Professional Level Options Module, Paper P6 (MLA)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2014 Answers 1 (a) Tax Consultant 14, Main Street Valletta The Directors Borg Co 18, Main Street Mosta 3 December 2014 Dear Sirs Malta tax implications of proposed merger Following our meeting, we hereunder provide you with our explanation of the tax implications of the two options being considered. Option A The transactions which need to be examined are the transfer of shares by Joe Borg to Galea Co, the increase in the share capital of Galea Co and the issue of the new shares to Joe Borg, the transfer of assets and liabilities by Borg Co to Galea Co, and the merger of Borg Co into Galea Co. 1. Transfer of shares by Joe Borg Income tax implications The Income Tax Act provides that, where a transfer involving the exchange of shares on a restructuring of holdings upon a merger takes place, then it is deemed that no loss or gain arises. However, in order for this provision to apply, the Capital Gains Rules provide that the exchange of shares should not produce any change in the individual direct or indirect beneficial owners of the companies involved or in the proportion of the value of each of the companies involved represented by the shares owned beneficially directly or indirectly by each such individual. As shown in the Appendix (Schedule 2), although the proposed operation will not produce a change in the beneficial owners of Borg Co and Galea Co respectively, the shareholders will not have the same proportion in value in the company as they had prior to the exchange of shares. The transfer of shares by Joe Borg to Galea Co will therefore not qualify for the income tax relief regulated by this provision. Joe Borg s holding in Borg Co (100%) is more than 25% of the nominal value of the issued share capital of Borg Co. The transfer will therefore qualify as a transfer of a controlling interest, meaning that the transfer value of the shares will be the higher of the consideration and the market value of the shares. The market value is determined by reference to the net asset value as shown in the financial statements for 2013 of Borg Co, i.e. the financial statements immediately preceding the year in which the transfer is made (2014). In order to determine the market value of the transfer of Joe Borg s shares to Galea Co, the net asset value of Borg Co will need to be adjusted by adding the value of goodwill to the net asset value. The value of the goodwill is equivalent to two years average profits of the company, calculated by reference to the profits for the five financial years preceding the transfer. Given that Borg Co does not own any immovable property, no adjustment is needed for the market value of the property and no deduction is needed for increases in inflation. The calculation of the market value and of the tax payable on the share transfer is shown in the Appendix (Schedule 1). Provisional tax at the rate of 7% of the higher of the consideration and the market value will be payable at the time of the transfer. Duty on documents and transfers implications The Duty on Documents and Transfers Act grants an exemption on an exchange of shares which takes place on the transfer of shares in a company by an individual in exchange for shares in another company if the exchange is part of a restructuring exercise and the two companies form part of the same group. This duty relief will not apply as, before the exchange of shares, Galea Co and Borg Co are held by different shareholders and do not qualify as a group of companies. The transfer of shares by Joe Borg to Galea Co will therefore give rise to duty on documents. The transfer of marketable securities is subject to duty at the rate of 2 for every 100 or part thereof of the amount or value of the consideration or the real value of the property, whichever is the higher. The law provides that where 75% or more of the assets of the company (excluding current assets other than immovable property) whose marketable securities are being transferred consists of immovable property, duty is charged at the rate of 5 for every 100 or part thereof of the amount or value of the consideration or the real value, whichever is the higher. 15

3 Given that Borg Co does not own any immovable property, the 2 for every 100 or part thereof rate will apply. Given that this is a contract of exchange, the duty is assessed on the value of the shares transferred. The real value of the company for duty purposes will be computed in the same way as the value of a controlling interest is determined for capital gains purposes. In determining the net asset value of a company which owns directly or indirectly immovable property, any liability in excess of the value of all assets excluding the value of the immovable property is not deductible, with the only exceptions being with respect to certain loans but this consideration is not relevant to Borg Co. 2. Issue of shares by Galea Co Income tax implications The value shifting rules apply where the market value of shares held by a person in a company has been reduced as a result of a change in the issued share capital of such company (or a change in voting rights attached to such shares). In terms of the relative statutory formula, as Joe Borg held no shares in Galea Co before the change in the share capital, the value of his share is to be taken as zero. This is then compared with the value of the shares issued to him and the difference is increased by the consideration, which, in Joe Borg s case, is the value of the shares he transferred to Galea Co. As is shown in the Appendix (Schedule 2) to this report, the change in the share capital produces a reduction in the market value of the shares held by Joe Borg and a corresponding increase in the market value held by the original Galea Co shareholders. However, the value shifting rules do not apply if the company is not a property company, which Galea Co is not, and it can be shown to the satisfaction of the Commissioner that the said change is effected for bona fide commercial reasons and is not a scheme or arrangement the main purpose of which is the avoidance of tax. Duty on documents implications As above, the issuing of shares in Galea Co will not give rise to any duty implications because, although there will be an increase in the real value of shares held by the original shareholders of Galea Co, Galea Co is not a property company and it can be shown to the Commissioner that the change is effected for bona fide commercial reasons and is not a scheme or arrangement the main purpose of which is the avoidance of tax. 3. Transfer of assets and liabilities Income tax implications The Income Tax Act provides that, where an asset is transferred from one company to another company and such companies are: deemed to be a group of companies; or controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders, it is deemed that no loss or gain has arisen from the transfer. Given that Galea Co will be the parent company of Borg Co when the assets and liabilities are transferred, this condition is satisfied. It should, however, be noted that, should any asset which falls within the charging provisions of the taxation of capital gains subsequently be transferred by Galea Co to another company which does not benefit from this tax relief, the base cost which would be considered will be the original cost, and the date of acquisition of the asset the date when it was acquired before the transfer from Borg Co took place. Duty on documents and transfers implications Given that Borg Co did not own any immovable property or shares in other companies, there are no duty implications. 4. Subsequent merger Upon the subsequent merger of Borg Co into Galea Co there will be no income tax or duty on documents implications. From a duty perspective, the companies qualify as a group of companies, given that Galea Co is the 100% holding company of Borg Co, so the restructuring of holding through a merger may benefit from duty relief. Option B Income tax implications Transfer of assets by Borg Co In terms of the conditions for the application of income tax relief (as described above), Borg Co and Borg Galea Co qualify as a group of companies as they are controlled and beneficially owned to the extent of more than 50% by the same shareholder (Joe Borg). The transfer of assets will therefore qualify for tax relief. As explained in the context of Option A, this relief can be clawed back in the event of a subsequent transfer of assets outside the group. Transfer of assets by Galea Co Galea Co and Borg Galea Co do not qualify as a group of companies as they are not controlled and beneficially owned to the extent of more than 50% by the same shareholders. Therefore relief from income tax will not apply. Any assets to be transferred must be identified to determine the income tax implications as any gains from the transfer of business, goodwill, business permits, copyright, patents, trademarks and trade-names are taxable. 16

4 Duty on documents and transfers implications As under Option A, duty relief will not apply because Galea Co and Borg Galea Co do not form a group of companies prior to the transfer of assets. Given that Borg Co and Galea Co do not own immovable property or shares in other companies, there are no other duty implications. Concluding remarks The proposed restructuring options will both lead to income tax and stamp duty implications for either Mr Borg or Galea Co. It is therefore advisable for all assets to be valued so that the tax implications can be calculated and the most tax efficient means of affecting the restructuring can be determined. Yours faithfully Tax Consultant (b) Appendix to letter Schedule 1 Tax Implications of the transfer of shares in Borg Co Calculation of tax on capital gains Net asset value of Borg Co 1,000,000 Goodwill adjustment Aggregate profit of the last five years 945,000 (200, , , , ,000) Two years average profit (945,000/5*2) 378,000 Market value of Borg Co 1,378,000 Less: Cost of acquisition (10,000) Capital gain 1,368,000 Income tax at 35% 478,800 Schedule 2 Change in value of the shares held through Option A Market value of Borg Co (from Schedule 1) 1,378,000 Determination of market value of Galea Co Net asset value of Galea Co 250,000 Goodwill adjustment Aggregate profit of the last five years 390,000 (70, , , , ,000) Two years average profit (390,000/5*2) 156,000 Market value of Galea Co before the exchange 406,000 Market value of Galea Co (Borg Galea Co) after the exchange of shares 1,784,000 Value of shares held before the exchange of shares Joe Borg (0% of Galea Co): 0 Peter Galea (75% of Galea Co): 304,500 Michael Galea (15% of Galea Co): 60,900 Petra Galea (10% of Galea Co): 40,600 Value of shares held after the exchange of shares Joe Borg (66 7%% of Galea Co): 1,189,928 Peter Galea (25% of Galea Co): 446,000 Michael Galea (5% of Galea Co): 89,200 Petra Galea (3 3% of Galea Co): 58,872 Schedule 3 Calculation of duty on documents On transfer by Joe Borg Real value = market value as calculated above, i.e. 1,378,000 Duty 1,378,000 x 2% = 27,560 17

5 2 Foreign Hold Co group (a) Interest Co and Malta Hold Co Taxation of Interest Co Interest Co, as a company incorporated outside Malta but which is tax resident in Malta in view of its management and control being exercised in Malta, is taxable in Malta on all of its income or capital gains arising in Malta, and all income arising outside Malta which is received in Malta. Given that the interest income is derived from a bank account outside Malta, it is deemed to arise outside Malta. If the interest income is not received in Malta, it will therefore not be taxed in Malta, and will be allocated to Interest Co s untaxed account. If the interest income is received in Malta, Interest Co will be taxable in Malta at the standard rate of 35% and the interest will be allocated to the foreign income account (FIA). For the purposes of the application of the imputation system, the interest income may qualify as passive interest, as it may be considered income which is not derived, directly or indirectly, from a trade or business, and it has not suffered any foreign tax by way of withholding. This implies that, upon a distribution of dividends, Malta Hold Co would not be entitled to the 6/7ths refund but only to the 5/7ths refund, thus resulting in an effective tax of 10%. Alternatively, and provided the interest income is received in Malta, Interest Co may apply the flat rate foreign tax credit (FRFTC) provisions, which allow for a notional foreign tax credit of 25%. This will result in an effective tax rate at the level of Interest Co of between 7 47% and 18 75%, depending on the level of expenses incurred by Interest Co which are deductible for tax purposes. Further, upon a distribution of dividends to Malta Hold Co, the latter can claim a 2/3rds refund thereby reducing the Malta tax rate to between 2 49% and 6 25%. The taxation of the interest income in Malta will effectively depend on whether the income is received in Malta or not. The most beneficial tax treatment is obtained where the interest income is not received in Malta subject, of course, to any foreign tax implications. Taxation of Malta Hold Co Malta Hold Co, a company incorporated in Malta, is resident and domiciled in Malta and is therefore taxable in Malta on a worldwide basis. Malta Hold Co is the parent company of four entities. In order to determine the tax implications of the dividends derived therefrom, each subsidiary must be considered separately. Given that Interest Co is tax resident in Malta, dividends derived from Interest Co would not benefit from the participation exemption. On the other hand, provided the holdings in Property Co, Foreign Fund and EU Op Co are deemed to be participating holdings, the dividends derived therefrom may qualify for the participation exemption. In order to qualify as a participating holding, the holding in each of these entities must qualify as an equity holding. In order to qualify as an equity holding, Malta Hold Co s holding must entitle it to any two of the following rights: a right to vote; a right to profits available for distribution to shareholders; a right to assets available for distribution on a winding up of the company. It is assumed that Malta Hold Co will have such rights in respect of all three companies. Dividends received from Interest Co Given that Interest Co is tax resident in Malta, any dividends distributed by Interest Co will benefit from Malta s imputation system, and will therefore not be subject to further tax in Malta. The tax account allocations, as well as the tax effects, will depend on whether Interest Co receives the interest income in Malta or not. If Interest Co does not receive the interest income in Malta, then the dividends distributed from Interest Co s untaxed account will be allocated to Malta Hold Co s untaxed account. If the interest income is received in Malta by Interest Co, then the dividends will be allocated to Malta Hold Co s FIA and, in turn, upon application, the 2/3rds tax refund which Malta Hold Co becomes entitled to in connection with those dividends will be allocated to its untaxed account. Dividends received from Property Co Given that Malta Hold Co s holding in Property Co is 50%, i.e. more than 10%, and that Property Co does not own or have any rights over immovable property situated in Malta, its holding in Property Co qualifies as a participating holding. Given that Property Co s income is all derived through the rental and sale of immovable property, it does not derive more than 50% of its income from passive interest or royalties, meaning that Malta Hold Co may benefit from the participation exemption on the dividends derived from Property Co. The dividends will be allocated to the final taxed account (FTA). The 10% withholding tax which Malta Hold Co suffers on the dividend which it receives from Property Co will therefore not be available as a credit. 18

6 Dividends received from Foreign Fund Given that Malta Hold Co s holding in Foreign Fund is more than 10%, and that the liability of investors in Foreign Fund is limited to the amount invested, provided Malta Hold Co s holding qualifies as an equity holding, then the holding also qualifies as a participating holding. Foreign Fund invests mainly in private equity ventures, so it can be assumed that it does not derive more than 50% of its income from passive interest or royalties, meaning that Malta Hold Co may benefit from the participation exemption on the dividends derived from Foreign Fund. The dividends will be allocated to the FTA. Dividends received from EU Op Co Although Malta Hold Co only has a holding of 5%, its right to appoint a director on the board of EU Op Co implies that its holding in EU Op Co is a participating holding. Furthermore, as EU Op Co is established in an EU jurisdiction, any dividends derived from EU Op Co may benefit from the participation exemption. The dividends will be allocated to the FTA. Interest income from Property Co The interest income will be allocated to the FIA. In view of the fact that the interest income has suffered withholding tax of 10%, the taxation of the interest income will depend on whether Malta Hold Co claims double tax relief or not. There are three possible scenarios with respect to the taxation of the interest income: 1. Malta Hold Co can choose not to claim any double tax relief for the withholding tax suffered. It will pay tax at 35% in Malta, allowing Foreign Hold Co to claim a 6/7ths tax refund of the Malta tax charge of Malta Hold Co. This will result in an effective tax of 5%. This option is only available if Malta Hold Co does not claim double tax relief on the withholding tax suffered. 2. Malta Hold Co can claim double tax relief for the 10% withholding tax suffered, but Foreign Hold Co would only be able to claim the 2/3rds refund (not a 6/7ths refund). The 2/3rds tax refund is determined by taking into account the tax charge, i.e. the tax prior to accounting for the relief for double taxation (2/3rds of 35% = 23 33%). Given that Malta Hold Co would benefit from a tax credit of 10%, the effective tax through the operation of the 2/3rds refund would be 1 67% (35% 10% = 25% tax paid by Malta Hold Co; 25% 23 33% tax refund = 1 67%). 3. Malta Hold Co can apply the FRFTC provisions and through its interaction with the 2/3rds refund, reduce the Malta tax to between 2 49% and 6 25%. The most beneficial option would be for Malta Hold Co to claim double taxation relief with respect to the withholding tax suffered, allowing Foreign Hold Co to claim the 2/3rds refund. (b) (c) Dividends paid to Foreign Hold Co by Malta Hold Co (i) Distribution of dividends There is no Malta withholding tax on the distribution of dividends to non-residents. This is true even where the distribution is from the untaxed account. Furthermore, given that Foreign Hold Co is a company incorporated in the EU holding more than 10% of Malta Hold Co, in terms of the Parent Subsidiary Directive, Foreign Hold Co should not be subject to tax on the dividend income it derives from Malta Hold Co. The refund which Foreign Hold Co may claim under the imputation system is not subject to any Maltese tax. However, the refund may not fall within the scope of the Parent Subsidiary Directive and may therefore be subject to tax in the country of residence of Foreign Hold Co in terms of the domestic law of that country. (ii) Refund procedure Foreign Hold Co must be registered as a shareholder of Malta Hold Co in order to benefit from tax refunds, and an application form must be prepared in order for the refund to be benefitted from. Income tax treatment of disposal gains There are no Malta tax implications on the winding down of the structure. If Foreign Hold Co derives any gain from the transfer of its holding in Malta Hold Co, it will be exempt from tax in Malta. If Malta Hold Co derives any gain from the transfer of any of its subsidiaries, it will be exempt from tax in Malta in terms of the participation exemption. 3 (a) Mr Jones Residence In terms of the domestic laws of Malta and Libya, Mr Jones is resident in both countries. Where an individual is deemed to be resident in both countries and a double tax treaty is in force, the tie-breaker rule is applied. Article 4(2) of the treaty provides that, where an individual is deemed to be resident in both countries, his tax residence is determined as follows: He is deemed to be resident in the country in which he has a permanent home. Mr Jones rents accommodation in both Malta and Libya; it is therefore difficult to determine which is his permanent home. 19

7 Where he has a permanent home in both countries or no permanent home, Mr Jones will be deemed to be resident in the country in which his personal and economic relations are closer (centre of vital interests). Mr Jones is employed in Malta but in terms of a contract which requires him to work mainly in Libya. However, his family lives in Malta and he visits them every weekend. The Commentaries to the OECD Model state that, in determining the centre of vital interests, more weight should be given to personal ties, i.e. where his family and possession are. Given that Mr Jones family are in Malta, he will be deemed to be resident in Malta for the purposes of the double tax treaty. Taxation of employment income Although Mr Jones is employed by a Maltese company, his contract requires him to work mainly in Libya. In terms of the double tax treaty between Malta and Libya, when Mr Jones exercises his employment in Libya, Libya may tax his employment income. However, in order for Libya to tax the employment income, at least one of the following conditions must be satisfied: Mr Jones is present in Libya for a period or periods exceeding 183 days in any 12-month period, commencing or ending in the fiscal year concerned; or Mr Jones salary is paid by an employer resident in Libya; or The remuneration is borne by a permanent establishment which the employer has in Libya. Mr Jones spends five days a week in Libya, and so it is safe to say that he will meet the 183-day threshold. This means that Libya will have primary taxing rights over Mr Jones employment income. Notwithstanding that Mr Jones is taxable in Libya, his employment income will also be taxed in Malta on the basis of his residence. The law provides that, when a contract of employment requires an individual to work mainly outside Malta, any employment income derived in respect of employment activities carried out outside Malta or in respect of any period spent in Malta in connection with such work or on leave will be taxed in Malta at the rate of 15% unless the individual opts to be taxed at the standard rates. The employment income will constitute the first part of Mr Jones income and he may still claim double tax relief on the tax which was paid in Libya on the employment income. (b) Mr James (i) Value added tax (VAT) implications of renting the property The letting of immovable property is generally exempt without credit. However, where the letting of the property is by a limited liability company to a person registered under Article 10 of the Value Added Tax Act for the purpose of the economic activity of that person, VAT will be due on the rental income. This implies that Extreme Property Co will need to register for VAT purposes under Article 10 and charge VAT at 18%. Once it is so registered, it will be able to claim credit for any input tax it incurs in connection with the property, such as on costs of repairs. (ii) Rental income of Extreme Property Co Extreme Property Co will be taxable in Malta on the rental income it derives. In computing its taxable income, Extreme Property Co can only claim the following expenses as deductions: any rent, ground rent or similar burden payable; any licence fee payable in terms of the Guest Houses and Holiday Furnished Premises Act, which would probably not apply to the case at hand; and a further deduction of 20% of the income remaining after deducting the above expenses. The interest expense, which would, as a rule, be deductible, is not deductible in the case at hand because: The interest is paid or payable to International Property Co, a company not resident in Malta, which granted the loan for the acquisition of the property. International Property Co, as a non-resident person, will be exempt from tax in Malta on the interest income as it is not engaged in business in Malta through a permanent establishment in Malta through which the interest is effectively connected and Mr James is not ordinarily resident and domiciled in Malta. Given that Mr James is the 100% shareholder, directly and indirectly, of both International Property Co and Extreme Property Co, both companies are deemed to be related. Taxation of Mr James As an individual resident but not domiciled in Malta, Mr James is taxable in Malta on income and capital gains arising in Malta and income arising outside Malta which is received in Malta. Any dividends which are distributed to Mr James from International Property Co will therefore be taxable in Malta only if they are received in or remitted to Malta. 20

8 4 Mr Grech and Mr May (a) (b) Prescribed fund Taxation of the prescribed fund A prescribed fund is generally exempt from income tax in Malta, with the exclusion of income derived from immovable property situated in Malta and investment income. The income derived by the prescribed fund in question will be taxable as follows: Interest paid by the Maltese bank: the prescribed fund will be subject to a withholding tax of 15%. This income will be allocated to the final taxed account (FTA). Interest derived from investment in Maltese government bonds: the prescribed fund will be subject to a withholding tax of 10%. This income will be allocated to the FTA. Distributions from other prescribed funds: the prescribed fund will be exempt from tax on this income. This income will be allocated to the untaxed account. Dividend distributions from a non-resident company: the prescribed fund will be exempt from tax on this income. This income will be allocated to the untaxed account. Taxation on distributions from the fund Mr Grech Given that Mr Grech is an individual resident in Malta, he qualifies as a recipient for the purposes of the investment income provisions. Mr Grech will therefore be subject to tax at 15% on all distributions by the prescribed fund from its untaxed account. This implies that, upon the distribution of profits by the prescribed fund which were derived from its holdings in the other prescribed fund and in the non-resident company, Mr Grech will be subject to withholding tax of 15%. No such withholding will be suffered on the distribution of profits derived by the prescribed fund from the bank interest and the interest derived from government bonds. Mr May Mr May is investing in the prescribed fund via a company which is not resident in Malta. Given that Mr May is resident but not domiciled in Malta, the non-resident company will not qualify as a recipient for the purposes of the investment income provisions. Since the non-resident company does not qualify as a recipient for the purposes of the investment income provisions, any distributions by the prescribed fund to the non-resident company will not be subject to tax in Malta. Tutorial note: If Mr May had been resident AND domiciled in Malta, the non-resident company would have qualified as a recipient for the purposes of the investment income provisions, and any distributions by the prescribed fund to the non-resident company would have been subject to tax in Malta. Income tax implications on the transfer of units in the fund Mr Grech Given that the units are listed on the Malta Stock Exchange, any gain derived from the transfer of the units will be exempt from tax in Malta. Mr May Given that Mr May is investing in the prescribed fund via a non-resident company, any gains derived from the transfer of units in the prescribed fund by the non-resident company will be capital gains arising outside Malta and, therefore, outside the scope of tax in Malta. Stamp duty implications The transfer of units of a prescribed fund is exempt from duty on documents and transfers. The exemption applies both to Mr Grech and Mr May. Non-prescribed fund Taxation of the non-prescribed fund A non-prescribed fund is exempt from income tax in Malta, with the exclusion of income derived from immovable property situated in Malta. The non-prescribed fund will be exempt on all the income it derives as it does not derive any income from immovable property situated in Malta. Taxation on distributions from the fund Mr Grech The tax implications of distributions from a non-prescribed fund are similar to the tax implications of distributions from a prescribed fund, i.e. any distributions of profits from the untaxed account to a person who qualifies as a recipient in terms of the investment income provisions will be subject to a withholding tax of 15%. Since the fund is exempt from tax on all of 21

9 the income it derives, all distributions will be made from the untaxed account. As considered above, Mr Grech qualifies as a recipient and therefore he will be subject to withholding tax at 15% on all distributions from the non-prescribed fund. Mr May As above, as Mr May is investing in the non-prescribed fund via a company which is not resident in Malta, the non-resident company will not qualify as a recipient for the purposes of the investment income provisions, and will therefore not be subject to any withholding tax on the distributions it derives from the fund. Income tax implications on the transfer of units in the fund Mr Grech The exemption available for units of a prescribed fund which is listed on the Malta Stock Exchange is not available to units of a non-prescribed fund. Should Mr Grech transfer any units he holds in the non-prescribed fund, he will therefore be taxable in Malta on any gains derived at his applicable tax rate. However, where the transfer is as a result of the redemption of units by the non-prescribed fund, he will be taxable in Malta on the gain at the rate of 15%, which will be withheld by the non-prescribed fund. Mr May Given that Mr May is investing in the non-prescribed fund via a non-resident company, any gains derived from the transfer of units in the non-prescribed fund by the non-resident company, whether by direct transfer or on redemption, are capital gains arising outside Malta and are therefore outside the scope of Maltese tax. Stamp duty implications The transfer of units of the non-prescribed fund is exempt from duty on documents and transfers. The exemption applies both to Mr Grech and Mr May. 5 (a) Mr and Mrs Bugeja In terms of the general place of supply rules, the place of supply of goods which are not transported takes place where the goods are at the time when they are placed at the disposal of the person acquiring them. However, where the goods are supplied on board a ship during the transport of passengers effected in the European Union (EU), the place of supply of the goods takes place at the point of departure of the transport of passengers. The point of departure means the first scheduled point of passenger embarkation within the EU. This means that, although Mrs Bugeja acquires the goods in Croatian territorial waters on board a cruise liner she boarded from Malta, because the first point of departure was in Italy, the place of supply of the goods will be deemed to be Italy. The place of supply of restaurant services is where the services are physically carried out. However, where such services are carried out on board ships during the section of a passenger transport operation effected within the EU, the place of supply is the point of departure of the passenger transport. Therefore, the place of supply of the Gala Dinner taking place in Greek territorial waters will, once again, be in Italy. (b) Oil Co Oil Co has contracted with two different service providers established outside Malta in order to provide it with services in Malta. IT Engineers Co The place of supply of the services provided by IT Engineers Co will follow the general place of supply rules in relation to services made to taxable persons. The place of supply is where the customer (Oil Co) has established its business. The place of supply of the service is therefore in Malta and it will be subject to value added tax (VAT) at the rate of 18%. Given IT Engineers Co is not established in Malta and Oil Co is established in Malta, the liability for the payment of VAT will be that of Oil Co which must account for VAT by means of reverse charge. Given that IT Engineers Co is not liable for the payment of VAT in Malta, it will not be liable to register for VAT in Malta. Helicopter IT Co The transportation services provided by Helicopter IT Co do not follow the general place of supply rules. The place of supply of passenger transport is deemed to take place where the transport takes place, proportionate to the distances covered. This implies that the supply will partially take place in Italy and partially in Malta. The helicopter transport will, however, not be subject to VAT in Malta as it qualifies as the international transport of persons which is exempt with credit. Helicopter IT Co will therefore not be liable to register for VAT in Malta. 22

10 (c) MT Ship Owner Co The contract entered into between Greek Ship Building Co and MT Ship Owner Co is a construction contract which is therefore treated as a supply of services for value added tax (VAT) purposes. The place of supply of a construction contract follows the general place of supply rules, so the place of supply is where MT Ship Owner Co is established, i.e. Malta. The supply of sea vessels used for navigation on the high seas for the purpose of commercial activities is a supply which is exempt with credit. This implies that there will be no VAT on the transfer of title of the cargo ship to MT Ship Owner Co. The supply of goods by MT Prop Co to Greek Ship Building Co is a supply of goods with transport, so the place of supply is where the goods are at the time when the transport begins, i.e. Malta. A supply to constructors of equipment to be incorporated on vessels which are used for navigation on the high seas for the purpose of commercial activities is a supply which is exempt with credit. There will therefore be no VAT implications in Malta. The five-year contract of hire between MT Ship Owner Co and MT Op Co is a supply of services as the ownership of the ship will not transfer to MT Op Co, so it does not qualify as a hire purchase. The five-year contract of hire will also not qualify as a short-term hiring, so the place of supply will follow the general principle, i.e. the place of supply will be where the customer is established, which is Malta. The hiring of a vessel which is used for navigation on the high seas for the purpose of commercial activities is a supply which is exempt with credit. There will therefore be no VAT implications in Malta. 23

11 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2014 Marking Scheme Available Maximum 1 (a) Option A Transfer of shares Tax relief for exchange of shares 0 5 Condition that there is no change of direct/indirect beneficial owners 1 Condition that there is no change in proportion in value 1 No change in beneficial owners 0 5 Change in proportion in value 0 5 Tax will be suffered on exchange of shares 0 5 Controlling interest 0 5 Higher of consideration and market value 0 5 Net asset value as per financial statements for Goodwill adjustment 1 No adjustments for immovable property applicable 1 Provisional tax 0 5 Duty on documents and transfers: exchange of shares relief 1 Not applicable as not a group 0 5 Duty will be suffered 0 5 Duty of 2% 0 5 Conditions for 5% duty 0 5 2% applicable in this case 0 5 Duty calculated on higher value 0 5 Real value for duty purposes 0 5 Issue of shares Value shifting rules 1 Joe Borg value is zero 0 5 Comparison of value of shares and consideration 0 5 Reduction in the market value of shares held by Joe Borg and increase in market value of original Galea Co shareholders 1 No value shifting rules as Galea Co is not a property company 0 5 Must be proved to the satisfaction of the Commissioner that is a bona fide transaction 0 5 Issuing of shares does not give rise to duty implications 0 5 Increase in real value of shares 0 5 Not a property company and bona fide commercial reasons 0 5 Transfer of assets and liabilities Intra-group exemption for group of companies 0 5 Owned and controlled as to more than 50% by the same shareholders 0 5 No loss or gain 0 5 Tax relief applies 0 5 Claw back 0 5 No duty implications 0 5 Merger No income tax or duty implications 0 5 Exchange of shares income tax conditions satisfied 0 5 Duty group relief satisfied 0 5 Option B Group relief conditions for transfer by Borg Co 1 Group relief applies to Borg Go 0 5 Group relief does not apply to Galea Co 0 5 Assets to be identified and taxability determined 1 Group relief will not apply for duty purposes 0 5 No duty as no immovable property/shares in other companies

12 Available Maximum (b) Net asset value of Borg Co 0 5 Goodwill calculation 0 5 Market value of Borg Co 0 5 Cost of acquisition 0 5 Tax 0 5 Net asset value of Galea Co 0 5 Goodwill adjustment 0 5 Market value of Galea Co pre exchange 0 5 Market value of Galea Co post exchange 0 5 Value of shares held 0 5 Value after exchange of shares 0 5 Duty on transfer Professional marks: Format and presentation of letter, including appropriate use of appendix 2 Effectiveness of communication

13 Available Maximum 2 (a) Taxation of Interest Co Interest Co is tax resident in Malta 0 5 Taxed on a remittance basis 0 5 Interest arises outside Malta 0 5 Allocated to untaxed account if not remitted 0 5 If received in Malta taxed and allocated to the FIA 0 5 Interest is passive interest 0 5 Definition of passive interest 0 5 6/7ths refund does not apply 5/7ths 0 5 May apply FRFTC 0 5 Notional tax credit 25% 0 5 Effective tax dependent on level of expenses 0 5 2/3rds refund 0 5 Taxation depends on whether income is received in Malta or not 0 5 Taxation of Malta Hold Co Taxed on worldwide basis 0 5 Dividends from Interest Co do not benefit from the participation exemption 0 5 Definition of a participatory holding 1 Application of imputation system to dividends from Interest Co 0 5 Allocated to untaxed account if not received in Malta 0 5 Allocated to FIA if received 0 5 Refund allocated to untaxed account 0 5 Holding in Property Co a participatory holding 1 Income of Property Co not passive interest or royalties 0 5 Dividend benefits from the participation exemption 0 5 Allocated to the FTA 0 5 Withholding tax suffered is a sunk cost 0 5 Holding in Foreign Fund is a participatory holding 1 Income of Foreign Fund not passive interest or royalties 0 5 Dividend benefits from the participation exemption 0 5 Allocated to the FTA 0 5 Right to appoint director implies participatory holding 0 5 EU jurisdiction 0 5 Allocated to the FTA 0 5 Interest income allocated to the FIA 0 5 Application of 6/7ths refund if no claim for double tax relief 1 Claim double tax relief only 2/3rds refund 0 5 Effective tax rate 1 67% 0 5 FRFTC 0 5 Best option (b) (i) No withholding tax 0 5 Even if distribution from untaxed account 0 5 Application of Parent Subsidiary Directive on WHT 1 Refund is not taxable in Malta 0 5 May be taxable in other country (ii) Conditions for application of refund 1 1 (c) Exemption from tax on any gains from the transfer of holding in Malta Hold Co 0 5 Gains derived from transfer of subsidiaries of Malta Hold Co

14 Available Maximum 3 (a) Application of tie-breaker rule 0 5 Permanent home 0 5 Home in both states 0 5 Centre of vital interests 0 5 More weight to personal ties 0 5 Resident in Malta 1 Libya may tax employment income 1 Conditions necessary (0 5 x 3) 1 5 Mr Jones to spend more than 183 days in Libya 0 5 Libya has primary taxing rights 0 5 Employment income will also to be taxed in Malta 0 5 Employment contract to mainly work outside Malta 0 5 Income derived from such employment 0 5 Taxed at 15%, unless opts otherwise 1 Employment income constitutes first part of Mr Jones income 0 5 Can claim double tax relief (b) (i) VAT generally exempt without credit 0 5 VAT due in this case with reasons 1 5 Need to register and charge VAT at 18% 0 5 Input credit can be claimed (ii) Taxable on rental income 0 5 Deductible expenses 2 Interest expense not deductible in this case 0 5 Paid to a company not resident in Malta 0 5 Interest income exempt from tax in Malta 0 5 Conditions for exemption not effectively connected 1 Mr James is not ordinarily resident and domiciled 0 5 Mr James is 100% shareholder so companies are related 0 5 Taxation of Mr James

15 Available Maximum 4 (a) Taxation of a prescribed fund 1 Bank interest WHT of 15% 0 5 FTA 0 5 Government bonds WHT of 10% 0 5 FTA 0 5 Distributions from prescribed fund: exempt 0 5 Untaxed account 0 5 Distributions from a non-resident company exempt 0 5 Untaxed account 0 5 Mr Grech qualifies as a recipient 0 5 Taxed at 15% on distributions from untaxed account 0 5 WHT on distribution from prescribed fund dividends and non-resident company dividends 0 5 No withholding on distributions from bank interest and government bonds 0 5 Mr May is not resident and domiciled 0 5 Non-resident company does not qualify as a recipient 0 5 Not subject to tax on any distributions 1 Mr Grech: No tax on transfer of units listed on the Malta Stock Exchange 1 Mr May: Investment is via a non-resident company 0 5 Outside the scope of Malta tax 0 5 Stamp duty exempt 1 12 (b) Taxation of a non-prescribed fund 1 All income exempt unless from Malta immovable property 0 5 Tax implications similar to a prescribed fund 1 Fund is exempt, so all distributions are from the untaxed account 0 5 Mr Grech is a recipient, so WHT at 15% 0 5 Mr May is not a recipient, so exempt 0 5 No exemption on transfer of units in non-prescribed fund 0 5 Taxable on transfer at marginal rate 1 Taxable on redemption of units at 15% 1 Mr May not taxable, either on transfer or redemption 1 No stamp duty

16 Available Maximum 5 (a) General place of supply of goods which are not transported 0 5 Goods supplied on board ship during transport of passengers 1 Definition of point of departure 0 5 Place of supply is Italy 1 Place of supply of restaurant services 0 5 Restaurant services on board ship 1 Place of supply is Italy (b) General place of supply of services rule 1 Place of supply is Malta, so VAT at 18% 1 Liability will be that of Oil Co 0 5 Reverse charge applies 0 5 IT Engineers Co not liable to register 1 Place of supply of transportation services 1 Place of supply is split 1 International transport, so exempt with credit 1 Helicopter IT Co not liable to register 1 8 (c) Construction contract is a supply of services 1 Place of supply is Malta 0 5 Supply of sea vessels used on high seas is exempt with credit 1 Place of supply of goods with transport is Malta 1 Exempt with credit supply 1 Supply of services, not hire purchase 1 Not a short-term hire 0 5 Place of supply is Malta 0 5 Exempt with credit supply