SIGNIFICANT DEVELOPMENTS 1. Guidelines (which do not as yet have the force of law) have been issued in order to determine in which cases a person is to be treated as receiving a fringe benefit. These guidelines will provide a basis for the calculation of the value of fringe benefits and establish rules for deduction of tax at source in respect of such benefits. 2. New provisions in the laws have been introduced in order to tax certain income of collective investment schemes and specific investments in such schemes. 3. Exchange controls have been further liberalized for the year 2001, and a total liberalization is expected to occur in the near future. TERRITORIALITY AND RESIDENCE Malta taxes individuals who are both domiciled and ordinarily resident in Malta on their worldwide income. Any person who is not ordinarily resident or domiciled in Malta is taxable only on income arising in Malta and on any foreign income remitted to Malta. A nonresident individual is taxed only on income arising in Malta. There are few specific rules relating to residence, ordinary residence, domicile, locality of income, or the remittance of income to Malta. Persons are usually held to be domiciled in a country where they actually have their permanent home. The locality where income arises is determined in accordance with the category of income concerned; different criteria may apply to different sources of income. Persons are considered to be ordinarily resident in Malta when they are so resident in the ordinary or regular course of their lives. The remittance of income to Malta is a question of fact. GROSS INCOME Employee gross income/Gains or profits from employment with a Maltese employer are usually fully taxable, including the value of “any benefit provided by reason of any employment or office.” Remuneration received for services rendered outside Malta by persons not domiciled or not ordinarily resident in Malta should not be liable to tax in Malta. Apportionment is resorted to where necessary. All rewards for services rendered, including fringe benefits and benefits-in-kind, are taxable, although some exemptions are provided. Some of the exemptions apply generally; others are intended for expatriates rendering services to or employed with certain Maltese-licensed investment services companies or Maltese-licensed insurance companies. Taxable benefits include living allowances, housing allowances, tax reimbursements (grossed up), use of car, paid vacation trips, and stock options. Fringe benefits/Guidelines outlining the valuation criteria for fringe benefits and the instances where a fringe benefit is deemed not to arise have been issued. These are to be followed by regulations, which the Minister of Finance is empowered to issue in terms of law. The new provisions on fringe benefits are expected to have retroactive effect and to apply for benefits provided with effect from January 1, 2001. Three main categories of fringe benefits are being identified by the guidelines. 1. Category 1 fringe benefits-Use of motor vehicles: The valuation of a fringe benefit arising on the use of a car would be calculated on the basis of three elements, that is, the car use value, the maintenance value, and the fuel value. The car use value is equivalent to 17% of the car value or to 10% of the car value if the car is more than six years old. In respect of both the maintenance and fuel value, the basis of valuation is in each case 3% of the car value if the latter does not exceed Lm12,000 or 5% of the car value in any other case. The fringe benefit is equal to the aggregate of these three elements multiplied by a percentage signifying the private use of the car. The private use percentage varies depending on the respective car value and may be as high as 60%. The private use element, that is, the taxable element, of a car cash allowance is 50% of the allowance if it is Lm1,000 or less, or the cash allowance less Lm500 if it exceeds Lm1,000. 2. Category 2 fringe benefits-Use of other assets including accommodation: Use of property/accommodation involves a chargeable fringe benefit of 5% of the higher of the market value and the original cost of the property. No fringe benefit is deemed to arise in certain situations, for example, use of an official residence of the holder of public office, temporary accommodation for security purposes, etc. The cost of making the property available for use by the employee (such as water, electricity, ground rent, redecoration, repairs and maintenance, and professional fees) is also a fringe benefit. The fringe benefit on the use of other assets (other than property and motor vehicles) stands at 12% of the higher of the market value and the original cost of the asset. The original cost is reduced by 40% in the case of assets that are owned for more than six years. Use of computers, related equipment, and Internet connection service is not considered a fringe benefit. 3. Category 3 fringe benefits-Other benefits: A Category 3 fringe benefit is valued at the actual cost to the employer of providing the fringe benefit or the market value thereof. This category of fringe benefits includes, inter alia, beneficial loan arrangements, share option schemes, reimbursement of private expenses, discounted goods and services, free or subsidized meals, and gifts. Valuation criteria differ according to the type of benefit. A partial or a full exemption is possible in certain cases. The provision of telephone services, computer equipment, recreational and child-minding facilities, certain awards, and certain training courses, among others, are not considered to be fringe benefits. Capital gains and investment income / Tax on capital gains is imposed on any gain realized on the transfer of immovable property (real estate), shares and other securities (excluding certain securities listed on the Malta Stock Exchange and investments that yield a fixed rate of return), business goodwill, copyright, patents, trade names, and trademarks. Gains from the transfer of other assets fall outside the scope of the tax. The rate of tax is the marginal rate of tax applicable to the particular taxpayer. Gains arising outside Malta and derived by a person who is either not domiciled or not ordinarily resident in Malta or is a returned migrant who qualifies for a reduced rate of income tax are not subject to tax even if remitted to Malta. Subject to the applicable statutory requirements, nonresidents and expatriates working in investment services or insurance are exempt from tax on any interest, royalties, and capital gains from specified sources, for example, disposal of units in collective investment schemes and of shares or securities in companies satisfying certain conditions. A final withholding tax system operates for certain types of investment income (see “Payment of tax” below), paid by certain payers to specified categories of (Maltese-resident) recipients. Substantial changes to the investment income provisions have been enacted in order to charge to tax investment income received by certain resident collective investment schemes and to tax resident investors on gains realized on disposal of units in funds investing a certain level of their assets outside Malta. DEDUCTIONS Business deductions/Certain allowances are available for business-related expenses for persons exercising a trade, business, profession, or vocation. These include, inter alia, scientific research, bad debts, and losses carried forward. To be deductible, expenses of an employee must be incurred wholly and exclusively in the production of the income and must be necessarily incurred. Where the employer reimburses employees for expenses incurred on the employer’s behalf, no tax liability should arise in the hands of the recipients, unless a gain or profit accrues to them from the arrangement. Nonbusiness expenses/Alimony payments determined by the Maltese courts and paid by a taxpayer to an estranged spouse are allowed as a deduction. No other nonbusiness expenses are allowed. Personal allowances/No personal allowances by way of credits or deductions are granted. TAX CREDITS There are no special credits for short-term residents. Income taxes paid abroad on income that becomes taxable in the hands of a Maltese resident may qualify for a credit if a double taxation treaty has been concluded with the relevant country or under the unilateral relief provisions of Maltese law. OTHER TAXES Social security taxes/For employees who do not earn more than Lm6,666 per annum, the employer and the employee each pay social security tax of 10% of salary. Employees earning in excess of Lm6,666 contribute Lm12.58 per week (same amount is contributed by the employer). Self-employed persons who earn less than Lm6,540 pay a flat contribution percentage of 15% on net income. Those earning in excess of Lm6,540 contribute Lm18.86 per week. Local taxes on income/There are no local or municipal taxes in Malta. Other taxes/Other taxes imposed include customs and excise duties on certain goods; a tax on air travel; value added tax on the importation and purchase of most goods and services; and stamp duty on certain documents and transfers, including transfers of immovable property and marketable securities, assignments of debts and other rights, and issues and renewals of insurance policies. Stamp duty is also imposed on transmissions by death of immovable property and shares in Maltese companies. TAX ADMINISTRATION Returns/Returns are filed on a calendar-year basis. Husband and wife are jointly responsible for filing tax returns, and spouses must choose which of them is to be registered as the taxpayer. The election of a “responsible spouse” remains effective for five years. The responsible spouse may elect to have the tax on the other spouse’s earned income computed separately. If a separate computation is chosen, husband and wife are assessed separately at the single person’s rates of tax. Unearned income is assessable in the hands of the spouse earning the higher level of income. The tax return, together with a self-assessment, must be submitted by the end of June of the year following the basis tax year. Under certain conditions, a taxpayer may file a declaration instead of a full tax return, in which case this should be filed by the end of April of the year following the basis year. Penalties are incurred on late filing of returns. The self-assessment is deemed to represent the correct tax position, and the Commissioner of Inland Revenue will not raise an assessment, unless he disagrees with the self-assessment. Payment of tax/Income tax is withheld from salaries (including taxable fringe benefits) under the Final Settlement System (FSS), which in most cases equals the individual’s total tax liability. Where income is not subject to the FSS (e.g., self-employed persons), the taxpayer is required to make three payments in the basis tax year under the provisional tax (PT) system. As from April 2000, the provisional tax payments are based on the last self-assessment filed by the individual, and payments are divided into three installments of 20%, 30%, and 50%, respectively. The tax liability that is still due at the tax return date after deducting all tax credits must be settled immediately with the submission of the return. Interest at 1% per month is charged on any unpaid tax. Provisional tax is also payable at 7% on the selling price of certain assets disposed of on account of tax imposed on capital gains. A withholding tax of 15% is imposed on specified types of investment income (e.g., banking interest paid to Maltese residents) and on income from most part-time work. This is a final tax, except where the taxpayer elects for the withholding tax to be credited against the taxpayer’s tax liability. TAX RATES Income is taxable at graduated rates. As from year of assessment 2001 (year of income 2000), in the case of single individuals (including married individuals opting for separate computation), there is a tax liability of Lm650 on the first Lm6,000 of income. Married individuals and single parents, widows/widowers, and separated parents satisfying certain conditions are liable to Lm725 tax on the first Lm7,500 of income. For amounts exceeding these thresholds, the tax rate is 35% for both single and married individuals. Tax rates for 2001 are as follows. Married resident taxpayers Taxable income Tax on Percentage Over Not over Column 1 on excess (Column 1) 0 Lm 4,000………………………………………… - 0 Lm 4,000 5,500………………………………………… - 15 5,500 7,500………………………………………… Lm 225 25 7,500……………………………………………………… 725 35 Single resident taxpayers or married individuals opting for a separate computation Taxable income Tax on Percentage Over Not over Column 1 on excess (Column 1) 0 Lm 3,000…………………………………… - 0 Lm 3,000 4,000…………………………………… - 15 4,000 6,000…………………………………… Lm 150 25 6,000………………………………………………… 650 35 Nonresident individuals (married or single) Taxable income Tax on Percentage Over Not over Column 1 on excess (Column 1) 0 Lm 300………………………………… - 0 Lm 300 1,300………………………………… - 20 1,300 3,300………………………………… Lm 200 30 3,300………………………………………………… 800 35 Residence permit holders and returned migrants are taxed at 15% on income over Lm2,500 for married taxpayers and 15% on income over Lm1,800 for single taxpayers, subject to a minimum tax liability of Lm1,000 per annum. INDIVIDUAL TAX CALCULATION Year of assessment 2002 (year of income 2001) Assumptions Resident married expatriate employed by a Maltese company. Tax computation Gross income: Salary …………………………………………………………………… Lm 29,500 Foreign bank interest remitted…………………………………………… 2,000 Capital gains arising in Malta…………………………………………… 2,500 Total gross income………………………………………………………… 34,000 Less-Expenditure necessarily incurred in producing the income………… 3,500 Total taxable income……………………………………………………… Lm 30,500 Tax thereon: On the first 7,500………………………………………… 725 On balance at 35% ……………………………………… 8,050 Total tax liability…………………………………………………………… Lm 8,775 Less: Tax withheld by deduction from salary…………………… 8,000 Provisional capital gains tax……………………………… 700 (8,700) Net payable………………………………………………………………… Lm 75 Note: Exchange rate of the lira at December 31, 2000:US$1=Lm0.4390. (3)