FFF-Legal

8 May 2010

A number of tax measures that had been annouced in the 2010 Budget have been enacted by means of Act 1 of 2010 (Budget Measures Implementation Act) published on the 16th April 2010. This law contains a number of amendments to the Maltese Income Tax Act and other tax legislation. 

A number of measures contained in the Act are designed to improve Malta’s attractiveness to foreign investors and strengthening Malta’s position as a tax efficient jurisdiction for international business. These include measures aimed at extending the scope of international Tax Refund and Participation Exemption regime, new exemptions and other interesting features.

Salient features:

• an extension of the Participation Exemption to cover gains and profits from the transfer of holdings in Maltese resident companies
• new rules on the tax treatment of international aviation business
• option to step-up the base cost of assets in the course of a transfer by a person or company of residence or domicile to Malta or pursuant to a cross-border merger
• an exemption from royalty income derived from patents
• extension of the unilateral relief from double taxation to include multi-tier structures
• new tax refund payment deadline
• a 15% flat rate tax for 'qualifying' employment income derived by expatriates posted to Malta

Extension of scope of Particaption Exemption

Prior to the amendments contained in Act 1, 2010, the Participation Exemption regime was applicable in respect of dividends and gains from an Participating Holding (equity holding in a company or similar entity resident outside Malta). The amendments brought about:

• a broadening of the definition of Equity Holding (dual criteria test) - the exemption has been extended to a holding in an entity or company that entitles the holder to at least 2 of following rights - the right to vote, the right to dividends and the right to assets on a winding up; and
• an extension of the Participation Exmeption to gains derived from the transfer of a Participating Holding in a Maltese-resident company (this does not apply where the Maltese company directly or indirectly owns immovable property situated in Malta) 

The above amendment provides additional tax planning opportunities for multi-tier structures involving holding and operating companies.  

Tax treatment of international aviation business

Income derived from the ownership, leasing or operation of aircrafts or aircraft engines used in international aviation business such as transport of passengers or goods. This type of income is deemed to arise outside Malta regardless of the country of registration of the aircraft/engines or whether the aircraft calls at or operates from Malta. 

This rule is of particular interest to companies or entities that are resident in Malta but not domiciled (that is, not registered or incorporated in Malta). A foreign registered / incorporated company or entity whose management and control are exercised in Malta is resident in Malta for tax purposes and income derived from the ownership, leasing or operation of aircraft or engines used in international operations will be taxable in Malta only if and to the extent remitted to Malta (remittance basis).

This rule, combined with the rules on the operation of aircraft in international traffic contained in Malta's double taxation agreements, presents interesting tax planning opportunities for airline and aviation operators setting up their residence in Malta.

Option for step-up in base cost

Another interesting rule provides for an option to revise the tax base cost of assets situated outside Malta without producing adverse Malta tax consequences. This option is available in the case of persons transferring their residence and/or domicile to Malta or in the case of companies resulting from a merger in terms of the Cross Borders Mergers Directive 2005/56/EC (Directive 2005/56/EC).In such cases, the assets may be revalued from historic cost to fair market value at the time of a transfer of residence/domicile to Malta or at the time of the merger. 

The step-up will reduce or limit an eventual gain on a subsequent disposal of the assets in question.

New royalty income exemption

Royalty and similar income derived from patents linked to eligible inventions will be exempt from Maltese income tax. The scope and extent of this exemption will be regulated by subsidiary legislation that will be published in due course.

Where the royalty income is derived by a company, the exemption will also apply to dividends paid (up to the level of the individual shareholder) from the exempt royalty income.

Extension of relief for underlying tax in multi-tier structures

In multi-tier structures involving Maltese and non-resident companies, double taxation relief for underlying tax suffered on the profits out of which a dividend is distributed has been extended to tax suffered in Malta. The new provisions covers structures involving a Maltese company holding having a foreign subsidiary or sub-subsidiary which suffers tax in Malta -relief will now be available on Maltese tax suffered by the foreign direct or indirect subsidiary. Prior to the amendment, relief was only available in respect of foreign tax suffered by such subsidiary or sub-subsidiary.

New tax refund payment deadline

Maltese companies pay tax at the rate of 35% but upon a distribution of profits, the shareholders are entitled to claim a refund of tax paid at corporate level. The extent of the refund depends on the nature and source of profits and on the account out which the profits are paid (companies are required to allocate profits to various tax accounts). To date, a refund was paid by the Maltese tax authorities to shareholders by not later than 14 days from the end of the month in which the refund becomes due. From now onwards, the refund is payable by not later than 14 days from the date on which the refund becomes due - this involves a reduction in the processing times and a quicker payment.

15% tax rate for expatriate personnel

The new measures include an optional flat rate tax of 15% in respect of employment income derived in Malta by individuals not ordinarily resident in Malta. This special tax rate will apply in respect of 'qualifying' employment income.  The conditions for benefiting from this tax rate will be contained in rules that are expected to be published soon. This tax measure will be of particular interest to qualified personnel providing services in Malta under a contract of employment.

Other measures

Act 1 of 2010 contains other tax measures, including anti-abuse measures aimed at transactions involving real estate situated in Malta. These inlcude the introdcution of the concept of 'property company' in Maltese income tax legislation.  

For further information please contact Damien Fiott or Antoine Fiott