Professional Level Options Module, Paper P6 (MLA)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 212 Answers 1 Tax consultant No 1, Main Street Valletta 7 December 212 Mr Frank Long Street Square City Free Republic Dear Frank Maltese income tax and stamp duty implications of the transfer of the shop and shares under the two options being considered. (a) Option 1 Transfer of Mosta shop by A Ltd Income tax implications The transfer of the Mosta shop from A Ltd to B Ltd is, by default, subject to a final withholding tax of 12% calculated on the higher of the market value and consideration. However, the Income Tax Act (ITA) provides for an exemption in the case of a transfer of immovable property situated in Malta from one company to another, where the individual direct or indirect beneficial owners of the two companies are the same and each one holds substantially the same percentage interest in the nominal share capital and voting rights in each of those companies. Under the first option, on the incorporation of B Ltd on 5 January 213, you will own 1% of the share capital, which means that A Ltd and B Ltd will be fully owned directly by the same individual shareholder (yourself) at the time the shop is transferred; therefore, the conditions for exemption will be satisfied. However, when a transfer of property has qualified for the exemption discussed above, the ITA brings into 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 Matthew acquires 5% of the ordinary share capital of B Ltd on 31 January 213, the individual direct beneficial owners of A Ltd and B Ltd no longer remain the same and, as a result, A Ltd and B Ltd will cease to be a group. As this will take place within the period of six years from the exempt transfer of the property, B Ltd will be treated as if, immediately after it acquired the land from A Ltd, it had transferred and re-acquired that property. This deemed transfer is taxable at the rate of 12% on the value at which B Ltd had acquired the property from A Ltd, i.e. 4,. Therefore, B Ltd will be required to pay 48, ( 4, x 12%) 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 Matthew acquires his 5% of the shares. The ITA also provides that a transfer of property that has been used in a business for a period of at least three years, and that is replaced within one year by a new property used solely for a similar purpose of the business, may be excluded from the 12% final tax system if the transferor so elects by means of a declaration made to the notary at the time of the publication of the deed of transfer and recorded in the said deed. If the election is made, any capital gain realised on the transfer is not taxed but the cost of acquisition of the new asset is reduced by the amount of the gain. Since A Ltd will be acquiring a shop in Valletta within six months from the transfer of the Mosta shop which, as it was acquired during 25, has been used in A Ltd s business for more than three years, and the Valletta shop is to replace the Mosta shop, A Ltd may opt to exclude the transfer of the Mosta shop from the final tax system. In this case, any capital gain realised on the transfer of the Mosta shop will not be taxed but the cost of acquisition of the Valletta shop will be reduced by the untaxed gain. Calculations of this gain and of the adjusted cost of the Valletta shop are provided in the appendix to this letter. A Ltd will still be required to pay provisional tax at the rate of 7% when transferring the Mosta shop to B Ltd unless, after being requested, the Commissioner gives his authorisation not to withhold provisional tax. If this roll-over relief is chosen, when Matthew acquires 5% of the ordinary share capital of B Ltd on 31 January 213, no tax will be payable by B Ltd on the Mosta shop even though A Ltd and B Ltd cease to be a group at this time, since the transfer of the Mosta shop by A Ltd will not have benefited from the exemption applicable to intra-group transfers. You should note, however, that the roll-over relief provisions will not apply if the replacement property (in your case the Valletta shop) is transferred within a period of two years (see further below under (c)). Stamp duty implications The Duty on Documents and Transfers Act (DDTA) provides for an exemption from duty in the case of a transfer of immovable property situated in Malta from one company to another, where the individual direct or indirect beneficial owners of the two companies are the same and each one holds substantially the same percentage interest in the nominal share capital and voting rights in each of those companies. Since both A Ltd and B Ltd are to be fully owned by you at the time the Mosta shop is transferred to B Ltd, these conditions will be clearly satisfied and as a result, the transfer of the shop from A Ltd to B Ltd on 15 January 213 will be exempt from duty. The transfer of 5% of the shares from yourself to Matthew will not trigger any claw back of duty as a result of A Ltd and B Ltd ceasing to be a group. 15

3 Transfer of shares in B Ltd Income tax on the sale of the shares The sale of the 5, shares will constitute a transfer of a controlling interest since the aggregate nominal value of the shares in B Ltd held by yourself represents at least 25% of the issued nominal share capital. 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. Since the transfer is to take place during the first financial year, the market value of B Ltd is taken to be the nominal value of its issued share capital (i.e. 1,) adjusted by replacing the book value of any land by its market value. However, since the Mosta shop is already stated at market value, no adjustment is required. Also, no goodwill adjustment is required. The market value of B Ltd is therefore 1, and the market value of the 5, shares transferred by you to Matthew is 5,, which is equal to the consideration that has been agreed. Therefore, no income tax will be payable since the transfer value is equal to the cost of acquisition of the shares transferred, resulting in a zero gain. Stamp duty on the sale of the shares Duty is payable at the rate of 2 or 5 for every 1 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 B Ltd s non-current assets is 4, and the value of its immovable property is also 4,, that is, 1%. As this is higher than 75%, the applicable stamp duty rate is 5%. The real value of the shares in B Ltd transferred by you 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. Since B Ltd is to fully finance the acquisition of the Mosta shop by way of a debt due to A Ltd, an adjustment is required to be made. As shown by the calculation provided in the appendix, this means that an amount of 39,, representing the disallowed liabilities, has to be added to the net asset value of B Ltd, resulting in the real value of B Ltd being 4, and the real value of the 5, shares acquired by Matthew for stamp duty purposes being 2,. The duty payable on this transfer by Matthew will therefore be 1, ( 2, x 5%). (b) Option 2 If Matthew acquires 5, shares in B Ltd on incorporation, A Ltd and B Ltd will no longer be considered to be a group for either ITA or DDTA purposes. As a result, the transfer of the Mosta shop will not qualify for exemption from income tax or duty under the intra-group transfer provisions (as explained under Option 1 above). However, A Ltd would still qualify for tax relief under the roll-over relief provisions which means that the transfer of the Mosta shop by A Ltd would not be subject to income tax on the capital gain. The transfer will be subject to stamp duty charged at the rate of 5 for every 1 or part thereof of the amount or value of the consideration or the real value of the Mosta shop. The duty payable on this transfer by B Ltd will therefore be 2, ( 4, x 5%). Therefore, Option 1 is the best option, since in this case Matthew will pay 1, duty, while under option 2 the duty payable by B Ltd would amount to 2,. (c) Effect of a subsequent transfer of the Valletta shop by A Ltd if option 2 is adopted Where a transfer of property qualifies for tax relief under the roll-over relief provisions, a number of restrictions apply to the replacement property, which in this case is the Valletta shop. The final tax system will not apply to the subsequent transfer of the Valletta shop, which means that such a transfer will be subject to tax at the rate of 35% on the profit or gain. If the Valletta shop is disposed of without replacement, the chargeable gain will be calculated by taking into account the transfer price and the reduced cost of acquisition. As shown in the appendix, the reduced cost of acquisition of the Valletta shop will be 384,77, based on the cost of acquisition (including stamp duty) of 525, less the untaxed gain of 14,923 realised on the transfer of the Mosta shop. However, if A Ltd transfers the Valletta shop within a period of two years from the date of its acquisition, the transfer of the Mosta shop by A Ltd would no longer qualify under the roll-over relief provisions. As a result, A Ltd will become liable to tax on the transfer of the Mosta shop to B Ltd at the rate of 12%, but also the subsequent transfer of the Valletta shop would cease to be subject to the restrictions explained above. Since the Valletta shop would then have been owned for less than seven years, B Ltd could opt to exclude the transfer from the final tax system and have tax charged at the rate of 35% on the gain or profit calculated by taking into account the actual cost of acquisition of the property (including stamp duty), i.e. 525,. Please do not hesitate to contact me if you have questions about the matters discussed herein. Yours sincerely, A N Other Tax Consultant 16

4 (d) APPENDIX TO LETTER Income tax implications of the transfer of the Mosta shop (options 1 and 2) Transfer value 213 4, Cost 25 (2,) Stamp duty (1,) Inflation deduction (Note 1) (42,677) Maintenance allowance (Note 2) (6,4) Capital gain (untaxed) 14,923 N1: 21, x (( )/664 88) = 42,677 N2: 2, x 8 years x 4% = 6,4 Adjustment to cost of acquisition of the Valletta shop: Purchase price 213 5, Stamp duty (5%) 25, Cost of acquisition 525, Capital gain (14,923) Adjusted cost 384,77 Income tax implication of the transfer of shares in B Ltd to Matthew (option 1) Market value of shares in B Ltd: Net asset value 1, Goodwill Book value of shop (4,) Market value of land 4, 1, The market value percentage is 5%, therefore: Market value of shares transferred 5, Cost of acquisition (consideration) (5,) Taxable gain Income tax payable by Frank at 35% Stamp duty implications of the transfer of shares in B Ltd to Matthew (option 1) Calculation of disallowed liabilities: Total assets 41, Immovable property (4,) 1, Total liabilities (4,) Bank loan/registered debt Disallowed liabilities 39, Market value 1, Real value 4, Real value of shares transferred (5%) 2, Stamp duty payable by Matthew at 5% of 2, 1, 2 (a) (i) Income tax treatment of Subco A Ltd s income Subco A Ltd is domiciled and resident in Malta by virtue of its incorporation, and so will be taxable in Malta on its worldwide profits at 35%. The income derived by Subco A Ltd consists wholly of income derived from a trade/business arising in Malta, which stands to be allocated to its Maltese taxed account (MTA). 17

5 (ii) Since Subco A Ltd owns immovable property which is used for the purpose of its activities, it is required to allocate annually to its immovable property account (IPA) an amount of annual market rent. This is calculated by multiplying the aggregate surface area of the property, which is 8 m 2, by 25, and therefore amounts to 2,. This allocation is to be made after all other allocations have been made, and is effected by transferring distributable profits first from its MTA, and any balance from its foreign income account (FIA), to the IPA. Any balance of annual market rent which is not transferred because there are no or insufficient profits which have suffered tax is first to be allocated by related companies up to the amount of the distributable profits allocated to their respective MTAs and FIAs, and any unallocated balance is then carried forward to the following year and added to the amount of the annual market rent for that following year. The annual market rent allocation reduces the amount of tax refunds that would otherwise have been claimed by Holdco Ltd, since a shareholder cannot claim the six-sevenths refund of tax paid on profits distributed from the IPA. Subco A Ltd s distributable profits for the year ending 31 December 212 allocated to the MTA amount to 247, (65% of 38,), 2, of which are to be transferred to the IPA. The difference between the distributable profits and the chargeable income after tax, resulting from the difference between the capital allowances and accounting depreciation of 2,, is allocated to the untaxed account. As Holdco Ltd is registered with the Commissioner of Inland Revenue to be eligible for refunds of tax on dividend distributions, the distribution of the 47, profits remaining in the MTA will entitle Holdco Ltd to a refund of 21,692, being six-sevenths of the Malta tax paid by Subco A Ltd on those profits (6/7 ( 47, x ( 35/ 65)). Income tax treatment of dividend received by Subco B Ltd Like Subco A Ltd, Subco B Ltd is domiciled and resident in Malta by virtue of its incorporation, and so will be taxable in Malta on its worldwide profits at 35%. Subco B Ltd s investment in Blackco Ltd is not considered to be a holding of equity shares of that company. This is because the shares do not provide an entitlement to at least 1% of two out of the three equity holding rights referred to in the Income Tax Act, i.e. the right to profits available for distribution, the right to vote and the right to assets available for distribution on a winding up. Thus, Subco B Ltd s investment in Blackco Ltd does not qualify as a participating holding (PH) and the dividend income stands to be allocated to its foreign income account (FIA). The following options are available to Subco B Ltd in respect of this income: Subco B Ltd may claim unilateral relief, in which case the income subject to Malta tax will be the dividend grossed up by the tax paid in Country Z on its profits, and the underlying tax will then be credited against the Maltese tax liability. This leaves an amount of 25% (35% 1%) of the gross income payable by Subco B Ltd as tax in Malta. If unilateral relief is claimed, a distribution of the profits will entitle Holdco Ltd to a refund of two-thirds of the Malta tax paid by Subco B Ltd, gross of the underlying tax relief, but not exceeding the Malta tax paid after relief. Since a refund of 23 33% would be lower than the 25% tax payable in Malta after relief, the refund due to Holdco Ltd will be restricted to 23 33% and the tax leakage will be 3,333, i.e. 1 67% of the gross dividend of 2,. Instead of claiming unilateral relief, Subco B Ltd may claim the flat rate foreign tax credit (FRFTC). Under this option, foreign tax is deemed to have been paid at 25%, and relief is granted after grossing up the amount of dividend received at this rate. If the FRFTC is claimed, the refund due to Holdco Ltd will be two-thirds of the Maltese tax after relief and not, as in the case of unilateral relief, at two-thirds of the Maltese tax before relief. If FRFTC is claimed, the effective tax rate will be 11,25, i.e. 6 25% of the net dividend of 18,, which is higher than the 1 67% of the gross dividend if underlying tax relief is claimed. The third option is for Subco B Ltd not to claim any relief at all for foreign tax. In this case, Maltese tax will be charged on the dividend received and Holdco Ltd would then be able to claim a refund of six-sevenths of the Malta tax paid. In such case the effective tax rate will be 1,, i.e. 5% of the gross dividend of 2,, which is higher than the 1 67% if underlying tax relief is claimed. Under both these last two options, the non-refundable balance of Maltese tax will be higher than under the first option. Unilateral relief is therefore the best option of the three. If unilateral relief is used, Holdco Ltd is also eligible for a two-thirds refund in respect of tax paid on the dividend income distributed by Subco B Ltd from its FIA of 46,677, as follows: Dividends received from Blackco Ltd 18, Underlying tax 2, Chargeable income 2, Tax at 35% 7, Relief of double taxation (2,) Malta tax payable 5, Profits distributed to Holdco Ltd (18, 5,) 13, Refund available to Holdco Ltd: 2/3 x 7, = 46,667 (limited to Malta tax paid, i.e. 5,) 18

6 (b) (i) Option 1: Interest charged by Wes Ltd Django Ltd is domiciled and resident in Malta by virtue of its incorporation and, as a result, is taxable in Malta on its worldwide income at 35%. The Income Tax Act (ITA) provides that interest payable by a person on capital employed in acquiring income is deductible against such income. However, such interest is not allowed as a deduction if: the interest is payable to a person not resident in Malta, and the interest is exempt from Malta tax in the hands of the non-resident person, and the loan on which the interest is payable is applied to finance the acquisition, development, construction, refurbishment and/or renovation of immovable property situated in Malta or any right thereon, and the payer of the interest and the non-resident lender are, directly or indirectly, controlled or beneficially owned to the extent of more than 1% by the same persons. Since all of these conditions apply, Django Ltd cannot deduct the interest paid to Wes Ltd against the rent received from Burrell Ltd. The ITA exempts from tax any interest accruing to or derived by any person not resident in Malta, provided that (1) the debt claim in respect of which the interest is paid is not effectively connected with a permanent establishment of the non-resident person in Malta and (2) the beneficial owner of the interest is a person not resident in Malta and such person is not directly or indirectly owned and controlled by, nor acts on behalf of, an individual or individuals who are ordinarily resident and domiciled in Malta. Since both conditions are satisfied, the interest is exempt from Malta tax in the hands of Wes Ltd which means that Django Ltd is not to withhold tax upon payment of the interest. (ii) Option 2: Rent received from Burrell Ltd Since Wes Ltd is incorporated and managed and controlled outside Malta, it is not treated as being tax resident in Malta and, as a result, is subject to the terms of the double tax agreement in force, so is taxable only on income arising in Malta. Article 6 of the OECD MC provides that income derived from immovable property, such as rental income, may be taxed in the country where the immovable property is located. The residence state will be able to tax such income but must give relief for tax suffered in the source state. The rent received by Wes Ltd is chargeable to tax in Malta since it is income derived from immovable property situated in Malta. The Income Tax Act (ITA) prescribes limited deductions in the case of income derived from rent which is not derived from a trade or business, consisting only of interest, rent or ground rent, licence fee payable for the purpose of the Guest Houses and Holiday Furnished Premises Act, and a further amount equivalent to 2% of the income remaining after deducting from the total of the income in question the rent/ground rent and licence fee. Wes Ltd is entitled to a deemed deduction of 2% of the rental income since the rental income is of a passive nature. The ITA provides that, where any person pays to a non-resident company any income chargeable to tax under the provisions of the ITA, he shall upon paying such income deduct tax therefrom at the rate of 35% and pay it to the Commissioner of Inland Revenue within 3 days. Such tax at source is to be set off for the purposes of collection against the tax charged on the non-resident person in respect of the relative income and any excess is refundable. Burrell Ltd is required to deduct tax at the rate of 35% from the gross interest paid to Wes Ltd and pay it to the Commissioner within 3 days. 3 (a) Aldo and Sandra The Duty on Documents and Transfers Act (DDTA) provides that duty at the rate of 5 for every 1 or part thereof is charged on every document whereby any immovable or any real right over an immovable is transferred by a company to its shareholders in the course of winding up, or in the course of a distribution of assets to its shareholders pursuant to a scheme of distribution. Duty is calculated on the higher of the amount or value of the consideration for the transfer or on the real value of the immovable. The transfer of the house by Alsan Ltd is by default subject to duty. The real value of the house is 25,, which means that the minimum amount of duty payable is 12,5 ( 25, x 5%). The DDTA grants an exemption from duty where a company transfers immovable property to its individual shareholder (including his/her spouse) in the course of winding up, or in the course of a distribution of assets pursuant to a scheme of distribution, if all of the following conditions are satisfied: the individual shareholder held all of the share capital of the company for a period exceeding five years immediately preceding the date of the transfer of the property. the property consists of one transferable unit, being either a dwelling house, garage, shop, office, store or warehouse. the property is held as a capital asset by the company and has been so held for a period exceeding five years immediately preceding the date of the transfer. This exemption is only available if the Commissioner issues a certificate attesting that he is satisfied that the above conditions are fulfilled. 19

7 Option 1: Alsan Ltd transfers the house to Aldo and his wife, Sandra Since both Aldo and Sandra have held the entire share capital of Alsan Ltd for more than five years and the property consists of a dwelling house, which has been owned by Alsan Ltd as a long-term investment for more than five years, the transfer qualifies for the exemption. Option 2: Alsan Ltd transfers the house to Paul The exemption does not apply to this transfer, as Paul does not own the entire share capital of Alsan Ltd. Since Paul does not require a permit for the purposes of the Immovable Property (Acquisition by Non-residents) Act and is to acquire the house for the purpose of establishing therein his sole, ordinary residence, duty in respect of the first 116,5 is charged at the rate of 3 5 per 1. The duty payable by Paul on this transfer is, therefore, 1,752 (( 116,5 x 3 5%) + ( 133,5 x 5%)). (b) (i) The general rule on the place of supply of services provides that the place of supply of services when the customer is a taxable person is the place where the customer is established but that, in all other cases, the place of supply is where the supplier is established. For the purposes of the general rule, a non-taxable legal person established within territories forming part of the European Union (EU) who is identified (registered) for value added tax (VAT) purposes is regarded as a taxable person; therefore, in the case of such persons, the place of supply of services is the place where the non-taxable legal person is established. (ii) Scenario 1 S Ltd The supplies made by S Ltd are considered to be electronically supplied services. Special provisions govern the place of supply of electronically supplied services, whereby the place of supply of electronically supplied services provided to non-taxable persons established outside the EU is the country where the customer is established. In all other cases, the place of supply of electronically supplied services is determined by the general rule as set out in (i) above. The effect of the combination of these rules in relation to the electronically supplied services provided by S Ltd is as follows: Electronically supplied services provided to taxable persons (including VAT-registered non-taxable legal persons) established both within and outside the EU (but outside Malta) (i.e. business to business transactions) are treated as supplied where the customer is established, i.e. outside Malta. Electronically supplied services provided to non-taxable persons established outside the EU are also treated as supplied outside Malta (under the special provision). Customers who are taxable persons established within the EU will be responsible for payment of VAT at their country s applicable rate under the reverse charge system. Both taxable and non-taxable customers outside the EU will be outside the scope of both Malta and EU VAT. Tutorial note: Where the customer is liable for the tax on the supply, the invoice shall contain an indication to this effect by the inclusion of the words Reverse Charge and a brief reference to the provision in the Act, or the appropriate provisions of Directive 26/112/EC under which the reverse charge procedure is provided, or any indication that the supply is subject to the reverse charge procedure. Electronically supplied services provided to taxable persons (including VAT-registered non-taxable legal persons) established within Malta (i.e. business to business transactions) are treated as supplied where the customer is established, i.e. within Malta, and subject to Malta VAT. Electronically supplied services supplied to non-taxable persons (other than VAT-registered non-taxable legal persons) established within the EU (i.e. business to consumer transactions) are treated as supplied in Malta and subject to Malta VAT. Scenario 2 R Ltd R Ltd provides estate agency and property valuation services which are considered to be services connected with immovable property. Special provisions govern the place of supply of services connected with immovable property. The place of supply of services connected with immovable property, including the services of experts and estate agents, is the place where the immovable property is located. R Ltd offers these services to non-taxable persons (i.e. as business to consumer transactions). Where the property is located in Malta, R Ltd should charge Malta VAT and where the property is located in Spain, R Ltd should charge Spanish VAT, subject to the relevant applicable registration thresholds of Malta and Spain. Properties situated in Country X are outside the EU and thus any related services will be outside of the scope of both Malta and EU VAT. 2

8 4 John (a) (b) (c) Tax treatment (deductibility and taxability) of the interest payable and receivable The Income Tax Act (ITA) provides that interest payable on money borrowed is deducted against income if the interest is payable on capital employed in acquiring that income. The ITA also brings the interest into charge to tax in the hands of the recipient. Under option 1, Foodstuffs Ltd is entitled to deduct the full amount of interest, amounting to per annum ( 3, at 8%), paid to John. No limitation applies which means that the interest can form part of an allowable loss. Under option 2, Foodstuffs Ltd is entitled to deduct the interest paid to John only against dividends received from Diner Ltd. Deductibility of the interest is limited to the amount of any dividend income and any excess is lost. Under both options 1 and 2, John is taxable on the interest received from Foodstuffs Ltd; however, he is entitled to deduct the bank interest amounting to. The deductibility of the interest is, however, limited to the interest income and any excess is lost. Under option 3, John is entitled to deduct the bank interest expense only against any dividends received from Diner Ltd. Again, the deductibility of the interest is limited to the amount of dividend income and any excess is lost. Income tax implications under option 1 of the transfer of the catering equipment applicable to both Foodstuffs Ltd and Diner Ltd. The ITA provides that, where wear and tear deductions have been allowed in any year of assessment in ascertaining the total income of a person in respect of property and that property is sold or otherwise transferred under an onerous title in the year immediately preceding the year of assessment, such person is required to submit together with his tax return for that year of assessment a balancing statement. However, the balancing statement need only be submitted if the sale/transfer of the property occurs either before the source of income in respect of which the wear and tear deductions have been allowed has ceased to exist, or before the source of income ceases to belong to the owner of the property. Diner Ltd will be transferring the business together with the business assets to Foodstuffs Ltd, which means that the source of the income, i.e. the profits derived from the restaurant business, does not cease to exist. Given that Diner Ltd has claimed wear and tear deductions in respect of the catering equipment, it will be required to submit a balancing statement with its tax return for year of assessment 213. Diner Ltd will be charged tax at the rate of 35% on the balancing charge of 25,, i.e. 8,75, as a balancing charge is deemed to be income chargeable to tax under the ITA. Balancing statement: Cost of catering equipment 15, Accumulated wear and tear allowed (note) (75,) Tax written down value 75, Transfer value 1, Balancing charge 25, Tax at 35% 8,75 Note: (15,/6 years) x 3 years = 75, The cost of acquisition of the catering equipment to Foodstuffs Ltd is 1,. The maximum wear and tear deduction that can be claimed in any year of assessment against the income derived from the restaurant business is one-sixth of 1,, i.e. 16,667 per year. Option which maximises the benefit of any potential loss relief claims and wear and tear deductions Under option 1, Foodstuffs Ltd is entitled to deduct the 15, losses carried forward to year of assessment 214 against the taxable income derived from the restaurant business acquired. Any amount of loss exceeding the chargeable income for a year of assessment can be carried forward to subsequent years until fully absorbed. Foodstuffs Ltd will also be entitled to deduct annually both the interest expense amounting to (from part (a)), and the wear and tear allowances amounting to 16,667 per year over a six-year period (from part (b)). No tax will be paid by Foodstuffs Ltd up to the year of assessment 217. The total tax payable for years of assessment 218 and 219 amounts to 19,6. Under option 2, Diner Ltd is only entitled to claim 75, of wear and tear allowances spread equally over the remaining three years to 216. The annual wear and tear allowance in the first three years (years of assessment 214 to 216) claimed by Diner Ltd will be higher than the amount claimable by Foodstuffs Ltd under option 1. However, Foodstuffs Ltd has available an additional 25, of wear and tear allowances ( 1, 75,). The total tax payable for years of assessment 214 to 219 by Diner Ltd amounts to 131,25, 17,5 per year in the first three years and 26,25 per year in the subsequent three years. 21

9 Assuming that Diner Ltd distributes all of its distributable profits at the end of each year, Foodstuffs Ltd would be entitled to deduct both its tax losses and the interest expense against the gross dividends received, resulting in tax refunds of 12,9, payable over the six-year period. This means that the tax leakage on a group basis would be 28,35, exceeding the tax payable under option 1 by 8,75. Since Diner Ltd would still be required to pay the full amount of tax each year but Foodstuffs Ltd will only receive the tax refund after it files its yearly tax return, option 2 also results in a cash flow disadvantage relative to option 1, and the tax refund is dependent on Diner Ltd distributing all of its distributable profits every year. Under option 3, the position of Diner Ltd will be the same as under option 2. Again, assuming that Diner Ltd distributes all of its distributable profits at the end of each year, John would be entitled to deduct only the interest expense against the gross dividends received, resulting in tax refunds receivable of only 5,4 over the six-year period. This means that the tax leakage on a shareholder/company basis would be 8,85, exceeding the tax payable under option 1 by 61,25. Also under option 3, the 15, of tax losses in Foodstuffs Ltd are effectively lost. Therefore, option 1 is the best option. Option 1 Foodstuffs Ltd s tax computations: Year of assessment Chargeable income before interest and capital allowances 75, 75, 75, 75, 75, 75, Interest expense 51, 51, 51, 51, 51, 51, Capital allowances ( 1,) 16,667 16,667 16,667 16,667 16,667 16,667 34,333 34,333 34,333 34,333 34,333 34,333 Loss claimed ( 15,) 34,333 34,333 34,333 34,333 12,668 Chargeable income 21,665 34,333 Tax payable at 35% 7,583 12,17 Options 2 and 3 Diner Ltd s tax computations: Year of assessment Chargeable income before capital allowances 75, 75, 75, 75, 75, 75, Capital allowances ( 75,) 25, 25, 25, Chargeable income 5, 5, 5, 75, 75, 75, Tax payable at 35% 17,5 17,5 17,5 26,25 26,25 26,25 Option 2 Foodstuffs Ltd s tax computations: Year of assessment Gross dividends 5, 5, 5, 75, 75, 75, Interest expense 26, 26, 26, 51, 51, 51, Loss claimed ( 15,) 26, 26, 26, 51, 21, Chargeable income 3, 51, Tax at 35% 1,5 17,85 Tax at source on dividends 17,5 17,5 17,5 26,25 26,25 26,25 Tax refundable 17,5 17,5 17,5 26,25 15,75 8,4 Net tax paid 1,5 17,85 Option 3 John s tax computations (extract): Year of assessment Gross dividends 5, 5, 5, 75, 75, 75, Interest expense Chargeable income 26, 26, 26, 51, 51, 51, Tax at 35% 9,1 9,1 9,1 17,85 17,85 17,85 Tax at source on dividends 17,5 17,5 17,5 26,25 26,25 26,25 Tax refundable 8,4 8,4 8,4 8,4 8,4 8,4 Net tax paid 9,1 9,1 9,1 17,85 17,85 17,85 22

10 5 (a) Lara (i) Malta income tax implications relevant to salary and benefits As from 1 January 213, Lara is to take up employment in Malta with MT Limited, a company incorporated and managed and controlled in Malta authorised to carry on the business of insurance from Malta. Lara will take up residence in Malta for a period of three years, i.e. up to 31 December 215. During her stay in Malta, Lara will be considered for Maltese domestic law purposes to be ordinarily resident but not domiciled in Malta, and as a result she will be taxable in Malta on income arising in Malta and on any income arising outside Malta received in Malta. Employment income is considered to arise in the state where the employment is actually exercised. Since Lara will be exercising her employment from Malta, she will be taxable in Malta on her employment income including the payment for her accommodation expenses which, in terms of the Fringe Benefits Rules, constitutes a benefit provided by reason of an employment or office. Lara is considered to be tax resident in Country Y during her stay in Malta, both under its domestic law and in terms of the Residence Article of the double tax treaty; however, this will not affect Malta s right to tax her employment income. In terms of the Dependent Personal Services Article of the tax treaty, Malta has the right to tax Lara s employment income since it is the country where the employment is exercised and (1) she is present in Malta for a period exceeding 183 days in a 12-month period commencing or ending in the fiscal year concerned, (2) her salary is paid by MT Limited, her employer, which is resident in Malta. (Tutorial note: Any one of these two tests is sufficient to confirm the right of Malta to tax the income.) The tax paid in Malta on Lara s employment income will be allowed as a credit against the Country Y tax on the same income. Lara s employment income is charged to tax at the progressive rates applicable to individuals resident in Malta (under article 56(1)(b)). (ii) Applicability of the Highly Qualified Persons Rules The Income Tax Act Highly Qualified Persons Rules provide that, where an individual who is not domiciled in Malta derives income subject to tax under article 4(1)(b) being emoluments payable under a qualifying contract of employment received in respect of work or duties carried out in Malta, or in respect of any period spent outside Malta in connection with such work or duties, or on leave during the carrying out of such work or duties, then the individual may opt to have the income charged to tax at the rate of 15%. Such income is deemed to constitute the first part of that individual s total income for that year. A qualifying contract of employment is one that covers an eligible office, which includes an actuarial professional employed with a company licensed by the Malta Financial Services Authority. The annual income from such employment should not be less than 75, excluding fringe benefits. Since these conditions are satisfied, Lara has the option to have her annual employment income charged to tax at the rate of 15% if the following conditions are also satisfied: She is protected as an employee under Maltese law and has the required adequate and specific competence She correctly declares for tax purposes the income received from the qualifying contract of employment She is in possession of professional qualifications She is in receipt of stable and regular resources sufficient to maintain herself She resides in a place deemed as normal for a similar family in Malta and which meets the general Maltese health and safety standards She is in possession of a valid travel document and of sickness insurance cover. The 15% tax rate only applies for five consecutive years for European Economic Area nationals; however, Lara s employment will not exceed this period. (b) (i) Economic double taxation arises where different persons are taxed on the same income. A common form of economic double taxation is caused by the simultaneous taxation of a company s profits at the level of the company and of its dividends at the level of the shareholder. Juridical double taxation occurs where the same person is taxed twice on the same income. A common situation is where the source country taxes a payment made to a person and the residence state of the recipient also taxes that person on the same income as part of his or her worldwide income. (ii) A full imputation system is a corporate tax system in which all of the tax paid by a company is attributed/imputed to the shareholders by way of a tax credit, to reduce the income tax payable on dividends distributed to shareholders. The imputation tax system allows companies to attach imputation credits to the dividends paid. Profits are either retained by the company and taxed at the corporate rate, or else paid out as dividends and instead taxed at the shareholder s rate. Imputation credits represent company tax already paid, and for eligible shareholders the effect is that distributed company profits are taxed just once at the shareholder s tax rate. Imputation credits are refundable. This means that not only can they reduce a taxpayer s total tax liability to zero, but also any excess will be refunded. 23

11 (iii) A full imputation system removes domestic economic double taxation if the effective tax rate applicable to the dividend income in the hands of the shareholder is lower than or equal to the corporate tax rate, since in such cases no tax would be payable on the dividend by the shareholder. In a cross border situation, economic double taxation is reduced/removed if the residence state, being the state where the shareholder is resident, allows underlying tax relief to be claimed by the shareholder or else allows tax credits attached to dividends to be eligible for double tax relief. However, in such cases the shareholder will only be entitled to reduce his or her tax liability to zero as no refunds can be claimed. The Income Tax Act (ITA) provides that every company resident in Malta is entitled to deduct from the amount of any dividend paid to any shareholder, other than a dividend paid out of distributable profits allocated to the untaxed account, tax at the rate paid or payable by the company on the income out of which such a dividend is paid, relief of double taxation being left out of account. Every company is required, upon payment of a dividend, to furnish the shareholder with a dividend certificate showing the gross taxed amount of the distributed profits in respect of each taxed account, before deduction of any tax chargeable on the company in respect of such distributed profits, and the total tax chargeable on the company in respect of the distributed profits. Any person, other than a body of persons (including a company) resident in Malta, who is in receipt of a dividend paid out of profits allocated to any of the taxed accounts other than the final tax account, is not obliged to disclose the dividend in a tax return. A body of persons (including a company) resident in Malta is obliged to disclose such dividend in its tax return for the relevant year of assessment. However, no person is charged to further tax in respect of the dividend. In the case where a person includes the dividend as part of his chargeable income, the dividend income chargeable to tax is the amount of the dividend increased by the tax paid by the company on the profits out of which the dividend has been paid and such tax is to be set off for the purposes of collection against the tax charged on the chargeable income. If it results that the tax credit attached to the dividend exceeds the tax charge on the chargeable income, the excess is refunded by the Commissioner. Tax paid at the company level is normally refunded if either the chargeable income, excluding the dividend income, does not fall within the 35% marginal tax rate or else deductions such as tax losses or interest are claimed against the dividend income. 24

12 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 212 Marking Scheme Marks 1 (a) Option 1 Transfer of Mosta shop by A Ltd Income tax implications The transfer by default is subject to final withholding tax of 12% 5 Calculated on the higher of the market value and consideration 5 Intra-group transfer from A Ltd to B Ltd exempt 1 5 Application of the degrouping charge when Matthew acquires 5% of B Ltd 1 5 Deemed transfer is taxable at the rate of 12% on the transfer value 5 Calculation of tax payable on deemed transfer 5 Time limit for payment. 5 Applicability of roll-over relief to A Ltd 2 Treatment of untaxed capital gain 5 A Ltd is required to pay provisional tax at the rate of 7% 5 Degrouping charge not applicable if roll-over relief claimed 5 Stamp duty implications Exemption from duty in the case of intra-group transfers 5 Transfer from A Ltd to B Ltd exempt 5 Degrouping charge not applicable 5 Income tax on the sale of the shares Transfer of a controlling interest 5 Transfer value is the higher of the market value and the actual consideration 5 Determination of market value of B Ltd 1 Determination of market value of shares transferred 5 Stamp duty on the sale of the shares Determining the rate of duty 1 5 Determination of real value of B Ltd 1 5 Determining the real value of shares transferred 5 Stamp duty payable by Matthew 5 17 (b) Option 2 A Ltd and B Ltd not considered to be a group for the ITA or DDTA 1 Availability of roll-over relief for income tax 1 Transfer subject to stamp duty at 5% 1 Calculation of duty payable by B Ltd 5 Identification of option 1 as the better option 5 4 (c) Subsequent transfer of Valletta shop by A Ltd Option 2 Final tax system not applicable 5 Determination of the chargeable gain 1 Roll-over relief not applicable if transferred within a period of two years 5 Transfer subject to final withholding tax of 12% 5 Ability to opt for tax at the rate of 35% on the gain or profit

13 (d) Marks Supporting calculations of the income tax and stamp duty payable Income tax implications of transfer of Mosta shop (options 1 and 2) Calculation of inflation deduction and maintenance allowance 1 Computation of gain rolled over 5 Stamp duty on acquisition of Valletta shop 5 Adjusted cost of acquisition of Valletta shop 5 Income tax implications of transfer of shares in B Ltd (option 1) Computation of market value of B Ltd 5 Confirmation of nil taxable gain/tax payable 5 Stamp duty on transfer of shares in B Ltd (option 1) Computation of disallowed liabilities 1 5 Computation of real value 5 Computation of duty payable 5 6 Format and presentation of the letter 1 Appropriate use of an appendix 1 Effectiveness of communication

14 Marks 2 (a) (i) Maltese income tax treatment of Subco A Ltd Company is subject to worldwide tax at 35% 5 Income stands to be allocated to its MTA 5 Required to allocate annually to its IPA an amount of annual market rent (AMR) 5 Calculation of AMR 5 Method of allocating AMR 1 5 AMR allocation reduces the amount of tax refunds because no refund re IPA 1 Difference between the capital allowances and tax depreciation allocated to the UTA 5 Calculation of distributable profit 5 Holdco Ltd entitled to a refund of 6/7ths of the Malta tax paid by Subco A Ltd on MTA profits 5 Calculation of refund 1 7 (ii) Income tax treatment of dividend received by Subco B Ltd Investment in Blackco Ltd not considered a holding of equity shares, with reasons 1 5 Investment in Blackco Ltd does not qualify as a participating holding (PH) 5 Dividend income stands to be allocated to its foreign income account (FIA) 5 Subco B Ltd may claim unilateral relief (underlying tax relief) 1 If unilateral relief is claimed, the refund due to Holdco Ltd will be 2/3rds of the Malta tax paid 1 Subco B Ltd may claim the flat rate foreign tax credit (FRFTC) 5 If the FRFTC is claimed, the refund due to Holdco Ltd will be 2/3rds of the Maltese tax paid after relief 5 Subco B Ltd may opt not to claim DTR 5 If no DTR is claimed, the refund due to Holdco Ltd will be 6/7ths of the Malta tax paid 5 Conclude unilateral relief is the best option 5 Calculation of distributable profit 1 Calculation of refund 1 9 (b) (i) Option 1: Interest charged by Wes Ltd Django Ltd taxable in Malta on its worldwide income at 35% 5 Interest is generally deductible against income 5 Conditions for interest to be disallowed as a deduction 2 5 Django Ltd cannot deduct the interest against the rent received 5 Interest exempt from tax in hands of Wes Ltd 5 Django Ltd is not to withhold tax upon payment of the interest 5 5 (ii) Option 2: Rent received from Burrell Ltd Wes Ltd is taxable only on income arising in Malta 5 Applicability of Article 6 of the OECD MC 5 Income derived from immovable property may be taxed in the country where the IP is located 1 Rent received by Wes Ltd chargeable to tax in Malta at 35% 5 Deductions allowed against rental income 1 Burrell Ltd to deduct tax at the rate of 35% from the gross interest paid to Wes Ltd 1 Time limit for payment to Commissioner

15 Marks 3 (a) Stamp duty implications under each of the two options Rate of duty charged on transfers of immovable property 5 Calculated on the higher of the consideration and the real value 5 Transfer of the house by Alsan Ltd is by default subject to duty 5 Exemption from duty in case of transfers by companies in the course of liquidation 5 Alsan Ltd transfers the house to Aldo and his wife the transfer qualifies for the exemption 1 Alsan Ltd transfers the house to Paul the exemption does not apply to this transfer 1 Determination of rate of duty applicable to Paul 1 Calculation of duty payable by Paul 5 1 (b) (i) General rule Place of supply of services Determination of the place of supply of services 2 (ii) Place of supply of services of S Ltd and R Ltd Scenario 1 Supplies considered to be electronically supplied services 5 Special provisions governing the place of supply of electronically supplied services to non-taxable persons outside the EU 1 5 General rule on electronically supplied services in all other cases 5 Electronically supplied services supplied to taxable persons 5 Application of the reverse charge system to EU persons 5 Electronically supplied services supplied to non-taxable persons within the EU 5 Scenario 2 Services considered to be services connected with immovable property 5 Special provisions governing the place of supply of services connected with immovable property 1 5 VAT implications of property situated in Malta 5 VAT implications of property situated in Spain 5 Subject to registration limits 5 VAT implications of property situated in Country X

16 Marks 4 (a) Tax treatment (deductibility and taxability) of the interest payable and receivable General treatment of interest under the Income Tax Act 5 Option 1: Foodstuffs Ltd entitled to deduct the full amount of interest 5 Option 2: Foodstuffs Ltd entitled to deduct the interest limited to the amount of dividend income 5 Options 1 and 2: John is taxable on the interest received from Foodstuffs Ltd 5 Deductibility of the interest limited to the interest income 5 Option 3: John entitled to deduct the interest limited to the amount of dividend income 5 3 (b) (c) Option 1 Transfer of catering equipment Conditions to submit a balancing statement 1 Source of the income does not cease to exist 5 Diner Ltd required to submit a balancing statement with its tax return 5 Balancing charge is deemed to be income chargeable to tax 5 Computation of balancing charge 1 Maximum wear and tear deductions to be claimed by Foodstuffs Ltd 5 4 Maximisation of potential losses and wear and tear deductions Option 1: Foodstuffs Ltd entitled to deduct the losses carried forward 5 Loss exceeding chargeable income for a year of assessment carried forward 5 Entitled to deduct annually both the interest expense and wear and tear deductions 5 No tax will be paid by Foodstuffs Ltd up to year of assessment Calculation of total tax payable for years of assessment 214 and Option 2: Annual wear and tear deduction in first three years will be higher than under option 1 5 Foodstuffs Ltd has available an additional 25, wear and tear deductions 5 Calculation of total tax payable for years of assessment 214 to 219 by Diner Ltd 1 5 Foodstuffs Ltd entitled to deduct losses and interest expense against the gross dividends 1 Calculation of tax refundable for years of assessment 214 to 219 to Foodstuffs Ltd 2 Calculation of tax leakage on a group basis 5 Option 3: Position of Diner Ltd will be the same as under option 2 5 Calculation of tax leakage on a group/individual shareholder basis 2 Identify option 1 as the best option