2020 Budget & Associated Tax Updates

In light of the several measures announced in the budget speech last year that have recently come into effect, we bring you a brief summary of The Budget Measures Implementation Act, 2020:

 

INCOME TAX UPDATES

Overtime

As from 1 January 2020, qualifying overtime income earned may be subject to a final tax rate of 15%, as opposed to being taxed at the individual’s applicable tax rates. Rules or other form of guidance are expected to be published in relation to this enabling provision.

Separate Computation for Married Couples

With effect from Year of Assessment 2021, married couples, where both spouses are living together, may opt to file separate tax returns, provided that certain conditions are met. Under this system, the income is taxed in the hands of the individual who is deriving the income, regardless of any legal right over such income.  This implies that spouses who opt for this system, will be responsible and liable for tax and entitled to refunds and deductions on their portion of the income. Essentially, the spouses would be regarded as two separate taxpayers in all aspects, also creating added administrative requirements.

Narrowing the criteria for the applicability of 5% tax on Property Transfers

The ITA provides that in cases where property is transferred within 5 years from acquisition, 5% final withholding tax on the transfer value of the property is imposed provided that the transfer takes place after 1st January 2015 and the property being sold does not form part of a project.

The Budget Act sets further restrictions by excluding disposals of any immovable property, which is not the transferor’s sole ordinary residence and on which any construction work requiring a development permission was carried out during the 5 year period.

Withholding tax on Assignments of Rights on a Promise of Sale Agreement

The budget Measures Implementation Act has amended the ITA, such that gains from the transfer of a promise of sale agreement are excluded from the Property Transfers Tax regime as per Article 5A of the ITA.

With effect from 1 January 2020, the first €100,000 of profit derived on the transfer of any right acquired through a promise of sale agreement shall be subject to a final tax at a reduced rate of 15%,  whilst any remaining value will be subject to the applicable tax rates.  7% provisional tax retains its applicability on any amount exceeding €100,000

Deductibility of Borrowing Costs

By means of the transposition of the EU Anti-Tax Avoidance Directive, Article 14(1)(a) of the ITA has been amended so that the deduction for borrowing costs is allowed in line with the Interest Limitation Rule. This change is effective as from 1^st January 2019 and further rules are expected to be issued with respect to any limitations of the deduction and carry forwards of such interest.

Other amendments

• The definition of a company under Article 2 of the ITA has been amended whereby parts of a cell company in which non-cellular assets are held will now be deemed to be a separate company.
• Article 14(1)(h) which relates to the 150% deduction with respect to research and development costs has been removed in light of the new rules implemented as a result of international law, such as The Patent Box Regime.
• Article 43 of the Income Tax Management Act has been amended to allow the payment of provisional tax in cases of transfers of securities in a property company, or of an interest in a property partnership as may be prescribed, provided that this does not exceed 35% of the transfer value.

 

DUTY ON DOCUMENTS AND TRANSFERS

Acquisition of Property for First-Time Buyers

As of the 15^th of October 2019, a reduced rate of 3.5% is applicable to the first €175,000 (previously €150,000) of the value or consideration paid by qualifying individuals acquiring immovable property to establish their sole, ordinary residence.

 Transfer of Partnership Interests

Transfers of shares and partnership interests are in principle subject to stamp duty, however, the Duty on Documents and Transfers Act contemplates for exemptions, which prior to the Budget Measures Implementation Act, were only applicable with regards to transfers of shares. With effect from 28th June 2019, the following is also applicable to the transfer of interest in a partnership, aligning the duty treatment of transfers of securities and transfers of partnership interest:

• Exemptions from stamp duty found in Article 47 of the DDTA.
• The value shifting provisions
• The restructuring exemption from duty

Duty on transfers of Foreign Marketable Securities in a Property Company

As of 1st January 2020, no duty shall be due on transfers inter vivos of foreign marketable securities (whether executed in Malta or outside Malta) held in a property company made to or by any person resident in Malta, 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.

Penalties and interest on duty

Prior to this Act, penalties for the underpayment of duty were equal to the duty as assessed by the Commissioner. With effect from 15th October 2019, additional duty equivalent to 20% of the amount of duty assessed by the Commissioner for Revenue, plus interest, shall be due where the Commissioner for Revenue determines that the value expressed or declared in a document is lower than the real value at the time of execution of the document.

 

VAT

Interest on Electronically submitted VAT Returns

The 7-day extension applicable to online VAT return filings is no longer conditional to the corresponding VAT payment also being made. Online filing of VAT returns within 7 days from the standard VAT return deadline, without making the corresponding VAT payment, does not trigger an administrative penalty for late filing of the VAT return.

 

OTHER UPDATES

• The vehicle scrappage scheme will continue to be available with grants up to a maximum of €1,500.
• A €300 bonus will be introduced upon the birth or adoption of a child.
• Persons residing in a home for the elderly shall receive a grant of €300. This grant increases to €350 for persons older than 80 years.
• The importation and production of certain single use plastics will be prohibited from 1st January 2021.

 

ARQ’s Tax Team can assist you with any further information or tax related queries.  Get in touch with them on [email protected]