The below tax update highlights the main measures that were entered into force by means of ACT VII of 2018, enacting the measures announced in the 2018 Budget speech.
Changes to the definition of a ‘Participating Holding’
The definition of a participating holding has been amended to now include holdings which arises where a company holds directly at least 5% (previously 10%) of the equity shares of a company whose capital is wholly or partly divided into shares, which holding confers an entitlement to at least 5% (previously 10%) of any two of the right to the following:
- Right to vote;
- Profits available for distribution; and
- Assets available for distribution on a winding up.
Prior to the changes to the definition of a participating holding, a partnership en commandite the capital of which is not divided into shares constituted under the Companies Act, not being a property partnership was also considered as a company. Following the recent amendments, this definition was also extended to a partnership or EEIG, not being a property partnership, and which has not elected to be treated as a company in terms of Article 27(6) of the Income Tax Management Act and any body of persons constituted, incorporated or registered outside Malta and of a nature similar to any partnership en collectif and en commandite where such body of persons has elected to be treated as a company in terms of Article 27(6) of the Income Tax Management Act and for as long as such election remains in force.
Changes to the remittances basis of taxation
As from basis year 2018, an individual who is a long-term resident, or who holds a permanent residence certificate or a permanent residence card will not be eligible to be subject to income tax in Malta under the remittance basis of taxation i.e. subject to tax in Malta on foreign source income remitted to Malta, with effect from the year in which long-term residence status or the right of permanent residence is granted and subsequent years. The terms "long-term resident", "permanent residence certificate" and "permanent residence card" shall have the meaning assigned to them respectively in the Status of Long-Term Residents (Third Country Nationals) Regulations and the Free Movement of European Union Nationals and their Family Members Order.
Moreover, with effect from basis year 2018, persons who are ordinarily resident but not domiciled in Malta and subject to tax in Malta on the remittance basis of taxation and whose annual income arising outside Malta and not received in Malta is at least €35,000, shall be subject to a minimum annual tax of €5,000. If the resident but not domiciled individual can proof to the Commissioner that had he been subject to tax in Malta under the worldwide basis of taxation, the total tax payable by him would have amounted to less than the minimum tax, his tax liability shall be capped accordingly at the said lower amount.
The minimum annual tax liability of €5,000 includes any Maltese income tax paid, whether by way of withholding or otherwise but excludes any tax paid on transfers of immovable property situated in Malta. The minimum annual tax liability is also applicable to married couples who opt for a joint computation and whose annual income arising outside Malta which is not received in Malta, derived by both spouses is at least €35,000.
Changes effecting the transfer of immoveable property
- Following the recent amendments through the Budget Measures Implementations Act, the term ‘Project’ for the applicability of the flat rate of tax of 5% shall not include land acquired by the owner and divided for transfer into more than one transferable portion, where the land is transferred by the owner in the same state as when acquired (i.e. no excavation or any other works whatsoever have been carried out on the property) and no permit has been issued by the Planning Authority during the period of ownership by the owner sanctioning the development of the land into more than one transferable unit.
- Upon the sale of immoveable property, for the purposes of determining the date of acquisition of property which was acquired by the transferor by a donation, the date of acquisition of such property should be the date in which the property was originally acquired by the donor. This provision does not apply for the transfer of property that was acquired by the transferor in terms of a causa mortis that happened before 25th November 1992.
- Similarly, the date of acquisition of property acquired by the transferor by virtue of the exemption in terms of Article 5A(4)(j) of the Income Tax Act upon the liquidation of a company, shall be the date when the property was acquired by the liquidated company.
- A clarification has been issued with respect to the exemption from property transfers tax on transfers of own residence whereby it has been clarified that this exemption should apply only if the property transferred does not form part of a project consisting of a dwelling house.
- The transfer of immoveable property from one company to another company forming part of the same group and where such companies are owned substantially the same is exempt from property transfers tax. Prior to the recent amendments to this exemption, in order for the exemption to apply, the property transferred must have been owned by the transferor for a period exceeding twelve years. This provision has now been removed and the exemption should apply as long as the transferor and transferee are owned substantially the same.
- It has been clarified that upon a partition of property which was acquired from a transferor which qualified for the exemption in terms of the transfer of his own residence, the legislation imposes property transfers tax upon partition in relation to a deemed transfer of a portion of that property, equivalent to his undivided share in that property, at its market value.
- Upon the transfer of immoveable property upon which a company claimed deductions for wear and tear, the company is required to prepare a balancing statement for such transfer.
Updates to the deduction in relation to intellectual property
The Income Tax Act provides for a deduction in relation to capital expenditure incurred for the acquisition of intellectual property spread equally over the useful life of the asset but in any case, over a minimum period of three years.
Following the amendments through the Budget Measures Implementation Act, the first year in which this deduction can be the year in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights is first used or employed in producing the income with effect from year of assessment 2017.
Moreover, a new deduction was introduced in relation to the exploitation of intellectual property whereby such deduction is capped at a percentage amount of qualifying income derived from qualifying intellectual property.
Changes to the applicability of the 15% flat rate of tax on rental income
It has been clarified that the flat rate of tax of 15% on rental income shall be applicable also to ground rents, whether from an urban or rural tenement.
Applicability of married and parent rates of taxation
With effect from year of assessment 2019, unmarried individuals, widows or widowers, separated or divorced persons may opt to be taxed at the married rates if they maintain a child under 18 years (or 23 years if receiving full time education or serving an apprenticeship) who is not in receipt of an annual income which exceeds Eur3,400.