Malta: Budget implementation Act
Mark Galea Salomone
On April 30 2015, the Maltese Parliament passed Act No. XIII of 2015. The Act implements some of the measures that had been announced in the November 2014 Budget. The main updates to Maltese income tax legislation that have international tax implications include:
an amendment to the participation exemption regime;
additional clarifications on the definitions of 'company' and 'dividend'; and
an extension of the flat rate foreign tax credit.
The Act reflects the recent amendments to the EU's Parent-Subsidiary Directive. Malta's participation exemption regime provides that a company registered in Malta may be entitled to claim an exemption (referred to as the participation exemption) in respect of income (for example, dividends) that the company derives from a participating holding subject to the satisfaction of certain conditions. Provided that the holding qualifies as a participating holding and that the anti-abuse conditions are satisfied (if applicable), the Act now prescribes that a new additional general anti-abuse rule (GAAR) will apply as of January 1 2016. From such date, the participation exemption is to apply only to the extent that the profits that are exempted under the regime are not deductible by the relevant subsidiary in the EU member state.
Another anticipated change brought about through the Act is the widening of the term 'company'. The definition of 'company' in Maltese income tax legislation has now been extended to include within its scope all partnerships. Before the amendments, only partnerships whose capital was divided into shares were included within the definition of 'company'. Moreover, partnerships whose capital is divided into shares, constituted before January 1 2015 are deemed to have elected to be treated as companies. The definition of 'company' is therefore wider. With respect to a change in the definition of 'dividend', reference to partnerships whose capital is divided into shares has been removed, reflecting the change in definition of 'company'. The wording has been substituted and now includes any distributions made by a company, to its partners or shareholders, as the case may be, and any amount credited to them as partners or shareholders as the case may be.
The Act also extends the scope of the Flat-Rate Foreign Tax Credit (FRFTC). The FRFTC is a unilateral mechanism of double taxation relief which deems foreign sourced income to have suffered tax at a rate of 25% of the amount of income received in Malta. The amount of FRFTC is added onto the income or gains received in Malta for the purpose of calculating the tax chargeable thereon. The company is then entitled to deductions against such grossed up income and the amount of FRFTC is then granted as a credit against the Maltese tax chargeable on said income. The extension in scope now also covers foreign sourced income, which Maltese income tax legislation allows in certain circumstances to be allocated to the IPA [immovable property account] instead of the FIA [foreign income account]. The FRFTC can now be claimed in respect of such income.
The changes discussed above were largely expected after announcements in the November 2014 Budget, together with major changes to the domestic property transfers tax regime.
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