Act provides for the imposition of duty on a number of documents which include a policy of insurance, bill of sale, a notarial deed and a schedule of redemption of ground rent filed in court.  The definition of a document has now been widened to include a judgement, decree or order of any court or other lawful authority, whereby any immovable or any real right over an immovable is transferred.

Cohabitant – A ‘cohabitant’ means a person in a cohabitation enrolled by means of a public deed under the Cohabitation Act. 

Spouse – The definition of a ‘spouse’ includes a partner registered as such in a civil union.  

The above-mentioned definitions are effective as from the 5^th June 2020.

With effect from the same date, certain exemptions and reductions in duty which are currently granted to a surviving spouse upon a transmission ‘causa mortis’ of property has now been extended to cohabitants as defined. These refer to the exclusion from the amount which is subject to duty of the usufruct of any property bequeathed in favour of the cohabitant and the exemption from duty on the ordinary residence from the deceased when the beneficiary of such residence is a cohabitant.

• Reduced rate of duty on transfers of immovable property

The reduced rate of duty of 3.5% that currently applies on certain acquisitions of immovable property will continue to apply, subject to the following changes effective as from the 20^th October 2020.

1. On the first Eur200,000 (previously Eur175,000) on acquisitions ‘inter vivos’ of immovable property acquired as a sole and ordinary residence by persons who do not require an AIP permit.  Such a reduced rate also applies on the redemption of ground rent or other burdens imposed on such a property.  This does not in any way prejudice the application of more beneficial rates such as for example ‘The First Time Buyers Scheme’.

2. On the value of immovable property exceeding Eur250,000 (previously Eur200,000) where such a property is donated by a parent to his or her descendant/s in the direct line to be used solely for residential purposes.  No duty will be paid on the first Eur250,000 (previously Eur200,000).  The exemption and the reduced rate will only apply on condition that this is the first donation between the parent and the said descendant/s and such descendant/s would not have availed themselves from any other duty relief in respect of the acquisition of any immovable property.  The reduced rate will also apply without prejudice to more beneficial rates that may be availed of on the acquisition of immovable property such as for example a reduced rate of 1.5% on the first Eur400,000 on a transfer ‘inter vivos’ of immovable property.

3. On the first Eur200,000 (previously Eur175,000) on the inheritance of immovable property or the usufruct of any real right over the property, which was the ordinary residence of both the deceased as well as the transferee or a dwelling house which prior to the inheritance was occupied by the transferee.  The reduced rate applies without prejudice to any other exemptions which may be applicable such as for example the exemption from duty on the inheritance by a surviving spouse or children of immovable property which was prior to the inheritance, the residence of the deceased spouse or parent as the case may be.

• Transfer ‘causa mortis’ of ordinary residence to descendants

The Act provides for an exemption from duty on the transfer ‘causa mortis’ of a dwelling house which constitutes the ordinary residence of the deceased to descendants in the direct line, on condition that such a residence must have been the ordinary residence of the deceased at the time of the transfer and for a minimum period of 3 years prior to the transfer.  These 2 conditions have now been removed with effect from the 20^th October 2020.  

• Ordinary residence

With effect from the 1^st January 2021, for the purposes of applying any exemption / reduced rate of duty on transfers ‘causa mortis’, the ordinary residence of the deceased shall still be considered to be his / her ordinary residence even in cases where such a deceased person was either hospitalised or was residing in an old people’s home at the time of the transfer. 

• Restructuring of holdings

As from the 28^th of June 2019, the exemption from duty applicable to intra-group transfers of securities upon a restructuring of holdings through mergers, demergers, amalgamations and reorganisations will now also be applicable to transfers of a) interests in partnerships between companies in exchange for shares and b) interests in partnerships by and to companies or partnerships for a consideration.

• The powers of the Commissioner to determine and assess duty

The provision granting powers to the Commissioner to determine and assess under-declared duty has been amended to reflect the wider definition of a ‘document’.  It is also being clarified that the powers of the Commissioner cover under declarations on transfers of real rights over an immovable property.