Malta – Exit Taxation

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Company exit taxation is a tax on capital gains in relation to companies that change tax residence to another country or transfer assets to another jurisdiction. This is a tax that is triggered by assets moving from the tax net of one country to the tax net of another country, in the absence of a transfer at arms length to a third party.

The EU ATAD I Directive has now made these rules mandatory across all EU member states as from the 1st January 2020. These rules were introduced into Maltese law in 2018 and are effective as from the 1st January 2020. The following are the main features of these regulations as implemented in Malta.

This tax levy is contemplated in the cases where assets are transferred from a Maltese registered company to its permanent establishment in another country or from the permanent establishment in Malta of a foreign company to that same head office company in the other jurisdiction.

Another instance where an asset is considered to be subject to this tax is when a Malta registered company changes its tax residence to another jurisdiction unless the assets in question remain effectively connected to the Malta permanent establishment.

Finally exit taxation needs to be considered also where a company transfers the business carried on by its permanent establishment from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.

The tax is calculated on the capital gain at an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their cost value for tax purposes.

The exit tax shall be paid by not later than the taxpayer’s relevant tax return date in such manner as may be determined by the Commissioner. A taxpayer may defer the payment of an exit tax by paying it in instalments over 5 years in certain specified circumstances.

Where a taxpayer defers the payment, interest shall be charged in accordance with the provisions of the Income Tax Management Act. Where there is a demonstrable and actual risk of non-recovery, the Commissioner may request taxpayers to provide a guarantee as a condition for deferring the payment.

Payment deferrals would be immediately discontinued, and the tax debt becomes recoverable in the cases where assets are subsequently disposed of; the assets, tax residence or business is transferred on to a third jurisdiction; the taxpayer goes bankrupt or is wound up; or the taxpayer company defaults on the agreed payment schedule.

Where assets, tax residence or the business carried on by a permanent establishment is transferred to Malta from another EU Member State, the starting value of the relevant assets for tax purposes in Malta shall be that established by that other EU Member State, unless otherwise determined by the Commissioner for Revenue.

For the purposes of these rules “market value” means the amount for which an asset can be exchanged, or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction.

The provisions of this regulation shall not apply in the case of asset transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management, provided that such assets are set to revert to Malta within a period of twelve months from the time of exit of such assets from Malta.

 

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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