|ATAD will change domestic laws in all
members states, including Malta
Following the European Council's adoption of the Anti-Tax
Avoidance Directive (ATAD), EU member states are required to
have certain anti-tax avoidance measures implemented into their
domestic law and applying from January 1 2019 (with certain
ATAD provides for the minimum harmonisation of rules in the
areas of interest deductions, controlled foreign corporations
(CFCs) and hybrid mismatches, and the introduction of a
corporate general anti-abuse rule (GAAR). In addition, exit
taxation rules must be introduced by member states.
Due to the fact that, according to Article 3 of ATAD, the
Directive sets only a minimum level of protection, member
states may introduce or retain rules that are stricter than the
rules prescribed by ATAD, subject to compatibility with primary
EU law, such as the fundamental freedoms.
The EU's ATAD is expected to have a significant impact on
Maltese tax law since Malta, currently, does not have rules in
all the areas covered by the Directive. For those areas already
catered for in Maltese domestic law, these rules will need to
be amended only to the extent that they do not meet the minimum
level prescribed by ATAD.
Interest limitation rule
The interest limitation rule under Article 4 of ATAD limits
exceeding borrowing costs to 30% of earnings before interest,
taxes, depreciation and amortisation (EBITDA). However, a
taxpayer may be given the right to deduct exceeding borrowing
costs up to a threshold of €3 million ($3.6 million) or to
fully deduct exceeding borrowing costs if the taxpayer is a
standalone entity. The notion of 'exceeding borrowing costs' is
defined as the excess of deductible borrowing costs of a
taxpayer over taxable interest income and 'equivalents'.
Under this rule, member states also have the following four
- To carry forward or backwards exceeding
- To exclude financial undertakings from the
scope of this rule;
- To exclude loans used to fund long-term
public infrastructure within the EU; and
- To allow taxpayers to deduct in full or in
part exceeding borrowing costs subject to the satisfaction of
group gearing ratio conditions.
The current Maltese income tax rules allow a tax deduction
for interest on any borrowed money if it is paid on capital
employed in acquiring income. The expense is allowable even
though the borrowing would have been made for a capital
purpose, but it is deductible only against the income derived
in the same year from the employment of that capital.
This special rule is in addition to the deduction for
interest paid on money due in relation to the company's trading
activities, such as interest on trade debts or charged on
normal business overdraft facilities – such interest
should be deductible under the general rule of deductibility.
To date, domestic case law on interest deductibility tends to
be quite strict.
There is also a restriction in respect of interest
deductibility where the relevant advance is in connection with
the financing of Maltese immovable property and subject to
certain other conditions.
If one had to look at Malta's current position, it may
possibly be argued that the domestic law already caters for
some limitations on interest deductions and ATAD may end up
being more generous since it contemplates the deductibility of
exceeding borrowing costs.
However, in October, the concept of a notional interest
deduction was introduced. As a result, the deduction of
interest could reach a maximum of 90% of the chargeable income
of an entity. This concept would be first applicable to
financial periods/years ending in 2017.
From January 1 2019, our expectation is that the interest
deduction limitation under ATAD will only override the notional
interest deduction rules in limited cases as a result of the
number of options and derogations under Article 4 of ATAD.
Exit taxation rules
In this area, Malta is currently not compliant with the
minimum level of protection required by Article 5 of ATAD since
Malta does not levy an exit tax. As a result, it is expected
that there will be changes in domestic law and that these will
come into effect by January 1 2020.
Malta will have to charge an exit tax in all the situations
described in Article 5(1) of ATAD, that is, on a transfer of
assets or business between a head office and a permanent
establishment (PE), or between PEs, or where a taxable entity
transfers its tax residence.
It is still unclear as to whether and how an
anti-hybrid rule will be transposed into Maltese law
and Malta should have quite a broad discretion in
implementing such a rule
Amendments in domestic law are expected to be introduced to
cater for those situations where Malta would, as a result of
any one of the situations mentioned above, lose its right to
tax the assets or the taxable entity.
Even though an exit tax will be introduced, one would expect
that the same exemptions and deferrals that are currently
contemplated in the law when transfers are made from one entity
to another, would also apply in the context of an exit tax,
that is when the transfers would take place from Malta to a
different member state or to a third country.
If one had to consider for instance a transfer of assets or
business between entities in different countries that form part
of the same group of companies, it is likely that Malta would
introduce the possibility of deferral of the payment of the
exit tax, similar to the deferral of tax on capital gains that
currently applies to transfers between local group
As regards to assets entering into the Maltese taxing net,
Malta has rules in place that allow the entity to step up the
value of the assets being transferred to Malta from another
country to their current market value. There are no prescribed
rules on how the market value will be determined and such rules
apply to all transfers of assets from other countries,
irrespective of whether an exit tax would have been charged in
the other country. To ensure the avoidance of double taxation,
ATAD requires member states to take into account the value of
an asset that was subject to the exit taxation rules as the
starting value for tax purposes, that is the asset will be
deemed to be acquired at such a value for the purposes of
calculating tax amortisation and subsequent capital gains.
Thus, Malta might need to amend the current rules slightly to
link the starting value for Maltese tax purposes to the value
of the asset in the exit country.
Malta has a long-standing GAAR in its domestic tax law
(Article 51 of the Maltese Income Tax Act).
The mandatory requirements of Article 6 of ATAD is that
member states are obliged to ignore any arrangements that have
been put into place for the main purpose of obtaining a tax
advantage that defeats the objects of the applicable tax law
and are not genuine.
This requirement fits in well with the provisions of Article
51(1) and 51(2) of the Maltese Income Tax Act which state as
- "[W]here any scheme which reduces the
amount of tax payable by any person is artificial or
fictitious or is in fact not given effect to, the
Commissioner shall disregard the scheme and the person
concerned shall be assessable accordingly"; and
- "[W]here any person, as a direct or
indirect result of any scheme of which the sole or main
purpose was the obtaining of an advantage which has the
effect of avoiding, reducing or postponing liability to tax,
or of obtaining any refund or set-off of tax, has obtained or
is in a position to obtain such an advantage, the
Commissioner shall by, order in writing, determine the
liability to tax the person, or of any other person, for any
year of assessment, in such manner and in such amount as may
be necessary, in the circumstances of the case, to nullify or
modify the said scheme and the consequent advantage."
As a result, Malta appears to be already compliant with the
mandatory requirements of ATAD in the area of GAAR.
Through these rules under Articles 7 and 8 of ATAD, member
states can treat an entity or a PE as a controlled foreign
company (CFC), and thus have the right to tax such profits as
per domestic tax rules.
These rules apply where the following conditions are
- The taxpayer itself or together with their
associated enterprises hold a direct or indirect
participation of more than 50% of the voting rights, capital,
or right to profit distribution; and
- The actual corporate tax paid on the
profits of an entity or a PE is lower than the difference
between the corporate tax that would have been charged on the
entity or PE under the domestic rules of the member state of
the taxpayer and the actual corporate tax paid on its profits
by the entity or PE – for this purpose, a PE of the
CFC, the profits of which are not taxed in the member state
of the CFC are not taken into account.
Member states may apply certain carve outs, such as cases of
substantive economic activity and certain de minimis
In terms of ATAD, there can be the possibility of excluding
the CFC's income under the following two scenarios:
- Member states should not include CFC
income in the taxpayer's tax base where it can be established
that the CFC carries on substantive economic activity and
such activity is supported by staff, equipment, assets and
premises as evidenced by relevant facts and circumstances;
- Member states should not include CFC
income in the taxpayer's tax base if such income arises from
arrangements that have not been put in place for the
essential purpose of obtaining a tax advantage – in
this case, the genuine nature of an arrangement is to be
determined by considering the significant people functions
relevant for the income generating activities and the risks
undertaken by the CFC.
Indeed, it is a question of substance, which has always been
given a lot of importance in a local context. However, Maltese
domestic law would have to be amended to adopt CFC legislation
as required by ATAD.
Rules addressing hybrid mismatches have also been included
as a minimum requirement under Article 9 of ATAD, whereby it is
stated that a deduction shall be given only in the member state
where such payment has its source.
It is still unclear as to whether and how an anti-hybrid
rule will be transposed into Maltese law and Malta should have
quite a broad discretion in implementing such a rule.
It is worth noting that, from January 1 2016, Malta tweaked
its participation exemption conditions to bring them in line
with the requirements of the EU Parent-Subsidiary Directive. As
a result, if a parent company resident in Malta had to receive
a dividend from a subsidiary resident in another member state,
the participation exemption on that dividend would only apply
to the extent that the distributed profits are not deductible
by the relevant subsidiary in the other member state.
The measures described in ATAD will bring about significant
changes to Maltese domestic law. It is unlikely that all the
measures will be introduced into Maltese tax law at the same
time – Malta will have to adopt the interest
limitation rule, CFC rules and anti-hybrid rule by January 1
2019, and exit taxation by January 1 2020.
The wide GAAR in the Maltese Income Tax Act is very similar
to the GAAR required by ATAD and, therefore, very limited
amendments, if any, will be required in this regard.
Going forward, there will continue to be significant focus
on 'substance', 'significant people functions', 'genuine
arrangements' and 'valid commercial reasons' in companies
established in Malta.
On an EU level, it is likely that the debate around the
compatibility of exit taxes with the EU fundamental freedom of
movement will continue.
Furthermore, on a local level, it will be interesting to
understand how the notional interest deduction rules that were
very recently announced will be affected by the introduction of
an interest limitation rule in accordance with ATAD.
In conclusion, one will have to adopt a 'wait and see'
approach to determine the impact of ATAD on Malta based on the
transposition of the requirements of the Directive by Malta and
by the other EU member states. Dispute resolution mechanisms
between member states are likely to become more relevant after
the implementation of ATAD by all member states.
Ewropa Business Centre, Level 3 - 701
Dun Karm Street, Birkirkara, BKR 9034
Tel: +356 2549 6000
Nicky Gouder, tax partner of ARQ Group, completed
his Association of Chartered and Certified Accountants
(ACCA) course in 2010. Following that, he specialised
in taxation and completed a diploma in taxation offered
by the Malta Institute of Taxation in 2011 and read for
the advanced diploma in international taxation provided
by the Malta Institute of Management. He also graduated
in business management from the University of Malta in
He is one of the three founding partners of the
Capstone Group, which was set up in 2010, specialising
in accountancy, tax, audit and advisory.
Nicky specialises in international taxation with a
focus on domestic legislation and has significant
experience in handling a wide portfolio of local and
international clients operating in various industry
sectors. He also lectured the advanced taxation module
for the Association of Chartered Certified Accountants
course provided through the Malta Institute of
Accountants and participates in a number of tax
conferences both on a domestic and international
Ewropa Business Centre, Level 3 - 701
Dun Karm Street, Birkirkara, BKR 9034
Tel: +356 2549 6000
Luana Scicluna, tax manager at ARQ Group,
specialises in international taxation and has
considerable experience on corporate restructuring
projects and succession planning. She assists several
local and international clients with handling their tax
affairs in Malta and provides advice on the tax
implications of a wide range of transactions.
Prior to joining ARQ Group in April 2017, Luana
worked within the tax service line of one of the Big 4
firms. Luana is an accountant by profession, concluding
her Bachelor of Accountancy (Hons) at the University of
Malta in 2009, following which she furthered her
studies in taxation through a diploma in taxation
offered by the Malta Institute of Taxation and an
advanced diploma in international taxation offered by
the Chartered Institute of Taxation (UK).