Legal Notice 411 of 2018 came into force on the 11th December 2018. The Legal Notice has transposed the provisions of the EU Directive 2016/1164 of the 12th July 2016, which laid down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD), into Maltese Tax Law.
The key provisions introduced are the following:
1. Interest Limitation Rule – effective as from the 1st January 2019
This Rule introduces a threshold on the amount of borrowing costs that exceed interest income which may be claimed in a tax period as a deduction. The maximum amount of tax that may be deducted by a taxpayer in respect to excess borrowing costs that amounts to more than €3,000,000, is 30% of EBIDTA. The interest limitation rules do not apply to standalone entities and to neither to financial undertakings.
2. Exit Tax Rule- effective as from the 1st January 2020
Exit Tax shall be imposed when a taxpayer ceases to be tax resident in Malta and moves to another State or on a transfer of assets from Malta to another State or the transfer of a business carried on by a permanent establishment. Possibility for a deferral if the transfer of residence is to another Member State.
3. General Anti Abuse Rule (GAAR) – effective as from the 1st January 2019
General Anti Abuse Rule to complement the anti-abuse measure already found in Malta Income Tax Act to combat any arrangement or a series of arrangements which have been put into place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not genuine. Such arrangement or any step to such arrangement will be disregarded for the purpose of calculating the tax liability in terms of the Income Tax Acts.
4. Controlled Foreign Company (CFC) Rules – effective as from the 1st January 2019
The CFC rules are new to Malta tax law. An entity shall be considered as a CFC when:
(a) the taxpayer alone 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 such entity, and
(b) the actual corporate tax paid on its profits by the entity is lower than the difference between the tax that would have been charged on the entity under the Income Tax Acts and the actual foreign corporate tax paid. Also applicable to a foreign permanent establishment belonging to a Maltese taxpayer.
Where an entity or a permanent established qualifies as a CFC then its non-distributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage shall be included in its tax base.