Legal Notice 411 of 2018 transposes the European Union Anti-Tax Avoidance Directives into Maltese domestic law by laying down rules against tax practices that directly affect the functioning of the internal market.
In line with ATAD, the new legal notice has transposed:
- The Interest Limitation Rule (Article 4)
- Exit Taxation (Article 5)
- General Anti-Abuse Provisions (Article 6)
- Controlled Foreign Company Legislation (Article 7)
The Interest Limitation Rule
The interest limitation rules aims to discourage artificial debt arrangements designed to minimise aggressive tax planning. In general, the new Legal Notice has introduced the rule that exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to thirty per cent (30%) of the taxpayer’s earnings before EBITDA. Certain rules apply for Groups. An exemption from the general rule applies for borrowing costs which do not exceed €3,000,000.
Exit Taxation
Exit taxation is aimed to prevent tax avoidance when assets are relocated. Under the new rules, capital gains may apply when:
- A taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or in a third country;
- A taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or in a third country;
- A taxpayer transfers its tax residence from Malta to another EU Member State or to a third country;
- A taxpayer transfers the business carried on by its permanent establishment from Malta to another EU Member State or to a third country;
General anti-abuse rule
The Legal Notice contemplates a general anti-abuse provision whereby for the purposes of calculating the tax liability in Malta, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.
We note that a similar provision has already been in place in the Income Tax Act before the introduction of this general anti-abuse provision.
Controlled Foreign Company Legislation
This Legal Notice introduces CFC legislation to Malta. CFC legislation targets tax structures which have been put in place for the deferral of taxation.
Whilst the newly introduced rules are not entirely clear, in general the CFC rules apply in circumstances where:
- The taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than fifty per cent (50%) of the voting rights, or owns directly or indirectly more than fifty per cent (50%) of capital or is entitled to receive more than fifty per cent (50%) of the profits of that entity; and
- The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment under the Income Tax Acts and the actual corporate tax paid on its profits by the entity or permanent establishment;
The un-distributed income of an entity which falls within the scope of a CFC should now be captured within in the tax base of the Maltese taxpayer.
Entities which fall within the scope of the CFC legislation but which have accounting profits of no more than €750,000 and non-trading income of no more than €75,000 are exempted from these rules;
Another exemption applies for CFCs of which the accounting profits amount to no more than ten per cent (10%) of its operating costs for the tax period;
FF International actively provides tax advice to corporate entities. These rules may affect your tax liabilities in Malta.
For further details on this update, kindly contact:
Franco Falzon C.P.A LL.M
(Managing Partner)
E: franco@ffinternational.com.mt
Peter Borg C.P.A
(Partner)
E: peter@ffinternational.com.mt
T: +356 2010 7771
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