By means of LN 228 of 2017, entitled ‘Voluntary Occupational Pension Scheme Rules’, the Malta Government has launched a number of tax incentives for contributions paid to qualifying schemes established in the context of an employment relationship for the purpose of providing retirement benefits to qualifying employees.
These rules apply in respect of qualifying contributions made to a qualifying scheme by or on behalf of any individual who:
- Derives employment income and who is duly registered for Maltese income tax purposes; and
- Is employed by a qualifying employer.
These rules do not apply to persons who benefit from a reduced rate of tax in terms of the Highly Qualified Persons Rules.
The incentives available under the legal notice are the following:
- A deduction against the employer’s taxable income amounting to the actual contributions paid by the employer during the year or €2,000, whichever is the lowest amount, per employee, per annum;
- A tax credit against the employee’s tax charge amounting to 25% of the actual contributions paid by the employee during the year or €500, whichever is the lowest amount, per annum; and
- A tax credit against the employer’s tax charge amounting to 25% of the actual contributions paid by the employer during the year or €500, whichever is the lowest amount, per annum, per employee.
Any contributions paid to a pension scheme by either the employer or the employee shall not constitute a fringe benefit in relation to the employee’s taxable income. This means that employees will no longer be taxed on any contributions made to the pension scheme.
Any capital sums paid to qualifying employees representing commutation of payments will remain exempt (up to a maximum of 30%) from income tax in terms of Article 12(1)(h) of the Income Tax Act.
Any unutilized tax credits can be carried forward indefinitely by the employer to be set off against any income tax due by the said employer in subsequent years of assessment. In the case of a qualifying employer which is a company, any income which has been relieved by the said tax credits will be allocated to its Final Tax Account. Any distributions made from this account to the company’s shareholders will not be subject to any further tax in the hands of the said shareholders.
On the other hand, any unutilized tax credits cannot be carried forward by the employee to be set off against any income tax due by the said employee in subsequent years of assessment. However, the tax credits may be set off against the tax due on the employee’s total income and is not limited to the tax due on the employment income. Where the employee is a married person and has opted for a joint computation, the tax credit may be set off against the tax due by the couple on their total income.
All contributions are to be reported by the employer on the Payee Statement of Earnings (FS3) in terms of the Final Settlement System (FSS) rules.
Payments received from the qualifying scheme shall constitute pension income for the purpose of Article 4(1)(d) of the Income Tax Act and therefore subject to tax. The rules provide for the obligation of the licensed holders (the persons who are authorized to administer retirement schemes and insurance companies authorized to carry on long term business of insurance) to withhold the appropriate tax in terms of the above-mentioned FSS rules.
These rules have been applicable as from 1st January 2017, which therefore have established that once an employer or an employee decides to contribute in a ‘qualifying scheme’, the abovementioned tax credits and deductions become available.
A ‘qualifying scheme’ is defined in the rules as either a retirement scheme licensed under the Retirement Pensions Act or a long-term contract of insurance issued by a license holder which qualifies in terms of the rules themselves.
The following conditions apply to a qualifying scheme:
- It provides for the commencement of payment of benefits to a qualifying individual at an age not earlier than 61 or not later than the date when the individual attains the age of 70, except in those cases where the long-term contract of insurance provides that the payment is made by reason of the permanent disability or death of the beneficiary; and
- In the case of a long- term contract of insurance, it provides for programmed withdrawal arrangements as provided for in the pension rules in terms of the Retirement Pensions Act.
The transfer of accumulated pension benefits of a qualifying employee from an occupational or personal retirement scheme to a qualifying scheme, shall not constitute a payment that is chargeable to income tax.
The rules provide for a number of obligations including reporting obligations on the license holders.