Professional Level Options Module, Paper P6 (MLA)

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1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) June 2009 Answers 1 (a) REPORT To: The directors of Quickbuck Limited From: XYZ tax advisor Date: 1 June 2009 Subject: The tax treatment of the proposed share transfers Further to your request to report to you the income tax and stamp duty implications arising from the proposed restructuring exercise, I set out my views on the various options being considered. (i) Option 1: Sale of shares in Entertainment Operations Limited (EOL) and Software Products Limited (SPL) by Two Holdings Limited (2HL) and Malta Investments Limited (MIL) to Quickbuck Limited As a resident company 2HL is liable to tax at 35% on the capital gain arising from the transfer. The taxable amount is the difference between the sale price and the cost of acquisition. When a transfer represents a transfer of a controlling interest, the Capital Gains Rules require an adjustment of the transfer price if it is less than the market value. This rule is not relevant in this case since the shares are being transferred at their market value. The tax payable on the transfer of 2HL s shares in EOL is calculated at Euro416,500 while the tax payable on the transfer of 2HL s shares in SPL is calculated at Euro120,050. It will be noted from the attached calculations, that the cost of acquisition of the original 50,000 shares in EOL is taken at Euro200,000. As these shares were acquired before the introduction of the tax on capital gains in 1992, the cost of their acquisition is their balance sheet value as resulting from the balance sheet for 1991, which is higher than the price that was actually paid by 2HL. This basis of calculation is being made on the assumption that the tax return of EOL for 1991 was delivered to the Commissioner of Inland Revenue by 18 November MIL is not liable to tax on the gain it derives from the sale of the shares since capital gains on share transfers derived by non-residents is exempt from tax. The exemption is subject to certain conditions, which are all satisfied in this case, namely, that the company in question does not own immovable property in Malta and that the non-resident is not owned, directly or indirectly, by a person who is ordinarily resident and domiciled in Malta and does not act on behalf of such a person. As Quickbuck Limited is owned by non-residents and does not own any assets in Malta, it may request a determination from the Commissioner of Inland Revenue for the purposes of article 47 of the Duty on Documents and Transfers Act. On the basis of this determination, the share transfers to Quickbuck Limited will be exempt from stamp duty. Option 2: Sale of shares in NewcoA by 2HL and MIL to Quickbuck Limited The second option entails, in the first place, the formation of NewcoA and the transfer by 2HL and MIL of their shares in EOL and SPL in exchange for new shares in NewcoA. In terms of article 5(14) of the Income Tax Act, a transfer that involves an exchange of shares on the restructuring of a holding upon a reorganisation is not subject to tax. This exemption is subject to the condition, as prescribed by regulations, that the exchange does not produce any change in the individual direct or indirect beneficial ownership of the companies involved. The proposed transfer of shares to NewcoA in exchange for new shares in NewcoA to 2HL and MIL satisfies this condition since it will not bring about any change in the ultimate ownership of EOL and SPL. The exchange will therefore not be subject to income tax. However, the exemption under article 5(14) is subject to a claw-back: the gains that were exempt on the exchange will become taxable when the shares in NewcoA are subsequently transferred to Quickbuck Limited, as envisaged under the second option. The income tax implications on the sale of the NewcoA shares will therefore be identical to those applicable to the sale of the EOL and SPL shares under the first option. A tax liability of Euro536,550 will accordingly be incurred by 2HL on the transfer of its shares in NewcoA to Quickbuck Limited. The share transfer by MIL will qualify for exemption from the tax on capital gains for the same reasons as explained in the context of the first option. The Duty on Documents and Transfers Act provides for an exemption from duty on an exchange taking place upon any restructuring of holdings through a reorganisation within a group of companies. Two companies are treated as forming part of a group in this context if they are directly or indirectly owned (whether through a parent-subsidiary relationship or otherwise) as to more than 50% by the same shareholders. The transfer of shares by 2HL in exchange for NewcoA shares qualifies for this exemption since the common beneficial shareholding requirement of more than 50% in each of the two companies is satisfied. However, the holding in NewcoA by MIL is less than 50% and consequently the transfers of shares in EOL and SPL by MIL to NewcoA are subject to stamp duty. As EOL and SPL do not own immovable property, the rate of duty is Euro2 for every Euro100 or part thereof of the higher of the consideration and the market value of the shares. In this case, the consideration is equal to the market value. On this basis, stamp duty on the transfer of the EOL shares will amount to Euro12,000 while stamp duty on the transfer of the SPL shares will amount to Euro3,000. Total duty payable by MIL is therefore Euro15,000. Quickbuck Limited may claim a determination under article 47 of the Duty on Documents and Transfers Act (as stated for the first option), in the context of the second option. This will entitle it to an exemption from stamp duty on the transfer of shares from NewcoA. 17

3 (ii) Option 3: Sale of shares in EOL and SPL by 2HL and MIL to NewcoB The income tax implications of the sale of shares in EOL and SPL by 2HL and MIL to NewcoB are identical to those arising from the sale of those shares to Quickbuck Limited under the first option. A tax liability of Euro536,550 will accordingly be incurred by 2HL on the transfer of its shares while the sale of MIL s shares will be exempt from tax. As NewcoB does not have business interests outside Malta, it does not qualify for a determination under article 47 of the Duty on Documents and Transfers Act. On this basis, stamp duty on the transfer of the EOL shares will amount to Euro40,000 while stamp duty on the transfer of the SPL shares will amount to Euro10,000. The total duty payable by NewcoB is therefore Euro50,000. The income tax and stamp duty liabilities referred to above are based on the following calculations: Calculation of tax on capital gains Transfer of shares in EOL by 2HL Euro Market value of the shares 2,000,000 Cost of acquisition: Cost of 50,000 shares is the higher of the net asset value of the shares as at 31 December 1991 (Euro200,000) and the nominal value of the shares (Euro50,000) (200,000) Cost of 100,000 shares (100,000) Gain 1,700,000 70% of the gain attributable to 2HL 1,190,000 Tax on gain attributable to 2HL at 35% 416,500 Transfer of shares in SPL by 2HL Euro Market value of the shares 500,000 Cost of acquisition: Cost of 10,000 shares being the nominal value of the shares (10,000) Gain 490,000 70% of the gain attributable to 2HL 343,000 Tax on gain attributable to 2HL at 35% 120,050 Calculation of stamp duty Transfer of shares to NewcoA by MIL Euro Euro Market value of EOL 2,000,000 Share attributable to MIL (30%) 600,000 Duty at Euro2 per Euro100 12,000 Market value of SPL 500,000 Share attributable to MIL (30%) 150,000 Duty at Euro2 per Euro100 3,000 Total duty payable by NewcoA 15,000 Transfer of shares to NewcoB by 2HL and MIL Market value of EOL 2,000,000 Duty at Euro2 per Euro100 40,000 Market value of SPL 500,000 Duty at Euro2 per Euro100 10,000 Total duty payable by the NewcoB 50,000 (b) (i) First alternative: Loan taken out by Quickbuck Limited Once the shares in EOL and SPL are transferred to Quickbuck Limited, the two companies will each be owned as to more than 50% by another company. However, two companies resident in Malta shall be deemed to be members of a group of companies if both are 51% subsidiaries of a third company resident in Malta. Quickbuck Limited is not resident in Malta. Therefore, the companies will not be able to surrender and claim losses from each other. As the loan taken out by Quickbuck Limited is a loan for a capital purpose (acquisition of shares) the interest for any particular year is deductible only to the extent that it can be offset against dividends received from the shares in question in that year. Dividends distributed from taxed income entitle Quickbuck Limited to a credit for the tax paid by the company, and when the taxable amount in the hands of Quickbuck Limited is reduced by the deduction for interest, the credit will result in a refund to Quickbuck Limited. 18

4 (ii) Entertainment Operators Limited Euro Euro Euro Profit before depreciation 70, , ,000 Capital allowances for the year 38,000 43,000 48,000 Capital allowances brought forward Capital allowances carried forward Group losses claimed 0 0 Chargeable income 32, , ,000 Current tax provision 11,200 51,150 61,600 Software Products Limited Euro Euro Euro Profit/(loss) before depreciation 26,000 (10,000) (11,000) Capital allowances for the year 26,000 26,000 26,000 Capital allowances brought forward ,000 Capital allowances carried forward 0 26,000 52,000 Group losses surrendered Losses brought forward ,000 Losses carried forward 0 10,000 21,000 Chargeable income Current tax provision Quickbuck Limited Euro Euro Euro Dividends receivable 32, , ,000 Interest deduction (62,500) (62,500) (62,500) Chargeable income 0 86, ,500 Current tax provision 0 30,275 39,725 Credit for tax at source (11,200) (52,150) (61,600) Tax refunds 11,200 21,875 21,875 The total tax payable (net of refunds) by the three companies under this financing option for the three year period, stands at Euro70,000. Second alternative Loan taken out by EOL As stated under the first alternative, SPL will be able to surrender its losses to EOL. The deduction for interest under this second alternative can be claimed by EOL. As the loan is required for the company s working capital, and not for a capital purpose, any interest that is not absorbed by the company s profits will be treated as a trading loss and carried forward to the subsequent year. Entertainment Operators Limited Euro Euro Euro Profit before depreciation (after deduction for interest) 7, , ,500 Capital allowances for the year 38,000 43,000 48,000 Capital allowances brought forward 0 30,500 0 Capital allowances carried forward 30, Group losses claimed Chargeable income 0 56, ,500 Current tax provision 0 19,600 39,725 Software Products Limited Euro Euro Euro Profit/(loss) before depreciation 26,000 (10,000) (11,000) Capital allowances for the year 26,000 26,000 26,000 Capital allowances brought forward ,000 Capital allowances carried forward 0 26,000 52,000 Group losses surrendered Losses brought forward ,000 Losses carried forward 0 10,000 21,000 Chargeable income Current tax provision The distribution of dividends to Quickbuck Limited will not result in any tax payable by or any tax refundable to Quickbuck Limited. The total tax payable by the three companies under this second alternative for the three-year period, stands at Euro59,

5 2 ABC tax consultant No 10, High Street Valletta Malta XX June 2009 Mr Abel Director s office Abel Organisation Long Street Capital City Country of residence Dear Sir, Requested advice Further to your instructions I set out my advice on the restructuring of holdings, the tax implications on the income received by Malta Trading Limited (MTL) following such restructuring and the payment of dividends payable to yourself. (a) Maltese tax MTL 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%. When a company resident in Malta pays a dividend, the shareholder becomes entitled to a refund of all or part of the tax paid by the company on the distributed profits. A refund of 100% applies to distributions of profits derived from a participating holding, a refund of 5/7ths applies to distributions out of passive interest or royalties, a refund of 2/3rds applies to distributions out of the foreign income account where double taxation relief has been claimed and a refund of 6/7ths applies in all other cases. The right to tax refunds mentioned above is subject to certain limitations, particularly with respect to income derived from or linked to immovable property situated in Malta, but it does not appear, from the information given, that these would apply in the case of the dividends payable to yourself. A shareholder may only claim refunds under the above rules if he is registered for this purpose with the Inland Revenue Department, and you satisfy this condition. As a non-resident, you will not be subject to any Maltese tax on the refunds. Following the restructuring, the company is expected to receive business income from its activities in dealing in scrapped material, interest from financing activities and income from its investment in Europa Services Limited, and different considerations apply to the tax treatment of the income from these various sources. Profits from trading in scrapped material Business income from dealing in scrapped material does not arise from a permanent establishment of the company outside Malta and therefore it stands to be allocated to the Maltese taxed account. Since the income from this activity is not subject to any foreign withholding tax, and is not allocated to the foreign income account, it is subject to tax in Malta without any grossing up and without any right to the flat rate foreign tax credit or any other form of double taxation relief. When MTL pays a dividend out of these profits, you will become entitled to a refund amounting to 6/7ths of the tax paid by the company on the distributed amount. As the company tax rate is 35%, the refund would amount to 30% of the profits before tax. Interest The interest derived by MTL from its financing activities is chargeable to tax in Malta as business income. Similarly to the income from the other business activity, it is not attributable to a permanent establishment of the company outside Malta and therefore it stands to be allocated to the Maltese taxed account. The interest is subject to foreign withholding tax of 10%. The company qualifies for double taxation relief and for this purpose the income is grossed up by the foreign tax before being subject to tax in Malta at 35%. The net Malta tax rate will be 25%. As the income is not allocated to the foreign income account, the company cannot claim the flat rate foreign tax credit. The refund of tax that should apply upon distribution of these profits is the 6/7ths refund, given that the interest suffers tax at a rate which is higher than 5%, it is not treated as passive interest and this refund is therefore not reduced to 5/7ths. As the interest is not allocated to the foreign income account, the refund is not reduced to 2/3rds, even though double taxation relief is claimed. The 6/7ths refund is calculated on the company tax before double taxation relief provided that it does not exceed the tax actually paid in Malta on the distributed profits. This means in practice that the tax payable in Malta by MTL on the interest will be refunded in full to you upon the distribution of such income: Gross interest 100 Foreign withholding tax 10 Amount received in Malta 90 Gross amount taxable in Malta 100 Maltese tax before double taxation relief 35 Double taxation relief 10 Tax payable in Malta after double taxation relief 25 Amount refundable on the distribution of the profits (6/7 of 35, restricted to a maximum of 25) 25 Malta tax after refund 0 20

6 Dividends Due consideration should be given to determining whether the investment by MTL in Europa Services Limited (ESL) constitutes a participating holding (PH) and whether the benefits associated with such holdings apply in the circumstances. The Income Tax Act defines a participating holding as an equity holding in a company that is not resident in Malta and that satisfies any of the conditions listed in the definition. One of the conditions is satisfied where the holding exceeds 10% of the equity shareholding of the non-resident company. Following the proposed restructuring, MTL will fully own ESL and consequently this will constitute a PH. Income derived from a PH is exempt from Maltese tax. Alternatively, it can be taxed, at the option of the company, at the normal rates but in such a case the tax paid will be fully refundable to the shareholder when the relative profits are paid out as a dividend. These benefits are subject to certain anti-abuse provisions, but these do not apply in this case since the investment is held in a company that is resident or incorporated in a territory that forms part of the EU. Dividends from ESL will therefore qualify for the PH benefit, i.e. a 100% refund. (b) The Mergers Directive Under the proposed restructuring, you will be transferring all your shares in ESL to MTL in exchange for shares in the latter company. The two companies are resident in different Member States of the EU. In terms of the EU Mergers directive, a transfer of shares under this type of restructuring is exempt from tax on capital gains, and, assuming that the Directive applies in MS in the same manner that it applies in Malta, the transfer of your shares in ESL should therefore be exempt from capital gains tax in MS. The Parent Subsidiary Directive In terms of the EU Parent Subsidiary Directive, when a company (the subsidiary) resident in an 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. Following the proposed restructuring, ESL will be a subsidiary of MTL within the meaning of this Directive. Assuming that the Directive applies in MS in the same manner that it applies in Malta, dividends paid by ESL to MTL will no longer be subject to withholding tax in MS. The Interest and Royalties Directive The Interest and Royalty Payments Directive provides a common system of taxation applicable to interest and royalty payments made between associated companies of different EU Member States. This directive primarily provides for an exemption from source taxation. For the purpose of this Directive, two companies are treated as associated where either of them has a direct holding of at least 25% in the capital of the other, or where a third company has a direct holding of at least 25% in the capital in each of the two companies. Under the present structure, interest is payable by companies resident in EU Member States but their relationship with MTL is through the holding held personally by you and it therefore does not satisfy the association criteria of the Directive. These criteria would be satisfied if MTL acquires the shares of those companies. In that case, interest payments could flow to MTL without withholding tax. I am at your disposal should you wish to discuss this letter further. Yours faithfully ABC Tax consultant 3 John Pisani (a) The solution to the conflicting claims by Malta and Savonaland with respect to Mr Pisani s residence is found in the tie-breaker clauses of the Residence Article of the tax treaty between the two countries. The first test under the Residence Article of the treaty is to see where John Pisani had a permanent home. This test is inconclusive as we are informed that he had a permanent home in both jurisdictions. The second test is to establish the place where he has the closest personal and economic relations (the place of vital interests). The information in the question suggests that John Pisani had personal connections both in Savonaland, because that is where his wife still lived in 2008, and in Malta, because he made social connections through his membership and participation in the band club. He also had economic connections with both countries. He had interests and involvement in Windmill Limited and he received income therefrom in Malta, but he also held a bank account in Savonaland and received substantial income there. Where the criteria of the permanent home and the centre of vital interests do not provide a solution, the treaty points to the country in which the taxpayer has an habitual abode. This test is, again, inconclusive as John Pisani spent as much time in Malta as he did in Savonaland. In these circumstances, the treaty applies the nationality test. John Pisani was a national of Malta but not a national of Savonaland. Therefore, Malta should be determined as the country of residence of John Pisani for the purpose of the operation of the treaty. (b) (i) John Pisani was originally domiciled in Malta. There is no evidence to suggest that he moved to Savonaland with the intention to remain there permanently. On the contrary, his return to Malta in 2008 indicates that he never lost his Maltese domicile. At any rate, under the principle that the domicile of origin remains a stronger force of attraction than the domicile of choice, his return to Malta raises the presumption that even if he had acquired the domicile of 21

7 Savonaland, the Maltese domicile was revived in In 2008 he was also resident in Malta for local tax purposes. Therefore, under the normal rules, he would be liable to tax in Malta on a worldwide basis for that year. However, the Income Tax Act provides for a special basis of taxation for returned migrant. Under this scheme, and subject to certain conditions, any foreign income arising to eligible persons is only taxable in Malta if it is received or remitted into Malta while capital gains arising outside Malta are not subject to tax. Moreover, the tax rate on income taxable in Malta, following a tax-free portion, is a flat rate of 15%. The exception to this rule is that any income arising in Malta from a trade, business, profession or vocation, or any income from an employment or office in Malta, is taxed at the normal rates of tax applicable to married resident individuals, disregarding the tax-free portion. The minimum tax applicable to persons electing for the scheme is Euro2,330. The returned migrants scheme applies to an individual who resided outside Malta for 20 years falling within a period of 25 years preceding the first day of the year of assessment in which he returned as resident to Malta. Another condition is that at least Euro14,000 of the foreign income of that individual is received in Malta in every calendar year. John Pisani qualfies for the scheme for year of assessment 2009 since he was away from Malta for 24 years prior to his return and satisfied the foreign income remittance requirements. The Maltese tax treatment of John Pisani s income for 2008 is as follows: Shareholders are not required to report dividends from Maltese companies in their tax returns, but when they report dividends they become entitled to a tax credit for the tax paid by the company on the distributed profits. As a returned migrant, John Pisani s dividends are taxable at a maximum rate of 15%. Consequently it is more beneficial for him to report his local dividends in his tax return since the credit would exceed 15% and produce a refund of tax. Under the treaty between Malta and Savonaland (based, as it is, on the OECD model) pensions paid in respect of private employment are taxable only in the country of residence. Therefore, John Pisani s pension is taxable only in Malta. The treaty provides that where the income is taxable in the country of residence on the remittance basis of taxation, the exemption from tax in the source country would only apply to the extent that the income is received in the residence country. This condition is immaterial in John Pisani s case since he received the pension in Malta. The income earned from his directorship is taxable at the standard rates of tax (eliminating the tax-free portion). The beneficial rates on income from a part-time occupation do not apply to income from directorships. The dividends from shares in foreign companies and the bank interest are not subject to Maltese tax as they were not received in Malta. The gains from the disposal of the securities are not taxable in Malta, even though they were received in Malta, since they represent capital gains arising outside Malta. (ii) Euro Euro Gross local dividends 3,308 Foreign pension 15,000 18,308 Income from office 10,800 Chargeable income 29,108 Tax liability 4,200 at 0% 14,108 at15% 2,116 9,100 at 15% 1,365 1,700 at 25% 425 Exceeds minimum tax of Euro2,330 2,116 1,790 3,906 Tax at source 2,577 at 35% (902) 731 at 35% 256 Reductions in respect of dividend affected by double taxation relief: 731 x (30% 15%) (rate of double taxation relief less: rate at which the dividend is taxed) (110) (146) Tax payable 2,858 22

8 4 Cottonera Developments Limited (i) (ii) (iii) (iv) (v) The tax on property transfers is, as a rule, governed by the final tax system under article 5A. The law allows certain exceptions and grants certain options, but these do not apply in this case considering, particularly, that the property has been owned for more than five years and is not situated in a designated area. Although one of the owners owns more than 50% of the property, the group exemption mentioned under (ii) below will not apply since that exemption applies only to a transfer that is made from one company to another. The liquidation of CD does not, in itself, trigger any taxation. However, the transfer of property by way of a distribution in kind upon the scheme of distribution is expressly included in the definition of transfer under article 5A and it is therefore taxable at 12% of the market value of the property. As this is a final tax, there will be no further tax liability on the shareholders when the profits are distributed on the company s liquidation. Stamp duty applies at Euro5 for every Euro100 of the real value. The real value is taken to be the market value. The difference between this and the previous option is that 40% of the property will be transferred by way of a sale to AB at book value rather than under the scheme of final distribution. This difference does not produce any change in the tax payable. The sale is governed by the final tax system (for the reasons given in (i) above) and under this system the tax is calculated by reference to the higher of the price and the market value. Both the sale of 40% to AB as well as the distribution in kind of the remaining 60% to Mr Y will therefore be subject to the final tax of 12% of the market value of the property, and no further tax will be due on the distribution of the profits by CD. Stamp duty applies at the rate stated under (i) above. The sale of 60% of the immovable property owned by CD to EF will qualify for exemption. For the reasons given in (i) above, the transfer will be governed by the final tax regime, but article 5A(4)(f) ITA exempts those transfers which would qualify for the exemption under article 5(9) ITA had the transfer been governed by the capital gains provisions. The exemption under article 5(9) applies in the case of a transfer that is made between two companies that are directly or indirectly owned (whether through a parent-subsidiary relationship or not), as to more than 50%, by the same shareholders. As CD and EF are each owned as to more than 50% by Mr Y, this sale satisfies the condition for the exemption. The fact that this sale to EF is governed by the final tax system means that there will be no clawback of the exempt profits on a subsequent transfer of the property. A subsequent transfer will be taxed at 12% of the transfer value and the price attributed to the present transfer (the book value rather than the market value) is therefore immaterial for tax purposes. Article 5A also provides that profits from transfers to which it applies are to be allocated to the final tax account. Dividends paid out of this account are not subject to any tax and this can be interpreted to mean that even though the transfer to EF is exempt, the eventual distribution of the profits by CD will not be subject to any tax. On the other hand, it can be argued that the final tax account is meant to include only profits that have suffered tax, and that the correct interpretation of the law would require the allocation of exempt profits to the untaxed account. If this latter interpretation prevails, when the profits derived by CD from the transfer of property to EF are eventually distributed to an individual who is resident in Malta, they will be subject to a withholding tax of 15% A similar exemption applies to stamp duty and no duty would apply on the transfer of property from one company to another where the companies are directly or indirectly owned as to more than 50% by the same shareholders. The transfer to Mr X will be subject to the final tax of 12%, and no further tax would be payable when the profits from this transfer are eventually distributed. However, as Mr X intends to use the property as his sole ordinary residence he will qualify for relief and stamp duty will be chargeable at Euro3 50 for every Euro100 for the first Euro116,500 of the market value of the property, and on the rest at Euro5 for every Euro100. The sale of immovable property from CD to EF will qualify for the exemption discussed under (iii) above except that, under this option, the exemption will apply to all the gains realised by CD. This also means that the benefit available on the distribution of the profits (0% or 15%, depending on which interpretation prevails, as discussed above) will extend to the full profits derived from the sale. As 40% of the profits under this option will be distributable to AB (a company), the 15% charge on this percentage, if applicable at all, will only arise when AB distributes the profits to Mr X. No stamp duty would apply on account of the group exemption mentioned above. The implications of the transfers under this option are similar to those mentioned under (iv) above, except for the fact that, once the distribution of the profits will be made upon the scheme of final distribution, and once it will not represent a distribution of income, it will not be treated as a dividend. This means that even if the profits were allocated to the untaxed account (the second possible interpretation discussed under (iii)), the distribution would still not be subject to any tax. No stamp duty would apply on account of the group exemption mentioned above. 5 (a) (i) The sale by A is an intra-community supply (goods transported from one Member State to another Member State). It takes place outside Malta, since the place of an intra-community supply is the place where the goods are when the transport begins. At the same time, the purchase of the goods by B is an intra-community acquisition that takes place in Malta, being the place where the transport ends. However, even though B is not registered for Maltese VAT purposes, the acquisition by B is exempt from Maltese tax since it forms part of a triangulation. The special provisions regulating triangulation also provide that the liability for the VAT on the sale by B to C is not on B but on C. C will account for the Maltese VAT on a reverse charge basis. 23

9 (ii) (iii) VAT legislation provides for special rules to regulate the place of supply of (inter alia) legal services. However, these do not apply to legal services provided to a non-taxable person established in the EU. Consequently, the services provided by D to E are governed by the default rule, and are deemed to be supplied in the place where the supplier is established, and therefore, not in Malta. Legal services provided to a taxable person established in Malta are treated as taking place in Malta. The supply by D to F is, accordingly, taxable in Malta, but the reverse charge rule applies in this case and the liability for the payment of the tax is on the customer F. A supply of goods which includes also the assembly of those goods is treated as taking place in the country where the assembly is made. The supply by G to H therefore takes place in Malta. As H is a taxable person and the supplier is not established in Malta, the liability to pay the tax in Malta is on H. (b) The charge to tax on employment income includes a charge on the value of any benefit provided by reason of an employment. In terms of the general provisions of the Fringe Benefits Rules, a cash payment paid by an employer to his employee is treated as a benefit provided by reason of the employment. The Rules also provide that a sum paid by a company to a former employee in recognition of services rendered to that company is treated as a benefit paid by reason of an employment. The Rules do not distinguish between contractual and gratuitous payments. These general provisions do not apply when the payment is a donation on purely personal considerations, or as a reimbursement for a debt that is not connected with the employment, or when it represents a distribution of profits by a company to its shareholder, but none of these exceptions applies in this case. The general provisions are subject to any exemption that may be allowable in any particular circumstances. Among the exemptions allowed under the Rules, there is the exemption for a long service award paid to an employee. However, this applies only when the award is paid for 15 years service or more, whereas, in this case, Michael had been employed with Solaris for 13 years only. Another exemption is provided for in the Income Tax Act. This applies to any capital sum paid by way of a retirement gratuity. This exemption is applicable to the payment of Euro20,000. On this basis, the payment of Euro39,000 paid in terms of the contract of employment and the long-service award of Euro10,000 are taxable as income from Michael s employment, while the retirement gratuity of Euro20,000 is exempt from tax. 24

10 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation June 2009 Marking Scheme Marks 1 (a) (i) Option 1 Gain on transfer by 2HL taxable 0 5 No scope for determination of controlling interest 0 5 Treatment of shares acquired pre Transfer by MIL is exempt 1 Exemption on duty 1 5 Option 2 Implications of art 5(14) exemption to transfers to NewcoA 2 Implications of tax on eventual sale to Quickbuck identical to (i) above 1 5 Group exemption as applicable to transfer by 2HL 1 5 Exemption not applicable to transfer by MIL dutiable transfer 1 Rate of duty applicable 0 5 Article 47 applies as for option Option 3 Taxable gain on transfer by 2HL as in (i) above 0 5 Transfer by MIL is exempt as in (i) above 0 5 No exemption from duty applies duty on transfers (ii) Calculation of tax on transfer of EOL shares 1 5 Calculation of tax on transfer of SPL shares 1 Duty payable by Newco A 1 5 Duty payable by Newco B 1 5 Appropriate format and presentation of the report 1 Effectiveness of communication 1 2 (b) (i) Comments about non-applicabiliy of group relief 3 (ii) Computations for EOL 3 Computations for SPL 2 Computations for Quickbuck Limited

11 Marks 2 (a) General Maltese tax implications 3 Implications on taxability and refund on business income from scrapped material 3 Implications on taxability and refund on interest from financing activity 4 Investment considered a ph and application of exemption 3 13 (b) (i) Condition of acquisition of majority of shares in the exchange 2 Application of the exemption to the transaction 1 3 (ii) Minimum holding requirements 3 Application of the exemption from withholding tax on dividends 1 4 (iii) Relationship between debtor and creditor for the operation of directive 3 Application of the exemption from withholding tax on interest 2 5 Appropriate format and presentation of the report 1 Effectiveness of communication (a) Application of tie-breaker clauses when residence is claimed by both territories 0 5 Permanent home in both territories inconclusive 1 Centre of vital interest test since permanent home in both territories 0 5 Arguments for determination of personal and economic relations 1 5 Habitual abode test if vital interest is inconclusive 0 5 Arguments for determination of habitual abode 1 Nationality being the decisive factor if habitual abode test was not conclusive 1 6 (b) Comments on domicile and residence status upon John s return to Malta 2 Worldwide taxation in the absence of a special scheme for returned migrants 0 5 Implications of the scheme: Remittance basis 0 5 Flat rate of tax 0 5 Normal rates applicable to business and employment income 0 5 Minimum tax liability 0 5 Conditions for the scheme: Period of absence from Malta 0 5 Minimum remittance 0 5 Tax treatment of dividends from Windmill Limited 1 No tax on foreign dividends and interest 1 No tax on capital gains on foreign securities even though received in Malta 1 Treatment of foreign pension 1 5 Tax on income from directorship 1 11 (c) Grossing up of dividends 0 5 Computation of tax liability (2 x 0 5) 1 Tax at source with applicable limitations

12 Marks 4 (i) Applicability of final tax with no possibility of opting out 1 5 No exemption available 0 5 No implications on liquidation process 0 5 Distribution in kind upon the scheme of distribution transfer 1 Duty at Euro5 per Euro100 in value 1 No further tax upon distribution of profits 1 (ii) Final tax on 40% to be charged on the market value, this being higher than the book value 1 5 Tax on transfer of 60% same as (i) above 0 5 Duty implications same as (i) above 0 5 (iii) Application and conditions for group exemption from tax 2 No clawback relevance to transfer value 1 Comments on allocation and distribution of profits 2 Availability of stamp duty exemption 1 Stamp duty on the acquisition of sole residence 1 5 (iv) Exemption from tax for transfer to EF applies as (iii) above 0 5 Comments on distribution of profits 1 Duty exemption same as (iii) above 0 5 (v) Implications on distributions in the course of winding up 2 Duty exemption same as (iii) above (a) (i) Existence of intra-community supply 0 5 Supplied outside Malta where transport begins 1 Intra-community acquisition by B 1 Acquisition takes place in Malta where the transport ends 1 Reason behind exemption on acquisition by B 1 5 Liability for Maltese VAT on C 1 C to account for VAT by reverse charge 1 7 (ii) Special rules for place of supply of legal services apply to EU established taxable persons 1 Place of supply for legal services provided to taxable person established in Malta Malta 0 5 Payment of tax in Malta is due by F by reverse charge 1 Supplies to non-taxable EU resident persons governed by the general rule 1 Legal service to non-taxable person resident in Malta is not deemed to take place in Malta (iii) Place of supply where assembly is made Malta 2 Liability falls on H since G is not established in Malta 1 3 (b) Implications of fringe benefit rules 3 Taxability of long service award and contractual obligations 2 Exemption accorded to capital sum paid by way of retirement gratuity