Reinvestment Tax Credit (Income Tax) Rules, 2005

L.N. 334 of 2005

INCOME TAX ACT

(CAP. 123)

Reinvestment Tax Credit (Income Tax) 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 Reinvestment Tax Credit

(Income Tax) Rules, 2005.

(2) 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 -

“base year” means the year during which the profit eligible

to be reinvested has been earned and subsequently declared in the

tax return for the relative year of assessment<

“the Commissioner” means the Commissioner of Inland

Revenue<

“the Corporation” means the Malta Enterprise Corporation<

“eligible person” means a person resident in Malta deriving

eligible profits that are reinvested in an eligible reinvestment project

approved by the Corporation and conforming with the requirements

of rule 3<

“eligible profits” means income deriving from any activity

carried out in Malta chargeable under the provisions of article

4(1)(a) of the Act and computed in accordance with the provisions

of the Act, and set-aside for the exclusive purpose of financing an

approved reinvestment project<

“eligible reinvestment project” means a project approved by

the Corporation under these rules, in respect of which qualifying

expenditure has been incurred and which is retained within the

business for at least two years or such other shorter period as the

Corporation may deem appropriate in view of the nature of the

project>

Provided that a project shall not be treated as an eligible

reinvestment project if it is linked to>-

(i) the production, processing or marketing of agricultural

and fisheries products<

(ii) export-related activities<

(iii) activities contingent upon the use of domestic over

imported goods<

“qualifying expenditure” means expenditure of a capital nature

exclusively financed by eligible profits, incurred as part of an

eligible reinvestment project as approved by the Corporation in>

(a)

acquiring an industrial building or structure<

(b) carrying out any extension or improvement to an

existing industrial building or structure, including the cost of

land forming an integral part of such extension<

(c) acquiring brand new or second-hand plant and

machinery excluding>

(i) motor vehicles unless these are, to the

satisfaction of the Corporation, specialised commercial

vehicles that are essential to the implementation of the

project< and

(ii) works of art, antiques, any assets whose use

is wholly or mainly of a decorative nature and any assets

whose cost is related to their intrinsic value rather than

to their specific usefulness for a qualifying project<

(d) acquiring intellectual property rights that are

essential to the implementation of the project<

(e) labour costs which may be capitalized as part of

the cost of any of the assets, extensions or improvements

referred to above>

Provided that such expenditure is incurred on assets>

(a)

which are first used in Malta< and

(b) in respect of which no income tax benefit or incentive

has previously been obtained under any other legislation<

“qualifying profits” means income deriving from the same

activity in which eligible profits have been earned, computed in

accordance with the provisions of the Act, that is relieved by a

reinvestment tax credit.

(1) These rules shall apply to eligible persons deriving

eligible profits in the year immediately preceding any of the years of

assessment 2006 to 2010 and reinvested in an eligible reinvestment

project by not later than three years from the beginning of the respective

base year>

(2) In order to qualify for the benefits under these rules, a

person shall, in the base year>

(i) have had a turnover of not more than Lm250,000, and

(ii) have had a minimum of three but not more than ten

employees of whom at least three were full time employees>

Provided that persons engaged as apprentices and students shall

not be treated as employees for the purpose of this item< and

(iii) have been registered as an FSS payor under the Final

Settlement System (FSS) Rules>

Provided that in the case of a company which prepares its financial

statements in a currency other than in Maltese liri, the turnover shall be

converted into Maltese liri by reference to the middle rate of exchange

as determined by the Central Bank of Malta.

(3) A person intending to benefit from the incentive

provided by these rules, shall, by not later than three months before the

relative tax return date, notify the Corporation of such intention for

each base year by means of a letter of application specifying such

intention and providing the following details>

(i) the person’s name, address, income tax registration

number and employer number<

(ii) the profit declared for the base year<

(iii) the amount of eligible profits to be set-aside for

reinvestment<

(iv) the turnover for the base year<

(v) the number of employees engaged during that year,

distinguishing between part-time and full-time employees as well

as the number of apprentices and students, if any, engaged by that

person<

(vi) the period during which the reinvestment is to be made<

(vii) the details of the reinvestment project, with a

breakdown of the major expense headings<

(viii) a certificate issued by a Certified Public Accountant

and Auditor confirming that the reinvestment project is viable,

that the expenses involved are reasonable and fair according to

market values, and that the reinvestment has the capacity to expand

the business>

Provided that any person who fails to notify the Corporation in

writing about the intention to apply for the incentive provided by this

rule, shall forfeit the right to be eligible for the benefit.

(4) The Corporation, on being satisfied with the application

referred to in this rule, shall issue a letter, copied to the Commissioner,

indicating the amount of the eligible profits approved for reinvestment

and setting out therein any conditions that it may deem fit to impose.

(1) Where eligible profits derived by an eligible person have Reinvestment tax

credit.

been set aside for the exclusive purpose of financing an eligible

reinvestment project as shall have been approved by the Corporation,

and the eligible profits or part thereof have in fact been used for such

purpose, that person shall be entitled to the benefit under sub-rule (2)

hereof.

(2) The benefit available under these rules shall be in the

form of a reinvestment tax credit equivalent to the tax chargeable on

that part of the eligible profits that is reinvested in an approved project

on the basis of the following formula>

tax on total income for the base year

less

tax on total income after excluding that part of the eligible

profits for the same base year that is being reinvested, calculated

at the rates applicable for the base year.

(3) A person entitled to a reinvestment tax credit in respect

of a year of assessment shall be entitled to deduct from the amount of

tax which is due on qualifying profits for that year of assessment the

amount of the reinvestment tax credit, calculated as a proportion of the

qualifying expenditure to the eligible profits that are deemed reinvested

and multiplied by the maximum tax credit entitlement derived by

applying the formula in sub-rule (2)>

Provided that the amount of reinvestment tax credit allowable in

terms of this sub-rule shall not exceed fifty thousand liri for any particular

year of assessment>

Provided further that the tax credit due to a company in respect of

an approved reinvestment project shall not exceed, in the aggregate,

fifty percent of the total cost of the project in question, 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 (OJ L 10#33, 13.1.2001), as subsequently

amended.

(4) (a) Where the reinvestment tax credit for any year of

assessment exceeds the tax payable by such person for that year, the

excess shall be added to the reinvestment tax credit, if any, for the

following year>

Provided that so much of the reinvestment tax credit which is

not so utilised at the end of any year is carried forward up to the year of

assessment 2015 and may not be set off against the tax due on any other

source of income or to generate a refund of tax.

(b) The reinvestment tax credit shall only be deducted

from the tax due on qualifying profits from the same source of the eligible

profits and for the purpose of this sub-rule qualifying profits are deemed

to be the last part of the total income.

(c) The reinvestment tax credit granted under these

rules shall not be allowed if the eligible profits have not been reinvested,

even if such profits had been set aside for reinvestment under an eligible

reinvestment project.

(5) Where a person has benefited from the provisions of

this rule, the reinvestment tax credit for any year of assessment shall be

deemed to have relieved from tax so much of the qualifying profits for

the year which when multiplied by the rate or rates of tax at which it

was chargeable in that year, is equal to the reinvestment tax credit.

(6) The chargeable income which is deemed to have been

relieved from tax in accordance with sub-rule (4) hereof, shall, for the

purposes of the Act, be retained in the business for at least until the end

of year of assessment 2014, and>

(a) in the case of an individual it shall be included in the

capital account and the movements in such account shall be

disclosed by way of a note to the audited financial statements<

(b) in the case of a limited liability company it shall be

disclosed separately in the audited financial statements in a reserve

entitled “Reinvestment Reserve”.

(7) (a) In the case of a limited liability company the

qualifying income which is deemed to have been relieved from tax is

allocated to the Maltese Taxed Account and, upon distribution, shall be

exempt from tax in the hands of the shareholders up to the ultimate

shareholder.

(b) The company shall state in the dividend warrant

pertaining to any such distribution that such income has been relieved

by a reinvestment tax credit in accordance with these rules, and the tax

which has so been relieved shall not be available for refund for any

purpose of the Act.

(8) Where the benefit provided by these rules is due to a

partnership, any such benefit shall be due to the partners of any such

partnership>

Provided that the reinvestment tax credit is calculated separately

for each partner on the share of qualifying profit attributable to such

partner in the manner set out in sub-rule (4).

(1) A person wishing to claim a reinvestment tax credit for Certificate of

compliance.

any year of assessment, shall submit to the Corporation, by not later

than three months before the relative tax return date, a written application

supported by audited financial statements and any other documentary

evidence requested by the Corporation.

(2) Any application required to be submitted to the

Corporation in order to benefit from these rules shall be in such form

and contain such particulars as the Corporation may require.

(3) The Corporation, on being satisfied with the submissions

referred to in this rule and within sixty days from the receipt of all

relevant information it may request, shall issue a Certificate of

Compliance confirming that all the provisions of these rules have been

complied with.

(4) On granting its approval for any purpose under these

rules, the Corporation shall confirm its approval in writing setting out

the conditions to be satisfied by the person, and the person’s entitlement

to the benefit provided by these rules shall be conditional on the

production of such written approval.

(5) The Corporation shall forward to the Commissioner

copies of certificates and approvals issued under the provisions of these

rules.

(1) On completion of each approved eligible reinvestment

project the company shall deliver, within ninety days of completion of

the project, a written certificate by a competent technical person to the

Corporation, copied to the Commissioner, showing>

(a)

the date of completion of the project<

(b) the amount of qualifying expenditure incurred and

claimed for each year of assessment, supported by a breakdown of

the major expense headings<

(c) whether, where applicable, the conditions, that may have

been made applicable to the project in terms of rule 3(4) have

been observed.

(2) Where the approved project includes qualifying

expenditure listed under paragraphs (a) or (b) to the definition of

“qualifying expenditure”, the certificate referred to in sub-rule (1) hereof

shall be accompanied by a deed of purchase in the case of acquisition

of an industrial building or structure or a statement written by the

architect under whose direction or supervision the works under paragraph

(b) were carried out, confirming that the expenditure was incurred in

the carrying out of the project as approved.

(1) Where, in terms of rule 3 hereof, the Corporation issues

a letter of approval to an applicant, it may, from time to time, make

such reviews of books and documents, hold on-site inspections on

premises of that applicant 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 Rules, the Corporation shall also keep a database

of all assistance provided to, or claimed by, applicant companies under

these Rules for 10 years from the date on which the last individual aid

was granted under the aforementioned Rules, in order to enable it to –

(a) provide the State Aid Monitoring Board with such

information as it may require< and

(b) inform the Commissioner whether the credits claimed

in terms of these rules have been properly calculated.

(3) Applicant persons that have received a letter of approval

in terms of rule 3 hereof, shall submit to the Corporation, by not later

than two months after the relative tax return date a copy of the tax

return for each year of assessment starting from the base year and all

subsequent consecutive years of assessment during which a deduction

and tax credit is available under these rules, irrespective of whether it is

utilised or not.

(4) Where the Corporation is not satisfied that an eligible

person is employing the benefit for the purpose it is intended for or has

failed to fulfil any condition under these rules, such person shall

immediately forfeit the right for the benefit.

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

eligibility to the benefit under these rules>

(a) the tax return together with audited financial statements

incorporating the TIFD codes as stipulated in the Tax Index of

Financial Data Rules, 2002, are to be submitted to the

Commissioner by the relative tax return date for each year of

assessment starting from the base year and all subsequent

consecutive years during which a reinvestment tax credit is

available irrespective of whether it is utilised or not<

(b) 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<

(c) 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.

These rules are established and shall be applied in accordance

Regulation (EC) No

with 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 (OJ L10#33, 13.1.2001), as subsequently amended.

Notwithstanding the other provisions of these rules, the

Commissioner shall have the right not to allow any reinvestment tax

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

provision of the Act or of the Social Security Act.

Except where the Commissioner otherwise approves, 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.

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