Malta’s Response to the EU’s Anti-Tax Avoidance Package

Following the adoption of the Anti-Tax Avoidance Directive by the European Council, similar to other jurisdictions, Malta is bound to implement a number of provisions in its tax legislation to ensure compliance thereto.

During the Malta Budget 2019 speech, the Minister of Finance has stated that through the adoption of the rules, Maltese law will embrace the same anti-tax avoidance regimes applicable in other EU member states.  The Minister has also announced that these regulations will neither bring about any changes to the Maltese general tax system nor to the current rules on the taxation of company profits.  The Minister also noted that the tonnage tax regime under Maltese rules has recently been cleared by the OECD Forum on Harmful Tax Practices and by the EU state aid rules.

The following provisions will be included in Maltese legislation in line with ATAD 1:

1. Interest limitation rules 

If a company’s interest and similar borrowing costs exceed interest receivable by €3,000,000, the maximum tax deduction that can be claimed in a tax period in respect of such excess costs are 30% of EBIDTA.  These limitations will neither apply to financial undertakings nor to long term public infrastructure EU projects or loans concluded before the 17th of June 2016.

2. Exit tax

A change of residence of a company or the movement of assets or business to another territory will be treated as a taxable exit event, and thus the company will become subject to tax as if the company had disposed of its assets.  However a deferral is possible, if the new location is another EU member state.

3. GAAR

In addition to the existing anti-abuse provision found in Article 51 of the Income Tax Act, it is expected the provision will be extended to apply to arrangements which are not genuine, meaning that they are not put in place for valid commercial reasons that reflect economic reality and which have been put in place with a main purpose of obtaining a tax advantage that defeats the object or purpose of tax law.

4. CFC rules

An entity will be considered as a CFC where it is subject to more than 50% control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profit is less than half the tax that would have been paid had the income been subject to tax in Malta.   Through the application of the CFC rules, the parent entity will be taxable on the CFC’s profits, even if the CFC does not distribute profits to its shareholder. 

However, this measure will not apply to:

(a)    CFCs with accounting profits of not more than EUR750,000 and non-trading income of not more than EUR75,000; or

(b)    CFCs whose accounting profits amounting to not more than 10% of its operating costs.

The Minister of Finance has also announced that Malta is committed to adopt the provisions of ATAD2, and to introduce regulations for the transposition of the EU Mandatory Disclosure Directive (DAC6) and the EU Dispute Resolution Mechanism Directive (DRM) by the respective implementation deadlines.  The Minister of Finance has also announced that a new patent box regime complying with the EU Code of Conduct (Business Taxation) and the OECD proposals on preferential intellectual property will be introduced.

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