Malta – Introduction of Anti-Tax Avoidance measures as from 1 January 2019
On the 22 October 2018, the Maltese Minister of Finance confirmed that Malta will be implementing a number of anti-tax avoidance measures in accordance with the EU Anti-Tax Avoidance Directive (ATAD 1). The following measures will be introduced as from 1 January 2019:
Interest Limitation Rule
The Interest Limitation Rule is found in Article 4 of the Directive – the aim of this rule is to discourage companies from creating artificial debt arrangements designed to minimise taxes.
As the name of the rule implies, there will be an interest deduction limitation based on Earnings before interest, tax, depreciation and amortisation (EBITDA). As from 1 January 2019, exceeding borrowing costs shall be deductible only up to 30% of the taxpayer’s EBITDA. “Exceeding borrowing costs” are defined as the amount by which the borrowing costs exceed interest revenues and other equivalent taxable revenues from financial assets that the taxpayer receives. Any borrowing costs which cannot be deducted may be carried forward to subsequent tax years.
There will be the possibility of calculating and applying this limitation at group level.
These new restrictions will not apply in cases where exceeding borrowing costs do not exceed €3m.
Malta will exclude from the scope of this paragraph financing undertakings and exceeding borrowing costs incurred on:
- loans used to finance long-term public infrastructure EU projects; and
- loans which were concluded before 17 June 2016.
A tax will be charged on the difference between the market value of the transferred assets and their value for tax purposes in the following situations:
- Transfers of assets from Head Office to a Permanent Establishment (PE) in another Member State or Third Country;
- Transfers of assets from a PE in a Member State to a Head Office or PE in another Member State or Third Country;
- Transfers of Tax Residence to another Member State or to a Third Country;
- Transfers of a PE out of a Member State.
In situations where the transfer is between Member States there will be the possibility of deferring the tax payment.
General Anti-Abuse Rule (GAAR)
Malta’s Income Tax Act (ITA) already contains a general anti-abuse rule as per Article 51 of the ITA. The new regulations which will come into force as from the beginning of 2019, will add to this rule by applying the definition of tax avoidance schemes as per the EU Directive. The regulations will be targeting non-genuine arrangements put in place for the essential purposes of obtaining some form of tax advantage, whether in the form of a tax reduction or deferral. ‘Non-genuine arrangements’ would be arrangements which are not put into place for valid commercial reasons reflecting the economic reality.
Controlled Foreign Company Legislation (CFC)
Malta will also be introducing CFC Legislation. The CFC Rules propose that the non-distributed income of an entity will be included in the tax base of a taxpayer where certain conditions are met. The main conditions are the following:
- The parent company, that is resident in Malta, together with associated enterprises, holds a direct or indirect participation of more than 50% of a foreign entity;
- The tax paid by the foreign entity is less than half the tax that would have been paid had the income been subject to tax in Malta.
The CFC Rules will not apply in the following cases:
- Entities or Permanent Establishments with accounting profits of no more than €750,000 and non-trading income of no more than €75,000; or
- With accounting profits which amount to no more than 10% of its operating costs.
Implementation of ATAD 2
Malta is also preparing regulations for the transposition of ATAD 2 and will meet the implementation deadlines as set out in the EU Directive, being 1 January 2020 and 1 January 2022. ATAD 2 has replaced the original anti-hybrid provisions which were included in the original proposal. These have now been extended to include mismatches involving third countries and have expanded the definition of ‘hybrid mismatches’ to include hybrid permanent establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.
We strongly suggest that you get in touch with our Tax Team or directly with Luana Scicluna or Nicky Gouder to see whether any of the above provisions will affect your Maltese structure.