Malta Transposes the EU Minimum Tax Directive (Pillar Two Rules)

On 20 February 2024, Malta enacted the relevant provisions of the EU Minimum Tax Directive [2022/2523] through the publication of Legal Notice 32 of 2024. The legal notice was later complemented by a Guidance Note issued by the Malta Tax and Customs Authority explaining the purpose of the legal notice, its interaction with Malta’s option to defer the implementation of parts of the EU Directive, and the compliance obligation of local entities affected by the EU Directive.

The legal notice applies for fiscal years beginning from 31 December 2023.

By way of background, the EU Minimum Tax Directive, published in 2022, incorporates the OECD’s Pillar Two tax rules, also known as the GloBE Rules, into EU law, which rules ensure that multinational enterprise (MNE) groups (and large-scale domestic groups within the EU) with annual revenues of €750 million or more in two of the last four years, are subjected to a minimum level of taxation, set at 15%, on the income arising in each of the jurisdictions in which they operate. The 15% floor is achieved primarily through one or a combination of mechanisms, being:

• an option for EU Member States/ countries to implement a (qualified) domestic top-up tax (or DMTT) that operates to increase the domestic tax liability of in-scope group entities located in their jurisdiction to the minimum effective tax rate of 15% of profits;

• the Income Inclusion Rule (or IIR) through which a top-up tax is charged on the ultimate parent or intermediate parent/s of the group for the shortfall between the tax paid in the jurisdictions in which the group entities are located, and the jurisdictional minimum tax computed in terms of the EU Directive/GloBE Rules; and

• where the IIR is ineffective, the Under-Taxed Profits Rule (or UTPR) applies such that the said tax shortfall is partly or fully collected by other group members.

The EU Minimum Tax Directive allows a delayed adoption of the IIR and UTPR up to 31 December 2029 by those Member States in which no more than 12 ultimate parent entities of in-scope groups are based. Indeed, as announced during the last Budget Speech, Malta elected for the delayed adoption, and the three components of the Pillar Two Rules will not be introduced in 2024, such that no top-up tax will be levied in Malta in 2024.

In this context, Legal Notice 32 transposes only those provisions of the EU Minimum Tax Directive that are necessary for the proper functioning of the Pillar Two regime, without transposing the provisions relating to the IIR, UTPR or DMTT. The transposed provisions cover the scope and applicability of the rules, definitions, rules on the location of constituent entities, administrative and transitory rules, and final provisions.

a)     Filing obligations of a constituent entity located in Malta

Whilst the current requirement for an entity to file an income tax return in terms of the standard income tax rules remains intact, in-scope constituent entities located in Malta are required to file an additional Pillar Two return, known as the Globe Information Return or GIR, with the Malta Tax and Customs Administration. Such obligation applies unless the Pillar Two return is filed by the ultimate parent entity (or UPE) of the group or by another group entity designated for the purpose, located in a jurisdiction with which Malta has a qualifying competent authority agreement that provides for the automatic exchange of the annual top-up tax information returns.

Given Malta’s deferral in applying the full Pillar Two rules, when the constituent entity located in Malta is the UPE of an in-scope group, the Malta UPE shall nominate a foreign designated filing entity to file the Pillar Two Return, located in a non-deferring Member State, or in the absence of such State, in a third country with which Malta has a qualifying competent authority agreement that provides for the automatic exchange of the annual top-up tax information returns.

Pursuant to the shifting of the filing obligations to another jurisdiction, the local entity must notify the Commissioner of the identity and location of the foreign filing entity. Such notification shall be made within 12 months from the end of the reporting fiscal year (extended to 18 months for first year of application of the EU Directive in Malta.)

When the filing becomes applicable, the legal notice prescribes a 15-month window from year-end for the filing of a GIR in Malta, extended to 18 months for the first year of application of the EU Directive in Malta.

b)     Penalties

One-time and daily administrative penalties are prescribed by the legal notice for certain non-compliance defaults, capped at:

• €20,000 for failure to file a Pillar Two return;
• €5,000 for the filing of an inaccurate or incomplete Pillar Two return; and
• €5,000 for failure to file any of the prescribed notifications to the Malta Tax and Customs Administration.

c)     Transitory provisions

Certain transitory provisions have been transposed through the legal notice, including:

• Article 47 of the EU Directive which outlines the treatment of pre-regime deferred tax assets and deferred tax liabilities upon transition into the Pillar Two regime;

• Article 48 of the EU Directive, which provides the transitory rates to compute the substance-based income exclusion for the first 10 years of application of the Pillar Two regime until fiscal years starting in 2032; and

• Article 49 of the Directive which, subject to the filing of the necessary notifications, provides a 5-year transitional relief from certain top-up taxes for groups in the initial phase of their international activity. 
  

Should you require any further information in this respect please do not hesitate to contact the undersigned or your KPMG contact.