Budget Measures Implementation Act 2019

By means of ACT VII of 2019, the Government of Malta has published an Act to implement various budget measures.

The following is a summary of the main changes to the Income Tax Act ( ITA).

Participation Exemption

Article 12 ( 1)(u) of the Income Tax Act grants an exemption to the dividends ( s.t.c) and gains derived by a company registered in Malta from a participating holding or from the transfer of such holding.

Prior to the introduction of the Budget Measures Implementation Act 2019, the law provided that in respect of participating holdings in companies and partnerships en commandite the capital of which is not divided into shares which are resident in Malta, the exemption would only apply to the gains or profits from the transfer of the said holdings (and not to dividends as well). This provision has been amended in line with the new definition of a ‘company’ under the Income Tax Act, to include also participating holdings in:

• A partnership or EEIG, not being a property partnership and which has not elected to be treated as a company;
• Other body of persons, not being a property partnership and which has not elected to be treated as a company;
• A collective investment vehicle, where the liability of the investors in such scheme is limited to the amount invested by them.

which are resident in Malta; OR

• Any body of persons that holds, directly or indirectly, shares or other interests in a company or any of a, b, c above.

This amendment also requires that in order for the transfer of the said holding to be exempt, such gain or profit would have been exempt under A. 12 ( 1) (c ) (ii) had the transfer been made by the beneficial owner of the gain or profit. Where there is more than one beneficial owner and not all of them qualify for the said exemption, the exemption shall apply to that part of the gain or profit to which the exempt beneficial owner/s is/are entitled.

The exemption under A. 12 ( 1) (c ) (ii) applies to non-resident beneficial owners who are not owned and controlled, directly or indirectly nor act on behalf of an individual/s who are ordinarily resident and domiciled in Malta and  who transfer shares in a partnership or company which is not  a property partnership/company.

Deemed Distributions 

Prior to the introduction of the Budget Measures Implementation Act 2019, an individual resident in Malta who was beneficially entitled, directly or indirectly to the profits of a company which applied the participation exemption mentioned earlier, would be subject to the deeming provisions. This means that such individual would be deemed to have received so much of that income or gains as corresponds to his, direct or indirect entitlement to receive that income or gains by way of dividend and would be subject to tax on the deemed dividends. This applied also when the direct shareholder of the Maltese company that owned the participating holding was a foreign company and the ultimate beneficial owner/s is/are ordinarily resident and domiciled in Malta. 

With the introduction of the Budget Measures Implementation Act 2019, with effect from year of assessment 2020, the above mentioned deeming provisions do no longer apply to companies which apply the participation exemption.

Minimum Tax for Ordinary Residents

The provision of Eur5,000 minimum tax applicable to individuals who are ordinarily resident but not domiciled in Malta has been slightly amended to clarify that even if the Eur35,000 income arising outside Malta is partly received in Malta (or none of it is received in Malta), the minimum tax would still apply.

Deduction for School Fees

The maximum tax deduction for school fees have increased as follows: 

1. In respect of each child attending Secondary School- Eur2,600
2. In respect of each child attending Primary School- Eur1,900
3. In respect of each child attending Kindergarten – Eur1,600 

The tax deduction is allowed in respect of children attending a registered private kindergarten or a school named by the Minister of Finance.

Transfer of Immovable Property- 12% tax on the gain

The Income Tax Act, in the following two scenarios, requires that the transferor of immovable property pays tax at 12% on the difference between the acquisition value and the transfer value of the property, rather than 12% on the transfer value.

A transfer of property (as long as it does not form part of a project) –

1. that was acquired by the transferor in terms of a transfer  causa  mortis that  happened  after  the 24^th November, 1992 ( provided it was not transferred by means of a judicial sale by auction); or
2. that was acquired by the transferor in terms of a donation made more than five years before the date of the transfer in question 

A provision has now been included in the ITA granting the said transferor the possibility to elect to be opt out of the above provision by means of a declaration made to the notary at the time of publication of the deed of transfer.