By means of ACT XVI of 2017, the Government of Malta has implemented the Budget measures for the financial year 2017. This article will highlight the main changes to the Income Tax Acts, namely the Income Tax Act (ITA) and the Income Tax Management Act (ITMA). A number of changes were also made to the Duty on Documents and Transfers Act (DDTA). This article will also highlight the main changes to the DDTA.
(A) The Income Tax Act
A.1 Definition of a Collective Investment Scheme (CIS)
With effect from year of assessment 2017, the definition of a CIS in Article 2(1) of the ITA has been amended to include schemes which have been notified in terms of the Investment Services Act (List of Notified AIFSs) regulations.
A.2 Exemption from tax on capital gains derived from sale of shares listed on the Malta Stock Exchange (MSE)
With effect from year of assessment 2018, the exemption from tax on capital gains derived from the sale of shares has also been extended to shares which are in consequence of a listing on the MSE. This will mean that gains on the transfer of shares which are listed on the Prospects platform operated by the MSE will also be exempt from income tax.
The exemption from income tax did not apply to a person who held shares prior to listing and where such person held shares prior to listing and acquired further shares after listing, any transfer of shares made by such person were first deemed to be a transfer of shares acquired after the listing. By means of this amendment, the exemption from income tax will also apply to shares which were acquired prior to listing. Such gains were prior to the amendment subject to tax at the rate of 15%. By virtue of this amendment, Article 56(22) of the ITA is no longer applicable with effect from year of assessment 2018.
A.3 Transfer of immovable property acquired causa mortis
The transfer of immovable property situated in Malta which was acquired by means of a causa mortis declaration before the 25th November 1992 was subject to a final tax of 7% calculated on the transfer consideration or the transfer value whichever is the higher. This final tax has now also been extended to transfers of property situated in Malta which were acquired by means of a causa mortis declaration before the 25th November 1992 and which are transferred by means of a judicial sale by auction. Such transfers were previously taxed at 12% final tax calculated on the difference between the transfer value and the value as declared in the causa mortis declaration.
A.4 Refund of tax at source on dividends
Dividends received by individuals are exempt from income tax when their total income exceeds a certain threshold (€28,700 in the case of individuals who opt for the married tax rates, €19,500 for individuals who opt for the single tax rates and €21,200 for parents). This would mean that such individuals would not be able to claim a refund of the tax at source paid by the company distributing the dividend when the corporate rate of tax (35%) exceeds that individual’s tax rate.
By means of an amendment, this exemption will no longer apply to dividends received in respect of shares listed on the MSE and distributed to individuals whose holding of shares in a company represent less than 0.5% of the share capital of the company. Thus, such shareholders will be able to claim a refund of the tax at source paid by the company on its corporate profits which represent the difference between the corporate rate of tax and their applicable tax rate. The removal of the exemption will only apply to dividends which represent profits derived in the year preceding the year of assessment 2018 or later years.
A.5 Exemption from income tax on employment income derived by married woman
Article 12(1)(u) of the ITA provides for an exemption from income tax on employment income derived by a married woman who is over 40 years of age and who returns in employment after having been absent from any gainful occupation for at least 5 years and where such income does not exceed certain thresholds stipulated in the Deduction (Income from employment) Rules (Eur9,450). The exemption will apply for 5 consecutive years starting from the basis year in which work is resumed.
By means of this amendment, references to the word ‘woman’ has been removed and instead reference is being made to ‘persons’, meaning that such an exemption will apply to all married persons. Furthermore, the person benefitting from the said exemption must not be on Parts 1 and 2 of the unemployment register as established by Jobsplus.
A.6 Deduction in respect of risk capital
A new deduction has been introduced (Article 14(1)(o)) for sums in respect of risk capital aimed at approximating neutrality between debt and equity financing. Rules still to be prescribed by the Minister.
A.7 Reduced tax rate for rental income derived from the Housing Authority Schemes
A new Article 31E was enacted which will with effect from year of assessment 2018, introduce a final income tax rate of 5% on the gross rental income received by a person who rents immovable property to another person for at least 7 years under a scheme administered by the Housing Authority and where the owner of the property is registered with the Housing Authority for the purposes of the scheme. Rules yet to be prescribed.
A.8 Deemed Distribution Order
Article 43 of the ITA deems certain profits to be distributed. Article 43(6)(c) ITA deems profits to be distributed to a resident shareholder when a company claims the participation exemption on dividends and / or capital gains derived from a participating holding. The deemed distribution will now also apply where the company has claimed a deduction in terms of Article 14(1)(o). Refer to A.6 above.
(B) The Income Tax Management Act
A.1 Certain companies not required to prepare an auditor’s report
All companies registered in Malta must have their financial statements audited by a Certified Public Accountant who has a Practicing Certificate in Auditing. By virtue of an amendment to Article 19(4)(a) ITMA, the audit report is not required for the first two accounting periods of a newly registered company whose sole shareholders are graduates of a Post-Secondary Institution who have set up the new company within 3 years of graduating. This will be effective as from year of assessment 2018. Rules and conditions still to be prescribed.
(C) The Duty on Documents and Transfers Act
C.1 Exemption from duty on transfers of an undivided share of a dwelling house owned by two co-owners
Article 32(7) of the DDTA provides for an exemption from duty on the transfer of an undivided share of a dwelling house from one co-owner to the other where the dwelling house was co-owned by the two individuals immediately before the transfer. This exemption from stamp duty has been extended to the transfer causa mortis of an undivided share of a dwelling house from the heirs of the deceased co-owner to the other co-owner. This applies only where the co-owners had declared that the property was acquired to establish or construct their sole ordinary residence.
C.2 Reduced rate of stamp duty on transfers causa mortis
Article 35(2)(i) of the DDTA provides that duty is paid at the rate of €3.50 for every €100 on the value between €35,000 and €70,000 of a dwelling house, where such a dwelling house was the ordinary residence of the deceased and where such a dwelling house is also occupied at the time of the transfer causa mortis by the transferee/s causa mortis as his / their ordinary residence.
Furthermore, Article 35(2)(ii) DDTA provided that duty shall be paid at the rate of €3.50 for every €100 on the first €70,000 of the value of a dwelling house, where such a dwelling house is the ordinary residence occupied by transferee/s causa mortis at the time of the transfer but was not occupied by the deceased.
By means of an amendment to the DDTA, the value on which the reduced rate of duty of €3.50 for every €100 is payable has been extended in both cases mentioned above from €70,000 to €150,000.
C.3 Exemption from duty for certain marketable securities
Article 47 of the DDTA provides for a number of exemptions from duty in respect of marketable securities issued by persons mentioned in sub articles (3) and (4) of the same Article. The exemption also applies to acquisitions and disposals of marketable securities made by the same persons.
A person to which this exemption applies is a company which carries on or intends to carry on a business or has / intends to have business interests to the extent of more than 90% outside Malta. The amendment clarifies that the intention to carry on a business or have business interests outside Malta must be made within a reasonable time frame as may be applicable.
The exemption from duty also applied to a company where more than half of its ordinary share capital, voting rights and rights to profits are held by persons who are not resident in Malta and who are not owned or controlled directly or indirectly by persons resident in Malta. Furthermore, the company must have the majority of its business interests situated outside Malta.
By virtue of an amendment, the exemption from duty will now apply to a company where more than half of its ordinary share capital, voting rights and rights to profits are held by persons who are not resident in Malta and who are not owned or controlled directly or indirectly by persons who are ordinarily resident and domiciled in Malta and such a company has the majority of its business interests situated outside Malta.
The exemption from duty also applies to a company which is not owned and controlled, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.
The duty exemption given by means of a determination issued by the Maltese tax authorities shall only be valid for three years and may be renewed for a further period of three years. An applicant for renewal shall state whether or not there have been any material changes to the facts and circumstances contained in the previous application for exemption. Any exemptions from duty issued prior to 1st December 2016 shall only be valid until 30th November 2019, which can also be renewed for a further period of three years at the option of the applicant company.