News

Malta Grants and Incentives – Investment Aid 2014 - 2020

Deloitte Malta Tax Alert

Insightful information on taxation relating to the Maltese jurisdiction, prepared by Deloitte Malta professionals.

Introduction

Malta Enterprise has published new Incentive Guidelines to re-launch the Investment Aid Tax Credits incentive which will provide the basis of investment aid from 1 July 2014 to 31 December 2020. This is a new incentive and not an extension of the previous one which expired on 30 June 2014. This tax alert provides details of the new incentive, including the salient changes from the previous one.

Back to top

i) Definition of Small and Medium Sized Enterprises

As under the previous incentive, eligible enterprises are differentiated by virtue of their size.  However, under the new guidelines the size of an enterprise impacts not only the percentage rate at which investment tax credits are to be computed, but also the type of investments that are eligible for investment aid.

The term ‘Small and Medium Sized Enterprise’ (SME) is defined in Annex 1 of Commission Regulation (EU) No 651/2014 of 17 June 2014, commonly referred to as the General Block Exemption Regulation.  SME’s are those enterprises which employ less than 250 persons and which either have an annual turnover not exceeding €50 million or an annual balance sheet total (total assets) not exceeding €43 million.  Within this category, a small enterprise is defined as an enterprise which employs fewer than 50 persons and whose annual turnover or balance sheet total does not exceed €10 million.

An ‘autonomous’ enterprise is defined in the SME definition as an enterprise which is completely independent or has minority partnerships of less than 25% with other enterprises.  A ‘partner’ enterprise is one where the holding between the relevant enterprises is more than 25% but less than 50%, while ‘linked’ enterprises are those where the holding of one enterprise in the other is more than 50%.  For the purpose of determining the size of an enterprise, the relevant data of partner enterprises is aggregated to that of the eligible enterprise in the proportion reflecting the higher of the percentage of shares or voting rights held.  In the case of linked enterprises, all the data of the linked enterprise must be added to that of the eligible enterprise for the purpose of determining the latter’s size.

Back to top

ii) Applicable aid intensity (percentage rates) for investment aid calculation

Investment Tax Credits are calculated either with reference to tangible and intangible investment costs resulting from an eligible investment project (see part iii below) or with reference to the value of wage costs for jobs directly created as a result of the eligible investment project. The applicable rates shall be as follows:

 

Small Enterprise

Medium Enterprise

Large Enterprise

Hotels

Start of works

 

 

 

 

1/7/14-31/12/17

35%

25%

15%

15%

 

 

 

 

 

Start of works

 

 

 

 

1/1/18-31/12/20

30%

20%

10%

Large 10%

SMEs 15%

 

 

 

 

 

 

The term ‘start of works’ has been defined as the earlier of either the start of construction works relating to the investment, or the first legally binding commitment to order equipment or any other commitment that makes the investment irreversible. Buying land and preparatory works such as obtaining permits and conducting feasibility studies shall not be considered as if the work on the project has started.

For large investment projects that exceed €50 million, the guidelines contain a formula that determines the maximum permissible aid. The formula is the following:


Maximum aid = R x (50 + 0.50 x B + 0 x C)

Where:

R is the applicable aid intensity for large enterprises;

B is the part of the eligible costs between €50 million and €100 million; and

C is the part of the eligible costs above €100 million.

Back to top

iii) Eligible investment projects

SMEs shall be awarded Investment Tax Credits on the basis of ‘initial investment’ projects related to:

a)      The setting up of a new establishment;

b)      The extension of the capacity of an existing establishment;

c)      The diversification of the output of an establishment into products not previously produced in the establishment;

d)      A fundamental change in the overall production process of an existing establishment; or

e)      The acquisition of assets belonging to an establishment that has closed or would have closed had it not been purchased, and which is acquired by an unrelated investor and does not comprise the acquisition of the shares of the said establishment.

The principal difference under this incentive is that large enterprises shall be awarded Investment Tax Credits in respect to ‘initial investments in favour of a new economic activity or activities’ in so far as this is not the same or similar to the activity or activities previously performed in the establishment. An activity is considered to be the same or a similar activity if it falls within the same class (four-digit numerical code) of the NACE Rev. 2 statistical classification of economic activities, which may be accessed via this link.

Another important change introduced under the current guidelines relates to aid granted for a fundamental change in the production process and aid granted for a diversification change in the production process. In the case of the former, the eligible costs must exceed the depreciation of the assets linked to the activity to be modernized in the course of the preceding three fiscal years. In the case of the latter, the eligible costs must exceed by at least 200% the book value of the assets that are reused, as registered in the fiscal year preceding the start of works.

Back to top

iv) Eligible activities

In order for an undertaking to be eligible for Investment Aid Tax Credits it shall carry on an economic activity which consists solely of one or more of the following, as explained in detail in the guidelines:

a)      Manufacturing

b)      Information technology

c)      Call centre activities

d)      Research and development, and innovation

e)      Eco-innovation, waste treatment and environmental solutions

f)       Biotechnology

g)      Pharmaceuticals

h)      Facilities for filming and audiovisual productions

i)       Provision of tertiary education

j)       Provision of private health care services

k)      Freeport and logistics operations

l)       Hotels, resort hotels, suite/apartment hotels or guest houses

m)     Knowledge intensive business services

n)      Cultural restoration

o)      Large scale cultural, creative and trade facilities

p)      Industrial packaging

The following salient aspects/clarifications in relation to the eligible activities outlined above are to be noted:

a)      Eco-innovation as defined in the guidelines no longer includes a reference to the energy sector.

b)      The provision of tertiary education is no longer restricted to tuition leading to qualifications classified by the Malta Qualifications Council but also includes tuition focusing on crafts, creativity, maritime, aviation, and/or innovative technical skills.

c)      The provision of private health care services specifically excludes the provision of residential care.

d)      The provision of hotel services has been widened to capture income (the tax on which may be offset by tax credits) derived from sources other than the actual hotel operations, but specifically excludes rental income.

e)      Cultural restoration activities related to works of art and antiques and investments in facilities that can house cultural, creative and trade events accommodating at least 1000 persons are new eligible activities.

f)       Packaging on an industrial scale which requires some form of automation and where the activities are not a mere preparation for direct sales is also a newly introduced eligible activity. This is to be distinguished from non-value added processes (see below) which are not eligible for investment aid.

Back to top

v) Disqualifying activities

As under the previous incentive guidelines, the current guidelines refer to actions and activities, the carrying out of which, would disqualify an undertaking from assistance under this incentive:

a)      Sales by retail, subject to certain qualifications as provided in the guidelines.

b)      Non-value added processes, where the main activity employs less than 100 persons (Full Time Equivalents) and includes dividing, sorting, mixing without changing the character of the goods and similar activities; or where the main activity involves assembly considered of a spurious nature.

c)      The preparation or production of food in the course of catering, unless such processes are carried out as part of eligible hotel operations.

Back to top

vi) Qualifying expenditure

Investment tax credits are computed by applying the applicable aid intensities referred to in section (ii) to qualifying expenditure undertaken by enterprises engaged in one or more qualifying activities listed in section (iv) in relation to eligible investment projects referred to in section (iii).

The value of qualifying expenditure is calculated as either the value of:

a)      Qualifying tangible and intangible assets acquired in relation to an investment project; or

b)      The value of wage costs for jobs directly created by the initial investment project.

 

Tangible assets

The term ‘Qualifying tangible assets’ refers to land, industrial buildings or structures, and plant and machinery.

Land, industrial buildings or structures are only eligible in relation to licensed industrial property and exclude the cost related to the construction of showrooms and the provision of office space. However, investment costs related to the acquisition and refurbishment of land, buildings or structures required for the provision of accommodation facilities in the hospitality sector (e.g. hotels) shall be eligible for investment aid.

The term ‘plant and machinery’ excludes motor vehicles, except for special purpose vehicles and vehicles registered under category NI. It also excludes works of art and antiques and any assets which are not directly related to the eligible activities of the undertaking. The assets acquired must be new, except when acquired by SMEs and for the acquisition of an establishment, and in any case, must be first time used in Malta. The guidelines contain additional provisions in connection with the eligibility of assets acquired under a lease agreement.

With the exception of plant and machinery which has become outdated due to rapid technological change, tangible assets must be kept by the undertaking for at least five years in the case of large enterprises or three years in the case of SMEs. The same rule applies to intangible assets.

 

Intangible assets

The term ‘intangible assets’ means assets entailed by the transfer of knowledge, through the acquisition of patents, licences, know-how or unpatented technical knowledge. SMEs may claim investment tax credits on the full expenditure on qualifying intangible assets, whereas the claim by large enterprises cannot exceed 50% of the total qualifying investment.

Qualifying intangible assets must be purchased under market conditions from third parties that are unrelated to the buyer and without the acquirer being in a position to exercise control on the seller or vice versa.

 

Job creation

In order to calculate the value of qualifying investment on the basis of job creation, the qualifying wage costs covering new employment created within three years of the completion of the investment project shall be considered. The value of the investment on which investment tax credits are to be computed shall be the equivalent of two years’ wages of the created jobs. The guidelines list the criteria to calculate the number of jobs created through the investment project, which are to be considered at group level.

As with tangible and intangible assets, each new job must be maintained in Malta for a period of three years in the case of SMEs and five years in the case of large enterprises. Individuals whose employment is terminated but who are replaced within six months shall be deemed to have been retained.

Where an enterprise chooses to claim investment tax credits by reference to created jobs, Malta Enterprise is to be notified at least three months before the submission of the tax return claiming the tax credits, giving details of the underlying investment project and of the jobs created.

Back to top

vii) The application process

First time applicants may submit an application for determination of eligibility under this incentive at any time of the year. Existing beneficiaries are required to reapply for a determination of eligibility and shall be informed by Malta Enterprise accordingly.

 

Determination of eligibility

In its determination, Malta Enterprise shall consider an enterprise’s activities and reserves the right to visit the enterprise’s premises at any time, both during the evaluation process as well as subsequent to the issue of the Incentive Entitlement Certificate. Malta Enterprise’s evaluation shall entail:

a)      The verification of the official NACE code

b)      A review of the Memorandum and Articles of Association

c)      A review of the latest financial statements where applicable

d)      A review of the actual activities carried out

e)      A review of the requirement permits where applicable (e.g. MTA licence for hotels)

f)       The SME declaration form establishing the size of the enterprise.

 

Pre-approval of significant projects

The current incentive guidelines have introduced a new process whereby an eligible beneficiary may, prior to the start of works of a particular project, wish to apply on a relevant application form for a pre-approval of investment aid to be applied to a particular project where the following costs are expected to be exceeded:

a)      €50,000 in the case of small enterprises;

b)      €100,000 in the case of medium enterprises;

c)      €250,000 in the case of large enterprises.

This process has been introduced to add an element of certainty as to the eligibility or otherwise of investment projects being undertaken by eligible undertakings.

Back to top

viii) Investment Tax Credits as reported in an enterprise’s tax return

Investment tax credits are claimed in the relevant schedules of an eligible enterprise’s income tax return. Companies’ income tax returns for accounting periods ending in 2014 (the year of assessment 2015), will contain separate schedules as follows:

a)      For Investment Tax Credits computed under the old Incentive Guidelines in respect of qualifying expenditure incurred up to 30th June 2014

b)      For Investment Tax Credits in terms of pre-approved investment projects under the old Incentive Guidelines (which projects are to commence before 31st December 2014 and which must meet the conditions set out in the relevant Letter of Intent issued by Malta Enterprise to the beneficiary)

c)      For Investment Tax Credits to be computed under the new Incentive Guidelines in respect of qualifying expenditure incurred after 1st July 2014.

Back to top

ix) Compliance requirements

Beneficiaries under this incentive are to submit to Malta Enterprise the following documents, for every year in which investment tax credits are claimed:

a)      Audited financial statements;

b)      Income tax return;

c)      A directors’ declaration confirming the eligibility of the activity undertaken by the enterprise;

d)      An auditors’ statement confirming the directors’ declaration in c) above;

e)      A directors’ declaration as to the computation of tax credits;

f)       A declaration of total assistance awarded to the enterprise;

g)      Nominal ledger extract containing details as to the capital expenditure on which tax credits are claimed;

h)      Enterprise Size Declaration;

i)        Latest licence issued by the Malta Tourism Authority (in the case of hotels)

In addition to the above, beneficiaries are to submit an annual report, containing:

a)      A breakdown of the eligible costs certified correct by a Certified Public Auditor, which report is to include the VAT number of the supplier, the invoice date, the value and the date it was settled by the beneficiary;

b)      The review of an independent Certified Public Auditor confirming that project accounting has been carried in accordance with the applicable accounting standards.

Malta Enterprise may also request the beneficiary to submit:

a)      Original VAT invoices and receipts;

b)      Proof of payment, being copies of the enchased cheques or original bank advice documents showing all payments effected in relation to the claimed costs;

c)      FS3s of the employees.

Back to top

Did you find this useful?