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4.1 Taxation of Corporate Capital Gains

Malta does not have a separate system of tax for capital gains. All taxable capital gains are added to the company’s other profits and taxed accordingly at the standard corporate tax rate (for which see Section 3.1.1).

In contrast to the taxation provision on income, the scope of the taxation provision of capital gains is limited. Only items which are specifically listed in the Act are taxable, whilst anything else falls out of the scope of the Act.

Furthermore, nondomiciled companies (see Section 2.2.1) are exempt from all foreign-sourced capital gains. Therefore, in the case of a nondomiciled company, only capital gains arising in Malta, which fall within the list of taxable capital gains below, are subject to Maltese tax.

Taxable capital gains in Malta arise on gains or profits from the transfer of:

  • ownership, usufruct and assignment of immovable property or cession of any rights over such property;
  • ownership, usufruct and assignment of securities or cession of any rights over such securities;
  • a beneficial interest in a trust; and
  • ownership, usufruct of or assignment or cession of any rights over any interest in a partnership.

Certain transactions are exempt, including:

  • transfers of shares listed on a stock exchange recognized by the Commissioner, not being securities in a collective investment scheme;
  • transfers of shares listed on a stock exchange recognized by the Commissioner, being securities in a collective investment scheme held in a prescribed fund;
  • nonprofit participating shares or shares with a fixed rate of return;
  • gains from the disposal of equity holdings in a Maltese or foreign non-property participating holding; and
  • certain transfers of units and such like instruments relating to linked long term business of insurance.

In the case of nonresident investors, the Income Tax Act specifically exempts capital gains on the transfer of, or on the transfer of any rights over, Maltese securities (i.e., units in a collective investment scheme, units relating to linked long-term business of insurance, interest in a partnership, and shares or securities in a company) realized by a nonresident transferor, as long as either the shares being transferred are not shares in an immovable property company or the transferor is not owned or controlled by, directly or indirectly, nor acts on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta.

It is important to keep in mind that stamp duty may still apply on a transfer of securities and, therefore, it is important to analyze a transfer also from a stamp duty point of view.

The Act also provides for an asset rollover relief, which even though not an outright exemption, still grants substantial cash flow advantages. This relief applies to assets which have been used in the business for a period of at least three years and which have been transferred and replaced within the same year by an asset used solely for a similar purpose in the business. In this case, any capital gain realized on the transfer of the first asset is not taxed, but reduced from the tax deductible cost of the new asset therefore allowing for the company to gradually suffer the tax payable through a reduction of the capital allowances.

A capital loss may only be set off against capital gains, with any unutilized amount of losses carried forward indefinitely until it is set off against future gains.

4.2 Definition of Corporate Capital Gains

Capital gains are triggered when an entity undergoes any of the taxable transactions mentioned in Section 4.1, with the taxable capital gain generally calculated by deducting the cost of acquisition of the asset from the selling price.

4.3 Computation

Generally, the taxable capital gain is derived by deducting the cost of acquisition of the asset from the selling price. There are, however, exceptions for the transfer of:

  • Immovable property situated in Malta. In this case, tax is payable in accordance with the property transfer tax which is considered in further detail in Section 9.3.1.
  • Transfer of controlling interest in a company. The transfer of a controlling interest is deemed to happen if, at any time during the 18 months preceding the transfer, the nominal value, voting rights or rights to profits held by the transferor represent at least 25 percent of the aggregate available to the company. The condition is also met if, in the same period, the aggregate rights attached to the shares give the right to the holder to appoint a director.

In this case the gain is calculated by deducting the cost of acquisition from the transfer value, with an allowance for inflation if the shares being transferred are shares of an immovable property company.

There is no specific distinction between short-and long-term capital assets.

4.4 Corporate Combinations and Divisions

4.4.1 Mergers

Transfers of chargeable assets (excluding immovable property in Malta and securities in a property company) between group companies upon restructuring through merger, demerger, amalgamation, and reorganization within the group do not give rise to capital gains tax and duty.882

Companies are considered to be members of the same group for capital gains purposes if they are tax resident only in Malta and if:

  • one is a more than 50 percent owned subsidiary of the other or both are more than 50 percent subsidiaries of a third Malta tax resident company; or
  • they are controlled and beneficially owned directly or indirectly by the same shareholders to the extent of more than 50 percent.

The 50 percent tests apply to share capital, voting rights, profits available for distribution, and distribution on a winding up.

Where the assets being transferred consist of immovable property in Malta, or securities in a property company, the group exemption is applicable if, in addition to the conditions listed above, the additional conditions mentioned in Section 4.4.2 are met.

Companies that transfer their residence and/or domicile to Malta as a result of a cross-border merger in terms of Directive 2005/56/EC may opt to claim a step up in the tax base cost of assets situated outside Malta without any adverse fiscal consequences in Malta, in accordance with Article 4A of the Income Tax Act. The said persons may, for tax purposes, opt to revalue the assets from their historic cost to their fair market value at the time of the shift of residence or domicile to Malta or at the time of the merger, as the case may be.

The revaluation will apply for the purpose of determining the taxable gain upon a subsequent disposal of the assets and serves to ensure that any unrealized increase in the value of such assets before the shift in residence/domicile or merger is exempt from income tax in Malta. The fair market value will also be used in computing the wear and tear allowances that are deductible in determining the chargeable income. Persons electing for a step-up base cost may not have been resident or domiciled in Malta prior to their transfer of residence and/or domicile and, in the case of a merger, the assets may not have been subject to tax in Malta prior to the merger.

4.4.2 Transfers of Corporate Property

Where assets being transferred consist of immovable property in Malta, or securities in a property company, a group exemption is available; however, the definition of a group is more complex and for companies to be treated as a group they must satisfy the below conditions:

  • one is a more than 50 percent-owned subsidiary of the other or both are more than 50 percent subsidiaries of a third Malta tax-resident company; or
  • they are controlled and beneficially owned directly or indirectly by the same shareholders to the extent of more than 50 percent.

The 50 percent tests apply to share capital, voting rights, profits available for distribution, and distribution on a winding up.

In addition to the conditions listed above, the following conditions must also be met:

  • the individual direct or indirect beneficial owners of the companies are the same; and
  • the individual beneficial owners hold, directly or indirectly, substantially the same percentage interest in the nominal share capital and voting rights in the companies involved in the transfer.

For the purpose of the above conditions, an individual is considered to hold substantially the same percentage interest in each of the transferring companies where the difference between the percentage interest held in each company does not exceed 20 percent. Article 5(9)(iii) of the Income Tax Act provides for companies which have a dispersed share capital where individuals holding less than 20 percent can either be ignored or grouped together for the purpose of the test.

Anti-abuse provisions are in place under which tax that should have been payable on transfers falling within the group provisions is clawed back in the case that the group provisions are no longer met within a period of six years from the date of the transfer.

Under domestic tax law, an exchange of assets with shares is deemed to be two separate taxable transfers.

Apart from the exemption mentioned in Section 4.4.1, there is another exemption upon the conversion of a business/partnership en nom collectif into a company, under Article 5(15) of the Income Tax Act. The transfer of assets on the conversion is exempt, provided that the company is beneficially owned as to 75 percent by the same person who owned the business/partnership en nom collectif.

Another important exemption relates to the transfer of immovable property to the shareholder or an individual related to the shareholder upon winding up of a company, provided that the said shareholder owned at least 95 percent of the share capital and voting rights of the said company for at least five years prior to the transfer and that the asset being transferred was kept as a capital asset by the company for a minimum of five years preceding the transfer.

4.4.3 Share Transfers

As discussed in Section 4.4.1, a transfer involving the exchange of shares (excluding those of a property company) may be exempt from capital gains tax upon restructuring through merger, demerger, division, amalgamation and reorganization. Transfers of shares of a property company can still avail of the exemption, however, the stricter conditions mentioned in Section 4.4.2 must be met.

4.4.4 Divisions or Separations

With respect to divisions and separations, the same tax implications for mergers mentioned in Section 4.4.1 apply.

4.5 Position of Losses from Business Operations

4.5.1 Definition

Outgoings and expenses can only be deducted if they were wholly and exclusively incurred during the production of the income.

Trading losses and capital losses are calculated separately with the law allowing the offset of trading losses against both trading profit and capital gains, but disallowing the offset of capital losses with anything except capital gains.

Foreign losses can only be deducted against domestic income if such losses would have been subject to tax under Maltese tax law had they been profits.

4.5.2 Treatment

Carryback — It is not possible to carry back losses under Maltese law.

Carryforward — Trading losses can be carried forward indefinitely and can be set off against future trading profits and capital gains. Capital losses can also be carried forward indefinitely, but capital losses may only be set off against future capital gains.

4.5.3 Losses After Change in Ownership

Malta does not have any restrictions on the use of losses incurred by the company prior to the change in its ownership.

4.6 Group Treatment

4.6.1 General Rule

Overview

It is possible to choose between two main sets of rules for dealing with group losses:

  • group loss relief through the surrender of losses, under Article 17 of the Income Tax Act; or
  • consolidated group relief, under Article 22A of the Income Tax Act.

In terms of eligibility, the two systems follow the same principles, where in order to receive benefits, the group companies must:

  • have the same accounting year end; and
  • have been part of the same group (see Section 4.6.2) during the accounting year, with certain exceptions for newly incorporated and wound-up companies.

Group loss relief

Group loss relief provisions allow for companies to surrender deductible losses to other companies within the same group to the extent that these are losses incurred in the same year and not carried forward from previous years.

Losses can only be surrendered once and only after any secondary tax account allocations have been carried out. The surrendering company must also meet certain criteria before proceeding with the surrender.

Group tax consolidation

Group tax consolidation provisions apply from year of assessment 2020 (basis year 2019), under which eligible group companies are able to elect to form a fiscal unit and file one consolidated tax return for that unit.

In contrast to group loss-relief provisions, the rules to be eligible to form a fiscal unit are slightly more complex and, in addition to the rules mentioned above, companies must also meet the stricter group criteria. See further Section 4.6.2.

Once a group of companies meets the criteria set out by the Income Tax Act, the parent company, referred to as the principal taxpayer, will have the option to elect to form a fiscal unit. Once a fiscal unit is formed:

  • any transactions occurring between two or more companies which form part of the unit will be deemed not to have occurred, as long as the transactions do not involve the transfer of immovable property in Malta or shares in a property company;
  • the responsibility of any tax reporting shifts solely to the principal taxpayer, however, all companies making part of a fiscal unit are jointly and severally liable for any payment of tax;
  • double taxation mechanisms are still applicable; and
  • the preparation of audited group consolidation accounts is mandatory.

It is also worth noting that in certain specific circumstances, a group may be able to apply for VAT grouping in Malta.

4.6.2 Definition of Group

The conditions for companies to be considered members of the same group for the purpose of group loss relief and group tax consolidation vary slightly.

In the case of group loss relief, companies are recognized as a group if they are tax-resident only in Malta and if one is more than a 50 percent subsidiary of the other or if both are more than 50 percent subsidiaries of a third Malta tax-resident company.

The 50 percent tests apply to voting rights, profits available for distribution and distribution on a winding up.

On the other hand, companies are recognized as a group for the purpose of the group tax consolidation provisions if:

  • the principal taxpayer is tax-resident only in Malta; and
  • one is a minimum 95 percent subsidiary of the other or if both are minimum 95 percent subsidiaries of a third Malta tax resident.

The 95 percent test for group tax consolidation must apply to two of the following three rights; namely, voting rights, right to profits available for distribution and right to distribution on a winding up.

4.6.3 Special Aspects

Gains derived from the transfers of chargeable assets between companies forming part of the same group (as defined) are exempt from tax and stamp duty.

An exemption from tax and stamp duty is also applicable on the transfer of chargeable assets on a restructuring within a group of companies through merger, demerger, amalgamation and reorganization. See further Section 4.4.1.

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