When was ATAD II transposed into Maltese legislation?
Malta transposed the Anti-Tax Avoidance Directive II Implementation Regulation (ATAD II) through the enactment of Legal Notice 348 of 2019 which came into effect on 1 January 2020.
Who is affected by ATAD II in Malta?
ATAD II applies to Maltese taxpayers, including permanent establishments of non-Maltese companies.
What is the aim of ATAD II?
ATAD II aims to combat aggressive tax planning, mainly by multinational enterprises, through hybrid mismatches between EU and third countries by correcting the mismatch outcomes arising from such hybrid mismatches.
In order to apply the corrective mechanisms under ATAD II, two factors are required, namely:
- Mismatch Outcome; and
- Hybrid Mismatch.
What is Mismatch Outcome?
A mismatch outcome can be of three types, being:
Double Deduction (DD) whereby the same payment gives rise to double tax deduction in two different jurisdictions;
Deduction without Inclusion (DNI) meaning that payment is tax-deductible in one jurisdiction and not included as taxable income in another jurisdiction; and
Indirect deduction or Non-Inclusion (D/NI) refers to instances when payment is deductible under the rules of the taxpayer jurisdiction and are set-off by the payee against a deduction under a hybrid mismatch arrangement.
What is Hybrid mismatch?
A hybrid mismatch involves the exploitation of different tax treatments in different jurisdictions to obtain a tax advantage.
The types of Hybrid mismatches covered under ATAD II are the following:
- Hybrid permanent establishments;
- Payments made by/to hybrid mismatches;
- Payments made under hybrid financial instruments; and
- Imported mismatches.
What are the Corrective Measures under ATAD II Implementation Regulation for the different types of mismatches?
ATAD II provides corrective measures to overcome the different outcomes of the hybrid mismatches. These corrective measures consist of a primary rule and a secondary rule. The secondary rule will only come into action when the primary rule is not applicable.
For the correction of Double Deduction Mismatch:
Primary Rule: when Malta is the country of the investor, the deduction should be denied in Malta; and
Secondary Rule: when Malta is the payer jurisdiction, the deduction must be denied in Malta for income tax purposes.
For the correction of Deduction without Inclusion Mismatch:
Primary Rule: Deduction should be denied in Malta where Malta is the jurisdiction of the payer
Secondary Rule: when Malta is the payee jurisdiction the payment should be included as taxable income to the extent that the mismatch results from an arrangement involving a payment under a financial instrument or the payment made by a hybrid entity where such payment would otherwise be disregarded under the laws of Malta.