On 11 December 2018, the regulations of the EU Anti-Tax Avoidance Directive were implemented into Maltese tax law by means of Legal Notice 411 of 2018. The new regulations came into force on 1 January 2019, with the exception of the rule relating to exit taxation, which shall come into force on 1 January 2020.
The ATAD Implementation Regulations apply to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies. They also apply to entities that are not resident in Malta but that have a permanent establishment in Malta provided that they are subject to tax in Malta as companies.
The following 4 anti-avoidance measures have been introduced into Maltese domestic law:
Interest Limitation Rule
The aim of this rule is to discourage companies from creating artificial debt arrangements designed to minimise taxes.
The rule introduces a capping on the amount of borrowing costs that a taxpayer may deduct against chargeable income. Exceeding borrowing costs shall be deductible only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA).
“Exceeding borrowing costs” are defined as the amount by which the borrowing costs exceed interest income 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 years for a maximum of 5 years.
Malta excluded from the scope of the interest limitation rule:
- exceeding borrowing costs falling below €3 million;
- entities that are not part of a consolidated group for financial accounting purposes and have no associated enterprises or Permanent Establishments;
- financial 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 in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- Transfers of assets from a PE in a Member State to a Head Office or PE in another Member State or Third Country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- Transfers of Tax Residence to another Member State or to a Third Country, except for those assets effectively connected with a PE in Malta;
- Transfers of a PE to another Member State or to a Third Country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.
In situations where the transfer is between Member States or to a third country that is party to the EEA Agreement there is the possibility of paying the exit tax in instalments over 5 years.
General Anti-Abuse Rule (GAAR)
Malta’s Income Tax Act (ITA) already contained a general anti-abuse rule as per Article 51 of the ITA. The new regulation which came into force on 1 January 2019 adds to this rule by applying the definition of tax avoidance schemes as per the EU Directive. The regulation targets 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)
As a result of the introduction of a CFC rule, income derived by subsidiaries or attributed to Permanent Establishments may in certain circumstances be taxed in the jurisdiction of the parent and/ or Head Office.
The main conditions for the CFC rule to apply 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 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 a foreign entity; and
- The actual corporate 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.
Once the CFC rule kicks in, the non-distributed income of the CFC will be included in the tax base of the Maltese parent, or Maltese Head Office, if the income arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.
The CFC rule will not apply to entities or PEs with accounting profits of:
- no more than €750,000 and non-trading income of no more than €75,000; or
- no more than 10% of its operating costs.