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Malta’s tax treaty with Switzerland amended

Deloitte Malta Tax Alert

10 May 2021

In terms of the Double Taxation Relief (Taxes on Income) (The Swiss Federation) (Amendment) Order, 2021 (Legal Notice 198 of 2021) (the ‘Protocol’), Malta has effectively implemented the revisions agreed to with Switzerland on 16 July 2020 to the Convention between Malta and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income signed on 25 February 2011 (the ‘Malta-Switzerland Treaty’).

Below is a summary of the key changes introduced by the Protocol:

Preamble

The Preamble was expanded in order to expressly state the intention of the Contracting States to further develop their economic relationship and enhance their cooperation in tax matters and to eliminate double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the Malta-Switzerland Treaty for the indirect benefit of residents of third States).

Article 7 – Business Profits

The article allocating taxing rights on business profits was amended to include a time limitation on the ability of Contracting States to adjust business profits. In this respect, a Contracting State shall not adjust the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting States after five years from the end of the taxable year in which the profits would have been attributable to such permanent establishment. This new provision shall not apply in the case of fraud, gross negligence or wilful default.

Article 9 – Associated Enterprises

Furthermore, the Protocol also removed the requirement for a Contracting State to agree that a primary adjustment made by the other Contracting State by virtue of article 9(1) of the Malta-Switzerland Treaty is justified both in principle and as regards the amount in order to make a secondary adjustment to the amount of tax charged on such profits.

In the same spirit of the change made to article 7 of the Malta-Switzerland Treaty, the Protocol clarified that for the purposes of article 9 of the treaty, a Contracting State shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but by reason of the special conditions of associated enterprises have not so accrued, after five years from the end of the taxable year in which the profits would have accrued to the enterprise. This new provision shall similarly not apply in the case of fraud, gross negligence or wilful default.

Article 23 – Entitlement of benefits

In addition, the Protocol introduced a principal purpose test applicable to all benefits under the Malta-Switzerland Treaty. Article 23 now states that, notwithstanding the other provisions of the Malta-Switzerland Treaty, a benefit under such treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purposes of the relevant provisions of the treaty.

Article 25 – Mutual agreement procedure

On a final note, the Protocol amended the mutual agreement procedure hereinafter ‘MAP’) mechanism in the Malta-Switzerland Treaty to allow a person accessing treaty benefits to present an MAP case to the competent authority of either Contracting State where such person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of the said treaty, irrespective of the remedies provided by the domestic law of those States.

Before the coming into force of the Protocol, the Malta-Switzerland Treaty provided that a MAP case may only be presented to the competent authority of the Contracting State of which he is a resident or, if the nationality non-discrimination provision in article 24(1) of the said treaty is applicable, to that of the Contracting State of which he is a national.

Entry into effect

The changes included in the Protocol shall enter into force on such date as may be announced by notice in the Government Gazette. The Protocol shall have effect:

(a) in the case in respect of taxes withheld at source, for amounts paid or credited on or after the first day of January of the year next following the date on which the Protocol enters into force;
(b) in respect of other taxes, for taxation years beginning on or after the first day of January of the year next following the date on which the Protocol enters into force.

As an exception to this general rule, the amendments concerning article 7 and article 9 shall have effect from the date of entry into force on such date as may be announced by notice in the Government Gazette, without regard to the taxable period to which the matter relates.

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