The provisions of Council Directive (EU) 2016/1164 of 12 July 2016 implemented rules against tax practices that directly affect the functioning of the internal market (the ATAD 1).
The rules were implemented by means of Legal Notice 411 of 2018 “European Union Anti-Tax Avoidance Directives Implementation Regulations, 2018”.
The new regulations came into force on 1st January 2019, apart from the regulations relating to Exit Taxation (which came into force on 1st January 2020).
- What is the purpose of the ATAD?
- What measures have been introduced in the new regulations?
- What are the objectives behind each measure?
- An Overview of the Measures:
What is the purpose of the ATAD?
The European Commission presented its proposal for an Anti-Tax Avoidance Directive as part of the Anti-Tax Avoidance Package on 28th January 2016.
On 20th June 2016, the Council adopted the Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affected the functioning of the internal market.
To complement the existing rule on hybrid mismatches and for a comprehensive framework of anti-abuse measures, the Commission presented another proposal on 25th October 2016.
The rule on hybrid mismatches aimed to prevent companies from exploiting national mismatches to avoid taxation.
The ATAD aims at the implementation of the Base Erosion and Profit Shifting (BEPS) recommendations made by the OECD and the G20 (in October 2015) at EU level.
It creates a minimum level of protection against Corporate Tax avoidance throughout the EU. It also ensures a fairer and more stable environment for businesses.
The ATAD contains five legally-binding anti-abuse measures. All the member states implemented them by 1st of January 2019 against common forms of aggressive Tax Planning.
What measures have been introduced in the new regulations?
The following anti-avoidance measures have been introduced:
Interest Deductibility Limitation Rule;
Exit Taxation Rule;
General Anti-Abuse Rule (‘GAAR’); and
Controlled Foreign Company (‘CFC’) Rule.
What are the objectives behind each measure?
The Interest Deductibility Limitation Rule aims at discouraging multinational groups for reducing their tax base in high tax jurisdictions through excessive interest deductions.
Exit Tax measures will ensure that when a taxpayer moves assets or their tax residence out of a States’ tax jurisdiction, that State will levy taxes on the economic value of any capital gain created in its territory. Even though the gain has not yet been realised at the time of the exit, the taxes will still be levied.
The GAARs’ feature in tax systems is to tackle abusive tax practices that have not yet been dealt with through specifically targeted provisions. For this, GAARs have a function aimed to fill in gaps, which should not affect the applicability of specific anti-abuse rules.
Controlled-Foreign-Company (CFC) Rules have the effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company hence deterring the shifting of profits to low tax / no tax countries.
An Overview of the Measures
1. Interest Deductibility Limitation Rule (BEPS Action 4)
It limits the deductibility of a taxpayer’s ‘exceeding borrowing costs’ i.e. the amount by which the deductible borrowing costs of a taxpayer in terms of the Income Tax Act, were it not for the provisions of the new regulations, exceeds taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives.
As from the 1st January 2019, exceeding borrowing costs shall be deductible only up to 30% of the taxpayer’s EBIDTA (earnings before interest, depreciation, tax and amortization) or up to an amount of EUR 3 million, whichever is higher.
Subject to certain limitations, corporate taxpayers which are members of a consolidated group for financial accounting purposes and who can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can fully deduct their exceeding borrowing costs.
Standalone entities, i.e. a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment can fully deduct exceeding borrowing costs.
Costs incurred on loans concluded before 17th June 2016 or used to fund certain long-term public infrastructure projects should be excluded when calculating the exceeding borrowing costs excluded from the scope of the regulations are financial undertakings including where such financial undertakings are part of a consolidated group for financial accounting purposes.
2. Exit Taxation
On the 1st January 2020, Malta will levy an exit tax charge when assets owned by a taxpayer are transferred outside of Malta in the following circumstances:
(1) A taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
(2) A taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
(3) A taxpayer transfers 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 permanent establishment in Malta;
(4) A taxpayer transfers the business carried on by its permanent establishment from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.
However, for transfers within the EU or European Economic Area (“EEA”), the taxpayer may request to defer the payment of exit tax by paying in equal installments over 5 years.
A guarantee may also be requested if such deferment is obtained.
Exit taxes shall also not apply if the assets in question relate to the financing of securities, assets posted as collateral or an asset transfer that takes place in order to meet prudential capital requirements or for the purpose of liquidity management if the assets are set to revert back to Malta within a period of 12 months.
3. General Anti-Abuse Rule (GAAR)
The GAAR introduced by the Regulations re-emphasizes the GAAR already existing in Maltese tax legislation.
The regulations provide that for the purposes of calculating the tax liability in according with the Income Tax Acts, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.
An arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
4. Controlled foreign company rules (CFC)
Under the ATAD 1, Member States can either tax:
(i) undistributed passive income (interest, royalties, dividends, etc.) of the CFC with a carve-out for CFCs with a substantive economic activity, OR
(ii) undistributed income of the CFC arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage.
Malta has through regulation 7 introduced the concept of CFC legislation through the non-genuine arrangements method, hence taxing the non-distributed income of an entity or PE which qualifies as a CFC as from 1st January 2019.
An entity or a PE will qualify as a CFC if the following conditions are met:
(i) The taxpayer by itself, or together with its associated enterprises, holds directly or indirectly more than 50% in the entity. Holding includes equity holding, voting rights and the right to profit; and
(ii) The actual corporate tax paid by the entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or PE computed in accordance with the Maltese Income Tax Act and the actual corporate tax paid on its profits.
Where an entity/permanent establishment is considered to be a CFC, the Regulations require the non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage to be included in the tax base of the Maltese resident entity.
The CFC rule applies only if: