Professional Level Options Module, Paper P6 (MLA)

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1 Answers

2 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) June 2014 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) Tax Consultant 14, Old Bakery Street Valletta The Directors AB Ltd Main Street Mosta 20 September 2013 Dear Sirs Malta income tax implications of sale of shares in Y Ltd to Mrs Z Following our meeting, we hereunder provide you with our comments on the tax implications of the transactions under consideration. Transfer of a controlling interest Any gain derived by AB Ltd from the transfer of its shares to Mrs Z is taxable in Malta. 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. AB Ltd s holding represents more than 25% of the nominal value of the issued share capital of Y Ltd, meaning that the transfer of 15% of its holding will qualify as a transfer of a controlling interest. 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 Y Ltd s 2012 financial statements, i.e. the financial statements for the year immediately preceding 2013, the year in which the transfer is to be made. The market value of the transfer of the shares in Y Ltd to be transferred by AB Ltd will be determined as follows: 1. Given that the assets of Y Ltd are represented solely by shares in X Ltd, and such shares represent more than 10% of the nominal value of the issued share capital of X Ltd, the book value of X Ltd s investment in Y Ltd must be substituted by the market value determined by reference to the same rules which apply to a transfer of a controlling interest. 2. Since the assets of X Ltd include immovable property, the book value of the property will be replaced by its market value as determined by an architect. 3. The value of goodwill must be added to the net asset value of Y Ltd. Given that the transfer would be made during Y Ltd s second financial year, no value will be attributed to the goodwill of Y Ltd itself. However, the goodwill of X Ltd would still need to be determined. The value of the goodwill is equivalent to two years average profits, calculated by reference to X Ltd s profits for the five financial years preceding the transfer. 4. A deduction is allowed to cater for the increase in inflation on the apartment blocks, determined by reference to the cost of acquisition and the relative immovable property indices. While this is not applicable to Y Ltd because it does not directly own any immovable property, the calculation would need to be carried out for X Ltd. Application of the de-grouping provisions The transfer of shares in X Ltd by AB Ltd to Y Ltd in 2011 did not give rise to any tax implications because the law provides that no loss or gain shall be deemed to arise where an asset (in this case the shares in X Ltd) is transferred between two companies which: qualify as a group of companies, i.e. both companies are resident in Malta and, either one, Y Ltd, is more than a 51% subsidiary of the other, AB Ltd, or are controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders. However, special rules apply in the case of a transfer of shares in a property company and given that it owns immovable property situated in Malta, X Ltd will qualify as a property company. Under these special rules, for the transfer of X Ltd shares to be deemed not to give rise to any gain or loss, the individual direct or indirect beneficial owners of the group of companies must be the same and each individual must hold substantially the same percentage interest in the nominal share capital and voting rights in AB Ltd and Y Ltd. The shareholders of AB Ltd are Mr A and Mrs B, and the shareholders of Y Ltd are Mr A and Mrs B (via AB Ltd) and Mr Y. The shareholders of AB Ltd and Y Ltd are considered to be the same, because Mr Y is not counted for the purposes of determining whether the shareholders of AB Ltd and Y Ltd are the same as he holds less than 20% of the nominal share capital and voting rights in Y Ltd. 15

3 Consequently, the shares Y Ltd holds in X Ltd are shares acquired from another company, where such acquisition was not taxable because AB Ltd and Y Ltd were considered to be a group of companies. Should Y Ltd and AB Ltd cease to be deemed a group of companies ( the original group ) before the lapse of six years from the date of the acquisition, the de-grouping provisions will apply. Y Ltd will cease to be a member of the original group if Y Ltd and AB Ltd no longer satisfy the conditions through which they benefitted from the intra-group exemption. To determine this, it is necessary to determine whether the individual direct or indirect beneficial owners of Y Ltd and AB Ltd following the transfer of shares to Mrs Z are the same, i.e. if each individual holds substantially the same percentage interest in the nominal share capital and voting rights in AB Ltd and Y Ltd. Should Mrs Z acquire 30% of the shares (15% from Mr Y and a further 15% from AB Ltd), the shareholders of AB Ltd and Y Ltd would not be considered to be the same. This is because Mrs Z would be counted as she holds more than 20% of the nominal share capital and voting rights in Y Ltd. As a result, AB Ltd and Y Ltd would no longer be a group of companies and the de-grouping provisions would apply. In terms of the de-grouping provisions, where a company (Y Ltd) ceases to be a member of the group it is treated as if, immediately after the acquisition of the shares which were exempt from tax, the company (Y Ltd) transferred and immediately re-acquired the shares at that time. The deemed transfer of shares by Y Ltd will qualify as a transfer of a controlling interest, whatever percentage interest Y Ltd has in X Ltd. The transfer value of the shares will therefore be the higher of the consideration and the market value of the shares, calculated as described above. Concluding remarks Should AB Ltd transfer 15% of its holding to Mrs Z in 2013 as proposed, the following income tax liabilities would arise: AB Limited will be subject to tax on the gain derived from the transfer as a transfer of a controlling interest of 151,014 (Appendix, Schedule 1); and Y Ltd will be subject to a de-grouping charge in its own right of 773,403 (Appendix, Schedule 2) as Y Ltd and AB Ltd will no longer be considered to be a group of companies. From a tax perspective, it would be advisable for AB Ltd to delay the transfer of the 15% of its shareholding until after the six-year period has elapsed; however, this may not be acceptable to Mrs Z who has stated a preference to complete the acquisition by the end of November Should you have any questions or require further advice, please contact me. Yours faithfully Tax Consultant 16

4 Appendix to letter Schedule 1 Calculation of tax on capital gain Determination of market value of Y Ltd Net asset value of Y Ltd December ,500,000 Immovable property adjustment 0 Less: Book value of investment in subsidiary (1,500,000) Goodwill adjustment 0 Market value of X Ltd Net asset value of X Ltd December ,800,000 Immovable property adjustment Add: Market value of immovable property 4,200,000 Deduct: Book value of immovable property (2,650,000) 1,550,000 3,350,000 Goodwill adjustment Aggregate profit of the last five years 2,200,000 (400, , , , ,000) Two years average profit (2,200,000/5*2) 880,000 Market value of X Ltd 4,230,000 Increase in market value over net asset value of X Ltd (4,230,000 1,800,000) 2,430,000 Market value of Y Ltd 4,230,000 Market value of 15% of Y Ltd 634,500 Market value of 634,500 is more than the agreed consideration of 300,000. Market value of shares transferred 634,500 Inflation deduction: 15% x ((500, , ,000) x (( )/777 07) (13,275) Cost of acquisition (15% x 1,500,000/90%) (250,000) Capital gain 371,225 Income tax at 35% 129,929 Schedule 2 Calculation of de-grouping charge Y Ltd acquired 100% of X Ltd in Calculation of market value of X Ltd Net asset value of X Ltd as per financial statements 1,500,000 Immovable property adjustment Add: Market value of immovable property 4,200,000 Deduct: Book value of immovable property (2,650,000) 1,550,000 3,050,000 Goodwill adjustment Aggregate profit of the last five years 1,550,000 (150, , , , ,000) Two years average profit (1,550,000/5*2) 620,000 Market value of X Ltd 3,670,000 Market value of 90% which benefitted from exemption 3,303,000 Cost of acquisition of 90% holding (1,080,000) Capital gain 2,223,000 Tax at 35% 778,050 (b) Stamp duty payable Mrs Z Where the company whose marketable securities are transferred has 75% or more of its assets (excluding all current assets other than immovable property) consisting of immovable property or any right over an immovable, the rate of duty is 5 for every 100 or part thereof of the higher of the consideration or the real value of the shares. The test is also imposed where the company whose marketable securities are transferred directly or indirectly holds, through other companies ( the property 17

5 companies ), immovable property or any rights over an immovable. However, in such a scenario in order for the increased 5% to apply, the test has to be satisfied collectively by the company whose shares are being transferred and the property companies. The real value of the company is computed in the same way as for capital gains purposes. However, in determining the net asset value of the company, any liability in excess of the value of all assets excluding the value of the immovable property is not deductible, except for the following liabilities: bank loans relating to the cost of acquisition of the immovable property or real right thereon; and debts registered at the Public Registry relating to the acquisition of the immovable property, where such debt is registered within three months from the date of acquisition. This implies that the 50% financed by means of a bank loan will be taken as a deduction, but the other 50% will not as the debt was not registered in the public registry. 2 Deluxe For Ltd group (a) Deluxe MT Ltd, Luxe MT Ltd, South East Dreams MT and Stone MT Ltd are all companies incorporated in Malta and are therefore resident and domiciled in Malta, meaning they are taxable in Malta on their worldwide income. Luxe MT Ltd Luxe MT Ltd s profits of 350,000 will be taxed at 35% and will be allocated to the Malta taxed account (MTA), given that the profits are of a trading nature. For the purposes of its activities, Luxe MT Ltd rents an office of 150 square metres from South East Dreams Ltd and pays rent of 175 per square metre per annum. The law [Tax Accounts (Income Tax) Rules] provides that, where the rent paid is less than the market rental value of the property and the rent is less than 250 per square metre per annum, the tenant must allocate the difference between the rent paid and 250 per square metre to the immovable property account. This means that, although Luxe MT Ltd would have made an initial allocation of its taxable profits ( 350,000) to the Malta taxed account, it must make a secondary allocation of 11,250 ( 75 x 150 square metres) to the immovable property account (IPA), which profits are transferred from the MTA to the IPA. Upon a distribution of profits from Luxe MT Ltd to Deluxe MT Ltd, the latter can claim a 6/7ths refund of the tax distributed from the MTA. Any profits distributed from the IPA cannot benefit from a tax refund. South East Dreams MT Ltd South East Dreams MT Ltd wholly owns three subsidiaries in South East Asia. Assuming that in each case South East Dreams MT Ltd s holding entitles 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, the holding will qualify as an equity holding. If this is the case then, given that it holds more than 10% in each of the companies, South East Dreams MT Ltd s holding will also qualify as a participating holding. As the three subsidiaries own and operate hotels in the respective jurisdictions, it is safe to assume that none of these subsidiaries will derive more than 50% of their income from passive interest or royalties. Therefore, South East Dreams MT Ltd should be able to benefit from the participation exemption on any dividends derived from its subsidiaries and, thus, not be subject to tax in Malta on these dividends. The dividends derived from the three subsidiaries will be allocated to the final taxed account (FTA). The fact that South East Dreams MT Ltd owns immovable property in Malta does not affect the application of the participation exemption. South East Dreams MT Ltd also derives consultancy fees from its subsidiaries. These profits will be allocated to the MTA, however, given that South East Dreams MT Ltd owns and uses an office for its trade and business, an allocation of 250 per square metre used must be made from the MTA to the IPA. In this respect 62,500 ( 250 x 250 square metres) will be transferred from the MTA to the IPA. With respect to the rental income derived by South East Dreams MT Ltd from Luxe MT Ltd of 26,250 (150 square metres x 175), these may benefit from a deduction of certain expenses listed by the law, including a 20% deduction. The net rental profits will be taxed at 35% and, given that such income is derived from immovable property situated in Malta, will be allocated to the IPA. As in the case of Luxe MT Ltd, on a distribution of the profits allocated to the MTA to Deluxe MT Ltd, the latter may claim a 6/7ths refund of the tax paid in Malta, but cannot benefit from the tax refund system in respect of any distribution of profits from the IPA. Stone MT Ltd Stone MT Ltd derives profits of 275,000 through the activities of its permanent establishment (PE) in Dubai. Such profits may be exempt from tax in Malta as they are attributable to the activities of the PE. 18

6 With respect to the dividends distributed by Rev For Ltd, Stone MT Ltd cannot benefit from the participation exemption. Rev For Ltd qualifies as a property company since it owns immovable property in Malta from which it derives its income. The law provides for an exception where the immovable property consists of an office, however, this only applies where the property owning company carries out a trade or business and uses the office space solely for the purpose of carrying on such trade or business. Given that Rev For Ltd derives its profits directly from immovable property situated in Malta, the exception will not apply to it. Therefore, the dividends distributed by Rev For Ltd to Stone MT Ltd will be allocated to Stone MT Ltd s IPA and, although Stone MT Ltd will be taxable at 35% on the dividends it receives, there will be no possibility of Stone MT Ltd or Deluxe MT Ltd benefitting from the tax refund system. (b) Tax computations Luxe MT Ltd FTA MTA IPA Gross income 0 350,000 0 Tax at 35% (122,500) 0 Profit after tax 227,500 0 Secondary allocation due to annual market rent [(250*150) (175*150)] 0 (11,250) 11,250 Distributable profits pre-allocation 0 216,250 11,250 Refund claimed by Deluxe MT Ltd [(216,250/65*35)*(6/7)] 0 99,808 South East Dreams MT Ltd FTA MTA IPA Dividends SED Cam Ltd 100,000 Dividends SED Vie Ltd 500,000 Dividends SED Thai Ltd 600,000 Consultancy fees 180,000 Rental income 26,250 20% deduction (5,250) Taxable income 1,200, ,000 21,000 Tax at 35% Note 1 (63,000) (7,350) Distributable profits pre-allocation 1,200, ,000 13,650 Secondary allocation due to annual market rent [(250*250)] 0 (62,500) 62,500 Distributable profits 1,200,000 54,500 76,150 Refund claimed by Deluxe MT Ltd [(54,500/65*35)*(6/7)] 25,154 Note 1: South East Dreams MT will not be subject to tax on the dividends derived by the three subsidiaries since the participation exemption will apply. Stone MT Ltd FTA MTA IPA Profits attributable to Dubai PE 275,000 Dividend distribution from Rev For Ltd 325,000 Taxable income 275, ,000 Tax at 35% Note 2 (113,750) Distributable profits 275, ,250 Note 2: The profits derived from the permanent establishment in Dubai may be exempt from tax in Malta since they are attributable to the activities of the PE. 19

7 Deluxe MT Ltd FTA MTA IPA UTA Dividends Luxe MT Ltd (gross) 332,692 17,308 Dividends South East Dreams MT Ltd (gross) 1,200,000 83, ,154 Dividends Stone MT Ltd (gross) 275, ,000 6/7ths refund (99, ,1545) 0 124,962 Taxable income 1,475, , , ,962 Tax at 35% (145,788) (160,812) 0 Distributable profits 1,475, , , ,962 Imputation credit (tax at source) 0 145, , Ms Egli (a) (i) In order to be entitled to benefit from the special tax status under the Malta Retirement Programme Rules, Ms Egli must satisfy a number of conditions. She must also apply to the Commissioner for Revenue for the special tax status to apply and must pay an administrative fee of 2,500. One of the conditions is that she must prove to the Commissioner for Revenue that she holds a qualifying property holding, being immovable property in Malta with a purchase consideration of not less than 250,000. However, as Ms Egli s property in Gozo was acquired prior to 1 January 2011, it can count as a qualifying owned property provided the value of the property on the date of application to the Commissioner is not less than 250,000. Ms Egli purchased the property for less than 250,000 but she has incurred considerable costs in its conversion. It is therefore advisable for Ms Egli to determine the current value of the property. If this is not less than 250,000, and provided that the value is supported by a separate and independent architect valuation including an architect s plan, Ms Egli will fulfil this particular condition. The other conditions laid down in the Malta Retirement Programme Rules for a person to qualify for the special tax status are that: They must not be in an employment relationship. They must not have benefitted from either the High Net Worth Individuals Rules or the Highly Qualified Persons Rules. They must not be a Maltese national or a national of a third country. For this purpose Switzerland is not deemed to be a third country. All of the pension must be received in Malta, and must constitute at least 75% of their chargeable income. The entitlement to a pension must be supported by documentary evidence. They must be in possession of a valid travel document. They must be in possession of sickness insurance in respect of all risks across the whole of the European Union normally covered for Maltese nationals for themselves and any dependants, e.g. in Ms Egli s case, her partner. They must not be domiciled in Malta and must not intend to establish a domicile in Malta within the next five years. Since Ms Egli does not intend to make Malta her permanent home she will satisfy this condition. They must be a fit and proper person. On the basis of the available information, it would seem that Ms Egli satisfies all the above conditions, and she should therefore qualify for the application of the Malta Retirement Programme Rules. (ii) Upon taking up residence in Malta, Ms Egli will be deemed to be a person resident but not domiciled in Malta, meaning she will be taxable in Malta on all income or gains arising in Malta, and all income arising outside Malta which is received in Malta. As a person resident in Malta, Ms Egli may benefit from the application of the double tax treaty between Malta and Switzerland. Any pension paid to her from Switzerland will be taxable only in Malta and the interest income derived from her Swiss bank account will suffer withholding tax of 10% in Switzerland. Ms Egli will be exempt from tax on the 750,000 commutation of her pension [in terms of a specific exemption under article 12 of the Income Tax Act]. Also, under the Malta Retirement Programme Rules, she will be taxable in Malta on her regular pension income and on her interest at the flat rate of 15%. She will still be entitled to double taxation relief for tax paid in Switzerland on the interest. However, as a beneficiary of the Malta Retirement Programme Rules, she will be subject to a minimum tax of 7,500 per annum and a further 500 per annum per dependant. Given the amount of pension Ms Egli expects to receive, this should not result in any additional tax burden since tax at 15% on her pension will exceed this amount. 20

8 A dependant is deemed to include a person with whom the beneficiary is in a stable and durable relationship, and not only one s spouse. If Ms Egli s partner satisfies this qualification then, as her partner does not derive any income, the tax payable by Ms Egli in terms of the Rules will also cover her partner s tax liability. (b) Ms Egli may take up the directorship posts as this is not in breach of the Malta Retirement Programme Rules. The Malta Retirement Programme Rules provide that a beneficiary should not be in an employment relationship, however, a beneficiary may hold non-executive posts on a board of a company resident in Malta. Any income derived from her activities as a director will, however, be taxable at the standard rate of 35%. Ms Egli must, however, ensure that her pension income continues to constitute at least 75% of her chargeable income in order to ensure that she continues to satisfy the conditions of the Malta Retirement Programme Rules. With respect to Ms Egli s partner, the Rules do not restrict the partner of a beneficiary from carrying on any activity. He is therefore free to open a café in his own name. As a person resident but not domiciled in Malta, he will be taxable on the profits he derives from this activity, as it qualifies as income arising in Malta. He will pay tax at the standard single rates. 4 (a) Fringe Ltd Fringe Ltd s contract of employment contains a number of issues which may give rise to fringe benefit issues. Generally, should Fringe Ltd pay or reimburse its employees for any expense incurred for their benefit, it will be deemed to be a fringe benefit. The value of a benefit is determined in terms of the Fringe Benefits Rules, and is taxable as employment income. The cost of the benefit to Fringe Ltd is an allowable expense for the purposes of corporate income tax. Medical insurance Where all employees benefit from medical insurance under the same parameters, the cost of the medical insurance is not deemed to be a fringe benefit. Cash car allowance The 3,000 car allowance for the use of the employees own cars is a fringe benefit. However, where: the car cash allowance is in terms of an employee s contract of service; the employees are not in a controlling position; and the employees are not entitled to the private use of another car owned or held under a title of lease by Fringe Ltd, the value of the benefit will be reduced by 50%, subject to a maximum total reduction of 1,170 in a calendar year. So, from the car allowance of 3,000, the employees can claim as a deduction 1,170, and the remaining 1,830 will be treated as a fringe benefit. Alternatively, the cash car allowance can be reduced to 2,340 (2*1,170) and the remainder, 660, can be paid out as a salary. One of the conditions relating to this treatment is that the employee is not in a controlling position. This mainly relates to shareholders of the company or of an associated company, or directors of the company or of an associated company who are not full-time employees. Therefore Mr Smith will not be deemed to be in a controlling position. Lunch allowance The lunch allowance of 25 per week is a taxable fringe benefit. Mobile telephony costs The costs incurred by Fringe Ltd on behalf of its employees for the provision of mobile telephony services used for the purpose of the business of the employer will be an exempt fringe benefit. Share option scheme The granting of a share option to employees is not deemed to be a fringe benefit for tax purposes. The benefit arises when the employee exercises the option. The value of the benefit is deemed to be 42 85% of the excess (if any) over the option price of the price the shares would fetch if sold at the market price on the date the option is exercised. Any gain realised by an employee from assigning or renouncing the share option in favour of another person will constitute a taxable capital gain. Any gain realised from later transferring shares acquired through the exercise of the share option will also constitute a gain. The cost of acquisition of the shares will be deemed to be the market value of the shares as at the date of exercise of the option. Business training The cost of business related training is not deemed to be a taxable fringe benefit. In the case at hand the cost of the flights, accommodation and meals would all fall within this exemption as would a reasonable subsistence allowance, insurance and other transport for which Fringe Ltd were to pay. 21

9 Accommodation The refund of Mr Smith s rent is a fringe benefit. Given that the property is owned by a person who is not related to Fringe Ltd, the value of the fringe benefit will be the actual rent payable, 1,500 per month. (b) Mr van Dijk As an individual resident but not domiciled in Malta, Mr van Dijk will be taxable in Malta on all income or gains arising in Malta, and all income arising outside Malta which is received in Malta. Given that Mr van Dijk is deemed to be tax resident in both Malta and the Netherlands, the tie-breaker rule of the Malta Netherlands double tax treaty must be applied. The tie-breaker rule provides a list of tests to be considered in order to determine where a dual resident is to be tax resident for the purpose of the treaty. The first condition relates to the place where the individual has his permanent home. Mr van Dijk has a permanent home only in the Netherlands as his accommodation in Malta is rented just for the six-month period he will be working there. Therefore, for the purposes of the treaty, Mr van Dijk will be tax resident in the Netherlands. In terms of Article 15 of the Malta Netherlands treaty, salaries, wages and other similar remuneration derived by a resident of the Netherlands in respect of an employment shall be taxable only in the Netherlands unless the employment is exercised in Malta. If the employment is exercised in Malta, then such remuneration as is derived in Malta may be taxed in Malta. The OECD Model Treaty Commentaries state that employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. In terms of the Malta Netherlands treaty, Mr van Dijk s base salary and benefits will be taxable in Malta if any one of the following conditions is satisfied. Mr van Dijk must be present in Malta for a period or periods exceeding in aggregate 183 days in any 12-month period, commencing or ending in the fiscal year concerned; or the remuneration is paid by, or on behalf of, an employer who is resident in Malta; or the remuneration is borne by a permanent establishment which the employer has in Malta. In applying the above rules to the facts: Mr van Dijk is present in Malta for less than 183 days, thus the first condition is not satisfied; but his base salary will be paid by Fringe Ltd, therefore the second condition is satisfied. The salary is therefore taxable in Malta, without the need to determine whether the third condition is satisfied. The Netherlands will be bound to grant a tax credit or exemption on the tax paid in Malta. Unless it is argued that the remuneration was paid on behalf of Fringe Ltd, the Dutch parent company s payment to the pension scheme and/or the payment of Mr van Dijk s accommodation are not taxable in Malta as they are not paid by, or on behalf of, Fringe Ltd. Tutorial Note: If one argues that the payment to the pension scheme and/or the payment of Mr van Dijk s accommodation are paid by the Dutch parent on behalf of Fringe Ltd, then these contributions would be taxable in Malta. The same would be taxable in Malta also if the Dutch parent is deemed to have a permanent establishment in Malta. 5 (a) Mr S The letting of immovable property is generally exempt without credit for value added tax (VAT) purposes. While no output VAT would need to be charged, neither can Mr S recover any input VAT incurred, meaning that any VAT incurred is a sunk cost. However, VAT is chargeable in certain cases, and the different categories of letting contracts Mr S is looking to enter into need to be considered separately: The letting of property to be used as offices is taxable only when it is let by a company and the tenant is a taxable person registered under Article 10 (the standard VAT registration). As the offices will be let by Mr S, this will be an exempt without credit activity. The letting of the apartments in Msida will also be an exempt without credit activity, as the lettings are not required to be licensed. The letting of land as a car park is an exception to the general rule given above. This letting of immovable property is deemed to be a supply of services, and the place of supply is where the immovable property is located, i.e. in Malta. Mr S will need to be registered for VAT purposes either under Article 10 (the standard VAT registration) or under Article 11 (the registration for small undertakings) of the VAT Act, the appropriate registration depending on his turnover from the rental of the car park (because his other contracts of letting are both exempt without credit activities). The relative entry threshold for registration under Article 11 (the registration for small undertakings) is 24,000 per annum, if the rental of property is considered an economic activity of relatively low value added or 14,000, if the rental is not deemed to be of low value added. 22

10 Should Mr S register under Article 11 (the registration for small undertakings), he will be issued with a local VAT number, will have to issue fiscal receipts for supplies made by him, and submit an annual declaration on his activities. While he will not be required to charge VAT on the supplies he makes, neither will he be able to claim a deduction of input VAT incurred in his economic activity. If Mr S qualifies as a small undertaking, he will have the option to register under Article 10 (the standard VAT registration) instead of Article 11 (the small undertaking registration), although, if his rental income exceeds the respective entry thresholds (as above), he must register under Article 10 (the standard VAT registration). If registered under Article 10 (the standard VAT registration), Mr S will be assigned a VAT registration number and will have to charge VAT at the standard rate of 18%, but may claim input VAT according to the rules on deduction. Mr S will also need to submit quarterly VAT returns. (b) Swiss Design Co The general rule with respect to the place of supply of goods depends on whether the goods are transported or not. When goods are transported, the place of supply is where the goods are at the time when the transport of those goods begins, while when goods are not transported, the place of supply is where the goods are at the time when they are placed at the disposal of the person acquiring them. However, where the goods supplied are assembled on behalf of the supplier following transportation, the place of supply is where the goods are assembled, i.e. in Malta. The supply of furniture by Swiss Design Co is VATable in Malta at the standard rate of 18%. In terms of the VAT Act, where a taxable person who is not established in Malta and is not registered in Malta is liable for the payment of tax on a supply [in terms of Article 20], they must apply to be registered for VAT under Article 10 (the standard VAT registration) by not later than 30 days from the date of the supply. The general rule is that the payment of VAT on a taxable supply is the liability of the person who makes the supply. However, where a supply of goods is made by a person not established in Malta to a person registered under Article 10 (the standard VAT registration), the payment of VAT on the taxable supply will be the liability of the person to whom the supply is made, i.e. Family Office Ltd. Therefore Family Office Ltd must account for the VAT at 18% on the supply by means of a reverse charge, meaning that Family Office Ltd will self-charge VAT without the need to claim or pay anything to the VAT Department. As Swiss Design Co is not liable to pay the VAT on the supply to Family Office Ltd, it does not need to register for VAT purposes in Malta. However, should Swiss Design Co decide to supply and assemble furniture for Mr Schultz, it will need to register for VAT in Malta. This is because the place of supply of the goods would be deemed to be in Malta (as above) but Mr Schultz is not a taxable person for VAT purposes, so Swiss Design Co would be liable to pay the VAT on the supply. 23

11 Professional Level Options Module, Paper P6 (MLA) Advanced Taxation (Malta) June 2014 Marking Scheme Marks Marks 1 (a) (i) Explanations 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 0 5 Market value of X Ltd 0 5 Market value of X Ltd immovable property 0 5 Value of goodwill 0 5 No value for goodwill for Y Ltd 0 5 Value for goodwill for X Ltd 0 5 Deduction for inflation 0 5 Not applicable to Y Ltd, but applicable to X Ltd 0 5 Group of companies exemption applies to 2011 transfer 1 Both AB Ltd and Y Ltd resident in Malta 0 5 Y Ltd is 51% subsidiary of AB Ltd 0 5 Additional/special rules apply to property companies 0 5 X Ltd is a property company 0 5 Requires same individuals and same percentage interest 1 Mr Y s <20% holding ignored 1 Exemption still applies to 2011 transfer 0 5 Lapse of six years required to avoid de-grouping charge 1 Conditions for no longer being considered part of group 1 Application of rules to new group 0 5 Application of de-grouping if Mrs Z acquires more than 20% 1 Basis of de-grouping charge 1 Cost and date of acquisition 1 Cost of acquisition 180, Transfer of controlling interest, no matter percentage interest 1 Conclusion based on results of calculations 1 Suggestion not to postpone sale (ii) Calculations Capital gain Net asset value Y Ltd 0 5 Immovable property adjustment in X Ltd 0 5 Goodwill adjustment in X Ltd 0 5 Market value of Y Ltd 0 5 Comparison of 15% market value with consideration 0 5 Inflation deduction 0 5 Capital gain 0 5 Tax payable 0 5 De-grouping charge Immovable property adjustment in X Ltd 0 5 Goodwill adjustment in X Ltd 0 5 Market value of X Ltd % of market value 0 5 Inflation adjustment 0 5 Tax payable Professional marks Format and presentation of letter, including appropriate use of appendix 2 Logical development and effective communication 2 4 (b) Description of 5% rate % direct holding or indirect holding in immovable property 1 75% of assets 0 5 Determination of real value 0 5 Exceptions to capital gains calculation in determining real value 1 Application of exceptions

12 Marks Marks 2 (a) Worldwide taxation 1 Allocation to MTA 0 5 Description of rule re indirect allocation to IPA 1 Allocation to IPA 0 5 Transfer from MTA to IPA 0 5 Applicable tax refund MTA 0 5 No IPA tax refund 0 5 Definition of equity holding 1 Participating holding >10% 0 5 Non-application of passive interest or royalty rule 0 5 Application of participation exemption 1 Allocation to FTA 0 5 Application of participation exemption no matter immovable property 0 5 Allocation of consultancy fees to MTA 0 5 Indirect allocation of MTA profits to IPA 1 Expense deductions in respect of rental income 1 Allocation to IPA 0 5 Application of tax refund as for Luxe 0 5 Exemption on permanent establishment profits 1 Non-applicability of participation exemption for Rev For Ltd dividends 1 Rev For Ltd qualifies as property company 0 5 Exemption from definition: office 0 5 Non-applicability of exemption from definition of property company 0 5 Allocation to IPA 0 5 Taxation of dividends 1 17 (b) Luxe MT Ltd Calculation of secondary allocation 0 5 Distributable profits 1 South East Dreams MT Ltd Participation exemption dividends 0 5 Rental income 0 5 Calculation of secondary allocation 0 5 Distributable profits 1 Stone MT Ltd Dubai PE 0 5 Dividend distribution from Rev For Ltd 0 5 Distributable profits 1 Deluxe MT Ltd Calculation of tax refund and allocation to untaxed account 1 Distributable profits

13 Marks Marks 3 (a) (i) Application for special tax status 0 5 Qualifying property condition 0 5 Value of qualifying property 250, Special rule where property purchased prior to 1 January Need to determine current value 0 5 Architect s valuation, etc 0 5 Not in employment relationship 0 5 Not benefitted from HNWI or HQP rules 1 Not national of Malta or third country 0 5 Pension received in Malta % of chargeable income 0 5 Valid travel document 0 5 Sickness insurance 0 5 Not intend to establish domicile in Malta 0 5 Fit and proper person 0 5 Conclusion (ii) Taxation of Ms Egli 1 Pension income taxable in Malta under treaty 1 Taxation of interest income in Switzerland under treaty 1 Commutation of pension exemption 1 Applicable tax rate 15% 1 Benefits from double taxation relief 0 5 Minimum tax 7, Further 500 per dependant 0 5 Tax also covers partner s liability (b) Beneficiary cannot be in employment relationship 0 5 Beneficiary can hold non-executive posts 1 Taxed at 35% 0 5 Beneficiary s partner can earn other income 1 Taxable on profits 0 5 Application of single rates

14 Marks Marks 4 (a) Meaning of fringe benefit 0 5 Taxable as employment income 0 5 Allowable for corporate income tax 0 5 Medical insurance not fringe benefit 0 5 Car allowance is fringe benefit 0 5 Rules for application of reduction of benefit (0 5 per condition) 1 5 Reduction of 50%, subject to cap 1, Calculation of deduction and fringe benefit 0 5 Mr Smith not in controlling position 1 Lunch allowance is a fringe benefit 0 5 Mobile telephone not fringe benefit, with reason 1 Share option is fringe benefit 0 5 Benefit arises when option is exercised 0 5 Value of benefit 1 Gain from transfer of option constitutes taxable gain 0 5 Gain from transfer of shares after application of option not taxable 1 Business training not fringe benefit 0 5 Expenses listed as incurred not fringe benefit 1 Other possible exempt benefits 0 5 Accommodation refund is fringe benefit 0 5 Actual rent paid is benefit value, with reason (b) Malta tax position of Mr van Dijk 0 5 Tie-breaker rule 0 5 Explanation of tie-breaker rule 0 5 Permanent home 0 5 Tax resident in the Netherlands 0 5 General rule under Article 15 1 Rules for taxation of source State (3 x 0 5) 1 5 Mr van Dijk in Malta for less than 183 days 0 5 Base salary paid by Fringe Ltd taxable in Malta 0 5 Relief for double taxation in the Netherlands 0 5 Payments made by Fringe Ltd not taxable in Malta

15 Marks Marks 5 (a) Letting is generally exempt without credit 0 5 Explanation of exempt without credit 0 5 Exception: letting by a company to person registered under Article 10 1 Letting of offices is exempt without credit as Mr S is not company 0 5 Letting of apartments, not licensed so exempt without credit 1 5 Exception: car park 0 5 Letting of immovable property: supply of services 1 Place of supply 0 5 Need for registration for VAT 0 5 Under Article 10 or Article Entry thresholds for small undertakings 1 Article 11 local VAT number and must issue fiscal receipts 1 Annual declaration of activities 0 5 No charging of VAT 0 5 No claiming deduction of VAT incurred 0 5 Option to register under Article 10 as small undertaking 0 5 Must register under Article 10 if thresholds exceeded 0 5 Issued with VAT registration number, charge VAT at 18% on supplies and may claim deduction of VAT suffered 1 Quarterly returns (b) Place of supply of goods which are transported 0 5 Place of supply of goods which are not transported 0 5 Place of supply of assembled goods 1 VAT payable in Malta at 18% 0 5 Registration obligation 1 General rule re payment of VAT 0 5 Exception where foreign supplier not registered but customer registered 1 Reverse charge mechanism 0 5 Swiss Design Co not liable to pay VAT or register for VAT in Malta 0 5 VAT registration requirement in case of supply to Mr Schultz