Following parliamentary debates on Bill 173, the Budget Measures Implementation Act, 2021 (‘the Act’) has been published on 16 April 2021. The Act contains amendments to several laws including the Income Tax Act (‘ITA’), Income Tax Management Act (‘ITMA’) and Duty on Documents and Transfers Act (‘DDTA’). We highlight herein the salient changes to these fiscal laws.

A] Amendments to the Income Tax Act and Income Tax Management Act

Amendments to the Participation Exemption

Malta’s Participation Exemption exempts dividends and capital gains derived from a participating holding, as defined, subject to the satisfaction of a number of conditions. 

The Act disapplies the exemption on income (not just dividends) where the body of persons is resident in a jurisdiction which is included in the EU list of non-cooperative jurisdictions (also available on the CfR portal) for a period of 3 months during the preceding year of assessment. Such applies unless it can be proved that sufficient significant people functions are maintained in that jurisdiction commensurate with the type and extent of the activity carried on in that jurisdiction and the income earned therefrom.

Transfer of own residence

Currently, an exemption from property tax applies on the transfer of immovable property that has been owned and occupied by the transferor as an own residence for a period of at least 3 years immediately preceding the date of transfer and provided that the property is disposed of within 12 months of vacating it. 

Through an amendment promulgated by the Act, any absences from one’s residence due to care in a hospital or home for the elderly are counted as part of the 3-year period, provided that the premises in question are not used or employed for any other purpose during such absence. This makes it possible for persons who leave their homes and stay in hospitals or retirement residences to avail themselves of the exemption upon the transfer of their home.

Non-deductible payments

For the purpose of ascertaining the chargeable income of a taxpayer, payments will not be tax deductible if they constitute a criminal offence or, in the case of a payment made outside Malta, would constitute a criminal offence if made in Malta.

Reduced Rate of tax on royalties derived from literary works

As announced by the Minister of Finance in his speech for Budget 2021, as from 1 January 2021 authors who receive royalties from qualifying literary works may opt to tax the full amount of such royalties at the rate of 15%. The tax is final and is payable by 30 April of the year following the relevant basis year, unless prescribed otherwise. The literary publication must be eligible for copyright in terms of the Copyright Act.

Transfer Pricing

Article 51A enables the Minister to introduce rules relating to Transfer Pricing both generally and specifically on the determination of the arm’s length pricing of a transaction or a series of transactions, any adjustments in relation thereto and advance pricing agreements. Currently Malta does not have any Transfer Pricing rules regulating the pricing of transactions between related parties, albeit anti-abuse provisions, including general anti-abuse rules and specific anti-avoidance rules applicable to a limited set of scenarios need to be taken into consideration. The new enabling provision indicates that Transfer Pricing rules are likely to be introduced in Maltese tax laws in the near future.

The Budget Measures Implementation Act 2021

Collection of information for foreign tax authorities

The turnaround time of any person to furnish information to the Commissioner for Revenue for the purposes of providing information to foreign tax authorities in jurisdictions with a reciprocal exchange of information agreement with Malta, has been changed to not earlier than 20 days from the Commissioner’s notice (formerly not earlier than 30 days). 

Adjustment Forms pursuant to a Mutual Agreement Procedure

The Act removes the 5 year prescription period for the filing of tax adjustment forms where the adjustment results in a reduction in the tax payable by or an increase in the tax repayable to the taxpayer in the cases where such forms are filed for the purposes of implementing an agreement reached pursuant to a Mutual Agreement Procedure (‘MAP’).

The MAP is a procedure which may be resorted to with the aim of resolving an international tax dispute, pursuant to specific provisions in a relevant double taxation treaty between Malta and another State and the EU Arbitration Convention (90/463/EEC of 23 July 1990) on the elimination of double taxation in connection with the adjustment of profits of associated enterprises. Access to and operation of the MAP has been improved since Malta ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing in 2018. 

Professional secrecy of financial services licensed entities

Article 17 of the ITMA has been deleted in its entirety. Such article  limited the powers of the Revenue to request information from financial services licensed entities except for the purposes of determining the taxable income of such entities, for the purposes of adhering to the investment income provisions, in certain instances of exchange of information with foreign tax authorities and in cases of suspected tax evasion by any person. Licensed persons refer to banks, providers of life assurance, providers of investment services, collective investment schemes and stockbrokers licensed in terms of the relevant local legislation.

B] Amendments to the Duty on Documents and Transfers Act

Changes to the definition of ‘documents’ in respect of which duty is chargeable

Maltese law imposes duty on transfers of certain assets or value in such assets and on documents executed or used in Malta, as defined. The Act has added to the list of dutiable documents a judgment, decree or order of any court or other lawful authority whereby any immovable or any real right over an immovable is transferred.

Extension of certain duty exemptions / reductions to cohabitants upon a declaration causa mortis

Certain exemptions / reductions from duty, currently granted to the surviving spouse upon a transmission causa mortis of property, have been extended to cohabitants. These relate to the exclusion from the dutiable amount of the value of the usufruct of any property bequeathed in favour of the cohabitant and the exemption from duty on the ordinary residence of the deceased where the beneficiary of such residence is the cohabitant, both effective as from 5 June 2020.

‘Cohabitant’ has been defined in the general definitions of the DDTA as a person in a cohabitation enrolled by means of a public deed under the Cohabitation Act, whereas a ‘spouse’ as been defined as including a partner registered as being in a civil union.

The 3.5% duty rate on transfers of immovable property

The 3.5% duty rate on transfers of immovable property

The reduced duty rate of 3.5% that currently applies on certain transfers of immovable property will continue to apply with the following changes, as from 20 October 2020:

  • on the first €200,000 (formerly €175,000) on acquisitions inter vivos of immovable property for sole and ordinary residence purposes by persons who do not require an acquisition permit (AIP). Such reduced rate applies also on the redemption of ground rent or other burden imposed on such property.

    This 3.5% rate applies without prejudice to the application of more beneficial rates that may be currently availed of on the acquisition of immovable property such as the First Time Buyer Scheme and others. Indeed, the €25,000 increase aligns the threshold of the 3.5% scheme with that of the First Time Buyer Scheme.

  • on the value exceeding €250,000 (formerly €200,000) when such property is donated by a parent to its descendent/s in the direct line for residential purposes, with the first €250,000 disregarded for duty purposes. Such exemption and 3.5% reduced rate apply provided that it is the first donation between the said family members for such purpose and provided that the acquirer does not own any other immovable property in respect of which duty relief was availed of.

    This 3.5% rate applies without prejudice to the application of more beneficial rates that may be availed of currently on the acquisition of immovable property by donation such as the temporary COVID-19 scheme allowing for duty of 1.5% to be levied on the first €400,000 in an inter vivos acquisition of immovable property.

  • on the first €200,000 (formerly €175,000) on the inheritance of property or usufruct of any real right over the property, which was the ordinary residence of both the deceased and the transferee or a dwelling house occupied by the transferee.

    This 3.5% rate applies without prejudice to any other exemptions that may be currently available such as exemptions when a surviving spouse or children inherit the residence of the deceased spouse / parent.

Transmission of ordinary residence to descendants

The DDTA provides for an exemption from duty applicable on the transfer causa mortis of a dwelling house, comprising of the ordinary residence of the deceased, to descendants in the direct line. The Act retains such exemption whilst removing the conditions that such residence must have been the ordinary residence of the deceased at the time of transfer and for a minimum of 3 years prior to the date of transfer.

Change in the interpretation of ‘ordinary residence’

When the person from whom a transfer causa mortis originates is  hospitalized or residing in an old people’s  home  at  the  time  of  the  transfer, the ordinary residence occupied by that person before being hospitalized or going  to reside in an old people’s home shall  be considered as that person’s ordinary residence for the purposes of applying the exemptions or the 3.5% reduced rate in transfers causa mortis.

Change in the interpretation of ‘ordinary residence’

Duty exemption on restructuring of holdings

Effective as from 28 June 2019, the exemption from duty on intra-group transfers of securities upon any restructuring of holdings through mergers, demergers, amalgamations and reorganisations has been amended to include (a) transfers of partnership interests between companies in exchange for shares, and (b) transfers of partnership interests by and to companies or partnerships for consideration.

Clarification on the Commissioner’s powers to determine and assess duty

The Act amends the provision which grants the Commissioner powers to determine and assess under-declared duty to reflect the wider definition of ‘document’ and clarify that its powers also cover under-declarations on transfers of real rights over immovable property.