European Union Anti-Tax Avoidance Directives Implementation

L.N. 348 of 2019

INCOME TAX ACT

(CAP. 123)

European Union Anti-Tax Avoidance Directives Implementation

(Amendment) Regulations, 2019

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 European Union Anti- Citation and

Tax Avoidance Directives Implementation (Amendment) Regulations, commencement.

2019 and they shall be read and construed as one with the European

Union Anti-Tax Avoidance Directives Implementation Regulations, S.L. 123.187.

hereinafter referred to as "the principal regulations".

(2)

These regulations shall come into force as follows

(a) the provisions of regulations 2, 3, 5 and 7 shall apply

with effect from 1 January 2020; and

(b) the provisions of regulation 6 shall apply with effect

from 1 January 2022.

Regulation 2 of the principal regulations shall be amended Amends

regulation 2 of

as follows

the principal

regulations.

(a) in sub-regulation (1) thereof, the words "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", shall be

substituted by the words "Directive (EU) 2016/1164 of 12 July

2016, as amended by Directive (EU) 2017/952 of 29 May 2017,

adopted by the Council of the European Union, laying down

rules against tax avoidance practices that directly affect the

functioning of the internal market"; and

(b) immediately after sub-regulation (2) thereof, there

shall be added the following new sub-regulation

"(3) Regulation 10 shall also apply to all entities that

are treated as transparent for tax purposes in terms of the

Income Tax Acts.".

Regulation 3 of the principal regulations shall be amended

(a) in the definition "associated enterprise" thereof,

immediately after the words "shall also be regarded as associated

enterprises;", there shall be added the following

"For the purposes of regulations 9 and 10

(i) where the mismatch outcome arises under

paragraph (b), (c), (d), (e) or (g) of the definition of

"hybrid mismatch" or where an adjustment is

required under regulation 9(3) or regulation 10, the

definition "associated enterprise" is modified so that

the 25 per cent (25%) requirement is replaced by a 50

per cent (50%) requirement;

(ii) a person who acts together with another

person in respect of the voting rights or capital

ownership of an entity shall be treated as holding a

participation in all of the voting rights or capital

ownership of that entity that are held by the other

person;

(iii) an associated enterprise also means an

entity that is part of the same consolidated group for

financial accounting purposes as the taxpayer, an

enterprise in which the taxpayer has a significant

influence in the management or an enterprise that has

a significant influence in the management of the

taxpayer;";

(b) immediately after the definition of "borrowing costs"

thereof, there shall be added the following new definition

""consolidated group for financial accounting

purposes" means a group consisting of all entities which are

fully included in consolidated financial statements drawn

up in accordance with the International Financial Reporting

Standards or any other financial reporting system as may be

determined by means of guidelines issued under article

96(2) of the Act;"; and

(c) immediately after the definition "financial

undertaking" thereof, there shall be added the following new

definitions

""hybrid mismatch" means a situation involving a

taxpayer or, with respect to regulation 9(3), an entity,

where

(a) a payment under a financial instrument

gives rise to a deduction without inclusion outcome

and

(i) such payment is not included within

a reasonable period of time; and

(ii) the

mismatch

outcome

is

attributable

to

differences

in

the

characterisation of the instrument or the

payment made under it.

For the purposes of sub-paragraph (i), a

payment under a financial instrument shall be treated

as included in income within a reasonable period of

time where

(A) the payment is included by the

jurisdiction of the payee in a tax period that

commences within twelve (12) months of the

end of the payer's tax period; or

(B) it is reasonable to expect that the

payment will be included by the jurisdiction of

the payee in a future tax period and the terms of

payment are those that would be expected to be

agreed between independent enterprises;

(b) a payment to a hybrid entity gives rise to a

deduction without inclusion and that mismatch

outcome is the result of differences in the allocation

of payments made to the hybrid entity under the laws

of the jurisdiction where the hybrid entity is

established or registered and the jurisdiction of any

person with a participation in that hybrid entity;

(c) a payment to an entity with one (1) or

more permanent establishments gives rise to a

deduction without inclusion and that mismatch

outcome is the result of differences in the allocation

of payments between the head office and permanent

establishment or between two (2) or more permanent

establishments of the same entity under the laws of

the jurisdictions where the entity operates;

(d) a payment gives rise to a deduction

without inclusion as a result of a payment to a

disregarded permanent establishment;

(e) a payment by a hybrid entity gives rise to

a deduction without inclusion and that mismatch is

the result of the fact that the payment is disregarded

under the laws of the payee jurisdiction;

(f) a deemed payment between the head

office and permanent establishment or between two

(2) or more permanent establishments gives rise to a

deduction without inclusion and that mismatch is the

result of the fact that the payment is disregarded

under the laws of the payee jurisdiction; or

(g)

a double deduction outcome occurs

Provided that for the purposes of this

definition

(i) payment

representing

the

underlying return on a transferred financial

instrument shall not give rise to a hybrid

mismatch under paragraph (a) where the

payment is made by a financial trader under an

on-market hybrid transfer provided the payer

jurisdiction requires the financial trader to

include as income all amounts received in

relation to the transferred financial instrument;

(ii) a hybrid mismatch shall only arise

under paragraphs (e), (f) or (g) to the extent that

the payer jurisdiction allows the deduction to be

set off against an amount that is not dual-

inclusion income;

(iii) a mismatch outcome shall not be

treated as a hybrid mismatch unless it arises

between associated enterprises, between a

taxpayer and an associated enterprise, between

the head office and permanent establishment,

between two (2) or more permanent

establishments of the same entity or under a

structured arrangement

Provided

further

that

for

the

purposes of this definition and regulations 9, 10

and 11

"deduction" means the amount that

is treated as deductible from the taxable

income under the laws of the payer or

investor

jurisdiction.

The

term

"deductible"

shall

be

construed

accordingly;

"deduction

without

inclusion"

means the deduction of a payment or

deemed payment between the head office

and permanent establishment or between

two (2) or more permanent establishments

in any jurisdiction in which that payment

or deemed payment is treated as made

(payer

jurisdiction)

without

a

corresponding inclusion for tax purposes

of that payment or deemed payment in the

payee jurisdiction. The payee jurisdiction

is any jurisdiction where that payment or

deemed payment is received, or is treated

as being received under the laws of any

other jurisdiction;

"disregarded

permanent

establishment" means any arrangement

that is treated as giving rise to a

permanent establishment under the laws

of the head office jurisdiction and is not

treated as giving rise to a permanent

establishment under the laws of the other

jurisdiction;

"double deduction" means a

deduction of the same payment, expenses

or losses in the jurisdiction in which the

payment has its source, the expenses are

incurred or the losses are suffered (payer

jurisdiction) and in another jurisdiction

(investor jurisdiction). In the case of a

payment by a hybrid entity or permanent

establishment the payer jurisdiction is the

jurisdiction where the hybrid entity or

permanent establishment is established or

situated;

"dual inclusion income" means any

item of income that is included under the

laws of both jurisdictions where the

mismatch outcome has arisen;

"financial instrument" means any

instrument to the extent that it gives rise

to a financing or equity return that is

taxed under the rules for taxing debt,

equity or derivatives under the laws of

either the payee or payer jurisdictions and

includes a hybrid transfer;

"financial trader" is a person or

entity engaged in the business of regularly

buying and selling financial instruments

on its own account for the purposes of

making a profit;

"hybrid entity" means any entity or

arrangement that is regarded as a taxable

entity under the laws of one (1)

jurisdiction and whose income or

expenditure is treated as income or

expenditure of one (1) or more other

persons under the laws of another

jurisdiction;

"hybrid transfer" means any

arrangement to transfer a financial

instrument where the underlying return on

the transferred financial instrument is

treated for tax purposes as derived

simultaneously by more than one (1) of

the parties to that arrangement;

"inclusion" means the amount that is

taken into account in the taxable income

under the laws of the payee jurisdiction.

A payment under a financial

instrument shall not be treated as included

to the extent that the payment qualifies for

any tax relief solely due to the way that

payment is characterised under the laws

of the payee jurisdiction. The term

"included"

shall

be

construed

accordingly;

"mismatch outcome" means a

double deduction or a deduction without

inclusion;

"on-market hybrid transfer" means

any hybrid transfer that is entered into by

a financial trader in the ordinary course of

business, and not as part of a structured

arrangement;

"person" means an individual or

entity;

"tax relief" means a tax exemption,

reduction in the tax rate or any tax credit

or refund (other than a credit for taxes

withheld at source);

"structured arrangement" means an arrangement

involving a hybrid mismatch where the mismatch outcome

is priced into the terms of the arrangement or an

arrangement that has been designed to produce a hybrid

mismatch outcome, unless the taxpayer or an associated

enterprise could not reasonably have been expected to be

aware of the hybrid mismatch and did not share in the value

of the tax benefit resulting from the hybrid mismatch;".

Paragraph (b) of sub-regulation (5) of regulation 4 of the Amends

regulation 4 of

principal regulations, shall be substituted by the following

the principal

regulations.

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

method as in the consolidated financial statements drawn up in

accordance with the International Financial Reporting Standards

or any other financial reporting system as may be determined by

means of guidelines issued under article 96(2) of the Act.".

Immediately after regulation 8 of the principal regulations, Adds new

regulations 9, 10

there shall be added the following new regulations

and 11 to the

principal

regulations.

(1) To the extent that a hybrid mismatch

results in a double deduction

(a) the deduction shall be denied if Malta

is the investor jurisdiction; and

(b) the deduction shall be denied if Malta

is the payer jurisdiction and the deduction is not

denied in the investor jurisdiction

Provided that, any such deduction shall be

eligible to be set off against dual inclusion income

whether arising in a current or subsequent tax period.

(2) To the extent that a hybrid mismatch results

in a deduction without inclusion

(a) the deduction shall be denied if Malta

is the payer jurisdiction; and

(b) the amount of the payment that would

otherwise give rise to a mismatch outcome shall

be included in income if Malta is the payee

jurisdiction and the deduction is not denied in the

payer jurisdiction.

(3) No deduction shall be allowed for any

payment by a taxpayer to the extent that such payment

directly or indirectly funds deductible expenditure

giving rise to a hybrid mismatch through a transaction

or series of transactions between associated enterprises

or entered into as part of a structured arrangement

except to the extent that one (1) of the jurisdictions

involved in the transaction or series of transactions has

made an equivalent adjustment in respect of such

hybrid mismatch.

(4) There shall be excluded from the scope of

application

(a) paragraph (b) of sub-regulation (2),

hybrid mismatches as defined in paragraph (b),

(c), (d) or (f) of the definition of "hybrid

mismatch" in regulation 3;

(b) paragraphs (a) and (b) of sub-

regulation (2), hybrid mismatches resulting from

a payment of interest under a financial instrument

to an associated enterprise where

(i) the financial instrument has

conversion, bail-in or write down features;

(ii) the financial instrument has been

issued with the sole purpose of satisfying

loss absorbing capacity requirements

applicable to the banking sector and the

financial instrument is recognised as such in

the taxpayer's loss absorbing capacity

requirements;

(iii) the financial instrument has been

issued

(A) in

connection

with

financial instruments with conversion,

bail-in or write down features at the

level of a parent undertaking;

(B) at a level necessary to

satisfy applicable loss absorbing

capacity requirements;

(C) not as part of a structured

arrangement; and

(iv) the overall net deduction for the

consolidated group under the arrangement

does not exceed the amount that it would

have been had the taxpayer issued such

financial instrument directly to the market

Provided that the provisions of

this paragraph (b) shall only apply until 31

December 2022.

(5) 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 shall

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.

(6) To the extent that a hybrid transfer is

designed to produce a relief for tax withheld at source

on a payment derived from a transferred financial

instrument to more than one (1) of the parties involved,

the benefit of such relief shall be limited in proportion

to the net taxable income regarding such payment.

(1) Where one (1) or more associated non-

resident entities holding in aggregate a direct or indirect

interest in fifty per cent (50%) or more of the voting

rights, capital interests or rights to a share of profit in a

hybrid entity that is incorporated or established in

Malta are located in a jurisdiction or 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 that income is not

otherwise taxed under any other provision of the

Income Tax Acts or in any other jurisdiction.

(2) Sub-regulation (1) shall not apply to a

collective investment vehicle. For the purposes of this

regulation, "collective investment vehicle" means an

investment fund or vehicle that is widely held, holds a

diversified portfolio of securities and is subject to

investor-protection regulation in the country in which it

is established.

To the extent that a deduction for payment,

expenses or losses of a taxpayer who is resident for tax

purposes 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.".

€0.90