Malta Anti-Tax Avoidance Hybrid Mismatch Rules

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The objective of these anti-tax avoidance hybrid mismatch rules is to deter cross border double deductions for tax purposes from, and cross border double non-taxation of, income. These rules only apply to transactions between associated enterprises, between a taxpayer and an associated enterprise, between the head office and permanent establishment, between two permanent establishments of the same entity or under a ‘structured arrangement’.

A “structured arrangement” means an arrangement involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch outcome, unless the taxpayer or an associated enterprise could not reasonably have been expected to be aware of the hybrid mismatch and did not share in the value of the tax benefit resulting from the hybrid mismatch.

Definitions:

A “hybrid entity” is any entity or arrangement that is regarded as a taxable entity under the laws of one jurisdiction and whose income or expenditure is treated as income or expenditure of one or more other persons under the laws of another jurisdiction.

A “hybrid mismatch” means a situation where:

(a) a payment under a financial instrument gives rise to an allowable deduction for tax purposes in one jurisdiction without inclusion as income subject to tax in another AND such payment is not included as income subject to tax in the payee jurisdiction within a reasonable period of time; AND the mismatch outcome is attributable to differences in the characterisation of the instrument or the payment made under it.

(b) a payment to a hybrid entity gives rise to a deduction without inclusion and that mismatch outcome is the result of differences in the allocation of payments made to the hybrid entity under the laws of the jurisdiction where the hybrid entity is established or registered and the jurisdiction of any ‘person’ with a participation in that hybrid entity.

(c) a payment to an entity with one or more permanent establishments gives rise to a deduction without inclusion and that mismatch outcome is a result of the differences in the allocation of payments between the head office and the permanent establishment or between two or more permanent establishments of the same entity under the laws of the jurisdictions where the entity operates.

(d) a payment gives rise to a deduction without inclusion as a result of a payment to a disregarded permanent establishment.

(e) a payment by a hybrid entity gives rise to a deduction without inclusion and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction – see (g)2 below

(f) a deemed payment between the head office and a permanent establishment or between two or more permanent establishments gives rise to a deduction without inclusion and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction – see (g)2 below

(g) a double deduction outcome occurs – see (g)2 below. Provided that for the purpose of this definition:

  1. Certain conditions relating to a financial trader are applicable
  2. A hybrid mismatch shall only arise under paragraphs (e), (f) and (g) above to the extent that the payer jurisdiction allows the deduction to be set off against an amount that is not dual inclusion income.

Tax Treatment in Malta:

1- To the extent that a hybrid mismatch results in a double deduction:

(a) The deduction shall be denied if Malta is the investor jurisdiction; AND

(b) The deduction shall be denied if Malta is the payer jurisdiction and the deduction is not denied in the investor jurisdiction;

Provided that such deduction shall be eligible to be set off against dual inclusion income whether arising in a current or subsequent tax period.

2- To the extent that a hybrid mismatch results in a deduction without inclusion:

(a) The deduction shall be denied if Malta is the payer jurisdiction; AND

(b) The amount of the payment that would otherwise give rise to a mismatch outcome shall be included in the income if Malta is the payee jurisdiction and the deduction is not denied in the payer jurisdiction;

3- No deduction shall be allowed for any payment by a taxpayer to the extent that such payment directly or indirectly funds deductible expenditure giving rise to a hybrid mismatch through a transaction or series of transactions between associated enterprises or entered into as part of a structured arrangement except to the extent that one of the jurisdictions involved in the transaction or series of transactions has made an equivalent adjustment in respect of such hybrid mismatch.

4- To the extent that a hybrid mismatch involves income of a disregarded permanent establishment of a tax payer resident in Malta which is not otherwise subject to tax in Malta, that tax payer shall include in its income the income that would otherwise be attributed to the disregarded permanent establishment. This applies unless Malta is required to exempt the income of the permanent establishment in terms of a double taxation treaty entered into by Malta with a third country.

5- To the extent that a hybrid transfer is designed to produce a relief for tax withheld at source on a payment derived from a transferred financial instrument to more than one of the parties involved, the benefit of such relief shall be limited in proportion to the net taxable income regarding such payment.

6- Certain other conditions and limitations apply.

Reverse hybrid mismatches:

Where one or more associated non-resident entities holding in aggregate a direct or indirect interest in fifty per cent or more of voting rights, capital interests or rights to share of profits in a hybrid entity that is incorporated or established in Malta are located in a jurisdiction or jurisdictions that regard the hybrid entity as a taxable person, the hybrid entity shall be regarded as a resident of Malta and taxed on its income to the extent that that income is not otherwise taxed under any other provision of the Income Tax Acts or in any other jurisdiction. This rule shall not apply to a collective investment vehicle.

Tax residency mismatches:

To the extent that a deduction for payment, expenses or losses of a taxpayer who is resident for tax purposes in Malta and in another jurisdiction is deductible from the tax base in Malta and in that another jurisdiction, the deduction shall be denied to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual inclusion income. If the other jurisdiction is a member State, the deduction shall be denied only if the taxpayer is not deemed to be a resident of Malta according to the double taxation treaty between Malta and the other Member State concerned.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact David Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

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