Annual International Bar Association Conference 2015 Vienna, Austria. Recent Tax Developments in Malta. Silvio Cilia LL.M (Leiden), LL.

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1 Page1 Annual International Bar Association Conference 2015 Vienna, Austria Recent Tax Developments in Malta Silvio Cilia LL.M (Leiden), LL.D The years 2014 and brought about a spate of changes in Maltese fiscal law. Significant legislative activity came about as a result of the 2015 Budget Speech and the consequent Budget Measures Implementation Act. These include significant amendments in the definition of company under the Income Tax Act, the taxation of immovable property, tax accounting rules, the taxation of partnerships and the participation exemption amongst others. Malta was also very active in the double taxation treaty sphere. The Budget Measures Implementation Act XIII of 2015 The Act introduced various changes to the Income Tax Act, the Income Tax Management Act and the Duty on Documents and Transfers Act. THE INCOME TAX ACT (ITA) As from year of assessment 2016, the definition of company has been extended to partnerships en nom collectif and en commandite who elect to be treated as a company. Partnerships that elect to be treated as companies would have the following applicable to them: 1. The partnership will no longer be considered as transparent but would be subject to tax on its income at a rate of 35%; 2. The Refundable Tax Credit System applicable to companies. Refunds of tax will be granted to the partners of electing partnerships; 3. The possibility for the partnership to surrender its trading loss to other companies belonging to the same group of companies; 1 This report covers the period from 1 April 2014 to 30 April 2015

2 Page2 4. The full imputation system on distribution of dividends, whereby tax paid at the level of the partnership is imputed in full towards the partners tax liability; 5. The application of the Flat Rate Foreign Tax Credit (FRFTC) this form of relief was only available to companies; 6. The participation exemption whereby dividends and capital gains received by partnerships are exempt from Malta tax provided that the qualification criteria are satisfied; 7. The special residence rule applicable to companies becomes applicable also to partnerships. The definition of Company has also been extended to include any European Economic Interest Grouping (EEIG) formed pursuant to the provisions of the Companies Act (European Economic Interest Grouping) Regulations. Due to the above changes, the definition of dividend was also amended thereby including amounts distributed to partners and the amounts credited to them as partners. Another significant change is that partnerships no longer need to carry out a trade, business, profession or vocation so as to be considered as transparent for tax purposes. Partnerships will be considered as transparent irrespective of the way in which they derive their income. It should be noted that if a partnership elects to be treated as a company, it will no longer retain its transparent status but, as aforesaid, would be taxed at the normal rate of 35%. An election to be treated as a company must be made within 60 days from its setting up. Remittance Basis of Taxation (Clarification) Article 4 of the Income Tax Act providing for the remittance basis of taxation with respect to persons who are resident but not domiciled in Malta, has been amended to clarify that the remittance basis of taxation does not apply to individuals who are married to an individual who is both resident and domiciled in Malta.

3 Page3 Partners in civil unions The terms: married individual, spouse and married in the Income Tax Act have been amended thereby making partners in civil unions susceptible to the same tax treatment as any other married couple. Transfers of immovable property With effect from 1 January 2015, various changes concerning the taxation of immovable property in Malta came into effect. The main feature of these changes is that the option to be taxed at 35% on capital gains on the transfer of property no longer applies. A final withholding tax of 8% (instead of the previous 12%) of the property s transfer value will apply on all transfers of immovable property subject to the following exceptions: a) A final withholding tax of 10% of transfer value will be applicable on transfers, made on or after 1 January 2015, of property which was acquired by the transferor prior to 1 January 2004 and in respect of which a notice of promise of sale agreement was not filed prior to 17 November b) A final withholding tax of 5% of transfer value will be applicable on transfers of property, made on or after 1 January 2015, which property is transferred not later than five years from the date of acquisition and does not form part of a project. c) A final withholding tax of 5% also applies to property situated in Valletta as long as it is acquired prior 31 December 2018 and transferred not later than 5 years from 31 December Such property must also be restored, rehabilitated and certified prior to the said date. d) A final withholding tax of 2% of the transfer value is applicable to transfers of immovable property which was owned, immediately prior to the transfer, by an individual or co-owned by two individuals who had declared in the deed of acquisition that the said property was acquired for the purpose of establishing therein their sole residence and as long as the transfer is made within 3 years from acquisition and provided also that, at the time of transfer, the transferor/s do not own any other residential property. e) A 7% rate of tax shall apply from 1 January, 2015 onwards to transfers of certain restored properties.

4 Page4 Participation exemption As from 1 January 2016, the tax exemption on dividends received from a participating holding, which would have benefitted from the withholding tax exemption in terms of the EU Directive 2011/96/EU (the Parent-Subsidiary Directive) and which are distributed by a parent company resident in Malta or by a Maltese permanent establishment of a parent company established in another EU member state, will only be applicable if the dividends are not deductible for income tax purposes at the level of the EU subsidiary. Tax Accounting Companies no longer have to distribute profits allocated to the Final Tax Account before distributing profits allocated to the Maltese Taxed Account. Nevertheless it remains mandatory for companies to distribute profits out of the Immovable Property Account, before any distributions are made from the Maltese Taxed Account. Dividends received by a person from a company registered outside Malta, which dividends would have originally been distributed from the Final Tax Account of a company registered in Malta will be deemed to have been distributed to such person directly from the Final Tax Account of the Maltese registered company. FRFTC to apply to Rule 9 companies Companies that would have elected not to allocate their profit to the Maltese Taxed Account and Foreign income Account but to allocate it exclusively to their Immovable Property account ( Rule 9 Companies ) are now able to claim the Flat Rate Foreign Tax Credit in respect of any foreign sourced income which, were not for the said election, would have fallen to be allocated to the Foreign Income Account. Amended income tax rates applicable to resident individuals With effect from 1 January 2015, the rate of tax which is applicable to the earning bracket up to 60,000 p/a has been reduced to 25% (instead of the previous 29%). The other brackets have remained unchanged. Dividend income falling within the new 25% tax band shall, however, remain taxable at the rate of 35%.

5 Page5 Disability trusts and foundations Transfers of property by the trustee of a disability trust or disability foundation to any one or more of the remaining beneficiaries of such trust or foundation or the heirs of the disabled beneficiary upon the death of the disabled beneficiary of such trust or foundation and where such heirs are only close relatives have been excluded from the scope of property transfers tax. Tax refunds on profits distributed by International Trading Companies As a result of amendments to Article 48 (4A) of the Income Tax Act, shareholders of former International Trading Companies had up to 31December 2014 to claim refunds of tax paid on profits earned prior to the 1 January However this deadline has now been removed and these shareholders may claim a refund of 6/7ths of the tax paid by the Company. Advance Company Income Tax The definition of Advance Company Income Tax has been amended such that it is now to be determined gross of any tax credits other than the Flat-Rate Foreign Tax Credit. New deductions from chargeable income Employing disabled persons attracts an allowable tax deduction which is equivalent to that employee s wage. However this is subject to a capping of 4,500 for each disabled employee. Companies which donate more than 2,000 to the Malta Community Chest Fund are eligible to benefit from a deduction from their chargeable income which is equivalent to 50% of the amount donated during the year of assessment Qualifying Employment in Innovation and Creativity The Qualifying Employment in Innovation and Creativity (Personal Tax) Rules, 2013 provide for a 15% flat rate of tax on income received by individuals employed in an eligible office. The term "eligible office" has been amended to include employment in a role directly engaged in industrial research, experimental development, product

6 Page6 development, product design, product or process innovation or senior management as may be further specified in a Guideline document issued by the Malta Enterprise Corporation and as verified by the Corporation. The definition of "qualification" in the Rules has been changed to include any qualification issued by an educational establishment attesting the successful completion of studies at post-graduate level and as recognised by the Malta Qualifications Recognition Information Centre as established by article 6 of the Mutual Recognition of Qualifications Act. The definition of "relevant experience" now means at least three years of experience in a role comparable to that of the eligible office as may be further specified in a Guideline document issued by the Corporation. VALUE ADDED TAX Notable changes in the Value Added Tax sphere include the abolition of the VAT registration exemption threshold of 7,000 has been abolished. As of 1 January 2015, all persons carrying on a commercial activity are obliged to register for VAT purposes either under Article 10 or article 11 of the VAT Act, according to their preference or eligibility, by not later than the 30 June 2015 It should also be noted that on 1 January, 2015 various changes to the place of supply rules for certain services came into effect in line with Council Directive 2006/112/EC as amended by Council Directive 2008/08. The services that have been affected by these amendments are telecommunications, broadcasting services and electronically supplied services. These changes affect transactions made between business and private consumers who reside within the EU. Both EU-based suppliers and non-eu based suppliers will have to determine the place of residence of their customers and charge and account for VAT in accordance with the rate applicable within the customer s state of residence. These changes are expected to have a significant impact on the Maltese internet gaming industry.

7 Page7 Double Taxation Agreement (DTA) developments Mauritius - Malta Mauritius and Malta signed a DTA on October 15, Malta - Mexico The DTA between Malta and Mexico entered into force on August 9, Liechtenstein - Malta The DTA between Malta and Liechtenstein has entered into force on July 1, Malta - Russia Russia completed its domestic ratification procedures in respect of the DTA signed with Malta on April 2, The DTA between Malta and Russia entered into force on May 22, Moldova - Malta The DTA between Malta and Moldova has entered in to force on 17 June 2015 Cayman Islands - Malta A tax information exchange agreement between the Cayman Islands and Malta entered into force on April 1, 2014.