Businesses operating an establishment in Malta, held by a title of lease may assign their lease agreement to a third party for consideration. What are the income tax, stamp duty and VAR implications contemplated by the Income Tax Act (Cap. 123 of the Laws of Malta), the Duty on Documents and Transfers Act (Cap. 364 of the Laws of Malta) and the Value Added Tax Act (Cap. 406 of the Laws of Malta) which both the assignor and the assignee need to consider before entering into such an assignment agreement? The purpose of this article is to shed some light on the fiscal implications which might arise including any double taxation treaty considerations.
Income tax implications and double taxation treaty considerations
The assignment of a lease agreement would for Maltese income tax purposes be considered as ‘a cession of any rights over property situated in Malta’ and therefore falls within the purview of the Property Transfers Tax as per Article 5A of the Income Tax Act (ITA). In fact the definition of a ‘transfer’ in terms of Article 5A(2)(a) of the ITA includes any assignment or cession of any rights over any immovable property situated in Malta. The consideration paid for the assignment of the lease would thus be subject to the default rate of income tax of 8%.
On the assumption that the assignor is a person resident in Malta (including both individuals resident in Malta as well companies incorporated in Malta which for the purpose of a double taxation treaty based on the OECD Model Convention is considered to be resident of Malta), then no double taxation treaty considerations will apply. This is because of the fact that the source of the gain is Malta (it is hereby being assumed that the immovable property is situated in Malta) and the recipient of the gain is also resident in Malta. Thus in this case, Malta would have an exclusive jurisdiction to tax such gain.
If on the other hand, the recipient of the gain is not resident in Malta, then typically a double taxation treaty based on the OECD Model Convention would grant a shared jurisdiction to tax to both Malta and the country of residence of the recipient of the gain. Such a treaty would typically grant a primary right to tax to Malta as the source country (i.e. where the immovable property is situated) and a secondary right to tax to the country of residence of the recipient of the gain. The latter jurisdiction would then have the obligation to grant the recipient of the gain relief from double taxation in terms of the applicable treaty so that the same income or gain would not be subject to tax twice in two different jurisdictions.
Duty on documents and transfers implications
Unlike income tax, the Duty on Documents and Transfers Act (DDTA) does not apply with respect to the ‘cession of any rights over property’ but applies only when ‘any real right over immovable property is transferred. In fact, Article 32(1) of the DDTA states that duty shall be charged on every document and on every judgment, decree or order of any court or other lawful authority, whereby any immovable or any real right over an immovable is transferred to any person. In view of the fact that the assignment of a lease agreement is not considered to be a transfer of a real right over an immovable property, then such an assignment would fall outside the scope of the DDTA and therefore the assignee would not be subject to the payment of duty on documents on such an assignment.
The assignment of the lease would qualify for a vat exemption and thus the transaction would not be subject to any VAT implications.