During 2018, Malta transposed into Maltese tax legislation the provisions of Council Directive 2016/1164 issued on 12 July 2016 (commonly referred to as Anti-Tax Avoidance Directive, ATAD I). Some of the provisions of the ATAD I and II are included in the ATX-MLA syllabus for and are examinable from June 2020 onwards, with two exceptions which are explicitly excluded:
This is one of three articles on this topic and explains the general anti-abuse rules (GAAR) and exit tax. The other two articles explain the controlled foreign company (CFC) and the interest limitation rules. Candidates should note that the content of this article indicates the extent to which the provisions of Malta’s transposition of ATAD I and II are examinable at Strategic Professional (ie ATX-MLA) level.
Article 51 (2) of the Income Tax Act (ITA) provided for a wide and encompassing GAAR, well before the introduction of the ATAD. Through ATAD I, the ITA GAAR, has been supplemented with an additional anti-abuse rule which is in line with the pre-existing principles in the ITA.
The ATAD GAAR empowers the Commissioner for Revenue, when establishing a taxpayer’s tax liability in terms of the ITA, to ignore 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 may comprise more than one step or part. 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.
With respect to ATX-MLA, the examining team expects candidates to be aware of the look through powers granted by the GAAR to the Commissioner for Revenue. In particular candidates are expected to be able to analyse a scenario and identify transactions (one offs or a series thereof) that could attract the Commissioner for Revenue’s scrutiny under the GAAR.
Companies, which are planning a migration to Malta, or a transfer of assets outside of Malta, should consider the tax implications, which may arise from the transposition of the exit tax rules into Maltese law emanating from the ATAD, introduced in the Maltese legislation through Legal Notice 411 of 2018. The exit tax rules are anti-abuse rules and are applicable with effect from 1 January 2020.
The exit tax rules introduce a tax on capital gains arising at the time of exit of the assets or transfer of business and tax residency, out of Malta. The deemed capital gain is to be determined by deducting the cost of acquisition of the transferred asset for tax purposes from the market value of the transferred asset, at the time of exit of the asset. A transaction will become taxable on transferring assets between entities in different countries in any of the below listed circumstances:
However where, despite any of the transactions above, Malta still has the right to tax any future capital gains from the transfer of the assets, the exit tax will not be triggered.
The exit tax shall be paid by not later than the company’s tax return date, in such a manner as may be determined by the Commissioner for Revenue. However, in any of the following circumstances, the taxpayer may defer the payment of the exit tax (subject to interest in line with the provisions of the Income Tax Management Act (ITMA)) by paying it in instalments over five years:
It is to be noted that the provisions relating to deferment of payment of the exit tax shall also apply:
However, where there is a demonstrable and actual risk of non-recovery, the Commissioner for Revenue may request a taxpayer to provide a guarantee as a condition for deferring the payment. The deferral of payment shall be immediately discontinued, and the tax debt would become recoverable in the following cases:
The exit tax rules also provided for a step up in asset value upon entry into Malta. In fact, where assets, tax residence or the business carried on by a PE is transferred to Malta from another EU member state, the starting value of the relevant assets for tax purposes in Malta shall be that established by that other EU member state. However, the Commissioner for Revenue is empowered to determine through an enquiry and assessment that such value does not reflect the market value (based on an evaluation of an independent person that is an expert in the field).
For the purpose of the exit tax rules, ‘market value’ means the amount for which an asset can be exchanged, or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction.
Further guidance on exit tax issued by the Maltese tax authorities
Further to the exit tax provisions contained in the ATAD Implementation Regulations, Subsidiary Legislation 123.187, the Commissioner for Revenue recently issued guidelines aimed to provide more clarity on Malta’s transposition of the ATAD, including the applicability of the exit tax rules.
The guidelines clearly state that in accordance with the ITA, Chapter 123 of the Laws of Malta, and the ATAD Implementation Regulations, Subsidiary Legislation 123.187, the applicability of the exit tax rules shall apply also to the unrealised capital gains, on which exit tax shall be levied as from 1 January 2020.
The recently issued guidelines contain a new interpretation by the Maltese tax authorities which provides that where Malta has the right to tax in terms of international tax principles but chooses not to tax, then it is considered that there is no effective loss of right to tax for Malta. This means that, as explained above, exit tax is not triggered. The guidelines provide an example of such an instance, when a taxpayer which is not taxed on foreign capital gains (for example because the taxpayer is subject to tax in Malta on a remittance basis) changes its place of effective management away from Malta, it will not be subject to exit tax on foreign unrealised capital gains, since such gain would in any case have been exempt.
It is the aim of the examining team to assess candidates’ knowledge of how the exit tax rules apply, through application of knowledge to a given scenario. Candidates will usually be expected to present their answers in the form of explanation with supporting calculations.
IP Limited is a company incorporated and effectively managed and controlled from Malta. During 2020, the company acquired intellectual property (IP) from an unrelated party for €1m and this is the IP’s accounting and tax carrying value as at the date of the example. During 2022, IP Limited will change its effective management and control to Italy (EU) and in terms of the treaty between Malta and Italy, with effect from 2022 the company will be deemed to be tax resident only in Italy. The IP has a market value of €2.5m.
Upon the change in management and control, a potential trigger of the exit tax is satisfied since, IP Limited will be transferring its tax residence from Malta to another country. Moreover, intellectual property is an asset category which is subject to tax in Malta, in terms of Article 5 of the ITA, should a disposal thereof occur. Therefore, on exit, IP Limited will be liable to exit tax of 35% (through the change of residence to Italy) on the difference between the market value of the IP (€2.5m) and the cost thereof (€1m). The exit tax is payable by the company’s tax return date. However, given that Italy is an EU member state, IP Limited is entitled to defer the payment of the exit tax (subject to interest in line with the provisions of the ITMA) by paying it in instalments over five years.
Written by a member of the ATX-MLA examining team