TAX ACCOUNTS (INCOME TAX) RULES

SUBSIDIARY LEGISLATION 123.101

TAX ACCOUNTS (INCOME TAX) RULES

19th February, 2008

LEGAL NOTICE 79 of 2008, as amended by Legal Notices 205 of 2008,

247 of 2011, 183 of 2015 and 38 of 2018 and 194 of 2019.

The title of these rules is the Tax Accounts (Income Tax)

Rules.

The provisions of these rules shall be deemed to have come

into force as from year of assessment 2008.

(1) With effect from year of assessment 2008 and

subsequent years of assessment an amount of distributable profits

resulting from the following shall be allocated to the final tax

account

(a) profits after tax resulting from income which has been

charged to tax under the investment income

provisions, and where such investment income is that

referred to in article 41(a)(viii) (2), (3), (4) and (5) of

the Act such income shall be allocated to the final tax

account of the company only when such company has

actually received that income;

(b) profits which have been exempt from tax under the

provisions of any Maltese law and where the

distribution of such profits by the company is exempt

from tax in the hands of the shareholders;

(c) the amount of chargeable income the tax chargeable on

which has been relieved from payment by any tax

credits where the distribution of such profits is exempt

from tax in the hands of the shareholders;

(d) dividends paid out of profits allocated to the final tax

account of another company;

(e) the profits after tax derived from the transfer of

property chargeable to tax under article 5A of the

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

such profits to be determined as prescribed in terms of

article 5A(10)(d);

(ee) gains or profits chargeable to tax in accordance with the

provisions of article 23 of the Act;

(f)

any profits after tax which under the provisions of

Maltese law are not subject to tax when such profits

are distributed by a company to any person and where

upon such a distribution no person is entitled to claim

any tax credit in respect of any tax paid on such

profits;

(g) the amount of chargeable income after tax of a

company which has exercised the option referred to in

article 48(4A)(b)(i)(1) of the Income Tax Management

Act earned while it was not an international trading

company;

(h) the amount which should be allocated to the Maltese

Taxed Account computed in accordance with rule 13

of the Sale of Agricultural Produce Rules;

(i) * profits after tax resulting from transfers in accordance

with the provisions of article 27G of the Act;

(j)

profits resulting from any grant or subsidy where the

distribution of such profits is exempt from tax in the

hands of the shareholders;

(k) profits after tax resulting from rents to which articles

31A to 31D of the Act is applicable;

(l)

the amount of the chargeable income the tax

chargeable on which has been relieved from payment

by any tax credits under any of the following rules or

regulations

(i)

the Business Promotion Regulations;

(ii) the Reinvestment Tax Credit (Income Tax)

Regulations;

(iii) the Deductions and Tax Credits (Research and

Development) Rules;

(iv)

the Tax Credit (Back Office Operations) Rules;

(v)

the Tax Credits (Owners and Operators of

Warehouses Situated in Free Zones) Rule;

(vi)

the Tax Credit (Electronic Business) Rules;

(vii)

the Reinvestment Tax Credit (Income Tax) Rule;

(viii) the Deductions and Tax Credits (General and

Specific Qualifications) Rules;

(ix)

the Tax Credit (Audiovisual Infrastructure)

Regulations, made under the Malta Film

Commission Act;

(m) profits referred to in any of the preceding paragraphs

which as at the end of the accounting period ending in

the year preceding year of assessment 2007 have not

been distributed

Provided that with effect from year of assessment 2015 the

provisions of paragraphs (c) and (l) shall no longer be applicable

and the amount of chargeable income the tax on which has been

relieved from payment by any tax credits shall after deducting the

tax chargeable thereon and adding the amount of tax credits utilised

to relieve the payment of such tax be allocated to the Maltese taxed

account.

(2) Where profits of a company are relieved from tax through

the deduction referred to in paragraph (o) of sub-article (1) of

article 14 of the Act, or any rules issued in terms of that paragraph,

*Shall be applicable from the year of assessment 2020.

an amount corresponding to one hundred and ten per cent (110%)

of the amount of profits which are so relieved from tax shall be

allocated to the company’s final tax account in the following

manner

(a) an amount corresponding to one hundred per cent

(100%) of the amount of profits which are so relieved

from tax shall be allocated directly to the final tax

account (hereinafter referred to as the "direct

allocation"); and

(b) an additional reallocation of profits of an amount

corresponding to ten per cent (10%) of the relieved

profits, out of the tax account to which such relieved

profits would, ignoring the provisions of this sub-rule,

otherwise fall to be allocated (hereinafter referred to as

the "additional reallocation")

Provided that if the amount of the additional

reallocation exceeds the total profits of the

undertaking for the particular basis year that would

have, ignoring the provisions of this sub-rule, been

allocated to the tax account to which such profit would

otherwise have been allocated, any such excess shall

be ignored for the purposes of the additional

reallocation

Provided further that

(i)

the additional reallocation shall be effected

subsequent to any tax account reallocation

required in terms of sub-rules (4) and (7) of rule

5; and

(ii)

the direct allocation and the additional

reallocation shall not be effected in respect of

deemed interest that is claimed as a deduction in

terms of sub-rule (1) of rule 3 of the Notional

Interest Deduction Rules against interest income

deemed to be received by the shareholder or

partner of the undertaking in terms of rule 5 of

the Notional Interest Deduction Rules.

For the purpose of rule 3, the amount of profits the tax

chargeable on which has been relieved by any tax credits referred

to in the said rule 3 shall be calculated by dividing the amount of

the tax credit by the rate or rates of tax at which the company’s

chargeable income is chargeable, and where such chargeable

income has been taxed at different rates of tax the tax credit shall

first be deemed to have relieved that part of the chargeable income

which has been taxed at the lowest rate.

(1) With effect from year of assessment 2008 and in

subsequent years of assessment an amount of distributable profits

arising in any year immediately preceding any of such years of

assessment which have suffered tax and which do not stand to be

a l l o c a t e d t o t h e f i n a l t a x a c c o u n t s h a l l b e al l o c a t e d t o t h e

immovable property account. Such amount of distributable profits

shall consist of the aggregate of the amounts referred to in sub-

rules (2) and (3).

TAX ACCOUNTS (INCOME TAX)

(2)

(a) Dividends paid out of profits allocated to the

immovable property account of another company.

(b) The amount of chargeable income after tax resulting

from any profits or gains in respect of which a

company has exercised its option to make an election

in accordance with rule 9.

(3) Any profits, gains or income derived, directly or indirectly,

from immovable property situated in Malta consisting of

(a) the amount of chargeable income after tax resulting

from any profits or gains of whatever nature derived

from the transfer of such immovable property or of any

rights whatsoever on such property or in relation

thereto;

(b) the amount of chargeable income after tax derived

from rents, premiums , provision of accommodation

and any income or gains however described and of

whatever nature derived, directly or indirectly, from

such immovable property including

(i)

any gains or profits derived from any timeshare

operation or any other operation of a similar

nature;

(ii) any gains or profits derived from the provision

of accommodation as defined in the Value Added

Tax Act such gains or profits being calculated by

reference to the value of sales which are subject

to Value Added Tax at the rate established in

terms of item 1 of the Eighth Schedule of the

Value Added Tax Act or which would have been

so subject but for the fact that the company is

not required to charge Value Added Tax by

virtue of it being registered under article 11 of

the Value Added Tax Act (hereinafter in these

rules such sales being referred to as the "Vatable

Sales"); and where such gains or profits are

derived from the carrying on of a trade, business

or other activity which includes the provision of

other services or goods in addition to the

provision of such accommodation, such gains or

profits shall be calculated by dividing the total

chargeable income of the said company derived

from that trade, business or other activity by the

value of its total sales of that trade, business or

other activity and multiplying the result by the

value of its Vatable Sales of that same trade,

business or other activity. For this purpose

companies which derive income from the

provision of accommodation must maintain

accounting records such that the gains or profit

derived from the provision of accommodation

may be readily ascertained in the manner

provided herein. Where a company derives

income from the provision of accommodation

and does not maintain such accounting records

the whole of its profit shall be deemed to be

derived from the provision of accommodation;

(iii) the amount of chargeable income after tax

resulting from profits directly derived from, and

not merely from the utilisation of, services

provided through the use of cables, wires, pipes

and any other material, device or apparatus,

where such cable, wire, pipe, material, device or

apparatus is annexed to a tenement or installed

in the ground permanently to remain

incorporated therewith. For the purpose of this

sub-paragraph, the provision of services shall

include the provision of electricity, energy, gas,

fuel,

water,

telephone

services,

tele-

communication infrastructures, electronic com-

munications services, electronic communication

networks, associated facilities, services and

data, radio and television;

(c) the amount of chargeable income after tax, derived

from work carried out on or in relation to such

immovable property consisting of brokerage and

professional services, construction work, project

management of construction work and work of

tradesmen;

(d) the amount of chargeable income after tax resulting

from profits derived from the provision of

management services in relation to any activity as a

result of which income is derived from the provision

of accommodation referred to in paragraph (b)(ii), and

where as a result of that activity income is derived

from the provision of other services or goods in

addition to the provision of such accommodation, such

profit shall be calculated by dividing the income

derived from the said management services by the

value of the total sales of that activity and multiplying

the result by the value of sales of that same activity

which are vatable sales;

(e) the following amounts which shall be determined

gross before any deductions whatsoever

(i)

the interest, fees or any other consideration

howsoever described derived, directly or

indirectly, from the granting of loans or from

any form of credit to finance the acquisition,

development,

construction,

refurbishment,

renovation of such immovable property or any

right thereon including professional fees related

thereto (including fees related to the acquisition

of finance) and any other matter which increases

or enhances the value of such immovable

property or any right thereon; and

(ii) insurance premiums related to the insurance of

such property

Provided that where the allocation of profits in terms

of this paragraph cannot for any year be made because

there are no or insufficient profits which have suffered

tax, the amount required to be allocated to the

immovable property account in accordance with this

paragraph, or part thereof, which for such reason could

not be allocated shall, in so far as not allocated to the

immovable property account of a related company or

companies in accordance with sub-rule (7), be added

to the amount to be allocated for the following year

and deemed to be part of that amount, or if there is no

such amount in respect of that year, be deemed to be

the amount to be allocated for that year and so on for

subsequent years;

(f)

any other profits however described where the

Commissioner is of the opinion that the said profits are

directly or indirectly derived from such immovable

property and in such case the Commissioner may

determine the manner in which such profits are to be

determined;

(g) profits or gains after tax however described derived

from the disposal of shares or other interests in any

entity which, directly or indirectly, principally owns

such immovable property;

(h) the amount of the annual market rent of such

immovable property owned and used by the company

for the purpose of its activities (excluding property

which is rented by the said company to other parties)

calculated by multiplying the aggregate surface area in

square metres of all floors of such premises so owned

and used by two hundred and fifty euro (€250) per

annum: provided that the allocation of profits to the

immovable property account in accordance with this

paragraph shall be made after all allocations have been

made in accordance with sub-rule (2) and the other

paragraphs of this sub-rule, and where the allocation

of profits in terms of this paragraph cannot for any

year be made because there are no or insufficient

profits which have suffered tax, the amount required to

be allocated to the immovable property account in

accordance with this paragraph, or part thereof, which

for such reason could not be allocated shall, in so far

as not allocated to the immovable property account of

a related company or companies in accordance with

sub-rule (7), be added to the amount to be allocated for

the following year and deemed to be part of that

amount, or if there is no such amount in respect of that

year, be deemed to be the amount to be allocated for

that year and so on for subsequent years.

(4) For the purpose of allocating profits to the immovable

property account in accordance with sub-rule (3)(e) and (h) the

allocation of profits to the tax accounts shall first be made ignoring

the provisions of the said two paragraphs and thereafter the

amounts which are to be allocated to the immovable property

account in accordance with the said two paragraphs shall (so far as

not already transferred to the immovable property account in terms

of this sub-rule) be transferred from the amount of distributable

profits derived in the accounting period ending in the year

preceding year of assessment 2008 and subsequent years of

assessment which would have, ignoring the provisions of the said

two paragraphs, been allocated to the Maltese Taxed Account and

the Foreign Income Account; and for this purpose such amount

shall first be transferred from amounts which would have been

allocated to the Maltese Taxed Account and then from amounts

which would have been allocated to the Foreign Income Account.

(5) The amount which cannot be allocated to the immovable

property account in terms of sub-rule (3)(e) and (h) because there

are no or insufficient profits which have suffered tax shall be the

amount which cannot be allocated to the immovable property

account in accordance with the procedure set out in sub-rule (4).

(6) The provisions of this rule shall be without prejudice to the

fourth proviso to the definition of "Foreign Income Account" in

article 2 of the Act and sub-rule (3)(e) and (h) shall, up to year of

assessment 2011, not apply to companies to which the said proviso

was applicable for all years of assessment from year of assessment

2008 to year of assessment 2011.

(7)

(a) Where, in accordance with the provisions of sub-rule

(3)(e) and (h), the allocation of profits in terms of the

said paragraphs cannot for any year be made by a

company because there are no or insufficient profits

which have suffered tax, or is not made as a result of

the company making an election in accordance with

rule 9, the amount required to be allocated to the

immovable property account in accordance with the

said paragraphs, which for such reason could not be so

allocated or is not so allocated, shall be allocated to the

immovable property account of a related company. For

the purpose of this sub-rule a related company

excludes a company which has made an election in

accordance with rule 9

Provided that the amount allocated to the immovable

property account of the related company shall not

exceed the amount of distributable profits derived by

the related company, which would have, ignoring the

provisions of this sub-rule, been allocated to the

Maltese Taxed Account and the Foreign Income

Account.

(b) For the purpose of allocating profits to the immovable

property account of a related company in accordance

with this sub-rule, the allocation of profits to the tax

accounts of the related company shall first be made

ignoring this sub-rule and thereafter the amounts

which are to be allocated to the immovable property

TAX ACCOUNTS (INCOME TAX)

account in accordance with this sub-rule shall be

transferred from the amount of distributable profits

derived by the related company in the accounting

period ending in the year preceding year of assessment

2012 and subsequent years of assessment which would

have, ignoring the provisions of this sub-rule, been

allocated to the Maltese Taxed Account and the

Foreign Income Account; and for this purpose such

amount shall first be transferred from amounts which

would have been allocated to the Maltese Taxed

Account and then from amounts which would have

been allocated to the Foreign Income Account.

(c) Where the company referred to in paragraph (a) is

related to more than one company, the amount to be

allocated in accordance with this sub-rule shall first be

allocated by the related company in which the parent

company, as defined in sub-rule (9)(a), has the highest

percentage beneficial entitlement to the amount of

distributable profits derived in the respective

accounting period allocated to the Maltese Taxed

Account and the Foreign Income Account, and any

balance of the amount not so allocated by the said

related company shall then be allocated by the related

company in which the said parent company has the

second highest percentage beneficial entitlement to the

amount of distributable profits derived in the

respective accounting period allocated to the Maltese

Taxed Account and the Foreign Income Account, and

so on

Provided that, for the purposes of determining the

related company in which the parent company has

highest percentage beneficial entitlement to the amount

of distributable profits derived in the respective

accounting period allocated to the Maltese Taxed

Account and the Foreign Income Account as required

in terms hereof, the parent company shall, itself,

constitute one of the related companies by which an

allocation must be made in terms of paragraph (a) and,

for the purposes of determining the hierarchy in the

manner as prescribed immediately above, the parent

company shall be deemed to hold a 100% beneficial

entitlement to the amount of distributable profits

derived in the respective accounting period allocated

to the parent company’s Maltese Taxed Account and

the Foreign Income Account

Provided also that the percentage beneficial entitlement

shall be that existing at the end of the respective

accounting period. For the purposes of this sub-rule,

"percentage beneficial entitlement" shall mean the

percentage of the profits available for distribution to the

ordinary shareholders represented by the profits available

for distribution to the holders of those shares.

(d) Where the tax return date, as determined in accordance

with article 10 of the Income Tax Management Act, of

the company referred to in paragraph (a) is later than

the tax return date of the related company, the amount

to be allocated to the immovable property account of

the related company in accordance with the said

paragraph shall be transferred from the amount of

distributable profits derived by the related company in

the accounting period ending in the year preceding the

year of assessment immediately following the year of

assessment of the company referred to in the said

paragraph.

(e) Dividends received from a company registered in

Malta shall be disregarded for the purposes of the

allocation referred to in paragraph (a) and for the

purposes of making the hierarchical determination

required in terms of paragraph (c) and the term

‘distributable profits’ shall, throughout this sub-rule,

be read and construed accordingly.

(8) Where a company derives profits consisting of interest,

royalties, fees or any other consideration howsoever described from

the granting of loans or any form of credit or from the provision of

services to a related company or from the use of tangible or

intangible assets by a related company where the profits of the

related company would have been allocated to the Immovable

Property Account, were it not for the said transaction or

transactions, and where such a transaction or transactions from

which such profits are derived are entered into with the sole or

main purpose of a shareholder or shareholders of any of the said

companies obtaining a refund of an amount of tax in terms of

article 48(4) or (4A) of the Income Tax Management Act to which

the said shareholder or shareholders would not have been entitled

were it not for the said transaction or transactions, the provisions of

article 48(10) of the Income Tax Management Act shall apply.

(9)

(a) For the purpose of sub-rules (7) and (8), a company

shall be deemed to be related to another company if at

the end of the year preceding the relevant year of

assessment both companies are

(i) resident in Malta; and

(ii) one is a subsidiary of the other or both are

subsidiary companies of a third company,

resident in Malta.

For the purpose of this sub-rule a company shall be

deemed to be a subsidiary of another company,

hereinafter referred to as the "parent company"

(i) if and so long as more than 50% of its ordinary

share capital and more than 50% of its voting

rights are owned directly or indirectly by the

parent company; or

(ii) the parent company is beneficially entitled either

directly or indirectly to more than 50% of any

profits available for distribution to the ordinary

shareholders of the subsidiary company; or

(iii) the parent company would be beneficially

entitled either directly or indirectly to more than

50% of any assets of the subsidiary company

available for distribution to its ordinary

shareholders on a winding up.

The Commissioner may, in his absolute discretion,

deem a company to be related to another company

where, in his opinion, the relationship between the

companies has been structured with the sole or main

purpose of circumventing the provisions of sub-rule

(7) and (8).

(b) Notwithstanding anything contained in these rules,

where during the year immediately preceding year of

assessment 2015 or any year thereafter, as a result of a

change in the direct or indirect shareholders of a

company (hereinafter referred to as "Company A"), or

a change in the rights attached to the shares issued by

Company A, such company becomes related to another

company (hereinafter referred to as "Company B")

within the meaning of paragraph (a) of this sub-rule,

the Commissioner may, on application made by either

Company A or Company B, in his absolute discretion,

determine that such companies are not related to one

another for the purposes of sub-rules (7) and (8)

Provided that the Commissioner will only issue such

determination where, in his opinion, the relationship

between the companies has not been structured with the

sole or main purpose of obtaining any advantage which

has the effect of avoiding, reducing or postponing

liability to tax, or of obtaining any refund or set-off of

tax.

(10) Where a person enters into an artificial arrangement

intended to shift profits be twe en tax accounts to create an

entitlement to a refund in terms of article 48(4) or (4A) of the

Income Tax Management Act, the provisions of article 48(10) of

the Income Tax Management Act shall apply.

(1) Work of tradesmen shall include but shall not be

limited to, work consisting of or related to electrical works,

plumbing, tile laying, pointing and rendering, plastering, painting,

excavation and clearing of site, demolition works, dry wall gypsum

works and any other work carried on or in relation to such

immovable property.

(2)

For the purpose of rule 5(3)(h)

(a) property held by a company under title of emphyteusis

shall be deemed to be owned by the said company; and

(b) where a company uses any immovable property for the

purpose of its activities owned by a related person for

no consideration or for a consideration which in the

opinion of the Commissioner is less than the market

rental value of that property and the said consideration

is less than two hundred and fifty euro (€250) per

square metre per annum, the said immovable property

shall be deemed to be owned by the said company and

the amount which shall be allocated to the immovable

property account in accordance with rule 4(3)(h) shall

be reduced by the amount of consideration paid by the

said company to the related person for the use of the

said immovable property; and for this purpose a person

shall be deemed to be related to a company if

(i)

that person and the company are, directly or

indirectly, controlled or beneficially owned to

the extent of more than 25% by the same

persons; or

(ii) that person owns, directly or indirectly, more

than 25% of the ordinary share capital or voting

rights of the company; or

(iii) that person, in any capacity whatsoever

including that of a trustee, holds the said

property or receives the said consideration for

and on behalf of or for the benefit of a related

person.

Where in a tax return the allocation of profits to be made in

accordance with these rules and the Act is materially incorrect, the

Commissioner may regard that tax return as not being complete in

all material respects for the purposes of article 10(5) of the Income

Tax Management Act.

Notwithstanding the other provisions of these rules, these

rules shall with regard to a collective investment scheme apply with

effect from year of assessment 2010 and subsequent years of

assessment and for this purpose the words "year of assessment

2007" in rule 3(m) shall be substituted by the words "year of

assessment 2009".

(a) Notwithstanding the provisions contained in the

definitions of "Foreign Income Account" and "Maltese

Taxed Account" in article 2 of the Act, but without

prejudice to any obligation to allocate profits to the

final tax account and the immovable property account,

a company may elect that the profits or gains derived

on or after the effective date of the election, which

would, in accordance with the above definition, stand

to be allocated to the Foreign Income Account and the

Maltese Taxed Account will not be so allocated

Provided that an election as aforesaid may only be

made by notice on such form as the Commissioner

may require, and which notice shall indicate

acceptance by all the directors of the company or by

the company secretary where such election is approved

by the board of directors of the company

Provided also that when an election as aforesaid has

been made, it shall also apply to all subsequent years

and may not at any time be renounced unless, upon

being requested, the Commissioner gives his

TAX ACCOUNTS (INCOME TAX)

permission in writing and in granting his permission

the Commissioner may impose such conditions as he

deems fit and reasonable, and where the company

which has requested permission to renounce the

election accepts the conditions laid down by the

Commissioner, such conditions shall be operative

notwithstanding any provisions of these rules and the

Act

Provided further that, when an election as aforesaid

has been made, the profits or gains derived by the

company which have been allocated to the Maltese

Taxed Account and Foreign Income Account, which,

as at the effective date of the election, have not been

distributed, shall be allocated to the immovable

property account.

(b) Where a company makes an election in accordance with

the provisions of paragraph (a), the provisions of rule

5(3)(e) and (h) shall, subject to the requirement to

allocate profits to a related company in accordance

with rule 5(7), not be applicable to the said company.

(c) Such election, made as aforesaid, shall become

effective from the first day of the financial year of the

company making the election, preceding the financial

year during which the election has been made, and the

said election shall apply to the whole of the profits or

gains referred to in paragraph (a) derived by the

company during the said preceding financial year and

subsequent years.

(d) When an election as aforesaid has been made, it shall

also apply to all subsequent years, and may not at any

time be renounced unless, upon being requested, the

Commissioner gives his permission in writing

Provided that the request for the renunciation of the

election may only be made on such form as the

Commissioner may require, and which request shall

indicate acceptance by all the directors of the company

or by the company secretary where such request is

approved by the board of directors of the company

Provided also that the Commissioner shall only give

his permission if the company which has requested

permission to renounce the election re-allocates its

profits after tax to its tax accounts in accordance with

the provisions of these rules from the year of

assessment from which the said election was effective,

as if the said company had never made such election

Provided also that the re-allocation referred to in this

paragraph shall not require the submission of a further

or further returns in accordance with article 13 of the

Income Tax Management Act, but shall only require a

change in the amounts brought forward in the return of

income of the year of assessment from which the

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renunciation shall apply

Provided further that where, at the time of the request for

the renunciation of the election, the company making

such request is in default of furnishing a return or returns

of income, the Commissioner may impose such other

conditions as he deems fit and reasonable, and where

such company accepts the conditions laid down by the

Commissioner, such conditions shall be operative

notwithstanding any provisions of these rules and the

Act.