Tax Credit (Back Office Operations) Rules, 2005

L.N. 331 of 2005

INCOME TAX ACT

(CAP. 123)

Tax Credit (Back Office Operations) Rules, 2005

IN exercise of the powers conferred by articles 14(2) and 96 of the

Income Tax Act, hereinafter referred to as “the Act”, the Prime Minister

and Minister of Finance has made the following rules>-

(1) The title of these rules is the Tax Credit (Back Office Title.

Operations) Rules, 2005.

(2) These rules shall apply in respect of qualifying

expenditure incurred on or after the 1 st January, 2005.

(3) The equivalent of the benefits under the scheme shall

be an amount specifically appropriated in Government’s financial

estimates for a particular financial year.

In these rules, unless the context otherwise requires –

(Rule 12)

Tax credit

Tax credit as a percentage of allowable expenditure

Item of allowable expenditure

Tax credit

Expenditure defined in paragraph (i) (immovable property) of 0.35%

the definition of "qualifying expenditure" in rule 2

Expenditure defined in paragraph (ii) (plant and machinery) of 1.75%

the definition of "qualifying expenditure" in rule 2

Expenditure defined in paragraph (iii) (intellectual property

7%

rights) of the definition of "qualifying expenditure" in rule 2

Mitbug[ fl-Istamperija tal-Gvern — Printed at the Government Printing Press

Definitions.

“additional employee” means an employee whose

employment is certified by the Corporation as the employment of

an additional employee by means of a certificate issued under rule

11<

“allowable expenditure” has the meaning assigned to it in

rule 9<

“approved project” means a project approved in accordance

with rule 5, as subject to any conditions that may be applicable in

terms of rule 5(2)<

“back office operations” means the provision by a company

of professional or administration services under outsourcing

agreements with enterprises established outside Malta, where such

services are to be used by those enterprises outside Malta<

“company” means a company, as defined in the Act, that

qualifies as a small or medium-sized enterprise>

Provided that as from such date as the Minister responsible

for finance may prescribe, “company” shall also include a company

as defined in the Act that does not qualify as a small or medium

sized enterprise<

“the Corporation” means the Malta Enterprise Corporation<

“maximum qualifying expenditure” has the meaning assigned

to it in rule 6<

“project period” means the period commencing on the earliest

date of commencement and ending on the latest date of completion

of the project in question as determined in terms of rule 7(1)(d)<

“qualifying expenditure” means expenditure incurred in the

carrying out of a qualifying project for -

(i) the acquisition, construction, development or

improvement of any immovable property, including related

labour costs which are capitalised as part of the cost of such

acquisition, construction, development or improvement<

(ii) the acquisition of plant and machinery, excluding

motor vehicles, works of art, antiques and any assets whose

use is wholly or mainly of a decorative nature or whose cost

is related to their intrinsic value rather than to their specific

usefulness for a qualifying project<

(iii) the acquisition of intellectual property rights from

third parties under open market conditions the cost of which

is amortisable<

“qualifying project” means a project, involving capital

expenditure, for the development or enhancement of facilities that

are used or designed to be used for back office operations in Malta<

“small enterprise” and “ medium-sized enterprise” have the

meaning assigned to them under the Business Promotion

Regulations, 2001<

(1) When a company engaged in a trade, business, profession

or vocation incurs allowable expenditure in carrying out an approved

project and satisfies the employment condition and the other relevant

conditions laid down in these rules, it shall be entitled to a tax credit in

accordance with and subject to the provisions of these rules.

(2) The said tax credit shall be in addition to and without

prejudice to the right of that company to a deduction, if any, that may

be allowable in respect of the said expenditure in accordance with the

provisions of article 14 of the Act.

(1) When a company engaged in a trade, business profession Application

Corporation.

or vocation incurs or intends to incur qualifying expenditure in carrying

out a qualifying project it may apply to the Corporation for the approval

of that project.

(2) An application under this rule shall be made on such

form as may be acceptable to the Corporation and shall>

(a) provide such particulars of the applicant as are necessary

to determine whether it qualifies or not as a small or medium sized

enterprise in accordance the provisions of the Business Promotion

Regulations, 2001<

(b) describe the project, its purpose and the expected date

of its commencement and its duration<

(c) contain a description of each item of qualifying

expenditure that the applicant has incurred or intends to incur in

the carrying out of the project, which items shall be grouped

according to the categories of expenditure listed in the definition

of “qualifying expenditure” in rule 2<

(d) state the number of additional employees that the

applicant plans to employ during the project period and up to three

years from its termination<

(e)

grant the authorisation referred to in sub-rule (3)<

(f) contain such other information, breakdowns and details,

and be accompanied by such documents and certifications as the

Corporation may require<

(g) be made by not later than three months prior to the

company’s tax return date for the year of assessment that

immediately follows the first year in which the company incurs

the expenditure to which the application refers.

(3) The authorisation referred to in sub-rule (2)(e) shall -

(a) grant to the Corporation and its officers access to any

premises or works as the Corporation may consider necessary in

order to ascertain any matter relevant to the approval of an

application and the right to a tax credit under these rules<

(b) authorise the Corporation to disclose to the

Commissioner any information and to pass on to the Commissioner

originals or copies of any documents and records that the

Corporation may have obtained in connection with the application.

(1) When the Corporation is satisfied that a project to which

an application made under rule 4 refers is a bona fide qualifying project

and that the application complies with the requirements of these rules,

it may approve the project and proceed to make a determination and

issue a letter of approval as provided in rules 6 and 7>

Provided that –

(a) the Corporation shall not approve any project after the

31 st December, 2008 or after such earlier date as the Corporation

may specify by means of a notice in the Gazette<

(b) the Corporation shall not approve a project whose

expected duration is more than thirty-six months.

(2) The Corporation may make the approval of a project

subject to such conditions as it may consider appropriate.

When the Corporation approves a project it shall determine

the extent to which, in its opinion, the expenditure referred to in the

application constitutes qualifying expenditure and is necessary and

reasonable in the light of the purpose for which it is or was intended to

be incurred, and the amount so determined shall constitute the maximum

qualifying expenditure.

(1) In respect of every approved project the Corporation shall

issue a letter of approval showing>

(a)

particulars of the applicant<

(b) a description of the project, with conditions as the

Corporation may have considered appropriate pursuant to rule 5(2)<

(c) the maximum qualifying expenditure for each item of

expenditure, indicating the category under the definition of

“qualifying expenditure” in rule 2 to which each such item belongs<

(d) the maximum aggregate State aid intensity to which the

applicant is entitled<

(e) the earliest date by which the project must commence

and the latest date by which it must be completed<

(f) the shortest period for which the investment must be

retained in terms of rule 9(2)<

(g) such other particulars as the Corporation may consider

appropriate.

(2) The Corporation shall deliver the letter of approval to

the applicant and a copy thereof to the Commissioner.

(3) The Corporation shall issue the said letter of approval

by not later than the company’s relative tax return date.

(1) Upon the completion of the approved project and not Certification of

completion by the

later than sixty days therefrom, the company shall deliver to the company.

Corporation a certificate drawn up by a person who is recognised by

the Corporation as competent for this purpose, showing>

(a)

the date of completion of the project<

(b) the amount of allowable expenditure.

(2) The company shall, within the time limit set out in sub-

rule (1), deliver a copy of the certificate to the Commissioner.

(3) The Commissioner may, after receiving a copy of the

certificate, request an independent opinion from the Corporation or any

other competent technical person regarding the contents thereof.

(1) Expenditure shall constitute allowable expenditure if and Allowable

expenditure.

to the extent that it meets all the following conditions>

(a) it is qualifying expenditure actually incurred by a

company in carrying out an approved project and is not reimbursed

to or otherwise recoverable by it<

(b) it is an item of expenditure to which a letter of approval

issued under rule 7 refers, which does not exceed the maximum

qualifying expenditure for that item, and in respect of which any

conditions that may have been made applicable in terms of rule

5(2) have been satisfied<

(c) it was incurred during the project period and for the

purpose for which the project was approved<

(d) it is correctly, clearly and separately recorded in the

records of the company and supported by documentary evidence<

(e) if it represents the cost of construction works, the

documentary evidence referred to in paragraph (d) includes a

statement by the architect under whose direction or supervision

the works were carried out confirming that the expenditure was

incurred in the carrying out of the project as approved.

(2) The investment represented by allowable expenditure

shall be retained within the company for at least five years after the

termination of the project period.

(3) If an investment or part thereof is not retained within

the company for the period referred to in sub-rule (2), the amount of

expenditure corresponding to that investment or part thereof, as the

case may be, that is not so retained, shall be deemed to have never

constituted allowable expenditure and the provisions of rule 13 shall

(1) Subject to the other provisions of this rule, the

employment condition referred to in rule 3(1) will be satisfied if the

company has employed at least one additional employee.

(2) Subject to sub-rule (3), an individual shall be deemed

to be an additional employee if all the following conditions are met –

(a) he is employed during the project period or during a

period of three years from its termination<

(b) he is employed under an indefinite contract or for a

period of not less than three years<

(c) his duties are solely and directly related to back office

operations of the employer<

(d) his employment represents a net increase in the number

of full time employees of the employer<

(e) his employment is certified by the Corporation in

accordance with rule 11 as an employment of an additional

employee.

(3) When an employee of a company who has been taken

into account in calculating the tax credit does not remain in the

employment of that company, for any reason whatsoever, for a period

of at least three years, and is not validly replaced as provided in sub-

rule (4), he shall be deemed to have never been an additional employee

and the provisions of rule 13 shall apply.

(4)

An employee shall be deemed to have been validly

replaced if>

(a) within three months from the date of the termination of

his employment the employer employs another individual in his

place< and

(b) the employment of the replacement employee satisfies

the conditions of sub-rule (2), except that the fact that it is a

replacement shall not, of itself, be deemed to be a breach of the

condition of paragraph (d) thereof< and

(c) the aggregate of the periods of employment of the

original employee and of his replacement or replacements is not

less than thirty-six months.

(5) A replacement employee may be validly replaced in the

same manner, and the period of his employment shall also be taken into

account for the purpose of sub-rule (4)(c).

(6) In calculating the number of additional employees, an

employee and his replacement or replacements shall count as one

additional employee.

(1) A company whose project is approved under these rules Certification of

additional

shall prepare and deliver to the Corporation a statement containing such employees.

information about its employees as is necessary to enable the Corporation

to determine the number of additional employees and their replacements,

including -

(a) the number of individuals who were in the employment

of the company before the commencement of the project and the

number and particulars of individuals who are employed by it as

full time employees during the project period and up to three years

from its termination<

(b) such further information and details as the Corporation

may consider relevant.

(2) The statement shall be prepared at such intervals as the

Corporation may require.

(3) When the Corporation is satisfied that a company that

is carrying on or that has carried on an approved project has employed

an individual that qualifies an additional employee in accordance with

the provisions of rule 10, and that it has obtained all the information

that it has considered relevant about the employees of that company, it

shall issue a certificate to that effect> provided that such certificate shall

be without prejudice to rule 10(3).

(1) The tax credit due to a company for a year of assessment

in connection with an approved project is calculated as follows>

(a) the amount of allowable expenditure falling within each

category of expenditure listed in the definition of “qualifying

expenditure in rule 2 and incurred from the date of the

commencement of the project period up to the end of the year

immediately preceding that year of assessment is multiplied by

the respective percentage as specified in the Schedule<

(b) the results obtained under paragraph (a) for the different

categories of expenditure are added and the total is multiplied by

the number of additional employees employed by the company

from the date of the commencement of the project period up to the

end of the year immediately preceding that year of assessment<

(c) the result obtained under paragraph (b) is then reduced

by the amount of tax credit, if any, already claimed for previous

years of assessment in connection with the project in question.

(2) Notwithstanding the provisions of sub-rules (1) the tax

credit due to a company in respect of an approved project shall not

exceed, in the aggregate, –

(a) in the case of a small or medium sized enterprise, fifty

percent of the total cost of the project in question and in conformity

with Article 4 of Commission Regulation (EC) No 70#2001 on the

application of Articles 87 and 88 of the EC Treaty to State Aid to

small and medium-sized enterprises, as subsequently amended<

and

(b) in the case of any other company, forty percent net grant

equivalent of the total cost of the project in question>

Provided that where the company in question has benefited

from any State aid in respect of expenditure incurred in the carrying

out of the project, other than as provided for in this Part, the

threshold referred to in paragraph (a) or (b), as the case may be,

shall be reduced by the value of that aid<

Provided further that the correct calculation of the said ceiling

and, where applicable, reduction, shall be the sole responsibility

of the company.

(3) The tax credit shall be availed of by way of a deduction

from the tax chargeable on gains or profits derived from back office

operations, and shall not be allowable as a deduction from tax chargeable

on gains or profits from any other source< and any amount of tax credit

due for a year of assessment that is not so absorbed in that year may be

carried forward and deducted from the tax chargeable on gains or profits

derived from back office operations in subsequent years>

Provided that any part of the tax credit that is not availed of up to

the year of assessment 2013 shall not be carried forward and the right

to a credit in respect thereof will lapse.

(4) Where, for a year of assessment, a company qualifies

for a tax credit under the Business Promotion Act and also under the

provisions of these rules, it shall avail itself of the tax credit under the

Business Promotion Act before any set-off is made in respect of the tax

credit due under these rules.

(5) A tax credit due in accordance with these rules shall not

give rise to a right for any refund.

(1) In the circumstances mentioned in rules 9(3) and 10(3) Reversal or

recalculation of

the tax credit in question shall be reversed or recalculated, as the case tax credit.

may be.

(2) The reversal or recalculation of a tax credit shall give

rise to an obligation of the company to pay an amount of tax, in addition

to any other tax liability, equivalent to the reduction in the tax credit

resulting from the reversal or recalculation, and such amount shall be

deemed to be tax chargeable under the Act for the year of assessment

immediately following that in which the cause for the reversal or

recalculation subsists, and shall be reported and paid by the company

in question accordingly.

A company to whom a letter of approval has been issued in

terms of rule 7 shall submit to the Corporation, by not later than two

to the Corporation.

months after the relative tax return date, a copy of the tax return for the

earliest year of assessment for which the relative tax credit may first be

claimed in terms of the said approval and for each subsequent year of

assessment for which the said tax credit remains available to it under

these rules, irrespective of whether the benefit is utilised or not.

(1) When the Corporation issues a letter of approval to a

company in terms of rule 7, it may, from time to time, make such reviews

of books and documents, hold on-site inspections on premises of that

company and make such other monitoring as it may consider necessary

for the purposes of these rules and for any matter relevant to an approved

application.

(2) In addition to the database kept under the provisions of

the Business Promotion Regulations, 2001, the Corporation shall also

keep a database of all assistance provided to, or claimed by, a company

under these rules for ten years from the date on which the last individual

assistance was granted, in order to enable it to –

(a) verify whether the provisions of these rules have been

complied with<

(b) provide the State Aid Monitoring Board with such

information as it may require< and

(c) inform the Commissioner whether the credits claimed

in terms of these rules have been properly calculated.

Notwithstanding the other provisions of these rules, the

Commissioner may make such enquiries and verification as he deems

fit in accordance with the provisions of the Income Tax Act, and shall,

after consulting the Corporation, have the right not to allow any tax

credit if any default is committed by the applicant in respect of any

provision of the Income Tax Act or the Social Security Act or any

subsidiary legislation issued thereunder.

No tax credit shall be due to a company under these rules for

a year of assessment unless it is claimed in the appropriate section of a

tax return submitted by electronic means by not later than the relative

tax return date.

The following further conditions must also be fulfilled for Further conditions.

eligibility to the benefit under these rules>

(a) no other benefits are being claimed or may

subsequently be claimed by a person on the same activity or project

under any other legislation granting fiscal incentive schemes<

(b) all tax liabilities including amounts due in respect of

FSS tax as well as social security contributions due up to the time

of the application, except for any tax still in dispute, must have

been settled or is being settled in accordance with a formal

agreement drawn up with the Commissioner.

Insofar as they provide for and regulate benefits for small Commission

and medium-sized enterprises, these rules are prescribed and shall be Regulation

No 70/2001.

applied in accordance with Commission Regulation (EC) No 70#2001

on the application of Articles 87 and 88 of the EC Treaty to Sate aid to

small and medium sized enterprises (OJ L 10#33, 13.1.2001), as

subsequently amended.