Answers
Professional Level Skills Module, Paper P6 (MLA) Advanced Taxation (Malta) June 2010 Answers 1 (a) To: Edward From: Tax consultant Date: 7 June 2010 Report on the income tax implications of the proposed property and share disposals As requested I set out below the income tax implications arising from the transfer of one of the properties owned by Omega Limited and upon the subsequent sale of shares in Omega Limited by yourself. Property X Omega Limited acquired Property X in 2009 to replace Property Z. Property Z had been used in the company s business for a period exceeding three years prior to its disposal and property X is used for a similar purpose in the business. Therefore, Omega Limited was entitled to claim roll-over relief on the disposal of Property Z. When roll-over relief is allowed, the subsequent transfer of the replacement property is specifically excluded from the scope of the final 12% tax on property transfers. Under this rule, the transfer of Property X will be governed by the capital gains tax provisions, which require that in the computation of the gain, the cost of acquisition must be reduced by the gain that was exempt upon the disposal of Property Z. However, a recent amendment to the legislation requires that if the replacement property is disposed of or ceases to be used in the business within a period of two years from its acquisition, the roll-over relief will be foregone. Because of this new provision, if Omega Limited were to transfer Property X it would become liable to tax on the transfer of Property Z, without the right to roll-over relief, in addition to the tax on the transfer of Property X itself. Omega Limited had owned Property Z for more than five years when it was sold in 2009. Therefore, the tax that would become due on that transfer if roll-over relief were lost would be a final tax of 12% on the market value on disposal of 500,000, equal to 60,000. Once roll-over relief is no longer available on the transfer of Property Z, the transfer of Property X would not be automatically excluded from the final tax system and would not be subject to the claw-back provision referred to above. However, as Omega Limited acquired Property X less than five years before the proposed transfer, it will have the option to exclude the transfer from the final tax system and, instead, become subject to tax on the gain. As the proposed transfer value of Property X is equal to the cost of its acquisition, opting out of the final tax system would mean that no tax would be payable on this transfer. The total tax that would be payable if Omega Limited decides to sell Property X will thus be the 60,000 that would become due on account of the loss of roll-over relief in respect of the transfer of Property Z. Property Y Omega Limited acquired Property Y from Alpha Limited, a company controlled by the same shareholder who owns Omega Limited, in 2006. Since Alpha Limited did not trade in immovable property when the property was transferred to Omega Limited, the transfer qualified for the so-called intra-group exemption accorded by the Income Tax Act. Omega Limited has owned Property Y for less than five years, but in calculating the period of ownership for the purpose of determining whether the company can opt out of the final tax system, the exempt intra-group transfer is disregarded, so Property Y will be treated as if it had been acquired at the time that it had been acquired by Alpha Limited, that is in 2003. Therefore, Omega Limited cannot opt out of the final tax regime and the transfer of Property Y by Omega Limited will be subject to tax at 12% of the market value of the property of 700,000, equal to 8,000. Relief on intra-group transfers is also governed by the capital gains provisions, which provide for a claw-back of the relief if the property is subsequently transferred outside the group, but as the subsequent transfer in this case would be governed by the final tax system these capital gains claw-back provisions would not apply. However, recent amendments to the final tax system provide for a different type of claw-back. Under the new rules, if a company owns property which has been acquired from another company and that acquisition qualified for the intra-group exemption, there will be a claw-back of the relief if the company ceases to be a member of the group before the lapse of five years from the date of the acquisition. In such a case, it will be deemed that immediately after the acquisition of the property, the company had transferred and re-acquired the property in question and tax will be charged on the deemed transfer at 12% of the taxable value, that is, the value at which the company had originally acquired the property. You plan to sell your shares in Omega Limited within the said five-year period and as a result of that sale the two companies will not remain within the same group. Therefore, if Omega Limited transfers Property X and the share sale takes place while it owns Property Y, the property transfer would produce a further tax liability of 12% of 500,000 (the 2006 transfer value) equal to 60,000. Sale of shares The sale of your shares in Omega Limited constitutes a sale of a controlling interest since you own more than 25% of the company. The sale value is therefore to be calculated by reference to the higher of the consideration and the market value of the shares. The consideration in this case has been agreed as equal to the market value, calculated on the basis of the adjusted net asset value of the company by reference to the financial statements for the year ended 31 December 2009. According to the available information the net asset value stands at 1,800,600. This amount needs to be adjusted for the value of the goodwill, calculated as twice the average profits for the last five years. The five-year profits amount to 1,220,000 and the goodwill figure is thus, 88,000 and the total market value of the shares is 2,288,600. No adjustment is required to the book value of the property since this is already shown at its market value. The total gain, after deducting the cost of the shares of 70,000, is 2,218,600 and tax will be payable at 35% of 776,510. 15
(b) Mr and Mrs Kind (i) Mr and Mrs Kind have used the property as their sole ordinary residence for more than three years and they will transfer it within one year from the date they vacate it. Mr and Mrs Kind will therefore qualify for the tax exemption on the transfer of a residence in respect of the house but, since it was only acquired in 2009, this exemption will not apply to the transfer of the adjoining garden. Under the final tax system, tax on the transfer of the garden will be charged at 12% of the transfer value. However, as the garden was acquired within five years of the planned transfer, Mr and Mrs Kind may opt out of the final withholding tax system, and instead pay the standard rates of income tax on the capital gain, if this is more beneficial. The Income Tax Act also grants an exemption on donations from parents to their children. If Mr and Mrs Kind transfer their property by way of a donation, they will therefore be exempt from tax and the exemption will apply to the whole property, including the garden. Stamp duty will be payable by each of the two children on the acquisition of the respective houses, regardless of whether the transfer is made by sale or by donation. The standard rate of duty on property transfers is 5% of the higher of the price and the market value. However, since Francis will be acquiring the property to use as his sole residence, the rate of stamp duty applicable on the first 116,500 in value of his house will be reduced to 3 50 per 100 in value The eventual sale of the property by Francis will qualify for the sole residence exemption (as above) since the conditions for that exemption will be satisfied. The exemption on donations from parents to their children is subject to a claw-back if the child transfers the property within five years from the donation. However, this claw-back applies only if the transfer by the child is not itself exempt, so no clawback will be applicable to Francis. John, however, will be subject to tax on the disposal of his house, since he will not be using it as his sole ordinary residence. Further, he will not have the right to opt out of the final tax system since he will have owned the property for more than five years at the time of sale. If John acquires the property by donation, and given that the subsequent transfer will be made more than five years after that donation, the value of the property at the time of the donation will be allowed as a deduction and the 12% final tax only will, therefore, be payable on the excess of the market value as at the time of the transfer over the market value as at the time of the donation. If, on the other hand, Mr and Mrs Kind sell the property to their children, the final tax will be payable on the full transfer value. (ii) Cost of the house 200,000 Cost of the garden 90,000 Market value of house 350,000 Market value of garden 100,000 Market value of Francis house in four years time 350,000 Market value of John s house in eight years time 50,000 Calculation of tax on the transfer by sale of the garden Consideration 100,000 Cost of acquisition Contract value 90,000 Stamp duty,500 9,500 Index of inflation: 2009 750 00 2008 73 05 Inflated cost (95,38) Taxable gain,616 Tax at 35% 1,616 The final tax regime would attract tax at 12% of 100,000 i.e. 12,000 making this less tax efficient. Calculation of tax on property disposal by John If the property is purchased from his parents: 12% of the transfer value (being the market value) of 50,000, therefore 5,000. If the property is acquired from his parents by donation: 12% of the excess of the transfer value over the acquisition value of 225,000 ( 50,000 225,000) therefore, 27,000. Calculation of stamp duty Francis (acquiring for use as his sole residence): 116,500 at 3 5% =,078, plus 108,500 at 5% = 5,25, therefore, total duty is 9,503. John: 225,000 at 5%, therefore, 11,250 16
2 (a) Tax consultant No 1, Republic Street Valletta 7 June 2010 Quasimo Main Street Capital City Country of residence Dear Sir, Requested advice re Quidproquo Limited Further to your instructions I set out my advice on the tax treatment under Maltese law of the income received by Quidproquo Limited for the financial period ended 31 December 2009 and its expected income for 2010, of the exchange of its shares in Blue Seas Company for shares in Clear Seas Company in 2010 and of the eventual distribution of its profits in 2011. (i) Provisions of Maltese law regarding refunds payable to shareholders When a company resident in Malta pays a dividend, the shareholder becomes entitled to a refund of all or part of the tax paid by the company on the distributed profits. A refund of 100% applies when the dividend is paid out of profits derived from a qualifying participating holding. If the dividends are paid from a non-qualifying participating holding, or out of passive interest or royalties, a refund of 5/7ths applies. If the distribution is made out of profits that were allocated to the foreign income account and in respect of which the company has claimed double taxation relief, the refund rate is 2/3rds. Some further considerations apply where the flat rate foreign tax credit is claimed, but as Quidproquo Limited will not be claiming the flat rate foreign tax credit, we have made no further reference to this type of relief. A refund of 6/7ths applies in other cases. No refund may be claimed on distributions out of the immovable property account, the final tax account or the untaxed account. Thus, the income that Quidproquo Limited will be required to allocate its immovable property account, because its business is conducted from immovable property that it owns in Malta, will restrict the amount of the refund that you may claim. A shareholder may only claim refunds under the above rules if he is registered for this purpose with the Inland Revenue Department, and it is noted that you satisfy this condition. You will, therefore, not be subject to any withholding tax in Malta on dividends paid by Quidproquo Limited and, as a non-resident, you will not be subject to any Maltese tax on these refunds. (ii) Maltese tax issues relevant to Quidproquo Limited Quidproquo Limited is taxable in Malta on its world-wide income because it is domiciled and resident in Malta by virtue of its incorporation. The standard rate of tax on company profits is 35%. Business profits The business income is derived from business activities in Malta and is not derived from or connected with trading in immovable property situated in Malta. However, as Quidproquo Limited carries on its business operations from premises owned by the company in Malta, an allocation of income has to be made to the immovable property account, calculated at 60 per square meter of the area of the premises. The balance of the business profits that remains after this allocation to the immovable property account will be allocated to the Maltese taxed account. The distribution of profits from the Maltese taxed account will entitle you to a refund of that part of the respective company tax and as no double taxation relief may be claimed in respect of this income, the applicable refund rate will be 6/7ths. Dividends The dividends from the portfolio investment fall to be allocated to the foreign income account. Quidproquo Limited may either pay Maltese tax on the grossed up income and claim double taxation relief or else pay Maltese tax on the dividends net of foreign tax without claiming relief. The distribution of the profits will entitle you to a 2/3rds refund if double tax relief is claimed. As it is understood that Quidproquo Limited will not be claiming relief under the flat rate foreign tax credit system, the 2/3rds refund will be calculated on the Maltese tax. If no double taxation relief is claimed the refund rate will be 6/7ths of the Maltese tax. Quidproquo Limited s investment in Blue Seas Company, and subsequently in Clear Seas Company, is a 100% ownership of the equity shares of a company that is not resident in Malta, making this a participating holding (PH). Maltese law grants an exemption from tax on dividends derived from a qualifying PH. Alternatively, a company may opt to be taxed on such dividends at the normal rates, but in that case the tax paid will be fully refundable to the shareholder when the relative profits are paid out as a dividend. A PH is a qualifying PH when it satisfies the so-called anti-abuse provisions. Blue Seas Company and Clear Seas Company are not resident or incorporated in the European Union (EU) and are subject to a rate of foreign tax that is less than 15%. In these circumstances it is necessary to examine the source of their income for anti-abuse purposes. Blue Seas Company derives its income from rents and interest. No foreign tax is charged on the interest and it is not directly or indirectly derived from a trade or business with the consequence that it will be considered as passive interest in terms of the Income Tax Act definition. However, since Blue Seas Company derived less than 50% of its income from 17
passive interest or royalties in 2009, the anti-abuse provisions will be satisfied and the dividend received by Quidproquo Limited in 2009 will qualify for the participation exemption. The passive interest of Blue Seas Company is expected to account for more than 50% of its income for 2010. However, as a result of the exchange of shares that occurred on 1 January 2010, Quidproquo Limited will receive the 2010 dividend from Clear Seas Company, and the anti-abuse conditions thus have to be applied to the income of this company. Clear Seas Company s income will not include passive interest or royalties and the anti-abuse conditions will therefore be satisfied. Therefore, Quidproquo s dividends from Blue Seas Company and from Clear Seas Company will be treated as derived from a qualifying PH. Transfer of investment in Blue Seas Company The transfer on 1 January 2010 by Quidproquo Limited of its investment in Blue Seas Company to Clear Seas Company in exchange for the 100% share capital of Clear Seas Company will not be subject to tax in Malta. As under Maltese law, capital gains derived from the disposal of a participation holding are exempt from tax and this exemption is not subject to the anti-abuse provisions referred to above. Also, the exchange of shares satisfies the conditions laid down for the exemption granted under article 5(1) of the Income Tax Act because the ultimate beneficial owners of the structure following the exchange remained unchanged. We will be more than pleased to oblige if we can be of any further assistance. Yours faithfully Tax consultants (b) Quidproquo Limited computation of tax liability and refund available 2010 Dividend from Other Business participating holding dividends profits Net income 0 20,000 50,000 Grossing up for dividend withholding tax 0 5,000 0 Taxable income 0 25,000 50,000 Tax at 35% 0 8,750 17,500 Credit for foreign tax 0 (5,000) 0 Tax payable by company 0 3,750 17,500 Allocation of income to the immovable property account 0 0 12,000 (1) Refund available 0 3,750 (3) 9,61 (2) Net tax leakage 0 0 6,100 Notes: (1) Allocation of 200 square meters at 60 per meter. (2) Refund only available on income allocated to the Maltese taxed account i.e. (50,000 17,500) 12,000 = 20,500; grossed up at 65% = 31,538 x 35% = 11,038 x 6/7 = 9,61. (3) Refund is calculated at 2/3rds of 8,750 but is being capped at 3,750 which is tax payable by the company. 3 (a) Wizard Limited (i) (ii) The interest charged to Wizard Limited is a deductible expense, whether it is charged by a Maltese company and if it is charged by the Notaxland company. Whilst tax is chargeable in Malta on the interest received by the Maltese finance company, Financeco Limited, the interest that would be received by the company formed in Notaxland, Lendingco Limited, after the refinancing would be exempt from Maltese tax. This is because the Income Tax Act [article 12(1)(c)(ii)] grants an exemption from tax on interest paid to a non-resident company which is not engaged in a trade or business through a permanent establishment situated in Malta and which is not beneficially owned by persons who are resident and domiciled in Malta. On the basis of the information provided regarding the tax law in Notaxland, the interest would also be exempt from tax in that country and may be paid back to Wizard Limited in the form of dividends by Lendingco Limited, free from any foreign tax. The shareholding in Lendingco Limited will not be a qualifying participating holding, and Wizard Limited will thus suffer Maltese tax at 35% on any such dividends. This rate could effectively be reduced to 18 75% if the flat rate foreign tax credit is claimed. The advantage of the re-financing is therefore that it can produce an effective reduced tax rate and a potential tax deferral depending on when the dividend is paid. Maltese tax law does not contain anti-controlled foreign company (CFC) legislation and there are therefore no rules that would specifically empower the Commissioner of Inland Revenue to look through the Notaxland subsidiary and treat its exempt income as taxable income of Wizard Limited. However, the general anti-avoidance provisions in the Income Tax Act [article 51] grant wide anti-tax avoidance powers to the Commissioner. If the refinancing is carried out wholly or mainly for the purpose of reducing or deferring the tax payable in Malta, the Commissioner will be empowered to take any measures that would be necessary to ensure that 18
Wizard Limited does not derive the planned tax benefit of that reduced tax liability. The refinancing plan could also be challenged if it is established that it is artificial or fictitious, or if it is not actually put into effect. The onus to prove the intention to avoid or postpone the tax, or that the refinancing is artificial or fictitious, or not actually put into effect, is on the Commissioner and the fact that Wizard Limited would derive a tax benefit is not sufficient to discharge this onus. The company would be in an even stronger position to defend its case if it can positively show that it has actually assumed a legal and commercial debtor-creditor relationship with Lendingco Limited and that there are commercial reasons for the refinancing. (b) Karl and Ruth income tax computation Note Joint computation 1 Income from employment 36,000 Interest in respect of a private issue of debt instruments by a Maltese resident company 2 200 Loss from profession 3 (20,500) Dividends 5,300 Chargeable income 21,000 Tax liability (21,000 11,900) at 15% 1,365 Unabsorbed credit for women returning to work 5 (300) Credit for tax at source (1,855) Refundable tax (790) Notes: 1 Karl and Ruth need to decide whether or not to opt for a separate or joint tax computation. Under separate computation, passive income (income derived from interest or dividends) is considered to be the income of the person with the higher earned income (income from a trade, business profession or vocation or from an employment or office), regardless of who of the two persons received it. In this case all of the passive income would be attributable to Ruth since Karl made a loss on the professional practice. As a consequence a better result will be achieved if the income is taxed at the married rates in a joint computation. 2 Interest paid in respect of a private issue of debt instruments by a Maltese resident company is only subject to withholding tax if paid to a collective investment scheme. Therefore no withholding tax can apply and the interest must be declared in the tax return. 3 The loss from Karl s profession can be offset against the other sources of income. No such set-off can be made for the unabsorbed capital allowances. These can only be carried forward for offset against future income from the profession. There is no obligation to declare dividends from local companies. However, in the current circumstances the declaration of such dividends will contribute to a lower tax liability for the year since the marginal rates of tax that will apply on the spouses income is less than the imputed tax on the dividends of 35%, which is available as a credit. No further tax is payable on dividends received from the final tax account and no credit may be claimed for tax at source. Therefore, such dividends are not to be declared. Thus, ( 1,950 + 1,95)/0 65 = 5,300 5 The credit allowed for women returning to work is 2,000. As only 1,700 of this credit was absorbed against Ruth s 2008 income, the balance of 300 is available to be absorbed against her 2009 employment income. 6 The dividend of 1,870 distributed from a non-prescribed fund of a Maltese resident collective investment scheme is subject to a final withholding tax. A 15% tax is withheld by the SICAV and no further tax is payable by Maltese resident persons on such income. This income will not form part of the tax computation and the tax withheld at source is not available as a credit. General Power Limited (a) Both General Power Limited and Assembelall Limited are incorporated outside Malta and therefore not domiciled in Malta. They are also managed and controlled outside Malta and consequently not even resident in Malta. In accordance with Maltese domestic law (i.e. ignoring any tax treaty provisions) these two companies are taxable in Malta only on any income that arises in Malta. The transactions in question will produce business profits, and business profits are deemed to arise in Malta if they are derived from activities amounting to trading in Malta. Trading in Malta is to be distinguished from trading with Malta. An activity does not amount to trading in a country simply because it is connected with that country. Trading in Malta implies an activity that is physically carried out in Malta. The contracted assembly of the power plant would involve trading in Malta and the income generated by this activity will therefore be deemed to arise in Malta. On the other hand, the profit derived from the sale of the plant to the Maltese company is not generated by any activity in Malta and will therefore to be treated as arising simply from trading with Malta. 19
Since a treaty for the elimination of double taxation (based on OECD Model) is in place between Malta and the Green Republic, the domestic rules highlighted above are supplemented by the provisions of the tax treaty, which provide that the source country can only tax business income if it is attributed to a permanent establishment of the non-resident company situated in the source country. Therefore, the fact that General Power Limited and Assembelall Limited will be trading in Malta is not enough to render them subject to Maltese tax from this activity. Their liability to Maltese tax will also depend on whether the companies will be conducting their business activities through a permanent establishment in Malta. A building site or a construction or installation project constitutes a permanent establishment only if it lasts for more than 12 months [under Art 5(3) of the treaty]. The assembly of the plant is an installation project, but the duration of the contract entered into between General Power Limited and PowerMalta Limited does not extend beyond 12 months. The project, therefore, is not a permanent establishment. As the activities in Malta of General Power Limited will be restricted to this contract, and as the company has no other place of business in Malta, its profits from the assembly of the plant will not be subject to Maltese tax, and therefore none of its income will be brought to charge to tax in Malta. Different considerations apply in connection with the activities of Assembelall Limited. This company has a workshop in Malta which is used for a number of other projects. The activities that are carried out through the workshop are not preparatory or auxiliary in nature, and the workshop therefore qualifies as a permanent establishment within the definition of this term under the treaty. Therefore, although the assembly project under the contract in question is not itself a permanent establishment, Assembelall Limited s profits will still be treated as arising through a permanent establishment in Malta and will be subject to Maltese tax, The profit that Assembelall Limited will derive will be equal to the excess of the 9,000,000 consideration over the 7,000,000 costs, i.e. 2,000,000. (b) Since the supply of the plant by General Power Limited includes the assembly of the plant in Malta, the place of supply for value added tax (VAT) purposes is Malta. General Power Limited will therefore be making a supply of goods in Malta but in terms of the VAT Act, where a taxable supply is made by a person established outside Malta to a person who is registered under article 10 of that Act, the liability to tax is on the customer and the supplier will not be required to register for VAT. Nonetheless, it will be entitled to a refund of any input tax incurred in Malta in terms of the regulations under the VAT Act that implement the provisions of the Eighth Directive. The services of Assembelall Limited under its Contract with General Power Limited will be treated as supplied in the country where they are physically carried out, that is, in Malta. The liability for the VAT on the services provided by Assembelall Limited under the contract will not be shifted to the customer (General Power Limited) since the customer is not a business registered under the VAT Act and since, moreover, Assembelall is established in Malta as it has a place of business there. Therefore, unless it is already registered, Assembelall Limited will be required to register for Maltese VAT purposes in connection with the services that it will be providing under the contract. 5 (a) United Services Limited (i) (ii) As a general rule, a business registered under article 10 of the VAT Act has the right to claim a deduction for VAT incurred on purchases of goods and services that are or are intended to be used by him in the course or furtherance of his business. One of the limitations to this rule is that costs incurred for the purpose of providing exempt without credit supplies do not give rise to input tax credits. Insurance services are exempt without credit supplies, but general management services are taxable supplies. The right to claim input tax credits arises at the time that the relative VAT cost is incurred. Since the costs in question were incurred by United Services Limited in 2008, when it still had plans to provide management services, it would have been entitled to claim input tax credits in respect of those costs. Another limitation under the VAT Act is that the deduction for VAT paid on motor vehicles, excluding commercial vehicles, is blocked. The VAT on the car is therefore not allowable as a deduction. Under the capital goods scheme, input tax credits on fixed assets are subject to an adjustment over a period of five years (20 years in the case of immovable property). An adjustment is due, inter alia, when, following a change in circumstances, the taxable person provides only exempt without credit supplies. In the case of United Services Limited, such a change occurred in 2009. United Services Limited would have claimed input VAT credits in respect of the professional fees and rent, but as this does not represent VAT on capital goods, no adjustment is due on these credits. Since no VAT deduction was claimed for the input VAT incurred on the purchase of the car, no adjustment is also due in respect of this asset. The capital goods scheme also provides that no adjustment is due in respect of expenditure on small assets whose cost or value is less than 1,160, and accordingly no adjustment is due in respect of the input tax credits claimed on the small items of equipment. An adjustment is, however, due in respect of the other input tax credits claimed in 2008, i.e. on the furniture. The adjustment consists of a claw-back of a proportion of the input tax credit corresponding to the proportion that the unexpired part of the period of adjustment bears to the whole period. As United Services Limited did not use its capital 20
assets in 2008, the five year period of adjustment commenced in 2009. The change therefore occurred when no part of the period of adjustment had expired, so the claw-back will accordingly be equivalent to the full amount of the respective VAT credit. (b) Local Manufacturing Limited (i) (ii) In terms of the Fringe Benefits Rules, a share option scheme does not give rise to any tax liability except if and when the option is exercised or assigned. When the option is exercised, the taxable amount is 2 85% of the market value of the shares at the time of the option after deducting the price paid, if any, for the acquisition of those shares. If the option is assigned, the gain from the assignment becomes subject to tax. If shares acquired under a share option scheme are disposed of, the taxable gain is calculated by taking, as the cost of acquisition, the market value of the shares at the time of their acquisition. Anthony Bianco: Fringe benefit received on the exercise of the option: Market value of the shares 6,000 Less price paid for the acquisition of the shares 5,000 1,000 Taxable fringe benefit at 2 85% 29 Conrad Debattista: Fringe benefit (option not exercised) 0 Gain from the assignment of the option rights: Price for the assignment 1,000 Cost 0 Taxable gain 1,000 Elisa Farrugia Fringe benefit received on the exercise of the option: Market value of the shares 1,500 Less price paid for the acquisition of the shares 1,000 500 Taxable fringe benefit at 2 85% 21 Gain on the share transfer: Transfer price 1,500 Deemed cost of acquisition (market value) 1,500 Taxable gain 0 21
Professional Level Skills Module, Paper P6 (MLA) Advanced Taxation (Malta) June 2010 Marking Scheme Marks 1 (a) (i) Implications of roll over relief applying on acquisition: Non-applicability of 12% final tax on transfer 1 Implication on subsequent transfer cost of acquisition reduced by exempt gain 1 Implications of selling replacement property within two years of original transfer 2 Computation of tax re Property Z 1 Implications for current sale if roll over relief not available 3 Implications of group transfer exemption on subsequent transfer 2 Computation of tax re Property Y 0 5 Non-applicability of capital gains clawback provisions 1 Implications on de-grouping 3 Computation of additional tax 0 5 15 (ii) Sale of controlling interest 1 Computation of sale value 1 5 Computation of tax 1 5 Appropriate format and presentation of the report 1 Effectiveness of communication 1 2 (b) (i) Exemption from tax sale of sole residence 2 Tax implications on sale of garden 1 Exempt donation of property by parents house and garden 1 5 Stamp duty payable by children when acquiring property under any option 0 5 Reduced rate applicable re sole residence 0 5 Exemption applicable on eventual sale of property by Francis both options 1 5 Tax implications of transfer of property by John 3 10 (ii) Calculation of tax on transfer of garden by parents 2 Calculation of tax on transfer of property by John 1 Calculation of stamp duty payable by each of the children 1 35 23
Marks 2 (a) (i) General tax implications and applicable refunds 3 Need for shareholder to be registered and application to Quasimo 1 (ii) Taxability and refund on business profits Determination that business profits are allocated to the Maltese taxed account 1 Allocation to the immovable property account 1 5 Applicable refund 1 Taxability and refund on dividends Option of grossing up and credit for foreign tax applicable refund 1 5 Option of taxing net dividends applicable refund 1 5 Investment considered a participating holding 1 Need to consider the anti-abuse provisions 0 5 Arguments for the satisfying the anti-abuse provisions 2009 2 Arguments for the satisfying the anti-abuse provisions 2010 2 Applicability of exemption 0 5 Transfer of investment not taxable 1 5 1 Appropriate format and presentation of the letter 1 Effectiveness of communication 1 2 (b) Grossing up of foreign tax 0 5 Credit for foreign tax 1 Calculation of refund when income is grossed with foreign tax 1 Calculation of allocation to the immovable property account 1 Calculation of refund on distribution of business profits 1 5 5 25 3 (a) (i) Interest charged still deductible for Wizard Limited 0 5 Interest arising to Notaxland company in Malta attracts no tax 1 5 Income taxed in Malta only when distributed tax deferral 1 Reduction in effective tax rate on dividends received through use of FRFTC 1 (ii) No specific anti-cfc legislation 1 General anti-tax avoidance measures under article 51 2 The onus to prove tax avoidance 1 Relevance of showing true debtor/creditor relationship/were commercial reasons for the planned refinancing 1 5 (b) Decision on single or joint computation 1 5 Treatment of interest from private issue of debt 1 Treatment of tax loss and unabsorbed capital allowances 2 Reason why dividends should be declared 1 5 Treatment of FTA dividends 1 Treatment of other dividends, including computation of tax credit 1 Available credit for women returning to work 1 Distributions from non-prescribed fund of a CIS 1 Computation of liability/refundable tax 1 11 20 2
Marks (a) Not domiciled or resident in Malta taxed only on income arising in Malta 1 Distinction between trading with/trading in Malta 2 5 Applicability to respective elements of the contract 1 5 Application of the treaty business income taxable only if a PE exists 2 Discussion on installation PE subject to duration of the contract 1 5 Conclusion on General Power Limited no PE, contract income not taxable in Malta 1 Implications of Assembelall Limited operating through the workshop PE 2 Conclusion on Assembelall Limited taxable on profits attributable to workshop 1 5 13 (b) Place of supply of goods with installation 1 Reverse charge rule on supplies by non-established persons 1 No obligation for General Power to Register 1 Right of General Power to refund 1 Place of supply of Assembelall s services 1 Non-applicability of reverse charge to supplies by Assembelall 1 Obligation of Assembelall to register 1 7 20 5 (a) (i) General rule on deductions 1 Limitation on exempt without credit supplies 1 Taxable management services and exempt without credit insurance services 1 Application to United Services in 2008 1 Limitation on blocked VAT 1 Application of limitation to car 0 5 Remaining items all entitled to full credit 0 5 6 (ii) General rule capital goods scheme 1 5 Identifying credits excluded from adjustment 1 5 Explaining how adjustment works 1 5 Commencement of adjustment period/amount of clawback 1 5 6 (b) (i) Option taxable only when exercised or assigned 1 Taxable amount when exercised 1 5 Taxation of gain on assignment 0 5 Taxation of gain on post-exercise disposal 1 (ii) Anthony Bianco 1 Conrad Debattista 1 5 Elisa Farrugia 1 5 20 25