TAX CREDIT (BACK OFFICE OPERATIONS) RULES

SUBSIDIARY LEGISLATION 123.83

TAX CREDIT (BACK OFFICE OPERATIONS) RULES

1st January, 2005

LEGAL NOTICE 331 of 2005.

(1) The title of these rules is the Tax Credit (Back Office

Operations) Rules.

(2) These rules shall apply in respect of qualifying expenditure

incurred on or after the 1st 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.

(Rule 12)

Tax credit

Tax credit as a percentage of allowable expenditure

Item of allowable expenditure

Tax credit

E x p e n d i t u r e d e f i n e d i n p a r a g r a p h ( i ) ( i m m o v a b l e 0.35%

property) of the definition of "qualifying expenditure" in

rule 2

E x p e n d i t u r e d e f i n e d i n p a r a g r a p h ( i i ) ( p l a n t a n d 1.75%

machinery) of the definition of "qualifying expenditure"

in rule 2

Expenditure defined in paragraph (iii) (intellectual 7%

property rights) of the definition of "qualifying

expenditure" in rule 2

In these rules, unless the context otherwise requires -

"the Act" means the Income Tax Act;

"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 11;

"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);

"back office operations" means the provision by a company of

professional or administration services under outsourcing

agreements with enterprises established outside Malta, where such

services are to be used by those enterprises outside Malta;

"com pany" means a com pany, as defined in the Act, th at

qualifies as a small or medium-sized enterprise

Provided that as from such date as the Minister responsible

for finance may prescribe, "company" shall also include a company

as defined in the Act that does not qualify as a small or medium

sized enterprise;

"the Corporation" means the Malta Enterprise Corporation;

"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 expenditure" means expenditure incurred in the

carrying out of a qualifying project for -

(i)

the acquisition, construction, development or

improvement of any immovable property, including

related labour costs which are capitalised as part of the

cost of such acquisition, construction, development or

improvement;

(ii) the acquisition of plant and machinery, excluding

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;

(iii) the acquisition of intellectual property rights from

third parties under open market conditions the cost of

which is amortisable;

"qualifying project" means a project, involving capital

expenditure, for the development or enhancement of facilities that

are used or designed to be used for back office operations in Malta;

"small enterprise" and "medium-sized enterprise" have the

meaning assigned to them under the Business Promotion

Regulations.

(1) When a company engaged in a trade, business,

profession or vocation incurs allowable expenditure in carrying out

an approved project and satisfies the employment condition and the

other relevant conditions laid down in these rules, 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 company engaged in a trade, business

profession or vocation incurs or intends to incur qualifying

expenditure in carrying out a qualifying project it may apply 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;

(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 the definition of "qualifying

expenditure" in rule 2;

(d) state the number of additional employees that the

applicant plans to employ during the project period

and up to three years from its termination;

(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.

(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

31st 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

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

application constitutes qualifying expenditure and is necessary and

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 issue a letter of approval showing

(a) particulars of the applicant;

(b) a description of the project, with conditions as the

Corporation may have considered appropriate pursuant

to rule 5(2);

(c) the maximum qualifying expenditure for each item of

TAX CREDIT (BACK OFFICE OPERATIONS)

expenditure, indicating the category under the

definition of "qualifying expenditure" in rule 2 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(2);

(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

later than sixty days therefrom, the company shall deliver to the

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 referred to in rule 3(1) will be satisfied if the

company has employed 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 during the project period or during a

period of three years from its termination;

(b) he is employed under an indefinite contract or for a

period of not less than three years;

(c) his duties are solely and directly related to back office

operations of the employer;

(d) his employment represents a net increase in the

number of full time employees of the employer;

(e) his employment is certified by the Corporation in

accordance with rule 11 as an employment of an

additional employee.

(3) When an employee of a company who has been taken into

account in calculating the tax credit does not remain in the

employment of that company, for any reason whatsoever, for a

period of at least three years, 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 13 shall apply.

(4)

An employee shall be deemed to have been validly replaced

(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) A company whose project is approved under these

rules shall prepare and deliver to the Corporation a statement

containing 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 the project and the number and

particulars of individuals who are employed by it as

full time employees during the project period and up to

three years from its termination;

(b) such further information and details as the Corporation

may consider relevant.

(2) The statement shall be prepared at such intervals as the

Corporation may require.

(3) When the Corporation is satisfied that a company that is

c a r ry in g o n or th a t h a s c a r r ie d on a n a p pr o ve d pr o je c t ha s

employed an individual that qualifies 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).

(1) The tax credit due to a company for a year of

assessment in connection with an approved project is calculated as

follows

(a) the amount of allowable expenditure falling within

each category of expenditure listed in the definition of

"qualifying expenditure" in rule 2 and incurred from

the date of the commencement of the project period up

to the end of the year immediately preceding that year

of assessment is multiplied by the respective

percentage as specified in the Schedule;

(b) the results obtained under paragraph (a) for the

different categories of expenditure are added and the

total is multiplied by the number of additional

employees employed by the company from the date of

the commencement of the project period up to the end

of the year immediately preceding that year of

assessment;

(c) the result obtained under paragraph (b) is then reduced

by the amount of tax credit, if any, already claimed for

previous years of assessment in connection with the

project in question.

(2)

Notwithstanding the provisions of sub-rule (1) the tax

credit due to a 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

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, as subsequently

amended; and

(b) in the case of any other 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 this Part,

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

c e il i n g a n d , w h e r e a p p l i c a bl e, r e d u c ti o n , s h a l l b e th e s o l e

responsibility of the company.

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

from the tax chargeable on gains or profits derived from back office

operations, 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 on gains or profits derived from back office

operations in subsequent years

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.

(4) 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.

(5) 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 reduction in the

tax credit resulting from 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 subsists, and shall be reported and

paid by the company in question accordingly.

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

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

two 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

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, 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

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 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 rules

(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.

Insofar as they provide for and regulate benefits for small

and medium-sized enterprises, these rules are prescribed and shall

be applied in accordance with Commission Regulation (EC) No 70/

2001 on the application of Articles 87 and 88 of the EC Treaty to

Sate Aid to small and medium sized enterprises (OJ L 10/33,

13.1.2001), as subsequently amended.

TAX CREDIT (BACK OFFICE OPERATIONS)