14 December 2018 Maltese Government adopts law to implement EU Anti-Tax Avoidance Directive; NID rules approved by EU Code of Conduct Group In December 2018, Malta's Minister for Finance transposed the provisions of Council Directive (EU) 2016/1164 of 12 July 2016 setting forth rules against tax practices that directly affect the functioning of the internal market (the ATAD 1) by L.N. 411 of 2018 (L.N. 411). L.N. 411 transposes the ATAD 1 as recommended into Maltese law. The ATAD 1 puts forth some major tax policy changes to Maltese law because it provided for a genre of norms that were previously not contemplated in Maltese tax law. It provides for structured mandatory controlled foreign company (CFC) rules (to deter profit shifting to a low/no tax country) and exit taxation (to prevent companies from avoiding tax when re-locating assets). In addition, the ATAD 1 introduced interest limitation rules to discourage artificial debt arrangements designed to minimize taxes and a general anti-abuse rule (GAAR) to counteract aggressive tax planning. Although Maltese law did previously provide for some basic interest limitation rules, the policy impact of interest limitation rules driven by the ATAD 1 is expected to be significant. Given that the wording of the GAAR contemplated by the ATAD 1 is comparable to the wording in Article 51 ITA, the ATAD 1's introduction of a new GAAR is not expected to have a significant impact. The provisions of L.N. 411 shall apply from 1 January 2019 (and from 1 January 2020 in the case of exit taxes) to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies. This includes entities that are not resident in Malta but have a permanent establishment in Malta provided that they are subject to tax in Malta as companies (taxpayers). Rules on exit taxation are addressed in article 5 of the ATAD 1 and have been transposed in a very similar manner in regulation 5 of L.N. 411. The rules provide for an imputed taxable gain that is triggered whenever certain transfers occur. The ATAD 1 provides that a taxpayer shall be subject to tax at an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes, in any of the following circumstances: a) A taxpayer transfers assets from its head office in Malta to its permanent establishment in another Member State or in a third country in so far as Malta no longer has the right to tax the transferred assets due to the transfer. b) A taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another Member State or in a third country in so far as Malta no longer has the right to tax the transferred assets due to the transfer. c) A taxpayer transfers its tax residence from Malta to another Member State or to a third country, except for those assets which remain effectively connected with a permanent establishment in Malta. d) A taxpayer transfers the business carried on by its permanent establishment from Malta to another Member State or to a third country in so far as Malta no longer has the right to tax the transferred assets due to the transfer. Regulation 5(2) of L.N. 411 prescribes that a taxpayer shall be given the right to defer the payment of exit tax by paying it in installments over five years, in any of the following circumstances: a) A taxpayer transfers assets from its head office in Malta to its permanent establishment in another Member State or in a third country that is party to the Agreement on the European Economic Area (EEA Agreement). b) A taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another Member State or a third country that is party to the EEA Agreement. c) A taxpayer transfers its tax residence from Malta to another Member State or to a third country that is party to the EEA Agreement. d) A taxpayer transfers the business carried on by its permanent establishment in Malta to another Member State or a third country that is party to the EEA Agreement. If a taxpayer defers payment of exit tax, interest shall be charged and if there is a demonstrable and actual risk of non-recovery, taxpayers may also be required to provide a guarantee as a condition for deferring the payment. In certain cases, the deferral of payment is discontinued and the tax debt becomes recoverable immediately. Article 7 of the ATAD 1 sets forth a CFC Rule. Article 7 has been transposed via regulation 7 of L.N. 411. This provides that an entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax, shall be treated as a CFC where the following conditions are met: a) In the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of capital or is entitled to receive more than 50% of the profits of that entity. b) The actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the Income Tax Acts and the actual corporate tax paid on its profits by the entity or permanent establishment. The corporate tax that would have been charged in Malta means the tax as computed according to the Income Tax Acts. Where an entity or permanent establishment is treated as a CFC, the ATAD 1 provides Member States with two options for CFC taxation. Malta has opted for option B, i.e., CFC taxation of non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. An arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income, provided that the said company is the taxpayer and the said significant people functions are carried out in Malta. However, an entity or permanent establishment with accounting profits of no more than €750,000, and non-trading income of no more than €75,000 or of which the accounting profits amount to no more than 10% of its operating costs for the tax period falls outside scope of CFC taxation. In computing the CFC income, the income to be included in the tax base of the taxpayer must be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company. The attribution of CFC income shall be calculated in accordance with the arm's-length principle. Regulation 4 of L.N. 411 draws heavily from article 4 of the ATAD 1 prescribing that: exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer's earnings before interest, tax, depreciation and amortization (EBITDA). For the purpose of applying the interest limitation rule, in accordance with guidelines which are to be issued by the Commissioner for Revenue (CfR), Malta may also treat as a taxpayer: a) An entity which is permitted or required to apply the rules on behalf of a group, as recognized for the purposes of Maltese tax law. b) An entity in a group, as recognized for the purposes of Maltese tax law, which does not consolidate the results of its members for tax purposes. In such circumstances, exceeding borrowing costs and the EBITDA may be calculated at the level of the group and comprise the results of all its members. a) A taxpayer, or a group where this is treated as a single taxpayer, may deduct exceeding borrowing costs up to €3,000,000. Malta has also exercised its right to exclude from the scope of the interest limitation rule exceeding borrowing costs incurred on: a) Loans which were concluded before 17 June 2016, but the exclusion shall not extend to any subsequent modification of such loans. b) Loans used to fund a long-term public infrastructure project where the project operator, borrowing costs, assets and income are all in the European Union, where the CfR is satisfied that the financing arrangements for the project have special features which justify such treatment with regards to other financing arrangements subject to the provisions of L.N. 411. Where the taxpayer is a member of a consolidated group for financial accounting purposes, the taxpayer has been given the right to fully deduct its exceeding borrowing costs if it can demonstrate that the ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group and subject to the following conditions: I. The ratio of the taxpayer's equity over its total assets is considered to be equal to the equivalent ratio of the group if the ratio of the taxpayer's equity over its total assets is lower by up to two percentage points. ii. All assets and liabilities are valued using the same method as in the consolidated financial statements. Malta has provided for rules allowing carry forward, without time limitation, exceeding borrowing costs and, for a maximum of five years, unused interest capacity, which cannot be deducted in the current tax period under paragraphs 1 to 5 of regulation 4. Financial undertakings have been excluded from the scope of the interest deduction limitation rules, including where such financial undertakings are part of a consolidated group for financial accounting purposes. Article 6 of the ATAD 1 puts forward a new anti-avoidance provision that overlaps with Article 51 ITA. The GAAR added by the Directive and transposed in regulation 6 of L.N. 411 prescribes that, for the purposes of calculating the corporate tax liability, 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 is regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. The NID rules, published in their current format by virtue of L.N. 37 of 2018, enable undertakings to apply a deduction of notional interest against chargeable income, which notional interest is determined by reference to the undertaking's risk capital. The aim of the NID Rules is to reduce the debt bias by approximating neutrality between debt and equity financing. A thorough review of the NID Rules was undertaken by the EU's Code of Conduct Group (Business Taxation) during 2018 and it has recently been concluded that the NID Rules are "considered as overall not harmful." Document ID: 2018-2486 |
