Malta transposes ATAD II

On 24 December 2019, Malta transposed the provisions of the Anti-Tax Avoidance Directive II by means of Legal Notice 348 of 2019 (‘ATAD II Implementation Regulations’). The ATAD II Implementation Regulations shall apply with effect from 1 January 2020. However, rules regarding reverse hybrid mismatches shall apply with effect from 1 January 2022.  

The ATAD II Implementation Regulations apply to Malta taxpayers, including permanent establishments of non-resident companies, and to all entities treated as transparent for tax purposes in Malta. The ATAD II Implementation Regulations aim to correct ‘mismatch outcomes’ that result from the implementation of hybrid mismatch arrangements. For the corrective mechanisms to find application, the ATAD II Implementation Regulations require two factors to subsist contemporaneously:

1. A ‘mismatch outcome’; and
2. A ‘hybrid mismatch’.

Furthermore, the ‘mismatch outcome’ must be a direct result of the ‘hybrid mismatch’.

Mismatch outcomes

In terms of the ATAD II Implementation Regulations, a ‘mismatch outcome’ means a ‘double deduction’ or ‘deduction without inclusion’.

A ‘double deduction’ (DD) occurs where a deduction of a payment, expense or loss is claimed in the jurisdiction in which the payment has its source, the expenses are incurred or the losses are suffered (i.e. the payer jurisdiction), and in another jurisdiction (i.e. the investor’s jurisdiction).

A ‘deduction without inclusion’ (DNI) occurs where:

1. a deduction of a payment is claimed in any jurisdiction in which that payment is made, without a corresponding inclusion for tax purposes of that payment in the payee jurisdiction; or
2. a deduction for a deemed payment between the head office and a permanent establishment, or between two or more permanent establishments, in any jurisdiction in which that deemed payment is treated as made, without a corresponding inclusion for tax purposes of that deemed payment in the payee jurisdiction.
   

Hybrid mismatches

The types of hybrid mismatch arrangements which are covered by the ATAD II Implementation Regulations, are the following:

(i) Payments made under hybrid financial instruments (i.e. payments made under financial instruments where the mismatch outcome is attributable to the differences in the characterisation of the financial instrument or the payment made under it);

(ii) Payments made by or to hybrid entities (i.e. payments made to or by a ‘hybrid entity’ where the mismatch outcome is the result of differences in the allocation of payments, or the fact that the payment is disregarded);

(iii) Hybrid permanent establishments (i.e. payments made to an entity with one or more permanent establishments where the mismatch outcome results from differences in the allocation of such payments between the head office and its permanent establishments. It also includes situations where the mismatch arises from disregarding a permanent establishment to which a payment is made, or disregarding a deemed payment between the head office and its permanent establishment or between two or more of its permanent establishments); and

(iv) Imported mismatches (i.e. situations where a payment deductible in Malta, directly or indirectly, funds a deductible expenditure in a non-EU jurisdiction and this deduction involves a hybrid mismatch).

Corrective mechanisms

The ATAD II Implementation Regulations provide for corrective mechanisms where a hybrid mismatch results in a mismatch outcome. The corrective mechanisms comprise of a primary rule and a secondary rule. The secondary rule is only triggered to the extent the primary rule is not applied.

Where a hybrid mismatch results in a DD:

(i) the primary rule requires that the deduction is denied in Malta, to the extent that Malta is the investor jurisdiction; and

(ii) the secondary rule provides that the deduction shall be denied by Malta to the extent Malta is the payer jurisdiction.

Where a hybrid mismatch results in a DNI outcome:

(i) the primary rule requires that, where Malta is the payer jurisdiction, such deduction be denied in Malta;

(ii) the secondary rule provides that Malta should include (as taxable income) the income that gives rise to the mismatch outcome, but only to the extent Malta is the payee jurisdiction and the mismatch outcome results from:

• an arrangement involving a payment under a financial instrument (subject to certain exceptions); or
• a payment made by a hybrid entity where such payment is disregarded under the laws of Malta.

Special corrective mechanisms also find application where mismatch outcomes occur as a result of ‘reverse hybrid mismatches’ and ‘tax residency mismatches’.