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8.1 General Anti-Avoidance Provisions

A general anti-avoidance rule applies in Malta and under Article 52 of the Income Tax Act an advance ruling can be requested on its application to a particular transaction. This rule denies any tax benefit if it results from an arrangement or scheme of which the sole or main purpose was the avoiding, reducing or postponing liability to tax, or of obtaining any refund or set-off of tax. It is also possible for a person to be assessed to tax when a scheme is entered into (or even if not given effect to) which reduced the amount of tax payable and is artificial or fictitious.

Furthermore, specific anti-avoidance provisions apply, in particular to counter misuse of the investment income provisions, the flat-rate foreign tax credit, the participating holding exemption and the deemed distribution orders.

Mandatory disclosure rules

Editor’s note: Council Directive 2020/876/EU of June 24, 2020, made in response to the COVID-19 (coronavirus) pandemic, amends Directive 2011/16/EU (DAC) by allowing Member States to grant a deferral of the initial reporting deadlines under DAC6. For information on the reporting dates prescribed by each Member State, please see our Mandatory Disclosure Rules (MDR) & DAC6 Roadmap.

Malta published Legal Notice No. 342 of 2019 in December 2019, introducing the Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations 2019 (“the regulations”). These regulations amend the Cooperation with Other Jurisdictions on Tax Matters Regulations (S.L. 123.127) and transpose the provisions of Directive 2018/822/EU (DAC6) (amending Directive 2011/16/EU (DAC)) on the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.

The regulations took effect on July 1, 2020, but intermediaries, and certain taxpayers, were also required to declare historical reportable cross-border arrangements, whose first steps were implemented between June 25, 2018 and June 30, 2020. The scope of the regulations is very closely aligned to DAC6, with the definitions of “associated enterprise”, “intermediary”, “relevant taxpayer”, “cross-border” and “marketable arrangement”, transposed verbatim. Likewise, the list of hallmarks in the regulations is closely aligned to the hallmarks in the new Annex IV to Directive 2011/16/EU.

The main thrust of the regulations is geared towards intermediaries that design, market, organize or manage the implementation of reportable arrangements, and towards taxpayers that have designed a reportable cross-border arrangement

Regulation 5 sets out reporting timelines for intermediaries of bespoke arrangements. A reporting obligation is incumbent upon an intermediary if the intermediary has a presence in Malta. A qualifying presence can take many forms such as incorporation, tax residence, a permanent establishment through which services with respect to the arrangement are provided and even professional association related to legal, taxation or consultancy services. The reporting requirement is restricted to information that is within the intermediary’s knowledge, possession or control. An intermediary is exempt from filing information in Malta upon evidence that the same information has been reported in another EU Member State, or that such information has been reported by another intermediary.

The regulations also allow certain categories of intermediaries whose profession is referred to in Article 3 of the Professional Secrecy Act (namely advocates, accountants, etc.) to invoke a waiver from filing information on a reportable cross-border arrangement where the reporting would constitute a criminal offence under Article 257 of the Maltese Criminal Code. If such privilege is invoked, the intermediary is obliged to notify any other intermediary, or if none the relevant taxpayer, of such waiver, within a period not exceeding seven working days. Furthermore, the regulations prescribe that the intermediary must provide a list to the Maltese tax authorities, on an annual basis, of the reportable cross-border arrangements where legal professional privilege has been claimed.

The regulations clarify that an intermediary should have the right to provide evidence that it did not know or could not reasonably be expected to know that it was involved in a reportable cross-border arrangement. The onus of providing such evidence to substantiate the claim rests entirely on the intermediary.

Intermediaries aside, the regulations also prescribe reporting obligations on relevant taxpayers. A relevant taxpayer is required to report cross-border arrangements if it has a presence in Malta. Presence can be in the form of (i) tax residence, (ii) a permanent establishment that benefits from an arrangement, or (iii) the receipt of income or profits in Malta, or the carrying out of an activity in Malta, without being tax resident nor having a permanent establishment in any other EU Member State. No reporting obligation is incumbent upon a taxpayer if evidence is shown that the arrangement has been reported by an intermediary or by another taxpayer, or has been reported in another EU Member State. It is mandatory for a relevant taxpayer to provide details to the Maltese tax authorities regarding the use of arrangements in each of the years for which the taxpayer has availed itself of such arrangement.

Regulation 11 prescribes penalties for non-compliance for both an intermediary and a relevant taxpayer, in equal measure. Failure to report information on a timely basis in a complete and accurate manner will levy a fixed penalty of 200 euros in addition to a daily penalty of 100 euros for each day the default persists, capped at 20,000 euros. A failure to comply with a request made by the Maltese tax authorities levies a penalty of 1,000 euros in addition to a daily penalty of 100 euros for each day in default, capped at 30,000 euros. The obligation to collect and retain documentation pertinent to a reportable arrangement subsists for a period of five years. Any default in relation to this will trigger a penalty of 2,500 euros.

Following the adoption of Directive 2020/876/EU by the Council of the European Union, Malta published Legal Notice No. 315 of 2020, introducing the Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations 2020, which deferred reporting deadlines by six months.

Reportable cross-border arrangements made on or after January 1, 2021, must be reported within a 30-day period from the triggering event. A “triggering event” is the earlier of (i) the day after the reportable cross-border arrangement is made available for implementation, (ii) the day after the reportable cross-border arrangement is ready for implementation, or (iii) when the first step in the implementation of the reportable cross-border arrangement has been made. In addition, certain intermediaries must file, within 30 days of the day after they provided (directly or by means of other persons) aid, assistance or advice with respect to designing, marketing, organizing, making available for implementation or managing the implementation of a reportable cross-border arrangement.

The deadline for submitting the first periodic report concerning a “marketable” device was April 30, 2021

Planning Point: Practitioners should note that Malta’s legislation is closely aligned with DAC6, with consistent hallmarks and the same application to cross-border arrangements only. The legislation contains no extension to VAT, customs duties, excise duties and compulsory social security contributions.

Both taxpayers and practitioners should be aware that although a Maltese operation may well not be reportable in Malta, the interpretation of certain hallmarks may result in the same arrangement being reported in other Member States. Professional guidance is therefore highly recommended.

DAC7: Reporting Obligations for digital platform operators

Malta has enacted Legal Notice 8 of 2023 (amending Subsidairy Legislation 123.127, ‘Cooperation with Other Jurisdictions on Tax Matters Regulations’), which transposes Article 1(8) of Directive 2021/514/EU (DAC7) (amending Directive 2011/16/EU (DAC)) and introduces mandatory reporting rules for digital platform operators. Primarily, the directive extends tax transparency rules to digital platforms by requiring (i) reporting platform operators to collect and report prescribed information on reportable sellers using their platforms for certain commercial activities, and (ii) EU Member States to automatically exchange this information.

Malta has largely followed the wording of the DAC7 Directive.

Reporting Platform Operators: The legislation provides for the collection and reporting to the Maltese tax authority of certain information by digital platform operators in respect of sellers of goods and services using their platforms.

A platform is defined as any software, including websites and mobile applications, which allows sellers to connect to other users to carry out a relevant commercial activity. However, the definition does not include platforms that allow only (i) the processing of payments, (ii) listing or advertising by users or (iii) the redirection or transfer of users to a platform.

Reporting applies to operators of digital platforms who are tax resident in Malta, incorporated or managed in Malta, or have a permanent establishment in Malta, provided that the platform is engaged in a relevant commercial activity. If a platform operator is required to report data and information to the tax authorities of more than one EU Member State (for example, because that platform operator is tax resident in more than one EU Member State), it may choose the Member State in which it fulfills its reporting obligations.

Non-EU platform operators must also report to the Maltese tax authority if they are registered in Malta and facilitate relevant activities of EU sellers or the rental of immovable property located in a Member State.

Relevant Activities: The relevant activities that trigger an obligation to report are:

  • the rental of immoveable property;
  • the provision of a personal service (time or task-based work);
  • the sale of goods (tangible property); and
  • the rental of any mode of transport.

For the reporting obligation to apply, the activity must be carried out for consideration and may be cross-border or domestic.

Reportable Sellers: A reportable seller is an EU resident individual, company or legal arrangement, registered on the platform and carrying out a relevant activity. Non-EU resident platform users renting out immoveable property located in an EU Member State are also reportable sellers.

Government and publicly traded entities are excluded from reporting. So too are casual sellers of goods for which the platform has facilitated less than 30 sales and for which the total consideration paid does not exceed 2,000 euros during a reporting period. An exclusion also applies to sellers engaged in high frequency renting of immoveable property. To qualify, there must be more than 2,000 relevant transactions during a reporting period.

Information to be Reported: From January 1, 2023, reporting platform operators must collect prescribed information on non-excluded sellers carrying out a relevant activity and identify reportable sellers. Due diligence provisions require the platform operator to verify the reliability of the information gathered.

The information to be disclosed to the Maltese tax authority includes a reportable seller’s identity, EU Member State of residence, financial account details, tax identification number (“TIN”), VAT/business registration numbers, consideration paid or credited per quarter, and any fees, commissions or taxes withheld by the reporting platform operator.

Additional information is required to be reported in the case of rental of immovable property.

Reporting Mechanics: Reportable information must be submitted to the Maltese tax authority no later than January 31 of the year following the calendar year in which a reportable seller is identified. The deadline for first reporting of data by platform operators is January 31, 2024.

Exchange of reported information by EU Member States is required within two months following the end of the reporting period.

Compliance: There are sanctions and monetary penalties for non-compliance.

 

Hybrid mismatches

On December 24, 2019, Malta published Legal Notice No. 348 of 2019, introducing the European Union Anti-Tax Avoidance Directives Implementation (Amendment) Regulations 2019 (“the Regulations”). These regulations implement the hybrid mismatch arrangements contained in Directive 2016/1164/EU (the Anti-Tax Avoidance Directive) (ATAD 1) as amended by Directive 2017/952/EU (ATAD 2) and generally apply with effect from January 1, 2020. An exception are the provisions for reverse hybrid mismatches which apply from January 1, 2022.

The Regulations apply to corporate taxpayers, trusts and also the permanent establishments of nonresident companies. There is clear alignment with the ATAD directive and a following of the guidance contained in the Final Report on Action 2 of the OECD/G20 BEPS Project Report “Neutralising the Effects of Hybrid Mismatch Arrangements”.

The Regulations make a distinction between a mismatch outcome and a hybrid mismatch. The defensive measures contemplated by the Regulations become effective when a hybrid mismatch results from a mismatch outcome. A mismatch outcome results from a “double deduction” or a “deduction without inclusion” situation.

A double deduction occurs when a deduction of the same payment, expenses or losses is claimed in both the payor/source jurisdiction and the investor jurisdiction.

A deduction without inclusion occurs when the deduction of a payment is claimed in the payor jurisdiction without a corresponding inclusion for tax purposes of that payment (or deemed payment) in the payee jurisdiction. It also includes a deduction claimed for a deemed payment between the head office and permanent establishment, or between two or more permanent establishments, in any jurisdiction (payor jurisdiction) without a corresponding inclusion for tax purposes of that payment (or deemed payment) in the payee jurisdiction.

The types of hybrid mismatches covered by the Regulations are:

  • payments under a financial instrument where the mismatch outcome is a result of a difference in legal characterization of the financial instrument;
  • payments to a hybrid entity where the mismatch outcome is a result of the entity being disregarded for tax purposes, or of differences in the allocation of the payment;
  • payments to a hybrid permanent establishment where the mismatch outcome is the result of the permanent establishment being disregarded, or of differences in the allocation of payments between head office and permanent establishment or between two or more permanent establishments of the same entity;
  • payments to a hybrid entity or hybrid permanent establishment where the mismatch outcome is a result of the payment being disregarded; and
  • a double deduction outcome resulting in a deduction for the same payment, expense or losses in two or more jurisdictions without a corresponding income inclusion.

A hybrid mismatch is limited to arrangements and transactions between associated enterprises, or between the head office and its permanent establishment. The rules may still apply between unrelated parties if the hybrid mismatch is as a result of a structured arrangement whereby the taxpayer or an associated enterprise could reasonably be expected to be aware of the hybrid mismatch and share in the value of the tax benefit resulting from the hybrid mismatch.

The Regulations implement six defensive measures. Each measure includes a primary rule and a secondary rule. In a case where the primary rule fails, the secondary rule will apply.

In the case of a double deduction:

  • Primary rule — the deduction is denied in Malta if it is the investor jurisdiction; and
  • Secondary rule — the deduction is denied in Malta if it is the payor jurisdiction and the deduction is not denied in the investor jurisdiction.

In the case of a deduction without inclusion:

  • Primary rule — the deduction is denied in Malta if it is the payor jurisdiction; and
  • Secondary rule — the amount of the payment that would otherwise give rise to a mismatch outcome is included in income if Malta is the payee jurisdiction and the deduction is not denied in the payor jurisdiction.

To the extent that a hybrid mismatch involves income of a disregarded permanent establishment of a taxpayer resident in Malta which is not otherwise subject to tax in Malta, that taxpayer must include in its income the income that would otherwise be attributed to the disregarded permanent establishment. This applies unless Malta is required to exempt the income of the permanent establishment in terms of a double taxation treaty entered into by Malta with a third country.

In the case of a reverse hybrid mismatch, where an entity established in Malta has more than 50 percent of its ownership held by nonresident entities located in jurisdictions that regard the hybrid entity as a taxable person, the hybrid entity shall be regarded as a resident of Malta and taxed on its income to the extent that income is not otherwise taxed under any other provision of the Income Tax Acts or in any other jurisdiction.

To the extent that a deduction for payment, expenses or losses of a taxpayer resident in Malta and in another jurisdiction is deductible from the tax base in Malta and in that other jurisdiction, the deduction shall be denied to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual-inclusion income. If the other jurisdiction is a Member State, the deduction shall be denied only if the taxpayer is not deemed to be resident in Malta according to the double taxation treaty between Malta and the other Member State concerned.

8.2 Thin Capitalization/Other Interest Deductibility Rules

Malta has two rules limiting the deductibility of interest expenses: one is a general principle of Maltese tax law and the second is a thin capitalization rule introduced as a result of the EU ATAD requirements.

Interest paid by a Malta-registered person to a foreign related person is only deductible against income it has helped to generate. It is therefore difficult to artificially gear up a company simply by introducing debt.

Furthermore, Maltese tax law provides for a limitation on deduction with respect to certain interest paid to nonresidents. Such limitations apply where.

  • the interest is paid to a nonresident for the granting of a loan or from any form of credit to finance the acquisition, development, construction, refurbishment, renovation of immovable property situated in Malta or any right thereon; and
  • the payer of the interest is related to the nonresident.

With effect from January 1, 2019, new thin capitalization regulations were introduced as part of the implementation of the EU Anti-Tax Avoidance Directive (Directive 2016/1164/EU) (ATAD).11120 The regulations limit deductibility of taxpayers’ exceeding borrowing costs (i.e., the net amount of deductible interest and taxable interest income) up to 30 percent of the taxpayer’s earnings before interest, tax, depreciation and amortization (EBITDA). Net borrowing costs in excess of this threshold may not be deducted, but may be carried forward without time limitation, and with a possibility to carry forward for a maximum of five years any unused interest capacity.

The regulations provide for several exceptions, in particular:

  • de minimis rule — full deductibility of exceeding borrowing costs up to 3 million euros;
  • full deductibility of exceeding borrowing costs if the taxpayer can demonstrate that the ratio of its equity over its total assets is equal or higher than the equivalent ratio of the group;
  • a standalone entity exemption — full deductibility of exceeding borrowing costs if the taxpayer is a standalone entity (i.e., a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or PE);
  • exclusion from the scope of costs incurred on loans concluded before June 17, 2016 or used to fund certain long-term public infrastructure projects; and
  • exclusion of financial undertakings.

8.3 Controlled Foreign Company (CFC) Rules

With effect from January 1, 2019, Malta introduced CFC regulation pursuant to the EU Anti-Tax Avoidance Directive (Directive 2016/1164/EU) (ATAD).

Any foreign subsidiary or PE of a Malta resident company may be treated as a CFC if the following tests are met:

  • control test (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 percent of the voting rights, or owns directly or indirectly more than 50 percent of the capital, or is entitled to receive more than 50 percent of the profits of that entity; and
  • low-tax test — the actual corporate tax paid by the entity or PE is less than 50 percent of the tax that would have been charged under Maltese tax rules on the entity or PE.

The CFC rules do not apply in relation to the following situations:

  • where the profits of the CFC are generated through genuine business arrangements and are not artificially entered into with a purpose of obtaining a tax advantage, in line with the guidance from the European Court of Justice;
  • where the accounting profits do not exceed 750,000 euros and nontrading income of no more than 75,000 euros; or
  • where the accounting profits amount to no more that 10 percent of operating costs in the tax period.

When an entity is considered to be a CFC, the undistributed profits/income may be included in the taxable income of the controlling entity and a credit granted for the tax paid at source. The income to be included in the taxable income of the controlling entity is, however, limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company and in line with the arm’s-length principle.

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