The Government of Malta has, by means of ACT VIII of 2020 published various important provisions in Malta’s fiscal legislation, which implement the key measures announced by the Minister of Finance in his budget speech of October 2019. A summary of the most important provisions will be explained below.
Income Tax Act (ITA)
With effect from the 20th March 2020, the proviso to the definition of a company under Article 2 of the ITA has been amended, which now provides that every cell of a cell company and that part of a cell company in which non-cellular assets are held, shall be deemed to be a separate company. This follows the amendment to Article 84E of the Companies Act, which provides the Minister for Finance with powers to make regulations for the formation and regulation of cell companies carrying on engaged in shipping or aviation business.
This means that each cell and the non-cellular part of a cell company will be registered separately for income tax purposes, will have a separate income tax registration number, will be required to assess its chargeable income separately, will submit a separate income tax return and will pay tax and receive refunds of tax in its own right.
5% Final Withholding Tax on transfers of Immovable Property
A restriction has been introduced in those cases where the 5% withholding tax applies on the transfer of immovable property situated in Malta. The ITA provides that the transferor will be subject to a 5% final withholding tax, payable on the transfer value, where a property is transferred within 5 years from its acquisition, provided that the transfer is made after 1st January 2015 and the property does not form part of a project.
With effect from 20th March 2020, a new provision has been introduced to exclude from this article, the disposal of any immovable property made within five years from the date of acquisition, which is not the transferor’s sole ordinary residence and on which any works for which a development permission was required, have been carried out on the said property by the transferor or by a related person of the transferor. This means that such a transfer will not benefit from the reduced rate of 5%.
Rental Income derived from Long Private Residential Leases
The Act provides for a new proviso to Article 31D(2) of the ITA allowing for an abatement of tax paid on rent derived from long private residential leases in circumstances and by such amounts as may be prescribed. This amendment is effective as from 20th March 2020. Article 31D(2) of the ITA provides for a reduced final rate of tax of 15% on rental income derived from a tenement.
Profits derived from the Assignment of Promise of Sale Agreements
By means of a news items published on the website of the Maltese tax authorities, profits derived from the assignment of a promise of sale agreement will be subject to a final tax of 15% as from 1st January 2020. The 15% tax rate will be applicable on the first Eur100,000, while the rest will be subject to a 7% provisional tax. For further details, you may access this news item here.
The Budget Measures Implementation Act has amended the ITA, so that gains derived from the transfer of promise of sale agreements has now been excluded from the Property Transfers Tax regime as per Article 5A of the ITA. New rules will be published relating to the tax treatment of such profits, including the conditions for the validity of such assignments, the allowable deductions for the purpose of determining the income chargeable to tax derived from such an assignment as well as compliance matters.
Allowable Deduction for Borrowing Costs
Article 14(1)(a) of the ITA has been amended so that the deduction for borrowing costs will be allowed in accordance with the interest limitation rule (Regulation 6) recently added in view of the transposition of the EU Anti-Tax Avoidance Implementation regulations (ATAD I) in the ITA.
150% Deduction for Expenditure on Scientific Research
With effect from 1st January 2019, the third proviso to Article 14(1)(h) of the ITA has been removed, meaning that it is no longer possible to claim a deduction of 150% on any expenditure incurred on scientific research.
Income Tax Returns for Married Couples
A new Article 49A has been introduced with respect to the filing of separate income tax returns for married couples living together. With effect from year of assessment 2021, each spouse may make an election to file a separate income tax return, which can be availed of if:
- during the year in which the election is made, the income of each of the spouse consists of income derived from a trade, business, profession or vocation, from employment income (excluding directors fees); or from a pension received in relation to past employment ; OR
- the married couple has agreed by means of a public deed that any property they acquire during marriage will be governed by the system of separate property or by the system of community of residue with separate administration in terms of Maltese or foreign law and that system still applies to them at the time the election is made.
Where a separate tax return is filed:
- The income of each spouse will be taxed separately, and each spouse will be separately responsible to comply with the respective provisions of the ITA, with respect to the submission of income tax returns, ascertainment of chargeable income and tax payment.
- The income of a spouse shall comprise all income derived by that spouse, irrespective of any rights which the other spouse may have in respect of that income.
- Any deductible expenses will be availed of by the spouse in whose name the respective receipt is issued. Where a receipt has been issued in the name of both spouses, the expense shall be deemed to have been incurred by the spouses in equal proportions.
- Any unabsorbed losses, capital allowances or tax credits bought forward from a previous year of assessment preceding that in which the couple opted for a separate tax return, shall be accounted for in the computation of the income of the spouse in whose name the income which had given rise to those losses, capital allowances and tax credits was chargeable to tax.
- Any unabsorbed capital losses resulting from a transfer made jointly between the two spouses shall be divided between the spouses in proportion to the undivided shares transferred by them respectively. If the transfer was made by one of the spouses, any unabsorbed losses shall only be available as a deduction against any capital gains derived by that spouse.
- The income of each spouse will be taxed at the single rates of tax.
- A married couple living together may revoke this election, by means of a notice in writing to the Commissioner for Revenue, subject to certain conditions which may be imposed, including that the election will not be available again to the spouses for that year and for the four subsequent years of assessment
Income Tax on Overtime Income
A new provision has been introduced wherein with effect from 1st January 2020, a taxpayer may opt to have his/her qualifying overtime income subject to tax of 15%. Except where the individual elects otherwise, the tax shall be final and shall not be available as a credit, set off or refund. Rules relating to eligibility are still to be published.
Income Tax Management Act (ITMA)
Trustees and Central Securities Depositories
As from 1st June 2020, the Commissioner for Revenue will treat licensed trustees and central securities depositories as the beneficial owners of the shares unless they provide the said Commissioner with a certificate which includes the names and income tax registration numbers of the person or persons for the benefit of whom they are holding the shares.
This change has been brought about by the 5th AML Directive relative to the beneficial ownership register.
With effect from 20th March 2020, the provisional tax due on transfer of securities in a property company or of an interest in a property partnership will be equal to an amount which will be established in the ITA or in the ITMA, which amount will not exceed 35% of the higher of the market value and the transfer consideration.
With effect from year of assessment 2021, tax refunds due to tax payers which are determined on the basis of an income tax return which is filed late, shall become due on the later of 6 months after the furnishing of the income tax return or 6 months after the date on which the refund would have become otherwise due. This has been reduced from 12 months.
Duty on Documents and Transfers Act (DDTA)
Acquisition of Property for the Purposes of Establishing one’s Sole Ordinary Residence
An important amendment has been made, effective as from the 15th October 2019, with respect to persons acquiring immovable property in Malta (who do not require an AIP permit) to establish therein their sole ordinary residence. In this case, the first EUR 175,000 of the value or consideration of the property will be subject to a duty 3.5% (rather than the standard rate of 5%). This has been increased by Eur25,000 from Eur150,000. Any amount of value or consideration of the property over and above the amount Eur175,000 will be subject to duty of 5%.
The increase to Eur175,000, being the value or consideration which will be subject to a reduced rate of duty of 3.5% has also been extended to cases of transfers causa mortis, where the inherited property consists of a dwelling house, being the ordinary residence of the transferor and where such dwelling house is also occupied by the transferee/s as their ordinary residence. In such cases the law also provides that the first Eur35,000 of the value or consideration of the property transferred causa mortis will be exempt from duty.
Transfers of Foreign Marketable Securities held in Property Companies
With effect from 1st January 2020, no duty will be due on transfers inter vivos of foreign marketable securities (whether executed in Malta or outside Malta) held in a property company, provided that duty on such transfer would have been paid in the country where the transfer is executed or in the jurisdiction where the company is registered.
Prior to this amendment, Malta stamp duty was chargeable on transfers inter vivos, whether executed in Malta or outside Malta, of foreign marketable securities in a property company made to or by any person resident in Malta.
New Exemptions from Stamp Duty Applicable to Transfers of Interest in a Partnership
With effect from 28th June 2019, the following is applicable to interests in partnerships:
- The restructuring exemption from duty will also be applicable to transfers of interest in partnerships.
- The blanket exemption from stamp duty found in Article 47 of the DDTA will also apply to transfers of interest in partnerships. Article 47 of the Act, provides for an exemption from stamp duty on transfers of marketable securities held by or issued by certain companies, which include amongst others companies that are owned as to more than 50% by non-residents and who have the majority of their business outside Malta.
- The value shifting provisions applicable to reduction in the real value of marketable securities were extended to also cover reductions in the real value of an interest in a partnership.
The above has finally brought to an end a number of inconsistencies that existed between the treatment for stamp duty purposes of transfers of marketable securities and transfers of interests in partnerships.
New Penalty Regime
As from 15th October 2019, certain omissions to pay duty will be subject to an additional duty equivalent to 20% of the amount of duty assessed by the Commissioner and an interest at a rate which will be prescribed by the Minister for Finance.
Interest on Late Payment of Duty
As from 1st January 2020, interest on late payment of duty has been introduced. The rate of interest will be determined by the Minister for Finance.
Deadline for the Payment of Duty Post Assessment
The deadline for the payment of duty, additional duty and interest following the conclusion of an assessment has been extended to 30 days. The extension will apply as from 1st January 2020. Within 2 days from the lapse of the above-mentioned thirty-day period, the Commissioner may register a note of privilege for the amount demanded in the judicial act, either in the Public Registry or in the Land Registry.
Value Added Tax (VAT)
Payment of VAT for Online Filing of VAT Returns
Prior to this amendment, the seven-day extension applicable to online VAT return filings was subject to the payment of the corresponding VAT due. By virtue of this amendment, the online filing of VAT returns within 7 days from the standard VAT return deadlines, without making the corresponding VAT payment, shall not trigger an administrative penalty for late filing of the VAT return.