On January 1 2019, the provisions of EU Council Directive 2016/1164 (July 12 2016), which laid down rules against aggressive tax planning and avoidance practices which directly affect the functioning of the internal market (Anti-Tax Avoidance Directive, or ATAD), entered into force in Malta.
The ATAD was transposed into Maltese law by means of the EU's Anti-Tax Avoidance Directives Implementation regulations (L.N. 411 of 2018), also known as the 'regulations'. The regulations, described below, are applicable 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.
Interest limitation rule
The interest limitation rule (Article 4 of the regulations) restricts the deductibility of borrowing costs that exceed borrowing costs.
Borrowing costs are broadly defined to include: interest expenses on all forms of debt, payments under profit participating loans, imputed interest, the finance costs associated with finance lease payments, and other type of costs that are economically equivalent to interest.
Exceeding borrowing costs refer to the amount a deductible borrowing cost of the taxpayer exceeds the taxable interest revenues (and other economically equivalent taxable revenues) that the taxpayer receives.
The deductibility of such costs is limited to 30% of the taxpayer's earnings before interest, depreciation and amortisation (EBITDA). Any costs exceeding this threshold shall be deemed as non-deductible in the tax period in which they have been incurred by the taxpayer.
The regulations provide a possibility to carry forward, without any time limitation, on any non-deductible exceeding borrowing costs. In addition, any unused interest capacity may be carried forward up to a maximum of 5 years.
A number of exceptions apply to the main rule, which allow the taxpayer to disregard the 30% EBITDA restriction and deduct all the exceeding borrowing costs incurred by such taxpayer:
a) A de minimis rule permits full deductibility of exceeding borrowing costs, up to an amount of EUR 3 million ($3.36 million);
b) Standalone entities, which do not form part of a consolidated group for financial accounting purposes, and which have no associated enterprises or permanent establishments (PE), enjoy full deductibility of exceeding borrowing costs; and
c) Full deductibility of exceeding borrowing costs is permitted when the taxpayer can demonstrate that the ratio of its equity over its total assets equals or exceeds the equivalent ratio of the group of which the taxpayer is a group member.
Certain exclusions from the interest limitation rule apply.
General anti abuse rule
The general anti abuse rule (GAAR) notes that in calculating the tax liability of a taxpayer in accordance with domestic tax legislation, the tax authority in Malta is to ignore an arrangement (or a series of arrangements) which has been put into place for the main purpose of obtaining a tax advantage. This would defeat the purpose of the applicable tax law.
An arrangement, or series of arrangements, shall be classified as non-genuine, with regards to Article 6 of the regulations, to the extent that such arrangements are not put into place for valid commercial reasons.
In such a case, the tax liability of the taxpayer shall be calculated in accordance with domestic tax legislation, disregarding the arrangement and the benefits that would have been applied by virtue of such an arrangement.
Controlled foreign company rules
The controlled foreign company (CFC) rules set out in Article 7 of the regulations notes that the Maltese tax authority may include in the tax base of a Maltese taxpayer the non-distributed income of a foreign entity based in another member state where the taxpayer holds a participation and:
- Such entity is classified as a CFC; and
- The income of the entity is deemed to arise from non-genuine arrangements put into place for the essential purpose of obtaining a tax advantage.
An entity or a PE where the profits are either not subject to tax, or are exempt from tax, shall be treated as a CFC when:
a) An entity in which the Maltese taxpayer, independently or together with associated enterprises, holds a direct or indirect participation which amounts to more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital, or is entitled to receive more than 50% of the profits of that entity (the control test); and
b) The entity is deemed to be a resident in a tax jurisdiction that is clearly more favourable than the jurisdiction of the Maltese taxpayer (the low taxation test). This is deemed to be the case where the actual corporate tax paid by the entity on its profits is lower than the difference between the tax that would have been charged if the entity were taxable under Maltese domestic legislation, and the actual tax currently paid on its profits in the other member state.
Entities or PEs with accounting profits that do not exceed EUR 750,000 and non-trading income which does not exceed EUR 75,000, or entities or Pes where the accounting profits amount to no more than 10% of their operating costs for a given tax period, are excluded from the scope of the CFC rule.
Where an entity or a PE is treated as a CFC, there shall be included in the tax base the non-distributed income of the entity or PE arising from non-genuine arrangements, which have been put into place to obtain a tax advantage.
In terms of Article 5 of the regulations, a taxpayer in Malta will be subject to an exit tax on an unrealised gain when:
i) A transfer of assets is made by the taxpayer from its head office in Malta to its PE in another EU member state, or in a third country as long as Malta does not have the right to tax capital gains from the transfer of such assets (due to the transfer);
ii) A transfer of assets by the taxpayer from its PE in Malta to its head office, or another PE in another EU member state, or in a third country as long as Malta no longer has the right to tax capital gains from the transfer of such assets (due to the transfer);
iii) A transfer by the taxpayer of its tax residence from Malta to another EU member state or to a third country, except for those assets which remain effectively connected with a PE in Malta; and
iv) A transfer by the taxpayer of the business carried on by a PE of the taxpayer from Malta to another EU member state, or to a third country as long as Malta no longer has the right to tax capital gains from the transfer of such assets (due to the transfer).
Although the regulations state that the exit tax shall be paid no later than the taxpayer's tax return date, depending on the destination of the assets transferred and subject to certain conditions, taxpayers may be eligible to defer the payment of the exit tax by paying it in instalments over five years. Such a deferral shall be subject to an interest payment, and the Commissioner may request the taxpayer to provide a guarantee.
Regulations relating to exit taxation enter into force from January 1 2020.
On April 1 2019, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) entered into force in Malta.
The MLI is an instrument developed by the OECD to enable jurisdictions to modify their double tax treaties in an efficient and synchronised manner, without requiring long bilateral negotiations between jurisdictions to implement such modifications.
At the time of ratification, Malta listed 73 out of a total of 77 bilateral tax conventions that are to be covered by the scope of the MLI as covered tax agreements (CTAs), and which are to be modified by the MLI.
The aim of the MLI is to establish a minimum level of protection against tax avoidance by introducing provisions which directly modify the scope and conditions under which CTAs apply.
The adoption of various MLI provisions depends on the date of entry into force of the MLI for both Malta and the other state of a given tax treaty. Provisions regarding withholding taxes (WHT) will take effect on the first day of the calendar year following the date the MLI enters into force for both parties.
MLI provisions with respect to other taxes will become effective for taxable periods beginning on or after 6 months of the date the MLI enters into force for both parties of the CTA.
The first category of MLI provisions imposes a minimum level of protection against treaty abuse, tax avoidance and tax evasion (the Minimum Standard).
The Minimum Standard provisions are not optional and are thus applicable on every CTA listed by Malta. The Minimum Standard includes a general anti-abuse rule, a principal purpose test, and provisions dealing with the mutual agreement procedure (MAP) and corresponding adjustments.
Article 6 provides for a model preamble text which sets out a GAAR aimed at preventing treaty abuse, tax avoidance and tax evasion to be included in the preamble of Maltese CTAs.
The GAAR emphases that the intention of a treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit or residents of third jurisdictions).
The principal purpose test (PPT) in Article 7 of the MLI precludes the application of treaty benefits by Malta, where it is reasonable to conclude that at least one of the principal purposes of an arrangement (or structure entered into by a taxpayer) is to acquire such treaty benefits, and where the application of such benefits would not be in accordance with the purpose and the object of the treaty provision involved.
The criteria applied by the PPT are similar to those applied by the GAAR in the ATAD regulations. Both tests assess whether a certain arrangement has been put into place for the main purpose of obtaining a tax advantage or a treaty benefit. The PPT of the MLI focuses on the question whether the granting of such benefit would be in accordance with the purpose and object of the treaty benefit involved, whereas the GAAR of the regulations takes into account the non-genuine nature of the arrangement used to gain access to a certain tax advantage.
In addition to the Minimum Standard provisions, Malta has opted to apply the provisions of Article 9(4) of the MLI, which deals with capital gains from the alienation of shares or interests in entities deriving their value principally from immovable property.
In terms of Article 9(4), gains derived by a resident of a contracting jurisdiction from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other contracting jurisdiction, if these shares or comparable interests derived more than 50% of their value (directly or indirectly) from immovable property (real property) that is situated in the other contracting jurisdiction, at any time during the 365 days preceding the alienation.
Malta submitted a list of CTAs which already include a provision similar to Article 9(4) of the MLI, and which accordingly do not require any modification. For the treaties which do not yet contain a similar provision, the introduction of Article 9(4) MLI may increase the taxing rights of the source state.
Shares which indirectly derive a majority of their value from immovable property in the source state will become subject to tax in the contracting jurisdiction where the immovable property is situated.
Furthermore, Malta has chosen to apply the MLI provisions regarding the arbitration procedure, subject to certain reservations (Article 18-26 of the MLI).
The ATAD regulations and the introduction of the MLI have general application across all industries and operations. The Maltese Income Tax Act already contemplates similar wording in relation to general anti-abuse provisions which are comparable to the GAAR Rule. This has now been supplemented further. With the introduction of ATAD, new principles have been implemented into Maltese tax law, the effects of which are yet to be seen.
The impact that the MLI will have on Malta's tax treaty network will also be determined by whether the reservations which the corresponding contracting states opt for are aligned with those of Malta. The entry into effect of the MLI will therefore certainly affect the interpretation and application of covered double tax treaties.
|Dr Donald Vella|
Tel: +356 2123 8989
He regularly advises clients from various industry sectors including financial institutions, private equity and hedge fund promoters and managers, professional trustees, as well as high-net-worth individuals.
During his time at Camilleri Preziosi, he has advised and assisted international clients on Maltese corporate law and taxation regarding a wide range of transactions. He also regularly represents clients in courts and fiscal tribunals on direct and indirect taxation matters. In Malta, Donald is particularly active in advising clients in corporate M&A and corporate restructuring transactions.
He regularly acts as an examiner at the University of Malta and is a speaker at a number of seminars and conferences.
|Dr Kirsten Cassar|
Tel: +356 2567 8117
Kirsten Cassar's main practice areas include mergers and acquisitions, corporate restructuring, domestic and international tax advisory and restructuring, and providing advisory services particularly on tax efficient structures for local as well as cross-border transactions.
Kirsten also regularly assists in advising clients on the corporate law aspects of a wide range of transactions and other areas including corporate finance, M&A and capital markets. This provides clients with a comprehensive insight on a wide range of matters.
This article was written by Donald Vella and Kirsten Cassar of Camilleri Preziosi Malta.