EU ATAD implemented into Maltese domestic law
Deloitte Malta Tax Alert
14 December 2018
Malta has implemented the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (‘ATAD’) by means of Legal Notice 411 of 2018, as published in the Government Gazette of Malta No. 20,102 of 11 December 2018 (‘ATAD Implementation Regulations’). The new regulations shall come into force on 1 January 2019, with the exception of the regulations relating to exit taxation, which shall come into force on 1 January 2020.
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The ATAD Implementation Regulations shall apply to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies. The said regulations shall also apply to entities that are not resident in Malta but that have a permanent establishment in Malta provided that they are subject to tax in Malta as companies.
The ATAD Implementation Regulations have introduced the following four anti-avoidance measures:
- an interest deductibility limitation rule;
- an exit taxation rule;
- a general anti-abuse rule (‘GAAR’); and
- a controlled foreign company (‘CFC’) rule.
Interest deductibility limitation rule
The regulations limit the deductibility of taxpayers’ exceeding borrowing costs (i.e. the amount by which the deductible borrowing costs of a taxpayer in terms of the Income Tax Act, Chapter 123 of the Laws of Malta (‘ITA’), were it not for the provisions of the regulations, exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives) to only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortization (‘EBITDA’). As a result, any exceeding borrowing costs that exceed the 30% EBITDA threshold would be considered to be non-deductible in the tax period in which they are incurred, with a possibility to carry forward the excess, without time limitation, and with a possibility to carry forward, for a maximum of 5 years, unused interest capacity.
The regulations provide for several exclusions from, and derogations to, the general rule, which Malta has opted for, in particular:
- de minimis rule: full deductibility of exceeding borrowing costs up to EUR 3,000,000;
- a standalone entity exemption: full deductibility of exceeding borrowing costs if the taxpayer is a standalone entity (i.e. a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment);
- exclusion from the scope of costs incurred on loans concluded before 17 June 2016 or used to fund certain long-term public infrastructure projects;
- exclusion of financial undertakings; and
- full deductibility of exceeding borrowing costs if the taxpayer can demonstrate that the ratio of its equity over its total assets is equal or higher than the equivalent ratio of the group.
In terms of the ATAD Implementation Regulations, a taxpayer shall be subject to exit tax on an unrealised gain arising upon:
- a transfer of assets by a taxpayer from its head office in Malta to its permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- a transfer of assets by a taxpayer from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
- a transfer of tax residence of a taxpayer from Malta to another EU Member State or to a third country, except for those assets which remain effectively connected with a permanent establishment in Malta;
- a transfer of the business carried on by a permanent establishment of a taxpayer from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.
Depending on the destination of the assets which may be subject to exit taxation on the basis of this regulation and the recipient of those assets, taxpayers may have the right to defer the payment of the amount of tax by paying it in instalments over 5 years, although this would be subject to the payment of interest and, potentially, the provision of a guarantee.
The ATAD Implementation Regulations also stipulate a GAAR, under which tax authorities shall ‘ignore 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’. For these purposes, an arrangement or series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
Where an arrangement, or a series thereof, is ignored, the tax liability shall be calculated in accordance with the provisions of the ITA.
In terms of the ATAD Implementation Regulations, the CFC rule shall find application where the following conditions are met:
- control test (in case of an entity): the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of capital or is entitled to receive more than 50% of the profits of that entity; and
- low-taxation test: the actual corporate tax paid by the entity/permanent establishment is less than 50% of the tax that would have been ‘charged’ on the entity or permanent establishment in terms of the ITA.
Should an entity or permanent establishment be treated as a CFC, the non-distributed income of the said entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage shall be included in the tax base of the taxpayer. The income to be included in the tax base of the taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company.
The CFC rule shall not find application in relation to an entity or permanent establishment:
- with accounting profits of no more than EUR 750,000 and non-trading income of no more than EUR 75,000; or
- of which the accounting profits amount to no more that 10% of its operating costs in the tax period.