Professional Level Options Module, Paper P6 (MLA)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2011 Answers 1 Report To: John, Paul and Alex From: Tax consultant Date: 6 December 2011 Subject: The income tax and stamp duty implications arising from, and relevant to, the options under consideration. (i) (ii) Tax implications arising as a result of Alex acquiring 50% of the ordinary share capital of C Ltd The Income Tax Act (ITA) provides for an exemption in the case of a transfer of an asset from one company to another where such companies are controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders. However, if the asset consists of immovable property situated in Malta, the exemption applies only if the individual direct or indirect beneficial owners of the two companies are the same and hold substantially the same percentage interest in the nominal share capital and voting rights in each of those companies. The transfer of the office building during 2010 qualified for this exemption since these conditions were all satisfied. However, the law brings to charge to tax a deemed transfer of immovable property situated in Malta in the event that the group which existed at the time when the exemption was claimed ceases to exist within a period of six years from the date of the exempt intra-group transfer. When Alex acquires 50% of the ordinary share capital of C Ltd in December 2011, B Ltd and C Ltd will cease to be a group. As this will take place within a period of six years from the exempt transfer of the property, C Ltd will be treated as if, immediately after it acquired the office building from B Ltd in 2010, it had transferred and re-acquired that property. This deemed transfer is taxable at the rate of 12% on the value at which C Ltd had acquired the property from B Ltd, i.e. 100,000. Therefore, C Ltd will be required to pay 12,000 to the Commissioner of Inland Revenue within 15 working days from the date the group ceases to exist, that is, from the date on which Alex acquires the shares. Income tax and duty implications arising under the two options Option 1 Under this option A Ltd will transfer 12,500 ordinary shares in C Ltd to Alex. A Ltd owns more than 25% of the share capital of C Ltd, and so the transfer of its shares will constitute a transfer of a controlling interest. This means that for the purpose of calculating the capital gain or loss arising from the transfer, the transfer value of the shares is the higher of their market value and the actual consideration. The market value of C Ltd is the net asset value resulting from its financial statements for the financial year preceding that in which the transfer is made (i.e. the financial statements for the year ended 31 December 2010), increased by the value of the goodwill and taking into account any adjustment to the book value of any immovable property and of any shares in another company. C Ltd does not hold any shares and the property is shown in the relevant financial statements at its current market value. Therefore no adjustment is required in respect of property or shareholding. The value of the goodwill is taken to be twice the average annual profits before tax for the last five years. However, since A Ltd has been in existence for less than five years, the average profits are to be calculated by reference to the total profits for the four years preceding The market value of C Ltd is therefore 189,500. The market value of the shares transferred is a percentage of the market value of C Ltd. At the end of 2010, the shares transferred represented 50% of the share capital and carried 50% of the voting rights, and their value is therefore 50% of the value of the company. The market value of the shares transferred is therefore 94,750, while the amount actually paid for the shares by Alex under this option will be 75,000. The transfer value taken into account will therefore be 94,750. For the purpose of determining the chargeable gain arising from the transfer, the cost of acquisition of the shares is deducted from the transfer value. This amounts to 12,500, being the nominal value of the shares on the incorporation of C Ltd. A deduction is also allowed for the increase in inflation in respect of the cost of immovable property owned at the time of the transfer of the shares. The increase for inflation is to be determined by using the index of inflation established in terms of the Housing (Decontrol) Ordinance. As shown in the Appendix to this report, the tax payable on this transfer by A Ltd will be 28,630. Duty is payable at the rate of 2 or 5 for every 100, or part thereof, of the amount or value of the consideration or the real value, whichever is the higher, of the shares transferred. The 5% rate applies when the company in question owns immovable property whose value is at least 75% of the value of the company, excluding the value of current assets other than immovable property. The value of the company s fixed assets is 300,000 and the value of the immovable property is 150,000, that is 50%. As this is less than 75%, the applicable stamp duty rate is 2%. The real value of the shares transferred by A Ltd is determined in the same manner as for capital gains purposes (as explained above), except that for stamp duty purposes no account is taken of any liability in excess of the value of all assets, excluding the value of any such immovable property or any real right thereon, other than a bank loan or a registered debt relating to the acquisition of the property. 15

3 As shown in the Appendix to this report the duty payable on this transfer by Alex will be 1,975. Option 2 Under this option, C Ltd will issue 25,000 ordinary shares to Alex. Where the market value of shares held by a person in a company is reduced as a result of a change in the issued share capital or a change in voting rights, there is a deemed transfer of value in securities (article 5 of ITA) and tax is charged by reference to the difference between the market value of the shares held immediately before, and the market value of those shares held immediately after, the change. Where the issued share capital of the company is not made up of different classes of shares, the market value of shares held in a company is a percentage of the market value of that company corresponding to the percentage of the issued share capital. Since both the existing shares and the shares to be issued by C Ltd to Alex are of the same class, the percentage held by A Ltd in C Ltd before and after the share issue is 100% and 50% respectively. The method of determining the market value of the company immediately before and after the share issue is identical to the method used in the case of a transfer of a controlling interest (as explained above), with the exception that the net asset value that is taken into account is that resulting from an accounting statement drawn up as at the date of the deemed transfer of value consisting of two balance sheets showing the position of the company immediately before and immediately after the change in share capital. The Capital Gains rules provide that where the issued share capital of the company includes shares whose return is limited to a fixed rate of return, the net asset value is to be reduced by the book value of those shares unless the company has applied an amount standing to the credit of any of its reserve accounts, other than a capital redemption reserve and profits available for distribution, in paying up to any extent the allotment of those shares. Thus, the net asset value of C Ltd is not to be reduced by their book value (50,000) since the preference shares were issued out of the revaluation reserve of C Ltd. As shown in the Appendix to this report the market value of the 25,000 shares held by A Ltd in C Ltd immediately before the share issue is 254,500 while the market value of the same shares immediately after is 202,250. This means that the market value of the shares held by A Ltd has been reduced by 52,250 as a result of the shares issued to Alex. The taxable amount is determined by deducting from the reduction in value (52,250) a portion of the cost of acquisition of the shares held by A Ltd immediately before the share issue. The portion is determined by the following formula: Percentage reduction in value multiplied by the cost of acquisition of the shares. No deduction is allowed for inflation in this case. As shown in the Appendix to this report the tax payable on this deemed transfer by A Ltd is 16,491. The Duty on Documents and Transfers Act (article 42) brings into charge to duty a deemed transfer of value in marketable securities. The duty is payable by the person who acquires value as a result of a change in the issued share capital of a company. The method applied for determining the value acquired is the same as that used for the purpose of determining the value reduced for capital gains purposes. The market value of shares held by Alex immediately before the share issue is zero since he did not hold any shares in C Ltd at that time. The market value of the 25,000 ordinary shares issued by C Ltd to Alex (immediately after the share issue) is 202,250. This means that the value of the shares is 52,250 higher than the price (a difference which corresponds to the reduction in the market value of the shares held by A Ltd). Duty is payable by Alex on this difference. As shown in the Appendix to this report the duty payable on this deemed transfer by Alex is 1,045. Recommendation Option 2, being the issue of shares to Alex, is the better option since this results in both a lower amount of both tax and duty being payable compared to Option 1. (iii) APPENDIX: Supporting calculations of tax and duty liabilities Option 1: Market value of shares in C Ltd (using the balance sheet for the year ended 31 December 2010): Net asset value 142,000 Calculation of goodwill Profits for the previous four years: 2007 (15,000) 2008 (10,000) , ,000 Two years average profits 47, ,500 16

4 Tax on the transfer of shares in C Ltd by A Ltd (transfer of a controlling interest): Market value percentage is 50%. Market value at 94,750 is higher than the agreed consideration of 75,000 (12,500 x 6) Market value of shares transferred 94,750 Inflation deduction: (100,000 x (( )/758 58)) (1,515) Cost of acquisition (12,500) Taxable gain 80,735 Income tax payable by A Ltd at 35% 28,257 Calculation of disallowed liabilities: Total assets 325,000 Immovable property (150,000) 175,000 Total liabilities (183,000) Bank loan/registered debt 0 Disallowed liabilities 8,000 Market value 189,500 Real value 197,500 Real value of shares transferred (50%) 98,750 Stamp duty payable by Alex at 2% of 98,750 (Note) 1,975 Note: The value of the property is (150,000/300,000 x 100%) = 50% of the assets of the company, excluding current assets. Since this is less than 75% the rate is 2 for every 100 or part thereof. Option 2: Market value of shares in C Ltd (using balance sheet for the year ended 15 December 2011): Net asset value 207,000 Calculation of goodwill Profits for the previous four years: 2007 (15,000) 2008 (10,000) , ,000 Two years average profits 47,500 Market value of C Ltd pre issue 254,500 Consideration for shares issued (25,000 x 6) 150,000 Market value of C Ltd post issue 404,500 17

5 A Ltd Alex Market value % pre issue 100% 0% Market value % post issue 50% 50% Market value of shares held pre issue 254,500 0 Market value of shares held post issue (202,250) (202,250) Consideration paid for shares acquired 150,000 Value transferred/(acquired) 52,250 (52,250) Stamp duty payable at 2% of 52,250 (Note) 1,045 Deductions: Cost of acquisition of 25,000 shares 25,000 Portion of cost deducted: (((254, ,250)/254,500) x 25,000) (5,133) Taxable gain 47,117 Income tax at 35% 16,491 Note: Calculation of disallowed liabilities: Total assets 370,000 Immovable property (150,000) 220,000 Total liabilities (163,000) Bank loan/registered debt 0 Disallowed liabilities 0 2 (a) Tax consultant No 1, Main Street Valletta 6 December 2011 Mr John Hunt Long Street Square City Free Republic Dear Mr Hunt, Requested advice Further to your instructions, I set out my advice on the Maltese tax treatment of the income of Yellow Ltd and Green Ltd and the tax implications arising on the income received by Holdco Ltd. (i) Income tax treatment of Yellow Ltd s and Green Ltd s income Both Yellow Ltd and Green Ltd are domiciled and resident in Malta by virtue of their incorporation, with the consequence that they are taxable in Malta on their worldwide profits at 35%. Trading profits derived by Yellow Ltd s branch in Country E The fact that Yellow Ltd is subject to tax in Country E on its business profits indicates that it has a permanent establishment in that country. This is because in terms of Malta s treaty for the elimination of double taxation with Country E, based as it is on the OECD model, business profits derived by a company resident in Malta are not taxable in Country E unless they arise through a permanent establishment situated there. Business income derived by a company from a permanent establishment situated outside Malta stands to be allocated to its foreign income account (FIA). The following options are available to Yellow Ltd in respect of this income: It may claim treaty relief, in which case it will be subject to Malta tax on the business profits grossed up by the tax paid in Country E, and the foreign tax will then be credited against the Maltese tax liability. This leaves an amount of 15% (35% 20%) of the gross income payable by the company in Malta. If treaty relief is claimed, a distribution of the profits will entitle Holdco Ltd to a refund of two-thirds of the Malta tax gross of treaty relief (but not exceeding the Malta tax after relief). This means that the maximum refund would be 23 33%, which is higher than the 15% tax payable by the company, thus all of the tax paid in Malta by Yellow Ltd will be fully refundable to Holdco Ltd. It may claim the flat rate foreign tax credit (FRFTC), in which case the business profits will be deemed to have suffered foreign tax amounting to 25% of the net income received in Malta. This is equivalent to the 20% foreign tax actually paid on the gross amount, so the tax payable by Yellow Ltd in Malta will be equal to that payable if 18

6 (ii) treaty relief is claimed. But under the FRFTC method, the two-thirds refund is computed by reference to the Maltese tax after relief, and so will leave a balance of non-refundable Maltese tax. It may claim the foreign tax as a deduction against its income, and include the net business profits in its chargeable income without claiming any double taxation relief. The refund on the distribution of the profits in this latter case would be six-sevenths of the Malta tax paid. Again, there will be a non-refundable balance. Treaty relief is therefore the best option of the three, as only this alternative results in a full refund of the tax paid in Malta to Holdco Ltd. Dividends received by Yellow Ltd from Redco The Income Tax Act (ITA) defines a company as including a body of persons constituted outside Malta that is similar in nature to a partnership en commandite whose capital is divided into shares. Redco is therefore considered to be a company for the purpose of the ITA. Yellow Ltd s investment in Redco is a 10% ownership of the equity shares of that company. This is because the shares provide an entitlement to at least 10% of two out of the three equity holding rights referred to in the Income Tax Act, being the right to profits available for distribution and the right to assets available for distribution on a winding up (the third equity holding right, which Yellow Ltd does not hold, is the right to vote). Considering also that Redco is not a property company, Yellow Ltd s investment qualifies as a participating holding (PH). Maltese law grants an exemption from tax on income derived from a PH. If Yellow Ltd claims the participation exemption, the profits resulting from the exempt dividends will be allocated to its final tax account (FTA). Alternatively, a company receiving income from a PH may opt to be taxed on the income at the normal rates, in which case the tax paid will be fully refundable to the shareholder when the relative profits are paid out as a dividend. However, these benefits only apply provided certain anti-abuse provisions are satisfied. Yellow Ltd s income from Redco satisfies all these anti-abuse tests because Redco is resident and incorporated in the European Union (EU), is subject to a rate of foreign tax which is more than 15% and does not derive more than 50% of its income from passive interest or royalties. (Note: it would still qualify for the benefit even if it satisfied only one of these tests.) Therefore, Yellow Ltd can claim the participation exemption or opt for a 100% refund on the distribution of these profits. It is assumed that Yellow Ltd will not opt out of the participation exemption. Tutorial note: In terms of the EU Parent Subsidiary Directive, when a company (the subsidiary) resident in a EU Member State is owned as to at least 10% by a company (the parent) resident in another EU Member State, dividends paid by the subsidiary to the parent company cannot be subject to withholding tax. This means that Country D should not withhold tax at 15% on the dividends distributed by Redco to Yellow Ltd. Income of Green Ltd The income derived by Green Ltd consists wholly of income arising in Malta. In accordance with the Tax Accounting Rules, the amount of chargeable income after tax derived from the provision of accommodation as defined in the Value Added Tax Act is to be allocated to the immovable property account (IPA). The rules also provide that a company is required to allocate to its IPA the amount of the annual market rent of immovable property owned and used by the company for the purpose of its activities. However, since Green Ltd does not own the hotel but rents it out from an unrelated person, it is not required to make this allocation. The ITA provides for the possibility of a company to surrender losses derived from its trade or business to another company if both companies form part of a group. However, group relief is only available where the surrendering company and the claimant company are both members of the same group throughout the year preceding the year of assessment for which the relief is claimed. Since Green Ltd was acquired during basis year 2011 (on 20 February 2011) the loss incurred by Black Ltd cannot be surrendered to Green Ltd. Tax implications arising from the distribution of both Yellow Ltd s and Green Ltd s profits to Holdco Ltd Holdco Ltd is domiciled and resident in Malta by virtue of its incorporation, with the consequence that it is taxable in Malta on its worldwide profits at 35%. Holdco Ltd is registered with the Commissioner of Inland Revenue to be eligible for refunds of tax on dividend distributions and is therefore eligible for a two-thirds refund in respect of tax paid on the profits derived by Yellow Ltd through its branch in Country E. It does not qualify for a refund in respect of the dividend paid by Green Limited, since this dividend will be paid out of the IPA. Holdco is required to allocate the dividends received from Yellow Ltd and Green Ltd to the same tax account as that out of which the dividends were distributed. The dividend received from Yellow Ltd out of its FTA will not form part of the chargeable income of Holdco Ltd and so will not be subject to further Maltese tax in its hands. Holdco Ltd and Black Ltd are considered to be a group for the purposes of the group relief provisions and all the conditions applicable for making a group claim are satisfied, i.e. both companies are resident in Malta and have a common financial year, and Black Ltd was a 100% subsidiary of Holdco Ltd throughout the relevant period. This means that Black Ltd can surrender its loss to Holdco Ltd. The amount of the loss to be claimed is the accounting loss after adding back depreciation. As the loss relates to a business carried on in Malta, Holdco Ltd can only offset such a loss 19

7 against profits allocated to its Maltese taxed account (MTA) or immovable property account, that is, against the dividend income received from Green Ltd. Holdco Ltd cannot utilise such loss against dividends received from the FIA of Yellow Ltd. Holdco Ltd is also entitled to deduct the interest, amounting to 160,000, paid in respect of the bank loan taken out to finance the acquisition of the shares from the dividend received from Green Ltd. The Income Tax Act specifically provides for a deduction in respect of interest payable on capital employed in acquiring the income. Please do not hesitate to contact me if you have questions about the matters discussed herein. Yours sincerely, A N Other Tax Consultant (b) Yellow Ltd FTA FIA Dividend from PH 300,000 Business profits 500,000 Chargeable income 500,000 Tax at 35% 175,000 Relief of double taxation (100,000) Tax payable 75,000 Distributable profits 300, ,000 Green Ltd IPA Chargeable income 500,000 Tax at 35% 175,000 Distributable profits 325,000 Holdco Ltd Tax accounts FTA FIA IPA UTA FTA dividend (Yellow Ltd) 300,000 FIA dividend (Yellow Ltd) 500,000 IPA dividend (Green Ltd) 500,000 Other income 2/3rds refund (Note) 75,000 Taxable income 500, ,000 Interest deduction 0 (160,000) Chargeable income 500, ,000 Group loss claimed (Black Ltd) (180,000) 180,000 Chargeable income for the year 500, ,000 Tax at 35% 175,000 56,000 Tax at source (175,000) (175,000) Tax payable/(refundable) 0 (119,000) Distributable reserves 300, , , ,000 Note: 2/3 x 175,000 = 116,667 but limited to 75,000, i.e. Malta tax actually paid. 3 Albert (a) Capital gains and property tax implications Transfer of assets to the company The Income Tax Act (ITA) brings to charge to tax capital gains derived by a person from the transfer of immovable property, the business, goodwill, and business permits (article 5). A transfer of furniture and stock of goods on its own falls outside the scope of this charge but, if the furniture and stocks are transferred together with the goodwill and other business assets, they may be treated as included in the transfer of the business and so be within the scope of that charge. 20

8 Unless the transfer is excluded or exempted from tax, the transfer of immovable property situated in Malta is subject to a final withholding tax of 12%, calculated on the higher of the consideration or market value (article 5A). Relief from a charge to tax on capital gains (article 5) applies where a business that is a going concern is incorporated into a limited liability company and the following conditions are satisfied: (a) The individual transfers to the company a business as a going concern, together with the whole of the assets of the business, or together with the whole of those assets other than cash. (b) The business is so transferred wholly in exchange for shares issued by the company to the person transferring the business. (c) The company is beneficially owned to the extent of not less than 75% by the same person who owned the business. The fact that Store B is to be transferred to a third party will not affect the availability of tax relief since the sale is to take place on 25 December 2011, i.e. before the date of incorporation of the company. So, on the proposed date of incorporation of 1 January 2012, the whole of the business assets owned will be transferred to the company. The business will be transferred in exchange for shares and Albert will beneficially own at least 75% of the new company. Since all the conditions will be satisfied no tax will be payable on the transfer of the capital assets, including the transfer of the shop and Store A, to Albert Limited. However, the exemption on incorporation will be clawed back and tax will have to be paid if the business is disposed of, or ceases to exist, within a period of two years, starting from the date the business is transferred to the new company. Sale of Store B The sale transfer of Store B will be subject to a final tax of 12% (article 5A). However, where a transfer is made within seven years from the date of acquisition, the transferor can opt out of this final tax system and have the transfer taxed by reference to the actual gain or profit determined (article 4(1)(a) or article 5). Store B is to be transferred within seven years from the date of the acquisition of the land, which means that the opt out provision is available to Albert. If this option is taken, the transfer, being a transfer of a capital asset, will be chargeable under article 5 of the ITA. Assuming that the consideration of 60,000 represents the market value of the property, the tax payable under the final tax system would be 7,200 (60,000 at 12%). In accordance with article 5, and ignoring inflation and maintenance allowance which are likely to be minimal, the chargeable gain would be 27,000 (60,000 (18, ,000)), resulting in a tax liability of 9,450 (27,000 at 35%). Therefore, it is not advisable for Albert to opt out of the final tax system. (b) Value added tax (VAT) implications Transfer of shop, Store A, furniture and fixtures and stock of goods for resale to new company In terms of the Value Added Tax Act (VATA), the transfer or disposal by a taxable person of goods forming part of his economic activity for consideration is treated as a supply of goods. The transfer of the furniture and fixtures and stock of goods is a supply of goods that takes place in Malta, made for a consideration, by a taxable person, which means that it is subject to VAT. In terms of the fifth schedule to the VATA, the transfer of immovable property is an exempt without credit supply. Therefore, no VAT is charged on the transfer of the shop and Store A. However, a transfer as a going concern of assets forming part of an economic activity for VAT purposes must be treated, as a matter of law, as neither a supply of goods nor a supply of services if certain conditions are met. Therefore, if the sale meets the following conditions the supply will be outside the scope of VAT and no VAT will be chargeable. (a) the assets are transferred to a person registered under article 10 to whom he transfers his economic activity, or part of that economic activity which is capable of separate operation, as a going concern; and (b) said assets are to be used by the transferee in carrying on the same kind of activity, whether or not as part of an existing economic activity, as that carried on by the transferor; and (c) said transfer is recorded in the records of the transferor indicating the registration number of the transferee. Since the shop, Store A, the furniture and fixtures and the stocks will be transferred along with the economic activity as a going concern to a new company registered with the Commissioner under article 10 of the VATA, and since the company is to carry on the same activity, no VAT will be chargeable on the transfer of these assets by Albert. Under the capital goods scheme, input tax credits claimed on the acquisition of fixed assets are subject to an adjustment over a period of 20 years in the case of immovable property (including a contract of works), or of five years in other cases. One of the circumstances which may give rise to an adjustment is where, during the adjustment period of five or 20 years, the capital good ceases to exist within the framework of the enterprise. However, when a business is transferred as a going concern, the enterprise continues to exist in the hands of the new owner, and the assets which are transferred together with the business continue to exist within the framework of that business. The transfer of the business assets by Albert to his company will therefore not give rise to an adjustment under this scheme. Sale of Store B When Albert sells Store B, that store will no longer exist within the framework of his enterprise. In terms of the capital goods scheme (as described above), this gives rise to an adjustment unless it is proved that the capital good was the subject of a supply in respect of which the VAT was deductible or that the capital good has been destroyed or stolen. In terms of the fifth schedule to the VATA, the transfer of immovable property is an exempt without credit supply. Accordingly, an adjustment falls to be made on the sale of Store B. 21

9 The adjustment in this case is made at once and consists of a claw-back of so much of the input tax that had been claimed as corresponds to the unexpired portion of the period of adjustment, including the year during which the reason for the adjustment occurs. The claw-back is calculated at one-fifth or one-twentieth of the amount of the tax initially deducted for every year of the unexpired period. The input tax credit claimed in respect of Store B was the VAT incurred in 2009, i.e. on the contract of works. Since store B was used immediately upon being constructed, the 20-year period of adjustment commenced in The disposal will occur in 2011, i.e. during the third year of the reference period, and the claw-back will accordingly be equivalent to 18/20ths of the respective VAT credit. Assuming that VAT was charged on the full construction costs, the amount to be paid back amounts to 2,430 (18/20 x 18% of 15,000). 4 (a) Tony and Carmen (i) (ii) Capital gains derived from a transfer of shares listed on a stock exchange recognised under the Financial Markets Act, not being securities in a collective investment scheme, are exempt from tax unless the following conditions apply: the shares were admitted to listing on or after 1 January 2010, and the transfer is made by a person who held the shares being transferred immediately before they were admitted to listing. Both Tony and Carmen each hold 10,000 ordinary shares, which were admitted to listing after 1 January The disposal of these shares is, therefore, not exempt from tax. However, the disposal of the 20,000 listed shares, which Tony acquired in March 2011, is not subject to tax since these shares were not held by him before they were listed. Both Tony and Carmen will be taxable on the disposal of the original 10,000 shares they each hold in TP Holdings plc. Specific rules apply for the purpose of determining the chargeable gain in such cases. For the purpose of ascertaining the gains or profits arising from the disposal of these shares the following applies: the transfer value cannot exceed the market value of the shares immediately upon being admitted to listing, and the cost of acquisition that is to be taken into account is the cost of acquisition of the original shares. The Capital Gains Rules provide that the market value of shares that are listed on a stock exchange recognised under the Financial Markets Act is the last quoted price of those shares on that exchange before the date of the transfer. In this case, the selling price of 5 15 per share is the current quoted price on the Malta Stock Exchange and, therefore, this represents the current market value. Since the market value of the shares upon listing was 5 per share (lower than the current market value), the transfer value for the purpose of determining the chargeable capital gain is this lower amount. The cost of acquisition is 1 per share, being the nominal value of the shares upon the incorporation of TP Holdings Limited. The chargeable capital gain is deemed to constitute chargeable income to be taxed separately at the rate of 15 cents on every euro. This means that the capital gain will not be aggregated with any other chargeable income which Tony and Carmen may be required to declare for that year of assessment. This also means that while the gains would not be subject to a higher rate of tax, the tax-free bracket cannot be availed of with respect to the tax on these gains. Malta income tax payable on the transfers of shares made by Tony and Carmen respectively Transfer of 20,000 shares by Tony The transfer is exempt from tax. No tax is payable. Transfer of 10,000 shares by Tony Transfer value 50,000 (10,000 shares at 5 per share) Cost of acquisition (10,000) (10,000 shares at 1 per share) Taxable capital gain 40,000 Tax at 15% 6,000 Transfer of 10,000 shares by Carmen Transfer value (as above) 50,000 Cost of acquisition (as above) (10,000) Taxable capital gain 40,000 Tax at 15% 6,000 22

10 (b) Aldo Malta is the country of residence and domicile of Aldo before he leaves to go to Country G on 1 January Aldo will be present in Malta for less than 183 days during 2012 and during 2013, but his absence from Malta will be temporary and he will retain his home in Malta. Consequently, Aldo will still be considered to be ordinarily resident and domiciled in Malta for both these years and as a result he will be taxable on all his income wherever it arises and whether received in Malta or not. During his stay in Country G, Aldo may be treated as being resident in that country also, in accordance with its domestic law. In that case, his dual residence will be eliminated in accordance with article 4 of the tax treaty, which is based on the OECD Model Convention, between Malta and Country G. Under the tie-breaker rules of that article, Aldo should be treated as resident only in Malta due to the fact that he has a permanent home available to him only in Malta. In terms of the Dependent Personal Services Article of the tax treaty, Country G has the right to tax Aldo s employment income since it is the country where the employment is exercised and (1) he is present in Country G for a period exceeding 183 days in a 12-month period commencing or ending in the fiscal year concerned, (2) his salary is paid by HT Limited, his employer, which is resident in Country G (note: any one of these two tests is sufficient to confirm the right of Country G to tax the income). The tax paid in Country G on Aldo s employment income will be allowed as a credit against the Malta tax on the same income. His taxable income for each of the two years will amount to 186,000. This amount includes the payment for his accommodation while in Country G which, in terms of the Fringe Benefits Rules, constitutes a benefit provided by reason of an employment or office. The Income Tax Act provides that where an individual derives income subject to tax (under article 4(1)(b)) being emoluments payable under a contract of employment requiring the performance of work or of duties mainly outside Malta and received in respect of work or duties carried out outside Malta, or in respect of any period spent in Malta in connection with such work or duties or on leave during the carrying out of such work or duties, such income is deemed to constitute the first part of that individual s total income for that year and is charged to tax at 15 cents on every euro. Since these conditions will be satisfied, Aldo will be charged to tax in Malta at the rate of 15% on the income derived from his contract of employment with HT Limited. Accordingly, Aldo s chargeable income for the years of assessment 2013 and 2014 will be 186,000 each year, resulting in a tax charge of 27,900 per year. The tax paid in Country G will be 18,600 each year, which will be deductible from the tax charge of 27,900, resulting in a net tax liability in Malta of 9,300 per year. Aldo has the option to have this income charged to tax at the progressive rates applicable to married individuals (under article 56(1)(a)). However, he will not do so, as this would produce a higher tax liability in Malta. 5 GRN Limited (a) Malta income tax implications of the royalty and interest receipt/payment GRN Limited (GRN) GRN is incorporated and managed and controlled outside Malta, which means that it is taxable in Malta only on income arising in Malta, such income being taxed at the rate of 35%. GRN is therefore taxable on both the royalties and interest arising in Malta received from TGS Limited (TGS). There is an exemption where the royalty or interest is derived by a person not resident in Malta (article 12(1)(c)). This exemption is relevant to GRN since it is not resident in Malta. However, the exemption is subject to the following limitations: (1) If the non-resident person is engaged in a trade or business in Malta through a permanent establishment (PE) situated therein the royalties or the debt claim in respect of which the interest is paid must not be effectively connected with such a permanent establishment. This limitation does not apply to GRN since it does not have a PE in Malta. (2) The beneficial owner of the royalty or interest must be a person not resident in Malta and such person must not be owned and controlled by, directly or indirectly, nor act on behalf of an individual or individuals who are ordinarily resident and domiciled in Malta. Since GRN is owned and controlled by Alan, who is ordinarily resident and domiciled in Malta, this limitation will have the effect of excluding the application of the exemption in this case. The ITA also provides for an exemption in the case of income consisting of royalties and similar income derived from patents in respect of inventions, whether in the course of a trade, business, profession or vocation or otherwise (article 12(1)(v)). This provision is not subject to the two limitations (as explained above article 12(1)(c)). This means that, since the royalties received by GRN fall within the scope of this provision, such income will be exempt in the hands of GRN notwithstanding that it is owned and controlled by an individual who is ordinarily resident and domiciled in Malta. In order for GRN to claim the exemption in respect of the royalty income, it must make a declaration of its total income from all sources in the return made pursuant to the Income Tax Management Act (article 10) to the Commissioner of Inland Revenue and submit in respect of every qualifying patent, a copy of a determination issued by Malta Enterprise. The income remains exempt from tax even upon distribution and so will be exempt from tax up to the level of the individual shareholder. 23

11 Malta has a treaty with Country H for the elimination of double taxation based on the OECD Model Convention. Articles 11 (interest) and 12 (royalties) of the treaty apply if GRN is considered to be the beneficial owner of the interest/royalties. In accordance with Article 11 Malta can tax the interest paid to GRN, but the tax so charged cannot exceed 10% of the gross interest payment. In accordance with article 12 the royalties arising in Malta paid to GRN are taxable only in Country H. Neither Article 11 nor Article 12 would have applied had GRN carried on a business in Malta through a PE situated in Malta and the right or property in respect of which the royalties/interest was paid were effectively connected with such a PE. In such a case Article 7 (business profits) would have applied. However this is not the case here. Therefore, the situation is as follows: since the provisions of the treaty prevail over the provisions of the ITA the interest income is taxable in Malta but the tax so charged will be capped at 10%; and the royalty income will be exempt from tax in Malta. GRN is required to file a tax return and declare the interest income. However, the royalty income need not be shown as part of its chargeable income. TGS is required to withhold tax from the interest payments and GRN can claim the tax withheld as a credit against the tax charged on the interest. GRN will be entitled to claim double taxation relief in Country H in respect of the Maltese tax paid on the interest. TGS Limited (TGS) Both the royalty and interest payments made by TGS are expenses incurred wholly and exclusively in the production of income and are therefore taken as a deduction for the purpose of determining the chargeable income. TGS is required to deduct tax when it pays income chargeable to tax under the ITA to a person not resident in Malta (article 73). Since GRN is a non-resident company the standard rate of withholding tax is 35%. The tax deducted is to be paid to the Commissioner within 30 days from the making of the deduction. The Commissioner may authorise a person required to effect a deduction of withholding tax, to deduct tax at a rate lower than that prescribed or to pay such income without any deduction of tax. As stated above, GRN is liable to tax in Malta only on its interest income, and this liability is limited to 10% of the gross payment. On this basis, TGS may make a request to the Commissioner to be authorised to deduct tax at the rate of 10% on the interest payment and to pay the royalties without tax deductions. If such a request is not made and tax is withheld at 35%, GRN will be able to claim a tax refund for the difference. Such tax deducted is to be set off for the purposes of collection against the tax charged on GRN Limited in respect of the interest. Any excess shall be refunded (article 48 of the Income Tax Management Act). (b) Malta income tax implications if GRN Limited is a Malta tax resident GRN Limited (GRN) Had GRN been incorporated and managed and controlled in Malta this would be a domestic situation which means that the exemption for royalties and interest derived by non-residents (under article 12(1)(c)) would have no application since the payments would have been made to a person resident in Malta. However, the exemption for income derived from patents in respect of inventions (under article 12(1)(v)) is available to residents as well as non-residents, and would therefore still apply. So the royalty income would still be exempt in the hands of GRN provided that the conditions (explained above) are satisfied. The interest received by GRN would not benefit from a reduced tax rate of 10% under a tax treaty but would be subject to the normal company tax rate of 35%. GRN would pay tax of 35,000 (35% x 100,000) on the interest income. The total tax paid by GRN Limited would therefore be 35,000. TGS Limited (TGS) Both the royalty and interest payments made by TGS would be deductible for the purpose of determining TGS s chargeable income. However, TGS would not be required to withhold tax on the royalty and interest paid to GRN since such payments would be made to a person resident in Malta. 24

12 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2011 Marking Scheme Marks 1 (i) Tax implications arising as a result of group ceasing to exist Intra-group exemption claimed 0 5 Conditions for claiming the exemption 1 5 Deemed transfer of immovable property situated in Malta 1 Group ceases to exist upon Alex acquiring shares in C Limited 1 5 Deemed transfer is taxable at the rate of 12% 0 5 Taxable value 0 5 Time limit for payment (ii) Income tax and stamp duty implications arising under the two options Option 1: Transfer of shares Income tax implications: Transfer of a controlling interest 1 Transfer value is the higher of the market value and the actual consideration 1 Determination of market value of C Ltd 3 Determination of market value of shares transferred 1 Determination of cost of acquisition of shares 1 Inflation adjustment 1 Stamp duty implications: Rate of duty 1 Determining the real value of shares transferred 1 Option 2: Issue of shares Income tax implications: Chargeable event: Deemed transfer of value in securities 0 5 Basis for determining the reduction in value 0 5 Determining the proportion of shares held pre and post issue 1 Determining the market value of the company immediately before and after the share issue 1 5 Treatment of shares whose return is limited to a fixed rate of return 1 5 Determining the cost of acquisition 1 Stamp duty implications: Chargeable event: deemed transfer of value in marketable securities 1 Duty payable by the person who acquires value 0 5 Method applied for determining the value 0 5 Market value of shares held by Alex immediately before issue 0 5 Recommendation of second option, with justification (iii) Supporting calculations of tax and duty liabilities First option: Transfer of shares Computation of market value of C Limited 1 5 Computation of market value of shares transferred 0 5 Calculation of inflation deduction 0 5 Computation of taxable gain 0 5 Computation of tax 0 5 Computation of duty 0 5 Second option: Issue of shares Computation of market value pre issue 2 Computation of market value post issue 0 5 Computation of value transferred 0 5 Computation of value acquired 0 5 Computation of portion of cost of acquisition 0 5 Computation of tax 0 5 Computation of duty Appropriate format and presentation of the report 1 Effectiveness of communication

13 Marks 2 (a) (i) Yellow Ltd and Green Ltd s items of income Subject to world wide tax at 35% 0 5 Trading profits derived by Yellow Ltd from a branch in Country E Branch is PE in Country E 1 Business profits allocated to foreign income account 0 5 Alternatives for relief of double taxation (3 x 0 5) 1 5 Effect of different reliefs on refund available (3 x 0 5) 1 5 Conclusion re best option to claim treaty relief 1 Dividends received by Yellow Ltd from Redco Partnership en commandite considered to be a company 0 5 Investment in Redco qualifies as a participating holding (PH) 1 Anti-abuse provisions satisfied 1 5 Options available: Participation exemption or 100% refund 1 Exempt profits allocated to final tax account 0 5 Income of Green Ltd Profits allocated to the immovable property account 0 5 Annual market rent allocation not required 0 5 Not possible to claim group loss relief (ii) Effect of distribution of Yellow Ltd and Green Ltd s profits and Black Ltd s loss for Holdco Ltd Holdco Ltd taxable in Malta on its worldwide profits at 35% 0 5 Eligible for a 2/3rds refund in respect of tax paid on profits distributed by Yellow Ltd 0 5 No refund re dividend received from Green Ltd 0 5 Dividends received from Yellow Ltd and Green Ltd to the same tax account 0 5 Dividend received from Yellow Ltd s FTA does not form part of its chargeable income 0 5 Holdco Ltd entitled to claim group loss relief 1 5 Allowable loss is the accounting loss after adding back depreciation 0 5 Holdco Ltd can only set-off such loss against the dividend income received from Green Ltd 1 Holdco Ltd entitled to deduct interest from the dividend received from Green Ltd Appropriate format and presentation of the letter 1 Effectiveness of communication 1 2 (b) Computation of tax and allocation of profits to tax accounts of Yellow Ltd 1 5 Computation of tax and allocation of profits to tax accounts of Green Ltd 0 5 Calculation of 2/3rds refund of Holdco Ltd and allocation to untaxed account 1 Deduction of loss claimed and interest against IPA dividend 1 Computation of tax and allocation of profits to tax accounts of Holdco Limited 2 5 Computation of imputation refund due to Holdco Limited

14 Marks 3 (a) Capital gains and property tax implications Transfer of shop, Store A and goodwill Discussion on general rules on capital gains and property transfer tax 2 Discussion on provisions providing for tax relief in respect of transfers of a going concern 2 Applicability of tax relief upon the transfer of Albert s business and assets 1 Conditions resulting in a claw back 0 5 Transfer of Store B The transfer of Store B subject to a final withholding tax of 12% 0 5 Availability to opt out of the final tax system and applicability to Store B 1 In case of opt out article 5 applies 0 5 Best option not to opt out in this case, with justification (b) Value added tax implications Transfer of shop, Store A, furniture and fixtures and stock of goods to new company Discussion of general rules on the disposal of goods forming part of economic activity 1 5 Transfer of immovable property is an exempt without credit supply 0 5 Discussion on general rules on a transfer as a going concern 2 Applicability to the transfer of business by Albert 1 Adjustment relating to input tax on the transfer of capital goods Discussion on general rules applicable to transfers of capital goods and input tax 1 5 No adjustment required on transfer of business assets as going concern by Albert 1 Adjustment relating to input tax on the transfer of Store B Discussion on the adjustment required to be made in respect of input tax credit claimed 1 5 Calculation of input tax paid back (a) (i) General discussion on the exemption applicable to transfer of listed shares 2 Application to transfer of 10,000 shares by Tony and Carmen taxable 1 Application to transfer of shares acquired by Tony after listing not taxable 0 5 Method for determining the transfer value of taxable transfers of listed shares and application in this case 2 Method for determining the cost of acquisition 1 Chargeable capital gain deemed to constitute separate chargeable income 0 5 Applicable tax rate and effect 1 8 (ii) Malta income tax payable on the transfer of shares made by Tony and Carmen No tax payable on 20,000 shares held by Tony 0 5 Computation of tax on transfer of 30,000 shares held by Tony 1 Computation of tax on transfer of 10,000 shares held by Carmen (b) Determination of country of residence as Malta 1 Basis of taxation in Malta 0 5 Consideration of OECD based treaty in case of dual residence 1 Applicability of Dependent Personal Services Article 1 5 Tax treatment of accommodation payment 0 5 Entitlement to claim treaty relief 0 5 Discussion of reduced tax rate applicable to Aldo s income 2 Calculation of tax payable and DTR 0 5 Option to apply married tax rates

15 Marks 5 (a) Malta income tax implications for GRN Limited Basis of taxation 1 Discussion of the applicability of article 12(1)(c) ITA (royalties and interest) 3 Discussion of the applicability of article 12(1)(v) ITA (royalties) 3 Discussion of articles 11 (interest) and 12 (royalties) of the OECD treaty 2 Interest income taxable in Malta at 10% 0 5 Royalty income exempt from tax in Malta 0 5 Malta income tax implications for TGS Limited Allowable deductions 0 5 General obligation to withhold tax at source under article 73 ITA 1 Effect of provisions in this case 2 Tax withheld available for set-off or refund (b) Malta income tax implications for GRN Limited Article 12(1)(c) (interest and royalties) ITA exemption not relevant 1 Article 12(1)(v) (royalties) ITA exemption still applies 1 Interest subject to tax at 35% 0 5 Computation of tax paid 0 5 Malta income tax implications for TGS Limited No obligation to withhold tax upon payment