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Budget Measures Implementation Act, 2021

Deloitte Malta Tax Alert

22 April 2021

On 16 April 2021, several of the measures announced in the Malta Budget 2021 speech (the ‘Budget Speech’) were enacted through the promulgation of the Budget Measures Implementation Act, 2021 (the ‘Budget Act’) with measures coming into force, unless otherwise stated, on 1 January 2021.

Below is a summary of the key legislative changes resulting from the Budget Act in connection with the Income Tax Act, Chapter 123 of the Laws of Malta (the ‘ITA’), the Duty on Documents and Transfers Act, Chapter 364 of the Laws of Malta (the ‘DDTA’) and the Income Tax Management Act, Chapter 372 of the Laws of Malta (the ‘ITMA’):
 

Income Tax

Clarification on the application of the ‘own residence’ tax exemption

  • In terms of ITA, a transfer of property that has been owned and occupied by the transferor as his own residence for a period of at least three consecutive years immediately preceding the date of transfer and provided that the property is disposed of within twelve months of vacating the premises, shall be exempt from property transfer tax in Malta.
  • The aforementioned three consecutive year period previously included the physical occupation of the premises and any absences from Malta such as on account of foreign employment, illness, holiday or study and, pursuant to the Budget Act, it has been amended to also include any absences due to illness, or care in a hospital or home for the elderly, provided that the premises in question are not being used or employed for any other purpose during such absence.

Introduction of a limitation of the participation exemption on shareholder dividends from non-cooperative jurisdictions

  • The EU list of non-cooperative jurisdictions for tax purposes (the ‘EU List’) was first proposed by the EU Commission in 2016 as an effective tool to deal with external risks of tax abuse and unfair tax competition and was established in December 2017 by the EU Council. Since then, it has become a strong tool to promote tax good governance on an international basis. As part of the listing process, jurisdictions are assessed against three key criteria: tax transparency, fair taxation and the implementation of the OECD base erosion and profit shifting minimum standards. The EU List is updated on a biannual basis and was last revised on 22 February 2021.
  • In December 2019, the EU Council recommended that Member States introduce effective and proportionate national legislative defensive tax measures towards non-cooperative jurisdictions as of 1 January 2021. According to the Council these national sanctions should include (but are not limited to) at least one of the following measures:
    • Non-deductibility of costs related to entities in a listed jurisdiction;
    • Withholding tax on payments;
    • Controlled foreign company (‘CFC’) treatment of income; or
    • Limitation of the participation exemption on shareholder dividends.
  • The Budget Act implemented the said recommendation by introducing a new limitation to Malta’s participation exemption regime which provides that the exemption shall not apply to income derived from a participating holding in a body of persons resident for tax purposes in a jurisdiction that is included in the EU list for a minimum period of three months during the year immediately preceding the year of assessment.
  • The new limitation includes a rebuttable presumption, which allows taxpayers to prove to the satisfaction of the Commissioner for Revenue (the ‘CfR’) that the said body of persons maintains sufficient significant people functions in that jurisdiction as is commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom.
  • Where such three months are consecutive and fall in two subsequent consecutive basis years, the exemption shall not apply in respect of any such income derived in any one of the two years.
    Non-allowable deductions
  • In terms of article 26 of the ITA, certain categories of expenses shall not be allowed as a deduction for the purpose of ascertaining the total taxable income of any person.
  • This article has now been amended so as to also include any payment the making of which constitutes a criminal offence or, in the case of a payment made outside Malta, would constitute a criminal offence if made in Malta.

Taxation of royalties on qualifying literary works

  • The Budget Act also introduced a new optional tax rate of 15% on royalties derived on or after 1 January 2021 by an individual in his capacity as an author of a qualifying literary work by virtue of his title to the copyright on that work conferred by the Copyright Act, Chapter 415 of the Laws of Malta.
  • The 15% tax shall be final and no set-off or refund shall be granted to any person in respect of the said tax. Such option shall be exercised on the full amount of the royalties of a given year by means of a notice to the CfR, and the payment of the tax by not later than 30 April of the relative year of assessment or such other date as may be prescribed, on such form and in such manner as the CfR may approve.

Transfer pricing enabling provision

  • The Budget Act includes the addition of article 51A to the ITA, a new provision which empowers the Minister for Finance to make rules in relation to transfer pricing generally and in particular, by such rules, provide for the determination of the arm’s length pricing of a transaction or a series of transactions, any adjustments in relation thereto and advanced pricing arrangements.

Powers of the CfR to request information

  • In terms of the ITMA, the CfR has broad powers to access information as often as he deems necessary, including providing information to foreign tax authorities where arrangements between Malta and the respective jurisdiction exist for reciprocal exchange of information for tax purposes.
  • Following recommendations made by the Global Forum on Transparency and Exchange of Information for Tax Purposes in September 2020, the Budget Act has effectively reduced the maximum reasonable time period within which a person who is requested information is obliged to furnish such information to the CfR in terms of article 10A of the ITMA to 20 days (previously 30 days).

Amendments to the five year prescription rule in relation to further returns

  • In terms of the ITMA, when a further return filed with respect to a year of assessment produces a reduction in the tax payable by, or an increase in the tax repayable to, that person as resulting from a previous return, it shall not have any effect for the purposes of the ITMA if it is made later than five years from the expiration of that year of assessment.
  • Pursuant to the Budget Act, it has been clarified that this five year rule shall not apply when a further return is filed with the CfR for the purposes of implementing an agreement reached pursuant to a mutual agreement procedure in terms of an arrangement in terms of article 76 of the ITA, including Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.
     

Duty on Documents and Transfers

Changes pursuant to the introduction of the Cohabitation Act

  • Following the promulgation of the Cohabitation Act, Chapter 614 of the Laws of Malta, a definition to the term “cohabitant” has been added to the DDTA, defining such term as a person in a cohabitation enrolled by means of a public deed under the Cohabitation Act.
  • Furthermore, with effect from 5 June 2020:
    • no account shall be taken of the value of the usufruct of any property chargeable under the DDTA bequeathed by the person from whom the transfer causa mortis originates in favour of the surviving cohabitant in assessing the stamp duty chargeable on declarations in terms of the DDTA; and
    • no stamp duty shall be levied at the time of the transfer where any property chargeable under the DDTA property consists of a dwelling house, being the ordinary residence of the person from whom the transfer originates, and the beneficiary of such residence is the surviving cohabitant.

Definitional changes

  • With effect from 5 June 2020:
    • The definition of a “document” has been extended to include a judgment, decree or order of any court or other lawful authority whereby any immovable or any real right over an immovable is transferred; and
    • A new definition of a “spouse” has been added to clarify that such term includes a partner registered as being in a civil union.

Acquisitions by individuals of sole ordinary residence

  • With effect from 20 October 2020, a reduced rate of 3.5% is applicable to the first €200,000 (previously €175,000) of the value or consideration paid by qualifying individuals acquiring immovable property to establish their sole, ordinary residence.

Transfers by a gratuitous title

  • With effect from 20 October 2020, no account shall be taken of the first €250,000 (previously €200,000) of the value of the property transferred by a gratuitous title by a person to his descendants in the direct line who acquire immovable property for the purpose of establishing therein or constructing thereon their sole, ordinary residence for stamp duty purposes, provided that this is the first transfer by such a person.

Transfers causa mortis

  • Prior to the Budget Act, property inherited by descendants in the direct line which has been used as residence by the person from whom the transfer originates for the last three years, was exempt from stamp duty, on the condition that the deed is made within one year from the death of the deceased.
  • Pursuant to the Budget Act, the aforementioned three years limitation has been removed and shall not be required for the said exemption to be met with effect from 1 January 2021.
  • Furthermore, in the same spirit of the changes to the ‘own residence’ tax exemption in the ITA referred to above, when the person from whom the transfer causa mortis originates is hospitalised or residing in an old people’s home at the time of the transfer, the ordinary residence occupied by that person before being hospitalised or going to reside in an old people’s home shall be considered as that person’s ordinary residence for the purposes of the DDTA.

Extension of provisions regulating stamp duty on the transfer of marketable securities to partnerships

  • With effect from 28 June 2019, DDTA provisions regulating stamp duty on the transfer of marketable securities with respect to restructurings of holdings through mergers, demergers, amalgamations and re-organisations within a group of companies have been extended to partnerships in the following manner:
    • The exemption on restructurings of holdings through mergers, demergers, amalgamations and re-organisations within a group of companies shall also be applicable to:
      • the exchange of a partnership interest for shares from one company to another where the company receiving the shares and the company whose shares are being exchanged are companies forming part of the same group of companies; and
      • the transfer of a partnership interest for consideration from a company or partnership to another company or partnership, where the transferor and the transferee form part of the same group of companies, or where any or both of them are partnerships, would have been considered to form part of the same group if they had been a company or companies;
    • The definition of “company” shall include a “partnership”;
    • The definition of “property company” shall include “property partnership”;
    • The definition of “group of company” shall be applied in the case of partnerships as if the partnerships had been a company; and
    • References to a company’s ordinary share capital, voting rights and rights to profits shall include a partnership’s capital, voting rights and right to profits.
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