Professional Level Options Module, Paper P6 (MLA)

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1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2013 Answers Note: ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers. Where such references are shown below [in italics and square brackets], they are given for information purposes only. 1 (a) Alfa Ltd Tax Consultant 12, Archbishop Street Valletta The Directors Alfa Ltd Main Street Sliema Dear Sirs Malta tax implications of proposed reorganisation Following our meeting, we hereunder provide you with our explanation of the tax implications of the two options being considered. Option A Income tax implications Any gain derived by A and C from the transfer of their shares to B and D respectively is taxable in Malta, and 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. A s holding represents more than 25% of the nominal value of the issued share capital of Alfa Ltd; this implies that the transfer of 10% of his holding will qualify as a transfer of a controlling interest and therefore 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 Alfa Ltd s financial statements for 2012, i.e. the financial statements immediately preceding the year in which the transfer is made (2013). In order to determine the market value of the transfer of A s shares to B, the net asset value will be adjusted as follows: 1. The book value of the office block provided in the financial statements will be substituted with its market value, determined by an architect s valuation. 2. The value of the goodwill will be added to the net asset value. The value of the goodwill is equivalent to two years average profits of Alfa Ltd, calculated by reference to its profits for the five financial years preceding the transfer. 3. A deduction will be given for the increase in inflation on the value of the office block, determined by reference to the cost of acquisition index. Since C held just 10% of the shares of Alfa Ltd, the transfer by C to D will not qualify as a transfer of a controlling interest and therefore any gain will be calculated by reference to the transfer value. As per Schedule 1, the income tax payable will be 145,331 by A and 101,500 by C. Stamp duty implications 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. However, 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 highest. The value of the property of Alfa Ltd is less than 75% of the assets of the company, so the 2 for every 100 or part thereof rate will apply. The real value of the company for duty purposes is computed in the same way as the value of a controlling interest is determined for capital gains purposes. No exemptions from duty will apply because Alfa Ltd owns immovable property in Malta and so is considered a property company. As per Schedule 2, the stamp duty payable on the transfer by both A and C will be 8,900. Value added tax (VAT) implications There are no VAT implications on the transfer of shares, because such a transfer is deemed to be an exempt without credit supply in terms of [item 3, Part 2 of the Fifth Schedule] the VAT Act. 15

3 Option B Income tax implications [Article 5(9) of] 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 in terms of [Article 16 of] the Act; 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. However, where such asset is subsequently transferred by a company to another company which does not fall within the provisions above, or to another person, the base cost and date of acquisition of the asset which would be considered will be the original cost and the date when it was acquired before the transfer to the first company (being the company within the group) took place. Alfa Ltd will, however, qualify as a property company, given that it owns immovable property situated in Malta, and therefore the transfers will be subject to the special rules which apply with respect to the transfer of assets between group companies. A further condition which must be satisfied for a transfer to be deemed to produce no gain or loss is that the individual direct or indirect beneficial owners of the two companies are the same (disregarding persons who hold shares only in one company when their aggregate holdings in that company do not exceed 20% of the share capital) and each individual holds substantially the same percentage interest in the nominal share capital and voting rights of the company. The shareholders of Alfa Ltd and Beta Ltd are not the same. However, because C holds less than 20% of the nominal share capital and voting rights in Alfa Ltd, she is not taken into consideration for the purposes of determining whether the shareholders of Alfa Ltd and Beta Ltd are the same. The shareholders will not hold the same percentage shareholding in Alfa Ltd and Beta Ltd but their shareholding will still be considered substantially the same since the difference in the percentage shareholding of any of the shareholders is less than 20%. The transfer of assets, including immovable property, from Alfa Ltd to Beta Ltd will therefore not give rise to any income tax implications. The liquidation of Alfa Ltd following the transfer of assets will not give rise to the application of the degrouping provisions since these provisions specifically provide that a company is not considered as ceasing to be a member of a group by reason of its liquidation. Stamp duty implications The transfer of immovable property is subject to duty 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. However, in a transfer of immovable property between two companies an exemption similar to that provided for income tax purposes also applies for stamp duty purposes. In order for this exemption to apply, the Commissioner must issue a certificate stating that he is satisfied that the requirements or conditions for the application of the exemption do in fact apply. VAT implications The transfer of the business and the business assets will not have any VAT implications provided the transfer of going concern conditions are satisfied. To qualify as the transfer of a going concern: the assets must be transferred to a person registered under [Article 10 of the] VAT Act. Should Beta Ltd not be registered [under Article 10], approval from the Commissioner may be sought for this condition to be met; the assets being transferred must be used by Beta Ltd in carrying on the same kind of activity as that of Alfa Ltd; and the transfer must be recorded in the records of Alfa Ltd, indicating the VAT number of Beta Ltd. Concluding remarks In view of the points considered above, it is clear that from a purely tax perspective the more advantageous option is Option B, as this does not result in any income tax, stamp duty or VAT costs. Yours faithfully Tax Consultant 16

4 APPENDIX TO LETTER Schedule 1 Calculation of tax on capital gains On the transfer by A Net asset value of company 2,150,000 Immovable property adjustment Add: Market value of immovable property 1,000,000 Deduct: Book value of immovable property (500,000) 500,000 2,650,000 Goodwill adjustment Aggregate profit of the last five years 4,500,000 (750, , , , ,200,000) Two years average profit (4,500,000/5*2) 1,800,000 Market value of company 4,450,000 Market value of 10% 445,000 Market value of 445,000 is more than the agreed consideration of 300,000. Market value of shares transferred 445,000 Inflation deduction: 10% x (500,000 x (( )/567 95) (21,323) Cost of acquisition (10,000) Capital gain 413,677 Income tax at 35% 144,787 On the transfer by C Agreed consideration 300,000 Cost of acquisition (10,000) Capital gain 290,000 Income tax at 35% 101,500 Schedule 2 Calculation of stamp duty On the transfer by A Real value = market value as calculated above, i.e. 445,000 Duty = 445,000 x 2% = 8,900 On the transfer by C Real value = market value as calculated above, i.e. 445,000 Duty = 445,000 x 2% = 8,900 (b) Mr Zammit (i) (ii) Sale to a third party The transfer of immovable property situated in Malta is taxable [in terms of Article 5A] at the final rate of 12% of the transfer value. Where the property is transferred within seven years from its acquisition, the transferor may opt to be taxed on the gain element of the transfer at the standard rates but as Mr Zammit has owned his house and garage for 12 years, this option is not available. Given that Mr Zammit has owned and occupied the house for over three years as his own residence, should he sell the house within 12 months of vacating it the transfer would be exempt from tax. The exemption will also apply to the garage if it is sold together with the residence, provided it is of not more than 30 square metres and situated within 500 metres of the house. Mr Zammit s garage is 60 square metres, so he would not be able to benefit from the exemption on the transfer of the garage. Therefore, should Mr Zammit transfer his house and garage, he would not be taxable on the transfer of the house, but would be subject to a 12% final tax on the value of the garage, which implies a tax charge of 6,000. Inheritance by Jacqueline A duty of 5 for every 100 or part thereof is charged on every transfer of immovable property transferred causa mortis, however, provided the property continued to be Mr Zammit s ordinary residence until the time of his death, the first 17

5 35,000 of the value of the house will be exempt from duty. Furthermore, provided Jacqueline also occupies the house at the time of the transfer causa mortis, duty will only be charged at the rate of 3 50 for every 100 or part thereof on value of the house which exceeds 35,000 but not 70,000. The duty causa mortis payable on the transfer of the house and garage will therefore be as follows: First 35, ,001 70,000 at 3 5% 1,225 70,001 1,250,000 at 5% 59,000 Total 60,225 2 Med Pharma (Malta) Ltd (a) (i) Income tax treatment Med Pharma (Malta) Ltd is a company resident and domiciled in Malta, by virtue of being incorporated in Malta, and is therefore taxable in Malta on its worldwide profits. Profits derived from the manufacture and sale of generic medicines The benefit of the reduced rate of tax provided for in the double tax treaty is not available to Med Pharma (Y) Ltd since the company owns shares in Med Pharma (Malta) Holding Ltd, whilst it is Med Pharma (Malta) Ltd (and not Med Pharma (Malta) Holding Ltd) which qualifies for tax incentives in Malta. However, [in terms of Article 56(20) of the ITA], where a double taxation treaty provides for a reduced rate of tax on dividends paid by a company resident in Malta to a shareholder resident in the treaty country, the company is entitled to apply the reduced rate directly to so much of the profits which it derives from its trade or business as would, if distributed, be payable as a dividend to that shareholder. Moreover, where a Maltese company is owned by another Maltese company, the provisions of the said article apply as if the former company were owned directly by the shareholders of the latter company. Therefore, since Med Pharma (Malta) Holding Ltd is also a Maltese company, for the purposes of this provision Med Pharma (Malta) Ltd is deemed to be owned directly by Med Pharma (Y) Ltd, and this entitles it to apply the reduced treaty rate directly to its profits, provided one further condition is satisfied. This further condition is that Med Pharma (Malta) Ltd does not sell by retail. A company is deemed to sell by retail if its sales are made to a person who carries on a trade and the goods so sold are resold. Given that Med Pharma (Malta) Ltd sells to related companies, this condition is satisfied. Med Pharma (Malta) Ltd will therefore be taxed at the reduced rate of 15% on the profits which it derives from its manufacturing activities. Furthermore, Med Pharma (Malta) Ltd can benefit from a tax credit in terms of the Investment Aid Regulations. Given that the company is deemed to be a medium sized entity, it will be entitled to a tax credit equal to 40% of the qualifying investment of 450,000. This credit is deducted from the company s tax charge. The profits derived by Med Pharma (Malta) Ltd from the sale of generic medicines to its group companies are allocated to the Maltese taxed account (MTA), other than the amount of chargeable income, the tax chargeable on which has been relieved from payment by the tax credits, which is allocated to the final taxed account (FTA). Any unutilised tax credits can be carried forward to future years. Med Pharma (Malta) Ltd need not allocate any profits to the immovable property account (IPA) as it rents its factory and offices (immovable property) from third parties. Profits derived from patent royalties The royalties derived from the patents may benefit from an exemption from tax if the patent satisfies the conditions laid down in the Exemption on Royalties Derived from Patents Rules. Accordingly, the patent must be registered (in Malta or elsewhere), the research, processing and other preparatory work may have been carried out in Malta or elsewhere but Med Pharma (Malta) Ltd must obtain (and submit to the Commissioner) a determination issued by Malta Enterprise describing the invention and confirming that Malta Enterprise has received all the information and documentation it requires and that it is satisfied that the invention in relation to which the patent refers exists and is not in breach of any public policy. The income derived from the patent should not be shown as chargeable income in Med Pharma (Malta) Ltd s tax return as otherwise the company would be deemed as having waived its claim to the exemption. The exemption is extended to dividends distributed out of the exempt profits up to the ultimate shareholders and on this basis, should Med Pharma (Malta) Ltd obtain the exemption, the profits would be allocated to the FTA. Profits derived from the subsidiaries Dividends derived from non-resident companies may qualify for the participation exemption if the shareholding is substantial (greater than or equal to 10%) and it entitles the company to any two of the following rights: a right to votes; a right to profits available for distribution to shareholders; and a right to assets available for distribution on a winding up of the company. 18

6 (ii) In addition, in the case of a subsidiary incorporated in a non-european Union country, certain anti-abuse provisions must be satisfied. Med Pharma (Malta) Ltd s dividend income will qualify for exemption because Med Pharma (Malta) Ltd holds 100% of the two subsidiaries, Med Pharma (East EU) Ltd is a company incorporated in the European Union (EU); and Med Pharma (South America) Ltd derives all of its income from the sale of generic medicines, i.e. it does not have more than 50% of its income derived from passive interest or royalties. Where the participation exemption applies, the dividends derived by Med Pharma (Malta) Ltd will be allocated to the FTA. Tax implications of the distribution of dividends to Med Pharma (Malta) Holding Ltd Med Pharma (Malta) Holding Ltd is a company resident and domiciled by reason of being incorporated in Malta, and will, therefore, be taxable at the standard rate of 35%. Provided it is registered for tax refund purposes, Med Pharma (Malta) Holding Ltd may apply for a tax refund of the Malta tax charged to Med Pharma (Malta) Ltd on the profits distributed to it by that company. With respect to the profits derived from the sale of generic medicines, given that Med Pharma (Malta) Ltd benefitted from the reduced rate of 15% on account of the tax treaty, the only refund applicable [in terms of the provisions of Article 56(20) referred to above] is the refund [in terms of Article 48(4A) ITMA]. However, since Med Pharma (Malta) Ltd benefitted from a reduced rate of tax, the tax refund will not be 6/7ths of the Malta tax charge, but must be determined by means of the formula: Y = (R 5%)/R Y = (15% 5%)/15% Y = 67% The refund to apply will therefore be 2/3rds. Med Pharma (Malta) Ltd will not be taxable on this refund, and it will be allocated to its untaxed account. The dividends received by Med Pharma (Malta) Holding Ltd relating to the profits which were exempted in the hands of Med Pharma (Malta) Holding Ltd or were relieved from tax by way of tax credits will not be taxed in the hands of Med Pharma (Malta) Holding Ltd. (b) Tax computation 2012 Gross income (2,000, , ,250, ,000) 4,535,000 Less: Exemptions (500, ,250, ,000) (2,535,000) Taxable income 2,000,000 Tax at 15% 300,000 Less: Credit in terms of Investment Aid Regulations (40% x 450,000) (180,000) Tax due 120,000 Refund available to Med Pharma (Malta) Holding Ltd (2/3 x 120,000) (80,000) Effective tax 40,000 3 Mr Fribau Upon taking up residence in Malta, Mr Fribau will be a person who is resident but not domiciled in Malta. Accordingly, he will be taxable on his income and capital gains arising in Malta, and on any income arising outside Malta which is received in Malta. Under the general rules, the emoluments he derives as CEO of the licensed fund management company, including any fringe benefits, are taxable in Malta at the standard rates, but the director s fees from non-malta companies will only be taxable in Malta if they are received in Malta. Given that he is not, and will not be, domiciled in Malta, and that he is to be employed by a fund management company, Mr Fribau may benefit from either the Highly Qualified Persons Rules or the provisions [of Article 6] of the Income Tax Act on Investment Services Expatriates. However, he may not benefit from both rules, so must choose one. Highly Qualified Person Rules (the HQPR) Under the HQPR, Mr Fribau s chargeable income in Malta will be taxed at 15%. To qualify for this benefit, he must satisfy the conditions set out in those rules. He must prove to the satisfaction of the Malta Financial Services Authority (MFSA) that he holds an eligible office, with a company licensed by the MFSA, under a qualifying contract with a salary of at least 75,000 as adjusted annually in line with the Retail Price Index (which for basis 2013 means a minimum salary of 80,100). Mr Fribau is likely to satisfy all of these conditions: the post of CEO is an eligible office, his employment will be with an MFSA licensed company, and his contract specifies a salary of c. 120,000 which will exceed the prescribed minimum. 19

7 Mr Fribau will also need to prove to the satisfaction of the MFSA that: he has the necessary qualifications and experience the fact he has worked in London as a qualified professional in the fund management industry for five years should enable him to prove this; he is in receipt of stable and regular resources which are sufficient to maintain him and his family without recourse to the social assistance system in Malta this should not be an issue in his circumstances; he has adequate accommodation; he is covered by a sickness insurance policy; he is not domiciled in Malta; and he is in possession of a valid travel document. Should Mr Fribau benefit from the HQPR, he will be taxable at the rate of 15% on his salary of 120,000, and so will pay tax of 18,000 per annum in Malta. He will not be entitled to any deductions, double tax relief or set off of any kind on the salary he receives, whether this relates to his alimony payment or his children s school fees. Since Mr Fribau is a European Union (EU) national who has never lived in Malta before, he may benefit from the HQPR for the first five years that he is in Malta. After that he will be subject to tax at the rates applicable normally to Maltese residents. Since he maintains his two children, the rates applicable in his case will be the parental rates. Investment Services Expatriates (the ISE) Mr Fribau is to be employed by a fund manager and since he was not resident in Malta in the last three years, he qualifies as an investment services expatriate and may therefore benefit from the exemption from tax on certain fringe benefits for a period of ten years, as found in [Article 6 of] the ITA. His aggregate emoluments of 120,000 may therefore be structured in a way which includes, on the one hand, a fixed salary and, on the other, the value of the fringe benefits to which the ISE scheme applies. For this purpose, the contract should expressly mention the fringe benefits which would be covered by his emoluments and their value. [Article 6] ITA exempts the following fringe benefits: accommodation expenses incurred in Malta; a subvention of not more than 600 a month; medical expenses and medical insurance; compensation for school fees; the cost of providing a car; the cost of visits abroad by the employee and their immediate family. Based on the information provided, if Mr Fribau s employment contract is expressed correctly his [Article 6] exemptions could be 58,700 (30, , , , ,000) plus whatever amount is designated for the provision of visits abroad. In addition, [in terms of Article 14A] Mr Fribau may qualify for a tax deduction of 25,000 in respect of the alimony which he pays to the wife he has divorced. Assuming that his director s fees are not received in Malta, Mr Fribau s taxable income can therefore be reduced to at least 36,300 (120,000 58,700 25,000) and the tax on this amount, at the parental rates, will amount to 7,609. A further benefit of applying the provisions relative to the ISE is that Mr Fribau would be deemed to be not resident in Malta [for the purposes of Article 12(1)(c)], so he would benefit from the exemptions on interest income, royalties and capital gains arising in Malta should he derive any such income or gains while he is resident here. Conclusion The tax payable under the ISE can be significantly less than the tax payable under the HQPR. Moreover, the benefits under the ISE scheme are available for ten years whereas the 15% rate under the HQPR is only available for five years. This is particularly relevant given Mr Fribau s intention to reside in Malta for at least 12 years. 4 (a) Mrs Camilleri The place of supply of goods which are transported is generally where the goods are at the time when the transport of the goods begins, i.e. the UK. However, the acquisition of the car by Mrs Camilleri may qualify as a distance sale for VAT purposes. A distance sale is defined as an intra-community supply of goods transported by or on behalf of the supplier which satisfies certain conditions. The condition relevant to the case at hand is that the car does not qualify as a new means of transport as it is more than six months old and has a mileage of more than 6,000 kilometres. The general rule applicable to distance sales is that they are treated as taking place where the transport of the goods ends. When the total value of the distance sales effected by the same supplier and delivered in Malta in a given year does not exceed the statutory threshold, the supplies are treated as taking place in the country where the supplier is established unless he opts otherwise. In this case, Auto Dealer UK has made at least two supplies in Malta during Both supplies are distance 20

8 sales and their total value is 58,000, which exceeds the distance sales threshold of 35,000 provided for in the VAT Act. Since the conditions for the exception are not satisfied, the place of supply remains where the transport of the goods ends, i.e. Malta, and Maltese value added tax (VAT) is due at 18%. (b) HTI Finland Ltd The initial supply by HTI Poland to HTI Finland is a supply of goods with transport, and takes place in Poland, that is, where the transport begins. As the supply is to a European Union (EU) value added tax (VAT) registered taxable person, it should qualify as an exempt intra-community supply. Under the general VAT rules, HTI Finland would be liable to VAT in Malta on the intra-community acquisition of the goods. Moreover, it would be required to register for VAT purposes in Malta and charge Maltese VAT on the supply of those goods to Talo Ltd in Malta, with the right to claim back the VAT on the acquisition. However, since HTI Finland does not have a place of establishment in Malta, and since the acquisition is followed by a supply of the goods to a taxable person registered for VAT in Malta, the acquisition and the subsequent supply are governed by the simplification procedure for triangulations. The acquisition by HTI Finland is exempt from VAT in Malta and the liability for the payment of the Maltese tax on the subsequent supply is on Talo Ltd by way of the reverse charge mechanism. This meaning that Talo Ltd will self-charge VAT without the need to claim or pay anything to the VAT Department. In turn there will be no need for HTI Finland to register for VAT or to be liable to any other VAT obligation in Malta. In terms of the provisions applicable to triangulations, the invoice for the supply by HTI Finland to Talo Ltd must specify the Maltese VAT identification number of Talo Ltd and must designate Talo Ltd as the person liable for the payment of the VAT on that supply. (c) Mr Grima The supply by Sports24 7 is a supply of electronic services. The general rule for the supply of services to non-taxable persons is that the place of supply is where the supplier has established his business. However, where the services constitute the supply of electronic services to non-taxable persons who have their permanent address in a European Union (EU) member state by a taxable person who has established his business outside the EU, they are deemed to be supplied in the member state where the non-taxable customer is established. This means that value added tax (VAT) on the supply in question will be due in Malta at 18%. (d) True Insurance Being an insurance company which only insures risks in Malta, True Insurance provides exempt without credit supplies meaning that, while no output value added tax (VAT) is charged by True Insurance, neither can it recover input VAT incurred, therefore any VAT incurred is a sunk cost. The place of supply of the consultancy services received by True Insurance from TGV Legal is Malta; this implies that VAT on the 12,000 is due in Malta at the standard rate of 18% by means of reverse charge. The services received by True Insurance from TGV Legal, however, have more than just input VAT implications. Since True Insurance is not registered for VAT [under Article 10] and is accounting for VAT by means of reverse charge, it must register for VAT purposes under [Article 12 of] the VAT Act. This implies that True Insurance will be given a valid VAT identification number and, while True Insurance need not submit regular VAT returns, it must declare and pay VAT on any services received. 5 Fresh Ltd Taxation of dividend distributions With respect to the dividend distribution by Fresh Living Ltd to Fresh Ltd, given that both companies are incorporated in European Union (EU) jurisdictions, they may apply the provisions of the EU Parent Subsidiary Directive. Under the Directive, any dividends distributed by Fresh Living Ltd to Fresh Ltd should be free of any withholding tax in State U, and furthermore State E should exempt from tax the dividends received by Fresh Ltd, or grant underlying tax relief on the fraction of corporation tax related to those profits. In order to apply the Parent Subsidiary Directive, Fresh Ltd and Fresh Living Ltd must both satisfy the definition of a company in terms of the Directive. Therefore, both companies must: take a form which is listed in Annex I, Part A of the Directive; be resident in State E and State U in terms of the tax laws of their respective States, and not be tax resident in a country which is not a member of the EU in terms of a tax treaty concluded by State E and State U respectively; and be subject to a tax which is listed in [Annex I, Part B of] the Directive, without the possibility of an option or of being exempt or subject to any other tax which may be substituted for any of these taxes. Assuming that both Fresh Ltd and Fresh Living Ltd qualify as a company for the purposes of the Directive, given that Fresh Ltd holds more than 10% of the capital of Fresh Living Ltd, it qualifies as a parent company for the purposes of the Directive, and, by inference, Fresh Living Ltd qualifies as a subsidiary for the purposes of the Directive. 21

9 Therefore the dividends distributed by Fresh Living Ltd to Fresh Ltd will be exempt from withholding tax in State U, and also exempt from tax in State E, or will benefit from an underlying tax credit in State E which would anyway result in no tax in State E as the tax rate in State U is higher than the tax rate in State E. Based on the double tax treaty between State E and State U, the dividends distributed by Fresh Living Ltd to Fresh Ltd could have been subject to withholding tax at rate of 15% (which happens to be the domestic rate in State U) but the treaty rate is the maximum rate, therefore the exemption under the Directive will prevail in this case. State U will also be restricted from taxing the dividends distributed to Fresh Living Holding Ltd, in terms of the double tax treaty between State U and State X, as Fresh Living Holding Ltd holds more than 25% of Fresh Living Ltd. Taxation of royalty payments With respect to the royalty payment made by Fresh Living Ltd to Fresh Ltd, given that both companies are incorporated in EU jurisdictions, they may apply the provisions of the EU Interest and Royalty Directive. In terms of the Directive, royalty payments are free of any withholding tax if the conditions of the Directive are satisfied. In order to apply the Interest and Royalty Directive, the companies must fall within the definition of a company as defined in the Directive, which is similar to that in the Parent Subsidiary Directive, and therefore may be deemed to be met. Moreover, the Interest and Royalty Directive will only apply if the companies are deemed to be associated companies as per the definition provided in the Directive. Fresh Ltd and Fresh Living Ltd will be deemed to be associated companies if: Fresh Ltd has a minimum holding of 25% of the capital of Fresh Living Ltd. This condition is not satisfied since Fresh Ltd only has 20% of the capital of Fresh Living Ltd; or Fresh Ltd and Fresh Living Ltd are both directly held as to at least 25% by the same company. While this condition may appear to be prima facie satisfied, since Fresh Living Holding Ltd holds 80% of Fresh Living Ltd, and 100% of Fresh Ltd, the condition is not satisfied as all holdings must involve companies resident in the European Union, which Fresh Living Holding Ltd is not. Therefore this condition is not satisfied either. This implies that the companies cannot rely on the application of the Interest and Royalty Directive to restrict State U from imposing a withholding tax on the royalty payments. However, given that the double tax treaty between State E and State U is similar to the OECD Model Tax Convention, any royalties arising in State U which are paid to a resident of State E are taxable only in State E. Therefore, State U is restricted from applying withholding tax to the royalty payment made by Fresh Living Ltd to Fresh Ltd. The royalty payment may, however, be taxed in State E in terms of its domestic rate. Therefore the royalty of 150,000 will be taxed in State E at the rate of 10%, meaning there will a tax charge of 15,000 on the royalty received by Fresh Ltd. 22

10 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) December 2013 Marking Scheme Marks 1 (a) Option A Taxability of gain 0 5 Provisional tax 0 5 Existence of controlling interest 0 5 Determination of transfer value 0 5 Reference to net asset value in preceding year s financial statements 0 5 Market value of immovable property 0 5 Value of goodwill 0 5 Acquisition index 0 5 Transfer of C to D not controlling interest; reference to transfer value 0 5 Description of stamp duty at 2 for every 100 or part thereof 0 5 Description of stamp duty at 5 for every 100 or part thereof 0 5 Applicable rate is 2 for every 100 or part thereof 0 5 Determination of real value = controlling interest 1 No exemptions 0 5 No VAT, exempt without credit supply 0 5 Option B Group of companies 0 5 Control and beneficial ownership 0 5 No loss or gain 0 5 Claw back 0 5 Property company 0 5 Special provisions for property companies 0 5 Same/substantially the same percentage interest 1 Ignoring C 1 Difference in percentage interest 1 Conclusion: no income tax consequences 0 5 Non-application of degrouping on liquidation 1 Stamp duty at 5 for every 100 or part thereof 0 5 Exemption from duty 0 5 Certificate issued by Commissioner 0 5 VAT transfer of going concern 1 Transfer to person registered under [Article 10] VAT Act, or Commissioner approval 0 5 Beta Ltd to carry on same kind of activity 0 5 Indication of VAT number of Beta Ltd 0 5 Overall conclusion 0 5 Calculations Immovable property adjustment 0 5 Goodwill adjustment 0 5 Market value of 10% 0 5 Inflation deduction 0 5 Tax charge on transfer by A 0 5 Tax charge on transfer by C 0 5 Duty on transfer by A to B 0 5 Duty on transfer by C to D 0 5 Professional marks Format and presentation of the letter 1 Correct use of appendix 1 Effective communication 2 (b) (i) Application of ITA [Article 5A] 0 5 Non-application of option out of ITA [Article 5A] 0 5 Exemption as property owned for more than three years as own residence 1 Additional conditions applicable to separate garage 1 Non-applicability of exemption on sale of garage 0 5 Tax on sale of garage 0 5 Marks

11 Marks (ii) Duty on transfer of property at 5 for every 100 or part thereof 0 5 Exemption on first 35,000 1 Lower rate on next 35,000 1 Calculation of duty 0 5 Marks (a) Taxation of Med Pharma (Malta) Ltd 0 5 Treaty benefit of reduced rate 1 Reduced rate even on undistributed profits 1 Look through provision in case of Maltese companies 1 Application in this case 0 5 Must not sell by retail 0 5 When a company is not held to sell by retail 0 5 Reduced rate on profits derived from manufacturing business % tax credit 1 Tax credit deducted from tax charge 0 5 MTA tax account allocation 0 5 FTA tax account allocation 1 Carry forward of unutilised tax credits 0 5 No allocation to IPA 0 5 Exemption on income derived from patents 0 5 Registration of patent 0 5 Work to be carried out in Malta or elsewhere 0 5 Determination issued by Malta Enterprise 0 5 Contents of determination 0 5 Income not to be shown on tax return 0 5 Exemption extends to dividends 0 5 Application in this case 0 5 Participation exemption if substantial shareholding 0 5 Equity holding rights 1 Reference to anti-abuse provisions re non-eu entities 0 5 Holding requirement 0 5 EU company 0 5 Not passive interest or royalties 0 5 Allocation to FTA 0 5 Taxation of Med Pharma (Malta) Holding Ltd 0 5 May apply for a tax refund 0 5 Refund in terms of ITMA [Article 48(4A)] 0 5 Formula basis 0 5 2/3rds refund 1 Non-taxability of refund 0 5 Allocation to untaxed account 0 5 Non-taxability of dividends 0 5 (b) Gross income 0 5 Exemptions 0 5 Tax at 15% 0 5 Tax credit at 40% 0 5 Tax refund at 2/3rds 0 5 Effective tax

12 Marks Marks 3 Taxation of Mr Fribau 0 5 General rules standard rates 0 5 Director s fees 0 5 Exclusivity of different rules 1 15% rate under Highly Qualified Person Rules 0 5 Eligible office 0 5 Company licensed by MFSA 0 5 Minimum salary 0 5 These conditions all satisfied 0 5 Qualifications and experience 0 5 No recourse to social assistance 0 5 Adequate accommodation 0 5 Sickness insurance 0 5 Not domiciled in Malta 0 5 Valid travel document 0 5 Tax in Malta under HQPR 0 5 No deductions, DTR or set offs 1 Scheme applicable for five years 0 5 Application of parental rates 0 5 Not resident in Malta and employer 0 5 Qualifies as an investment services expatriate 0 5 Ten year exemption of certain fringe benefits 0 5 Structure package to include eligible benefits 0 5 Must be expressly mentioned 0 5 Accommodation expenses 0 5 Subvention 0 5 Medical expenses and insurance 0 5 School fees 0 5 Costs of car 0 5 Costs of visits abroad 0 5 Potential exemptions based on scenario 0 5 Alimony payment 1 Tax at parental rates 0 5 Non-resident for purposes of ITA [Article 12(1)(c)] 1 Reasoned recommendation of better option

13 Marks 4 (a) General rule place of supply where transport begins 0 5 Possible distance sale 0 5 Definition of distance sale 0 5 Provided not new means of transport 0 5 More than six months old 0 5 Mileage more than 6,000 km 0 5 Place of supply of distance sale where transport ends 1 Exception if total sales less than the threshold 1 Application to this case 1 (b) Goods with transport, place of supply Poland 0 5 Exempt intra-community supply 1 Liable to Malta VAT under general rules 0 5 Right to claim VAT back 0 5 No place of establishment in Poland or Malta 0 5 Acquisition followed by supply to registered person in Malta 0 5 Simplification procedure 1 Acquisition exempt from VAT 0 5 Liability to VAT arises on supply to Talo Ltd 0 5 HTI Finland does not need to register in Malta 0 5 Invoice must identify Talo Ltd as the VAT payer 1 (c) Supply of electronic services 0 5 General rule place of supply where supplier established 1 Exception for supply of electronic services to non-taxable person 1 VAT due in Malta 0 5 (d) Exempt without credit supplies 0 5 Meaning of exempt without credit 0 5 Place of supply of consultancy services is Malta 0 5 Reverse charge applies 0 5 Obligation to register 1 Issuing of VAT number 0 5 VAT compliance requirements 0 5 Marks

14 Marks Marks 5 Parent Subsidiary Directive applies to dividend distributions 0 5 Exemption from withholding tax in source state 1 Exemption of dividend income in receiving state 1 Underlying tax relief 0 5 Must satisfy the definition of a company in terms of Directive 0 5 Form as per [Annex I, Part A of] Directive 0 5 Resident in State E and State U 0 5 Not resident outside EU in terms of tax treaty 0 5 Subject to tax as listed in [Annex I, Part B of] Directive 0 5 Definition of parent company 1 Definition of subsidiary 0 5 Application of Directive in this case 0 5 No tax in State E even if underlying tax credit 1 Effect of strict application of tax treaty provisions 0 5 Exemption under the Directive prevails 1 No withholding tax on dividends distributed to Fresh Living Holding Ltd, as per treaty provisions 1 Interest and Royalties Directive applies 0 5 No withholding tax 1 Must satisfy definition of a company 0 5 Associated companies condition 1 25% minimum holding condition 0 5 Not satisfied in this case 0 5 Fresh Ltd and Fresh Living held directly by same company 0 5 All companies must be EU companies 1 Non-application of Directive in this case 0 5 No withholding tax in terms of tax treaty 1 State U restricted from taxing royalty 0 5 Royalty payment may be taxed in State E at domestic rates 1 10% withholding tax rate