Following the presentation of the Budget by the Minister for Finance back in November of last year, the Budget Measures Implementation Act XIII has on the 30th of April 2015 been enacted by the Maltese Parliament. The following article summarizes the main changes effected to the Income Tax Act, the Income Tax Management Act and the Duty on Documents and Transfers Act.
The amendments include amongst others the introduction of new tax rates for individuals, a new definition for ‘companies’ and ‘dividends’ and the possibility for partnerships to elect to be treated as companies. Major changes have also been introduced with respect to the tax on property transfers.
Other changes include the introduction of a beneficial tax rate for water polo players, a higher deduction in respect of school transport fees and an exemption for Government stipends.
Stamp duty on insurance has been increased to 11% and the duty on life insurance has been extended to all life insurance policies.
A. THE INCOME TAX ACT
A1 – Definition of a ‘Company’ and ‘Dividend’ for Income Tax Purposes
As from year of assessment 2016, the definition of a company has been extended to include partnerships ‘en nom collectif’and partnerships ‘en commandite’ whose capital is not divided into shares, which would have elected to be treated as a company.
This means that the following would be applicable to those partnerships which elect to be treated as companies:
- Such partnerships will no longer be considered transparent and will therefore be subject to tax on their income at the rate of 35%;
- The Refundable Tax Credit System, whereby refunds of tax will be granted to the partners of such partnerships;
- The possibility for such partnerships to surrender trading losses to other companies in the same group of companies (as defined);
- 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;
- The application of the Flat Rate Foreign Tax Credit (FRFTC), which is another form of relief from double taxation which is only applicable to companies;
- Participation Exemption, whereby dividends and capital gains received by such partnerships will be exempt from Malta tax provided certain criteria is satisfied;
- The special residence rule applicable to companies will also be applicable to partnerships which elect to be treated as companies.
In view of the new definition of companies, the definition of a ‘dividend’ has also been changed to include amounts distributed to partners and amounts credited to them as partners.
A2 – New tax treatment for partners in civil unions
The definitions of ‘married couple’, ‘married individual’, ‘spouse’ and ‘married’ have been amended to include individuals in a civil union. This means that individuals in a civil union will as from now on be treated in the same manner as married persons.
A3 – Clarification to the remittance rules applicable to individuals who are either ordinary resident or domiciled in Malta
Individuals who are either ordinary resident or domiciled in Malta are taxed in Malta on a remittance basis of taxation, meaning that they are taxed on foreign income only if this is remitted/received in Malta. Article 4 of the ITA, 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.
A4 – Property Transfers Tax (Article 5A of the Income Tax Act)
A major overhaul has been carried out to Article 5A of the Income Tax Act, whereby transfers of immovable property situated in Malta were subject to a final tax of 12% calculated on the higher of the transfer consideration and the market value at the time of the transfer. Article 5A also allowed the possibility to the transferor to opt out of Article 5A in certain circumstances, thus being subject to a tax on capital gains rather than to a final tax calculated on the transfer value.
A4.1 – The right to opt out of Article 5A
The right to opt out of Article 5A, with respect to transfers of immovable property made on or after 1st January 2015 but not later than 12 years from the date of acquisition, has been limited to transfers which satisfy all the following conditions:
- A notice of promise of sale has been given to the Commissioner before the 17th November 2014;
- The property is transferred to the same person appearing on the promise of sale; and
- The property is transferred before 1st January 2016.
With respect to a transfer of property situated within a Special Designated Area (SDA), the possibility to opt out of Article 5A is only applicable to transfers made before 1st January 2015.
A4.2 – Transfers of property by non-residents
Non-resident transferors had and still have the possibility to opt out of Article 5A, even in cases when they would have owned the property for more than 12 years. Amendments to the Income Tax Act have now eliminated the possibility for them to receive any refunds of the provisional tax paid in cases where their tax liability calculated on the capital gain is lower than the 7% provisional tax paid.
A4.3 – The right to opt out of Article 5A extended to certain listed companies
With effect from 1st January 2015, the right to opt out of Article 5A has been extended to transfers made by certain listed companies, where the following conditions are met:
- The property being transferred forms part of a project;
- The transfer is made by a company which has issued debt securities to the public and such securities are listed on a stock exchange recognized under the Financial Markets Act;
- The transfer is the first transfer made on or after 1st April 2015 of property forming part of that project;
- The reason for the use of the funds when the debts securities were issued to the public was solely to develop and construct the project.
When such an election to opt out has been made, it shall also apply to all subsequent transfers of property forming part of the project.
A new Article 27G was introduced which provides that income derived from such transfers will be subject to tax at 35%, while provisional tax paid on such transfer will amount to 8%. A special provisional tax of 10% will be paid on transfers of immovable property which would have been acquired before 1st January 2004.
The new Article also provides for certain restrictions where excess provisional tax may be refunded or set off against any tax due on other sources of income and capital gains for the same year of assessment. The amount which is not available for set-off or refund is calculated by means of a formula. Any unutilized provisional tax can be carried forward to subsequent years to be set-off only against the tax due on profits derived from the same project. Here again, the new Article provides for another formula which restricts the amount which can be set off.
If a loss is incurred, such a loss may not be set-off against other sources of income and capital gains, but can only be carried forward to be set off against income from the same source. Profits taxed under Article 27G of the Income Tax Act should be allocated to the company’s Final Tax Account, dividends from which will not give rise to any refunds or set-off.
A4.4 – New tax rates for transfers of immovable property situated in Malta
The following new tax rates apply with respect to immovable property transferred on or after 1st January 2015:
- The final tax on property transfers will amount to 8% of the transfer value with respect to immovable property situated in Malta, other than immovable property forming part of a project and property situated within a Special Designated Area.
- The rate is reduced to 5% of the transfer value in the case of immovable property which does not form part of a project and which will be transferred within 5 years from the date of acquisition. The rate of 5% will also apply to transfers of property situated in Valletta, which was acquired by the transferor before 31/12/2018 and which are certified by MEPA as being restored and rehabilitated before 2018. In such cases, the transfer must not be made later than 31 December 2023.
- The rate of 10% of the transfer value of the transferred property has been extended to immovable property which was acquired prior to 1st January 2004 and in respect of which a notice of promise of sale agreement has not been filed prior to 17 November 2014;
- The rate of 2% of the transfer value is applicable to transfers of immovable property which was immediately prior to the transfer owned by an individual or co-owned by two individuals who had declared in the deed of acquisition of that property that the said property had been acquired for the purpose of establishing therein their sole residence and the transfer is made within 3 years from acquisition.
A4.5 – Tax exemption on transfers of a dwelling house
Gains derived from the transfers of one’s own residence is exempt from tax subject to certain conditions being satisfied. With effect from 1st January 2015, the definition of ‘own residence’ incorporates a garden or grounds up to an area which does not exceed two times the area of the house, which is transferred through the same deed with the principal residence. A garage of not more than 30 square metres, situated within 500 metres of the dwelling house is also exempt from tax when transferred through the same deed. This has now been extended to garages of up to 70 square metres.
The property used as a residence must be registered with the Commissioner in terms of new rules still to be prescribed. The exemption may be applicable pro rata as the Commissioner may determine, where the property is not fully used as a residence such as for example where parts of it are being used for a trade or business or for any other purpose.
A5 – Exemptions
A5.1 – Participation exemption
As from 1st January 2016, the tax exemption on dividends received from a participating holding (established in an EU Member State), which has benefitted from the withholding tax exemption in terms of the EU Parent Subsidiary Directive, which is 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.
A5.2 – Exemption from income tax on employment income received by married women over 40 years of age
The maximum amount of employment income that must be derived by a married woman who is over 40 years of age in order to qualify for the tax exemption has been increased from €9,150 to €9,200. Beneficiaries must have been absent from work for at least 5 years and they should be chargeable to tax jointly with their husband.
A5.3 – Exemption from tax on stipends and other maintenance grants
With effect from year of assessment 2016, any stipends or maintenance grants paid to a student by the Government or by any other Government Institution will be exempt from tax.
A5.4 – Tax exemption on capital gains derived by Disability Trusts and Disability Foundations from transfers of immovable property
As from year of assessment 2016, any income or gains derived by the trustees of a Disability Trust or a Disability Foundation from the transfer of immovable property are exempt from tax, provided that the proceeds from the said transfer are to be exclusively utilized for the maintenance of a disabled beneficiary. If the disabled person dies before all the sales proceeds are utilized for his maintenance, then any proceeds which are distributed to the parents of the disabled child or to the other beneficiaries of the disability trust or foundation, will be taxed as follows:
- If less than 80% of the sales proceeds have been applied for the maintenance of the disabled child, then the balance distributed will be taxed at the rate of 8%. Such tax must be withheld by the trustee or foundation prior to making any payments;
- No tax shall be payable if 80% or more of the sales proceeds have been applied for the maintenance of the disabled child.
A6 – Tax accounting and Rule 9 companies
A6.1 – Tax accounting
It is no longer mandatory for companies to distribute profits allocated to the Final Tax Account before distributing profits allocated to the Maltese Taxed Account. However it is still mandatory for companies to distribute profits out of the Immovable Property Account, before making any distributions from the Maltese Taxed Account.
Furthermore, dividends received by a person from a company registered outside Malta, which were originally 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.
A6.2 – FRFTC to apply to Rule 9 companies
Rule 9 companies are those companies which would have elected not to allocate any of their profits to their Maltese Taxed Account and Foreign Income Account and to allocate all their profits to their Immovable Property Account (IPA). Such companies are now able to claim the Flat Rate Foreign Tax Credit (FRFTC) on their foreign sourced income, i.e. on those profits which would have been allocated to their Foreign Income Account if they had not made such an election. Such companies must also be specifically empowered to receive such foreign income.
A7. Tax deductions for school transport
As from year of assessment 2016, parents who pay fees for school transport in respect of their children who are below the age of 16 years and who attend church or private schools are allowed a deduction against their income of a maximum of Eur150 per annum per child. Deduction for tax purposes is only allowed if the claim is supported by a document issued by Transport Malta.
A8 – Lower income tax rates applicable to resident individuals
The rates of tax applicable to individuals earning up to €60,000 per annum has been decreased from 29% to 25%. The new progressive rates of tax for individuals, effective as from 1st January 2015 are as follows:
€0- €11,900 – 0%
€11,901 – €21,200 @ 15%
€21,201 – €60,000 @ 25%
€60,001 – @ 35%
€0 – €8,500 – @ 0%
€8,501 – €14,500 @ 15%
€14,501 – €60,000 @ 25%
€60,001 – @ 35%
€0 – €9,800 – @ 0%
€9,801 – €15,800 @ 15%
€15,801 – €60,000 @ 25%
€60,001 – @ 35%
A9 – Water polo players
The reduced rate of income tax of 7.5% applicable to football players has now been extended to employment income derived by water polo players.
B. INCOME TAX MANAGEMENT ACT
B1 – Transparent Partnerships
The condition that a partnership has to carry on a trade, business, profession or vocation in order to be treated as transparent for tax purposes has been removed. Partnerships can now derive income from any source and still be treated as transparent for income tax purposes. However partnerships which would have elected to be treated as companies for income tax purposes cannot be deemed to be transparent partnerships (refer to B2).
B2 – Option for partnerships to be considered as companies
As from year of assessment 2016, it is possible for partnerships to elect to be treated as companies for the purposes of the Maltese Income Tax Act. The election shall be effected not later than 60 days after the setting up of the partnership (refer to A1).
B3 – Refunds of tax paid on profits distributed by former International Trading Companies
Shareholders of former International Trading Companies had up to the 31st December 2014 to claim refunds of tax paid on profits earned prior to 1st January 2011. The deadline has now been lifted and the shareholders of such companies may now claim a refund of 6/7ths of the tax paid by the company.
B4 – Advance Company Income Tax
With effect from year of assessment 2015, the definition of ‘Advance Company Income Tax’ (ACIT) has been amended such that it is now determined gross of any tax credits other than the Flat Rate Foreign Tax Credit (FRFTC).
C. DUTY ON DOCUMENTS AND TRANSFERS ACT
C1 – Definition of marketable security
The definition of ‘marketable security’ has been amended to include only holdings of share capital in any company and any document representing the same. Prior to this amendment, the definition also included stocks, bonds and debentures.
C2 – Duty on life insurance policies
With the introduction of Article 25A to the Duty on Documents and Transfers Act, any policy of life insurance, wherever such policy is executed or used, is subject to a duty of 10% calculated on the agreed yearly premium.
C3 – Duty on policies of insurance
The duty payable in respect of policies of insurance (except for Life Insurance) has been increased from 10% to 11%.
C4 – Exemption from stamp duty for Disability Trusts and Foundations
No stamp duty is payable by such trusts/foundations upon the acquisition of immovable property as long as the main beneficiary is a disabled person and such immovable property is held solely for the benefit of the disabled person.
Furthermore, no stamp duty is payable when the immovable property is transferred by the trust/foundation to the other beneficiaries of the trust/foundation and / or to the heirs of the disabled person, where the property was the ordinary residence of the parents of the disabled person and the disabled person resided in that property during his lifetime up to his death.
C5 – New exemptions from stamp duty on certain acquisitions of immovable property
The transfer of an undivided share of a dwelling house will be exempt from the payment of stamp duty, where the said dwelling house was immediately prior to the transfer, co-owned by two individuals and the transfer is made by one of the co-owners to the other. Another applicable condition is that the co-owners must have declared in the deed of acquisition that the property was acquired to establish their sole ordinary residence.
Furthermore, no stamp duty will be payable on a deed of partition of immovable property which is held in common, where the value of the share of the property assigned to each co-owner is equal to the value of the undivided share held by each co-owner before the partition. Where the two values are not equal, duty is only paid on the excess.
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