Implementation Regulations, 2018

L.N. 411 of 2018

INCOME TAX ACT

(CAP. 123)

European Union Anti-Tax Avoidance Directives

Implementation Regulations, 2018

IN EXERCISE of the powers conferred by articles 52B and 96 of

the Income Tax Act, hereinafter referred to as "the Act", the Minister for

Finance has made the following regulations:-

(1) The title of these regulations is the European Union

commencement.

Anti-Tax Avoidance Directives Implementation Regulations, 2018.

(2)

These regulations shall come into force on 1st January, 2019

Provided that the provisions of regulation 5 shall come into

force on 1st January, 2020.

(1) These regulations implement the provisions of

Directive (EU) 2016/1164 of 12 July 2016 adopted by the Council of the

European laying down rules against tax avoidance practices that directly

affect the functioning of the internal market.

(2) These regulations apply to all companies as well as other

entities, trusts and similar arrangements that are subject to tax in Malta

in the same manner as companies, including entities that are not resident

in Malta but that have a permanent establishment in Malta provided that

they are subject to tax in Malta as companies. Such persons are

hereinafter referred to as "taxpayers".

For the purposes of these regulations, unless the context

otherwise requires

"associated enterprise" means

(a) an entity in which the taxpayer holds directly or

indirectly a participation in terms of voting rights or capital

ownership of 25 per cent or more or is entitled to receive twenty-

five per cent (25%) or more of the profits of that entity;

(b) an individual or entity which holds directly or

indirectly a participation in terms of voting rights or capital

ownership in a taxpayer of twenty-five per cent (25%) or more or

is entitled to receive twenty-five per cent (25%) or more of the

profits of the taxpayer

If an individual or entity holds directly or indirectly a

participation of twenty-five per cent (25%) or more in a taxpayer

and one or more entities, all the entities concerned, including the

taxpayer, shall also be regarded as associated enterprises;

"borrowing costs" means interest expenses on all forms of debt,

other costs economically equivalent to interest and expenses incurred in

connection with the raising of finance taking into consideration

definitions found in Maltese law, including, without being limited to,

payments under profit participating loans, imputed interest on

instruments such as convertible bonds and zero coupon bonds, amounts

under alternative financing arrangements, such as Islamic finance, the

finance cost element of finance lease payments, capitalised interest

included in the balance sheet value of a related asset, or the amortisation

of capitalised interest, amounts measured by reference to a funding

return under transfer pricing rules where applicable, notional interest

amounts under derivative instruments or hedging arrangements related

to an entity's borrowings, certain foreign exchange gains and losses on

borrowings and instruments connected with the raising of finance,

guarantee fees for financing arrangements, arrangement fees and similar

costs related to the borrowing of funds;

"exceeding borrowing costs" means the amount by which the

deductible borrowing costs of a taxpayer in terms of the Act, were it not

for the provisions of these regulations, exceed taxable interest revenues

and other economically equivalent taxable revenues that the taxpayer

receives;

"financial undertaking" means any of the following entities

(a) a credit institution or an investment firm as defined in

point (1) of Article 4(1) of Directive 2004/39/EC of the European

Parliament and of the Council or an alternative investment fund

manager (AIFM) as defined in point (b) of Article 4(1) of

Directive 2011/61/EU of the European Parliament and of the

Council or an undertaking for collective investment in transferable

securities (UCITS) management company as defined in point (b)

of Article 2(1) of Directive 2009/65/EC of the European

Parliament and of the Council;

(b) an insurance undertaking as defined in point (1) of

Article 13 of Directive 2009/138/EC of the European Parliament

and of the Council;

(c) a reinsurance undertaking as defined in point (4) of

Article 13 of Directive 2009/138/EC;

(d) an institution for occupational retirement provision

falling within the scope of Directive 2003/41/EC of the European

Parliament and of the Council;

(e) pension institutions operating pension schemes which

are considered to be social security schemes covered by

Regulation (EC) No 883/2004 of the European Parliament and of

the Council and Regulation (EC) No 987/2009 of the European

Parliament and of the Council as well as any legal entity set up for

the purpose of investment of such schemes;

(f) an alternative investment fund (AIF) managed by an

AIFM as defined in point (b) of Article 4(1) of Directive 2011/61/

EU or an AIF supervised under the Investment Services Act;

(g) UCITS in the meaning of Article 1(2) of Directive

2009/65/EC;

(h) a central counterparty as defined in point (1) of Article

2 of Regulation (EU) No 648/2012 of the European Parliament

and of the Council;

(i) a central securities depository as defined in point (1) of

Article 2(1) of Regulation (EU) No 909/2014 of the European

Parliament and of the Council;

"tax period" means the year immediately preceding the year of

assessment referred to in articles 10 and 11 of the Act, as applicable;

"transfer of assets" means an operation whereby Malta loses the

right to tax the transferred assets, whilst the assets remain under the legal

or economic ownership of the same taxpayer and "transferred assets"

shall be construed accordingly;

"transfer of tax residence" means an operation whereby a taxpayer

ceases to be resident for tax purposes in Malta, whilst acquiring tax

residence in another EU Member State or third country;

"transfer of a business carried on by a permanent establishment"

means an operation whereby a taxpayer ceases to have taxable presence

in Malta whilst acquiring such presence in another EU Member State or

third country without becoming resident for tax purposes in that

Member State or third country.

(1) Exceeding borrowing costs shall be deductible in the

tax period in which they are incurred only up to thirty per cent (30%) of

the taxpayer's earnings before interest, tax, depreciation and

amortisation (hereinafter referred to as "EBITDA").

For the purpose of this regulation, and in accordance with

guidelines issued by the Commissioner, the following may also be

treated as a taxpayer

(a) an entity which is permitted or required to apply the

rules on behalf of a group, as recognised for the purposes of

Maltese tax law;

(b) an entity in a group, as recognised for the purposes of

Maltese tax law, which does not consolidate the results of its

members for tax purposes.

In such circumstances, exceeding borrowing costs and the

EBITDA may be calculated at the level of the group and comprise the

results of all its members.

(2) The EBITDA shall be calculated by adding back to the

income subject to tax the tax-adjusted amounts for exceeding borrowing

costs as well as the tax-adjusted amounts for depreciation and

amortisation. Tax exempt income shall be excluded from the EBITDA.

(3) Notwithstanding the provisions of sub-regulation (1), the

taxpayer may

(a) deduct exceeding borrowing costs up to three million

euro (€3,000,000)

Provided that where under the provisions of sub-

regulation (1) a group is treated as a taxpayer, the amount of three

million euro (€3,000,000) shall be considered for the entire group;

(b) fully deduct exceeding borrowing costs if the taxpayer

is a standalone entity. For the purposes of this paragraph, "a

standalone entity" means a taxpayer that is not part of a

consolidated group for financial accounting purposes and has no

associated enterprise or permanent establishment.

(4) The following exceeding borrowing costs shall be excluded

from the scope sub-regulation (1)

(a) costs incurred on loans which were concluded before

17 June 2016, but the exclusion shall not extend to any subsequent

modification of such loans;

(b) costs incurred on loans used to fund a long-term public

infrastructure project where the project operator, borrowing costs,

assets and income are all in the European Union, where the

Commissioner is satisfied that the financing arrangements for the

project have special features which justify such treatment with

regards to other financing arrangements subject to the provisions

of this regulation

Provided that –

(i) a long-term public infrastructure project means a

project to provide, upgrade, operate and/or maintain a large-

scale asset that is considered in the general public interest by

an EU Member State; and

(ii) any income arising from a long-term public

infrastructure project shall be excluded from the EBITDA of

the taxpayer, and any excluded exceeding borrowing cost

shall not be included in the exceeding borrowing costs of the

group vis-à-vis third parties referred to in paragraph (b) of

sub-regulation (5).

(5) Where the taxpayer is a member of a consolidated group for

financial accounting purposes, the taxpayer may fully deduct its

exceeding borrowing costs if it can demonstrate that the ratio of its

equity over its total assets is equal to or higher than the equivalent ratio

of the group and subject to the following conditions

(a) the ratio of the taxpayer's equity over its total assets is

considered to be equal to the equivalent ratio of the group if the

ratio of the taxpayer's equity over its total assets is lower by up to

two (2) percentage points; and

(b) all assets and liabilities are valued using the same

method as in the consolidated financial statements referred to in

sub-regulation (8).

(6) The taxpayer may carry forward, without time limitation,

exceeding borrowing costs and, for a maximum of five (5) years, unused

interest capacity, which cannot be deducted in the current tax period

under sub-regulations (1) to (5).

(7) Financial undertakings shall be excluded from the scope of

sub-regulations (1) to (6), including where such financial undertakings

are part of a consolidated group for financial accounting purposes.

(8) For the purpose of this regulation, the consolidated group for

financial accounting purposes consists of all entities which are fully

included in consolidated financial statements drawn up in accordance

with the International Financial Reporting Standards or any other

accounting standard as determined by means of guidelines issued under

article 96(2) of the Act.

(1) A taxpayer shall be subject to tax on capital gains that Exit taxation.

are to be calculated at an amount equal to the market value of the

transferred assets, at the time of exit of the assets, less their value for tax

purposes, in any of the following circumstances

(a) a taxpayer transfers assets from its head office in Malta

to its permanent establishment in another EU Member State or in a

third country in so far as Malta no longer has the right to tax

capital gains from the transfer of such assets due to the transfer;

(b) a taxpayer transfers assets from its permanent

establishment in Malta to its head office or another permanent

establishment in another EU Member State or in a third country in

so far as Malta no longer has the right to tax capital gains from the

transfer of such assets due to the transfer;

(c) a taxpayer transfers its tax residence from Malta to

another EU Member State or to a third country, except for those

assets which remain effectively connected with a permanent

establishment in Malta;

(d) a taxpayer transfers the business carried on by its

permanent establishment from Malta to another EU Member State

or to a third country in so far as Malta no longer has the right to tax

capital gains from the transfer of such assets due to the transfer.

(2) The exit tax referred to in sub-regulation (1) shall be paid by

not later than the taxpayer’s tax return date in such manner as may be

determined by the Commissioner. A taxpayer may however defer the

payment of an exit tax referred to in sub-regulation (1) by paying it in

instalments over five (5) years, in any of the following circumstances

(a) a taxpayer transfers assets from its head office in Malta

to its permanent establishment in another EU Member State or in a

third country that is party to the Agreement on the European

Economic Area (EEA Agreement);

(b) a taxpayer transfers assets from its permanent

establishment in Malta to its head office or another permanent

establishment in another EU Member State or a third country that

is party to the EEA Agreement;

(c) a taxpayer transfers its tax residence from Malta to

another EU Member State or to a third country that is party to the

EEA Agreement;

(d) a taxpayer transfers the business carried on by its

permanent establishment in Malta to another EU Member State or

a third country that is party to the EEA Agreement.

The provisions of this sub-regulation relating to deferment of

payment of the exit tax shall apply –

(a) also to third countries that are party to the EEA

Agreement if they have concluded an agreement with Malta or

with the European Union on the mutual assistance for the recovery

of tax claims, equivalent to the mutual assistance provided for in

Council Directive 2010/24/EU; and

(b) where the Commissioner has approved a request made

in writing for such deferment.

(3) (a) Where a taxpayer defers the payment in accordance

with sub-regulation (2), interest shall be charged in accordance with the

provisions of article 44(2A) of the Income Tax Management Act.

(b) Where there is a demonstrable and actual risk of non-

recovery, the Commissioner may request taxpayers to provide a

guarantee as a condition for deferring the payment in accordance with

sub-regulation (2).

(4) Where sub-regulation (2) applies, the deferral of payment

shall be immediately discontinued, and the tax debt becomes

recoverable in the following cases

(a) the transferred assets or the business carried on by the

permanent establishment of the taxpayer are sold or otherwise

disposed of;

(b) the transferred assets are subsequently transferred to a

third country;

(c) the taxpayer's tax residence or the business carried on

by its permanent establishment is subsequently transferred to a

third country;

(d)

the taxpayer goes bankrupt or is wound up;

(e) the taxpayer fails to honour its obligations in relation

to the instalments and does not correct its situation over a

reasonable period of time, which shall not exceed twelve (12)

months

Provided that paragraphs (b) and (c) shall not apply to

third countries that are party to the EEA Agreement if they have

concluded an agreement with Malta or with the European Union

on the mutual assistance for the recovery of tax claims, equivalent

to the mutual assistance provided for in Directive 2010/24/EU.

(5) Where assets, tax residence or the business carried on by a

permanent establishment is transferred to Malta from another EU

Member State, the starting value of the relevant assets for tax purposes

in Malta shall be that established by that other EU Member State, unless

the Commissioner determines through an enquiry and assessment made

in accordance with the provisions of article 31 of the Income Tax Cap. 372.

Management Act that such value does not reflect the market value. For

the purposes of the said determination, the Commissioner shall engage

an independent person that is an expert in the field.

(6) For the purposes of sub-regulations (1) to (5), "market value"

means the amount for which an asset can be exchanged, or mutual

obligations can be settled between willing unrelated buyers and sellers

in a direct transaction.

(7) The provisions of this regulation shall not apply in the case

of asset transfers related to the financing of securities, assets posted as

collateral or where the asset transfer takes place in order to meet

prudential capital requirements or for the purpose of liquidity

management

Provided that such assets are set to revert to Malta within a

period of twelve (12) months from the time of exit of such assets from

Malta.

(1) For the purposes of calculating the tax liability in General anti-

according with the Income Tax Acts, there shall be ignored an abuse rule.

arrangement or a series of arrangements which, having been put into

place for the main purpose or one of the main purposes of obtaining a

tax advantage that defeats the object or purpose of the applicable tax

law, are not genuine having regard to all relevant facts and

circumstances. An arrangement may comprise more than one step or

part.

(2) For the purposes of sub-regulation (1), an arrangement or a

series thereof shall be regarded as non-genuine to the extent that they are

not put into place for valid commercial reasons which reflect economic

reality.

(3) Where arrangements or a series thereof are ignored in

accordance with sub-regulation (1), the tax liability shall be calculated in

accordance with the provisions of the Income Tax Acts.

(1) An entity, or a permanent establishment of which the

profits are not subject to tax or are exempt from tax shall be treated as a

controlled foreign company where the following conditions are met

(a) 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 fifty per cent (50%) of the voting rights, or owns directly or

indirectly more than fifty per cent (50%) of capital or is entitled to

receive more than fifty per cent (50%) of the profits of that entity; and

(b) the actual corporate tax paid on its profits by the entity or

permanent establishment is lower than the difference between the tax

that would have been charged on the entity or permanent establishment

under the Income Tax Acts and the actual corporate tax paid on its

profits by the entity or permanent establishment

Provided that for the purposes of this paragraph, the

permanent establishment of a controlled foreign company that is not

subject to tax or is exempt from tax in the jurisdiction of the controlled

foreign company shall not be taken into account

Provided also that the tax that would have been charged in

Malta means the tax as computed according to the Income Tax Acts.

(2) Where an entity or permanent establishment is treated as a

controlled foreign company under sub-regulation (1), there shall be

included in the tax base the non-distributed income of the entity or

permanent establishment arising from non-genuine arrangements which

have been put in place for the essential purpose of obtaining a tax

advantage.

For the purposes of this sub-regulation, an arrangement or a series

thereof shall be regarded as non-genuine to the extent that the entity or

permanent establishment would not own the assets or would not have

undertaken the risks which generate all, or part of, its income if it were

not controlled by a company where the significant people functions,

which are relevant to those assets and risks, are carried out and are

instrumental in generating the controlled company's income

Provided that the said company is the taxpayer and the said

significant people functions are carried out in Malta.

(3) There shall be excluded from the scope of sub-regulation (2)

an entity or permanent establishment

(a) with accounting profits of no more than seven hundred

and fifty thousand euro (€750,000), and non-trading income of no

more than seventy-five thousand euro (€75,000); or

(b) of which the accounting profits amount to no more

than ten per cent (10%) of its operating costs for the tax period

Provided that the operating costs may not include the

cost of goods sold outside the country where the entity is resident,

or the permanent establishment is situated, for tax purposes and

payments to associated enterprises.

For the purposes of regulation 7 -

Computation of

controlled

foreign

(a) the income to be included in the tax base of the

company

income.

taxpayer shall be limited to amounts generated through assets and

risks which are linked to significant people functions carried out

by the controlling company. The attribution of controlled foreign

company income shall be calculated in accordance with the arm's

length principle;

(b) the income to be included in the tax base shall be

calculated in proportion to the taxpayer's participation in the entity

as defined in paragraph (a) of regulation 7(1);

(c) the income shall be included in the tax period of the

taxpayer in which the tax year of the entity ends;

(d) where the entity distributes profits to the taxpayer, and

those distributed profits are included in the taxable income of the

taxpayer, the amounts of income previously included in the tax

base pursuant to regulation 7 shall be deducted from the tax base

when calculating the amount of tax due on the distributed profits,

in order to ensure there is no double taxation;

(e) where the taxpayer disposes of its participation in the

entity or of the business carried out by the permanent

establishment, and any part of the proceeds from the disposal

previously has been included in the tax base pursuant to regulation

7, that amount shall be deducted from the tax base when

calculating the amount of tax due on those proceeds, in order to

ensure there is no double taxation;

(f) there shall be allowed a credit of the tax paid by the

entity or permanent establishment against the tax liability of the

taxpayer. The credit shall be calculated in accordance with the

provisions of articles 77 and 82 of the Act.

€0.99