Jurisdiction to Tax. October Chris Borg

Transcription

1 1 Jurisdiction to Tax October 2014 Chris Borg

2 Agenda 2 1. Introduction - Residence and source - Tax treaties - Types of taxes 2. ITA Art. 4 (1) 3. Residence: Individuals 4. Residence: Companies 5. Domicile 6. Received in Malta 7. Temporary Residence ITA Art. 13

3 Refresher 3 Why are the concepts of residence and domicile important in tax law? Liability to tax in Malta depends on residence and domicile Residence and domicile determines whether: A person is subject to tax in Malta On what types of income / gains that person is subject to tax in Malta

4 Refresher 4 Residence and domicile A person who is BOTH ordinarily resident and domiciled in Malta is: Subject to tax on a worldwide basis Subject to tax in Malta on his worldwide income and capital gains, whether or not they are remitted to Malta Taxable on capital gains derived in Malta and on capital gains which arise abroad (capital gains arising abroad are still taxable in Malta even if the gain is not remitted to Malta)

5 Refresher 5 Residence and domicile A person who is ordinarily resident but not domiciled in Malta is: Subject to tax on the so-called remittance basis Taxed on income and gains arising in Malta Taxed on any foreign sourced income arising outside Malta only if received in / remitted to Malta Not taxed on income which arises abroad which is not received in / remitted to Malta Not taxed on capital gains arising abroad (even if received in / remitted to Malta)

6 Refresher 6 Residence and domicile A person who is not ordinarily resident but domiciled in Malta is: Subject to tax on the so-called remittance basis Taxed on income and gains arising in Malta Taxed on any foreign sourced income arising outside Malta only if received in / remitted to Malta Not taxed on income which arises abroad which is not received in / remitted to Malta Not taxed on capital gains arising abroad (even if received in / remitted to Malta)

7 Refresher 7 Residence and domicile A person who is not resident and not domiciled in Malta is: TAXABLE in Malta on income and gains arising in Malta Not taxable in Malta on income and gains arising outside Malta

8 Residence Companies

9 Residence - Companies 9 Under ITA Art. 2, a body of persons is considered resident in Malta in the following circumstances (dual test): the control and management of whose business are exercised in Malta, provided that a company incorporated in Malta on or after 1 st July 1994 shall be resident in Malta and any other company incorporated in Malta shall be resident in Malta from 1 st January 1995 where the management and control of the business of the company is exercised outside Malta...

10 Residence - Companies 10 A company is resident in Malta: 1. Incorporated in Malta; and/or 2. Control and Management is in Malta

11 Residence - Companies 11 Management and Control Similar to UK concept of central management and control : Place where main trading and strategic decisions are taken Place where Board of Directors meets Do Directors exercise actual management? Cesena Sulphur Co Ltd v. Nicholson (1876) Other cases notably de Beers Consolidated Mines Ltd v. Howe (1905)

12 Residence - Companies 12 Management and Control This is not: Where day-to-day decisions are taken Where day-to-day decisions are executed Where decisions are rubber stamped Regina v. Allen (2001) and Regina v. Dimsey (2001)

13 Residence - Companies 13 Influence vs Control (Wood and another v. Holden) The exercise of influence over directors does not automatically mean that directors do not exercise control Directors must take informed decisions and not merely sign documents Concept of shadow ( hidden ) director Advising vs dictating

14 Residence - Companies 14 Tax treaty resolution of dual corporate residence Company may be resident in two different countries, e.g. a company is incorporated in Malta with central management and control in the UK Dual resident companies are dealt with in Article 4(3) of OECD Model: Where a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated

15 Residence - Companies 15 Place of effective management The place of effective management is defined by the Commentaries to Article 4 of the OECD Model as: the place where the key management and commercial decisions that are necessary for the conduct of the entity s business as a whole are in substance made The following was removed by the 2008 amendments: The place where the most senior person or group of persons (for example the board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined

16 Residence - Companies 16 A company incorporated in Malta with management and control outside Malta is resident in Malta in terms of the ITA No Treaty: taxable in Malta on a worldwide basis Treaty: likely to be considered as resident of the other Contracting State in terms of Art. 4(3) of the Treaty

17 17 Domicile

18 Domicile 18 Domicile is not defined in the Income Tax Act Domicile is a principle of private international law Malta follows the Anglo-Saxon concept of domicile, which has been developed in the British Courts Applicable to Malta since our tax law is based on the UK tax law and principles Every person must have a domicile at all times and no person can ever have more than one domicile at any one time

19 Domicile 19 Domicile of an Individual Domicile determines the personal law of individuals regulating such things as marriage, succession and legal capacity in general Domicile refers to the place the person is mostly connected to

20 Domicile 20 Types of Domicile: 1. Domicile of origin 2. Domicile of choice 3. Domicile of dependence

21 Domicile 21 Domicile of Origin This is not defined in our law and the concept is based on UK legislation. Domicile of origin is the strongest domicile of an individual. Domicile of origin of an individual is the place of birth of the individual or the domicile of his father. Where the two differ it is the domicile of the father that determines the domicile of origin.

22 Domicile 22 Domicile of Choice A person of age and not incapacitated at law Severing the ties with the domicile of origin with the intention of residing permanently in another country No intention to return to the domicile of origin (which goes into abeyance, but can be revived!)) Establishing domicile of choice is a fact-finding exercise, though importantly one must also consider the intention of the individual

23 Domicile 23 Domicile of Dependence (aka Domicile by operation of the Law) Wives acquire the domicile of their husbands upon marriage Children acquire the domicile of their father Children whose father is dead or who are illegitimate acquire the domicile of their mother Children with unknown parents (foundlings) are domiciled in the country in which they are found

24 Domicile 24 Domicile of a Body of Persons A company is domiciled in the country of its incorporation A company may change its domicile through the process of re-domiciliation (continuation / flighting)

25 Domicile 25 Re-domiciliation Occurs when a company incorporated under the laws of one country migrates into the legal system of another country, without the need of being liquidated It thus changes its place of incorporation, and becomes regulated by the laws of that country

26 Domicile 26 Income that arose before re-domiciliation Not Taxable in Malta: allocated to the Untaxed A/C Income arising after re-domiciliation Company becomes subject to tax on a worldwide basis

27 Resident non-dom company 27 Resident non-dom company Resident in Malta and Domiciled outside Malta No Treaty: Potentially taxable in both countries Treaty: Likely to be deemed resident of Malta in terms of the Tax Treaty, and hence subject to tax in Malta. Under Malta s domestic law, it is taxable on: Income arising in Malta Income arising abroad which is received in Malta (as per IRD practice, this includes income arising and received abroad, which is remitted to Malta during the year it is earned)

28 Resident non-dom company 28 Company incorporated outside Malta with place of effective management in Malta 1. Fixed place of business Considered an oversea company Register with ROC File accounts of oversea company with ROC 2. No Fixed Place of business Merely register with Inland Revenue (i.e. apply for I.T. number)

29 Resident non-dom company 29 Shifting Control and Management to Malta First Board Meeting to be held in Malta Notify Inland Revenue that the company intends to become tax resident in Malta Books of Account to be kept in Malta Personnel and premises in Malta (if applicable) Board Resolution to shift tax residence (i.e. Control and Management) to Malta

30 30 Receipt in Malta ( remittance basis)

31 Received in Malta 31 Key concept under the Income Tax Act No definition Tax authorities equated received in with remittance Remittance basis v. taxation of income at the point in time when it arises

32 Received in Malta 32 Remittance of Income vs Capital This problem arises when there are mixed funds e.g. if one has capital in a foreign bank account, from which interest is derived Scottish Provident Institution v. Allan [1935]: Whatever is remitted is income, as it doesn t make sense to remit capital and continue financial activity by using accumulated profits Kneen v. Martin [1903]: Keep separate accounts to prove that remissions were in fact capital

33 Received in Malta 33 Inland Revenue s practice Income is deemed received in Malta, even if it was originally received outside Malta, if it was received in the same calendar year that it was remitted to Malta Income earned outside Malta in Y1 and remitted to Malta in Y2 is treated as capital, and therefore not taxable

34 34 Temporary Residence

35 Temporary Residence 35 ITA Article 13 Tax shall not be payable in respect of any income arising outside Malta to any person who is in Malta for some temporary purpose only and not with any intent to establish his residence therein and who has not actually resided in Malta at one or more times for a period equal in the whole to six months in the year preceding the year of assessment

36 Temporary Residence 36 3 conditions: 1. Temporary purpose; and 2. No intention to establish residence in Malta; and 3. Less than 6 months actual presence in Malta in a calendar year

37 Temporary Residence 37 Temporary purpose is a casual purpose, as against one s presence in pursuance of regular habits of life

38 Temporary Residence 38 Cooper v. Cadwalader (1904) American citizen, ordinarily resident in New York Rented house and shooting rights in Scotland Spent 2 months there each year Court held that stay in Scotland was not for a temporary purpose as it was not merely for a casual purpose, but in pursuance of regular habits of life

39 Temporary Residence 39 IRC v. Zorab (1926) Native of India Spent about 5 months per year in the UK visiting friends No business interests in the UK Tax authorities argued that visits were not for a temporary purpose, but he was actually in the UK in pursuance of regular habits of life Court held against tax authorities as recurrence of visits is not conclusive evidence of a settled purpose

40 Temporary Residence 40 Intention of establishing residence Cooper v. Cadwalader (1904) Considered to have constructive residence Court held that although Cadwalader only spent two months per year in Scotland, the house was at his disposal If a person has accommodation in a country there is an intent to establish residence, unless this residence is put to the disposal of other people

41 Temporary Residence 41 Less than 6 months presence in Malta in a year OBJECTIVE test

42 42 Thank you Chris Borg