Free Zones) Rules, 2005

L.N. 332 of 2005

INCOME TAX ACT

(CAP. 123)

Tax Credits (Owners and Operators of Warehouses Situated in

Free Zones) 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 Credits (Owners and Title.

Operators of Warehouses Situated in Free Zones) 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 –

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

“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)<

“the Corporation” means the Malta Enterprise Corporation.

“eligible operator” means a company, whose business consists

solely of the operation of any warehouse or such related activities

as may be approved by the Corporation<

“eligible owner” means a company, including an eligible

operator, that –

(i) owns, or

(ii) holds under any title valid at law, including a title

of lease, or

(iii) as a result of an approved project, will own or

hold under any such title a warehouse situated within a free

zone>

provided that the title holder of any property mentioned

in (ii) and (iii) shall not be in any way related to the eligible

owner<

“free zone” means a site or an area in Malta that is recognised

by the Comptroller of Customs as a free zone for the purposes of

customs legislation<

“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 company” means an eligible owner or an eligible

operator<

“qualifying expenditure” means expenditure incurred in the

carrying out of a qualifying project for -

(i) the construction, development or improvement of

a warehouse within a free zone, including related labour costs

which are capitalised as part of the cost of such construction,

development or improvement<

(ii) the acquisition of plant and machinery that is

required for the provision of warehousing facilities within a

free zone or for the operation of a warehouse within a free

zone, excluding office furniture, non-commercial 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<

“qualifying project” means –

(i) a project of an eligible owner that involves

qualifying expenditure< or

(ii) a project of an eligible operator that involves

qualifying expenditure referred to in paragraph (ii) of the

definition of “qualifying expenditure”<

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

meaning assigned to them under the Business Promotion

Regulations, 2001.

(1) When a qualifying company incurs allowable expenditure Tax credit in respect

of qualifying

in carrying out an approved project and where the employment condition expenditure.

referred to in rule 10 and the other relevant conditions laid down in

these rules are satisfied, 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 qualifying company incurs or intends to incur Application to the

qualifying expenditure in carrying out a qualifying project it may apply Corporation.

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 rule 2 in the

definition of “qualifying expenditure”<

(d) if the applicant is an eligible operator, state the number

of additional employees that it plans to employ during the project

period<

(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<

(c) in the case of an application filed by an eligible operator,

and where an application that refers to the same warehouse has

also been filed by an eligible owner, authorise the Corporation to

disclose to that owner information about the employment of

individuals by the operator where that information is necessary in

connection with the right of the owner to a tax credit under these

rules.

(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

st

31 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 Determination of

maximum

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

application constitutes qualifying expenditure and is necessary and expenditure.

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 Letter of approval.

issue a letter of approval showing>

(a)

particulars of the applicant<

(b) a description of the project, with such 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 rule 2 in the definition

of “qualifying expenditure 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<

(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

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

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

apply.

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

condition

employment condition referred to in rule 3(1) shall be satisfied–

(a) in the case of an eligible owner which is not also the

operator of the warehouse to which the approved project refers, if

that warehouse is, during the project period or within three years

from the termination thereof, operated by an eligible operator which

also carries out an approved project, and that operator employs,

during his project period, at least one additional employee<

(b) in the case of a qualifying company which is the operator

of the warehouse to which the approved project refers, if, during

the project period or within three years from the termination thereof,

it employs 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 under an indefinite contract or for a

period of not less than three years<

(b) his duties are solely and directly related to warehousing

operations<

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

of full time employees of the employer<

(d) he was not, at any time during the period of two years

prior to his employment with that employer, employed with a

person related through direct or indirect ownership or shareholding

with the employer<

(e) his employment is certified by the Corporation in

accordance with rule 11 as an employment of an additional

employee for the purpose of these rules.

(3) When an employee of an eligible operator who has been

taken into account in calculating the tax credit due to that operator or to

an eligible owner does not remain in the employment of that company,

for any reason whatsoever, for a period of at least thirty-six months,

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

12 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) An eligible operator whose project is approved under

these rules shall prepare and deliver to the Corporation such 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 its project and the

number and particulars and date of employment of individuals who

are employed by it as full time employees during the project period<

(b) such further information and details as the Corporation

may consider relevant.

(2) The statement shall be prepared in respect at such

intervals as the Corporation may require.

(3) When the Corporation is satisfied that an eligible

operator has employed an individual that qualifies as 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).

(4) Where the approved project of the operator in question

refers to a warehouse in respect of which the Corporation has approved

a project carried out by an eligible owner, the Corporation shall deliver

a copy of the certificate to the owner.

(1) The tax credit due to an eligible owner in respect of Calculation of the

tax credit.

allowable expenditure defined in rule paragraph (i) of the definition of

“qualifying expenditure” in rule 2 (the construction, development or

improvement of a warehouse) shall be allowable for the year of

assessment immediately following that in which the employment

condition is first satisfied and shall be the equivalent of>

A x B x 2.5%

where -

A = the amount of the said expenditure incurred by the eligible

owner on the whole approved project<

B = the number of additional employees employed during

the first year in which the employment condition is satisfied.

(2) The tax credit due to a qualifying company in respect of

expenditure defined in paragraph (ii) of the definition of “qualifying

expenditure” in rule 2 (the acquisition of plant and machinery) shall be

allowable for each year of assessment immediately following a year in

which that expenditure is incurred and shall be equivalent to –

A x B x 10%

where

A = the amount of the said expenditure incurred by the

qualifying company in the respective year

B = the number of additional employees employed during

the year in which that expenditure is incurred

(3) Notwithstanding the provisions of sub-rules (1) and (2)

the tax credit due to a qualifying 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

(b) in the case of any other qualifying 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 these rules, 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

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

company.

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

from the tax chargeable on gains or profits derived from the activities

for which the investment to which the approved project refers is made,

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 in subsequent years on

income from the said activities>

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.

(5) 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.

(6) 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)

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

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 amount represented by 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 takes

place, and shall be reported and paid by the company in question

accordingly.

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

of tax return to the

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

Corporation.

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 Powers of the

Commissioner.

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 Electronic tax

return.

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

eligibility to the benefit under these regulations>

(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.

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