Anti avoidance rules in Malta

Exceeding borrowing costs (the amount by which the deductible borrowing costs - interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance - of a taxpayer in terms of the Income Tax Act, were it not for the provisions of this Rule, exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives) shall be deductible in the tax period in which they are incurred only up to thirty per cent (30%) of the taxpayer's EBITDA.

The taxpayer may carry forward, without time limitation, exceeding borrowing costs and, for a maximum of five (5) years, unused interest capacity, which cannot be deducted in the current tax period.

Notwithstanding the general rule above, the taxpayer may:

• Deduct exceeding borrowing costs up to three million euro (€3,000,000);
• Fully deduct exceeding borrowing costs if the taxpayer is a standalone entity (a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment).

Costs incurred on loans which were concluded before 17 June 2016 are excluded from the scope of this rule, but the exclusion shall not extend to any subsequent modification of such loans. The same exclusion applies to costs incurred on loans used to fund certain long-term public infrastructure projects.

There is also full deductibility of exceeding borrowing costs if the taxpayer can demonstrate that the ratio of its equity over its total assets is equal or higher than the equivalent ratio of the group (if the taxpayer is a member of a consolidated group for financial accounting purposes).

An entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax shall be treated as a controlled foreign company where the following conditions are met:

1. in the case of an entity, the taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than fifty per cent (50%) of the voting rights, or owns directly or indirectly more than fifty per cent (50%) of capital or is entitled to receive more than fifty per cent (50%) of the profits of that entity; and
2. the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment under the Income Tax Acts (as computed according to the Income Tax Acts) and the actual corporate tax paid on its profits by the entity or permanent establishment.

Where an entity or permanent establishment is treated as a controlled foreign company, there shall be included in the tax base the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

An arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income. Provided that the said company is the taxpayer and the said significant people functions are carried out in Malta.

The CFC rule shall not apply in relation to an entity or permanent establishment:

1. With accounting profits of no more than seven hundred and fifty thousand euro (€750,000), and non-trading income of no more than seventy-five thousand euro (€75,000); 
2. Of which the accounting profits amount to no more that 10% of its operating costs for the tax period;

The income to be included in the tax base of the taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company. The attribution of controlled foreign company income shall be calculated in accordance with the arm's length principle. The income to be included in the tax base shall be calculated in proportion to the taxpayer's participation in the entity.

Where the entity distributes profits to the taxpayer, and those distributed profits are included in the taxable income of the taxpayer, the amounts of income previously included in the tax base shall be deducted from the tax base when calculating the amount of tax due on the distributed profits, in order to ensure there is no double taxation.

A taxpayer shall be subject to tax on capital gains that are to be calculated at an amount equal to the market value (the amount for which an asset can be exchanged, or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction) of the transferred assets, at the time of exit of the assets, less their value for tax purposes, in any of the following circumstances:

1. A taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
2. A taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
3. A taxpayer transfers its tax residence from Malta to another EU Member State or to a third country, except for those assets which remain effectively connected with a permanent establishment in Malta;
4. A taxpayer transfers the business carried on by its permanent establishment from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.

A taxpayer may however defer the payment of an exit tax by paying it in instalments over five (5) years, in any of the following circumstances:

1. A taxpayer transfers assets from its head office in Malta to its permanent establishment in another EU Member State or in a third country that is party to the Agreement on the European Economic Area (EEA Agreement);
2. A taxpayer transfers assets from its permanent establishment in Malta to its head office or another permanent establishment in another EU Member State or a third country that is party to the EEA Agreement;
3. A taxpayer transfers its tax residence from Malta to another EU Member State or to a third country that is party to the EEA Agreement;
4. A taxpayer transfers the business carried on by its permanent establishment in Malta to another EU Member State or a third country that is party to the EEA Agreement.

The deferral of payment shall be immediately discontinued, and the tax debt becomes recoverable in the following cases:

• The transferred assets or the business carried on by the permanent establishment of the taxpayer are sold or otherwise disposed of;
• The transferred assets are subsequently transferred to a third country;
• The taxpayer's tax residence or the business carried on by its permanent establishment is subsequently transferred to a third country;
• The taxpayer goes bankrupt or is wound up;
• The taxpayer fails to honor its obligations in relation to the instalments and does not correct its situation over a reasonable period of time, which shall not exceed twelve (12) months.

Where a taxpayer defers the payment in accordance with this rule, interest shall be charged.

Where assets, tax residence or the business carried on by a permanent establishment is transferred to Malta from another EU Member State, the starting value of the relevant assets for tax purposes in Malta shall be that established by that other EU Member State, unless the Commissioner determines through an enquiry and assessment made in accordance with the provisions of the Income Tax Management Act that such value does not reflect the market value. For the purposes of the said determination, the Commissioner shall engage an independent person that is an expert in the field.