By means of Legal Notice 411 of 2018, Malta has like all other EU Member States implemented the EU Anti-Tax Avoidance Directive. The regulations will be applicable as from 1st January 2019 with the exception of those relating to Exit Taxation which will be applicable as from 1st January 2020.
The following is a brief summary of Rule 7 of the regulations which deal with CFC rules.
Rule 7 of the Legal Notice provides for a definition of a CFC.
- An entity in which a Maltese resident taxpayer alone or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly, more than 50% of the capital or is entitled to receive more than 50% of the profits of that entity; and
- The actual corporate tax paid by the entity is lower than the difference between the tax that would have been charged on the entity under the Income Tax Acts and the actual foreign tax paid.
A CFC also includes a permanent establishment situated outside Malta of a Maltese resident taxpayer where the condition set out in (b) above is satisfied.
Where an entity or a permanent establishment is considered to be a CFC, the non-distributed income of the CFC which arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage are to be included in the tax base of the Maltese resident entity.
An arrangement or a series of arrangements are to be regarded as non-genuine when the entity or the permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it was not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out in Malta and are instrumental in generating the controlled company’s income.
The Regulations also provide for the manner in which the profits of the CFC are calculated to be included in the tax base of the Maltese resident entity. CFCs whose profits fall below certain minimum thresholds are excluded.