SIGNIFICANT DEVELOPMENTS 1. Guidelines (which do not as yet have the force of law) have been issued in order to determine in which cases an employee is to be treated as receiving a fringe benefit, to provide a basis for the calculation of the value of fringe benefits and to establish rules for deduction of tax at source, that is, deduction by the employer, in respect of such benefits. 2. New provisions have been introduced in order to tax certain income of some collective investment schemes and gains on disposal of investments in other types of schemes. 3. Exchange controls have been further liberalized in 2001 and a total liberalization is expected to occur in the near future. TAXES ON CORPORATE INCOME Income tax/ Companies are subject to tax at flat rate of 35%. There is no corporation tax structure separate from income tax. Petroleum profits tax/ Petroleum profits tax is levied as income tax, but the taxable profits are computed in a special way, including a production-sharing basis. Profits in respect of production-sharing contracts signed after January 1,1996, are taxed at 35%. Other petroleum profits are taxed at 50%. Insurance profits tax/Insurance profits tax is levied as income tax and imposed at the same rate as other corporate profits, but it is computed in a special way. In the case of nonresident companies the computation is applied with reference only to business carried on in or from Malta. (Until year of assessment 1999(year of income 1998) the income of nonresident insurance companies was computed as the portion of worldwide income referable to Malta premiums.) CORPORATE RESIDENCE All companies incorporated in Malta are considered to be both domiciled and resident in Malta. Other bodies of persons (including companies incorporated overseas) are considered to be resident in Malta when the control and management of their business are exercised in the country. OTHER TAXES There are no other corporate taxes. Value added tax/ Supplies of goods and services in Malta are subject to VAT at the standard rate of 15% (5% on hotel and holiday accommodation). Exports, food, and certain other goods and services are exempt with credit. Custom and excise duties/ Many goods imported from outside the European Union are subject to customs duties at a rate that in most cases is set at 8.1%. Excise duties are chargeable on certain petroleum oils and gases, alcoholic drinks and tobacco products. Certain protective levies are imposed on the importation (whether from the EU or otherwise) of selected goods-these levies are currently being phased out and they are expected to be removed completely by the year 2003. Employer's social security contributions/ Employers are obliged to pay social security contributions at the rate of 10% of the individual employee's salary, and at fixed rates of Lm 12.58 per week for annual salaries exceeding Lm6,666. Stamp duty/ Stamp duty is charged on, inter alia, transfers of immovable property (5% for both residents and nonresidents), marketable securities (2%; 5% in the case of transfers of shares in property companies), and assignment of debts and other rights (2.6%). BRANCH INCOME The tax rate on branch income is the same as that for resident companies. Other than the tax charged on a branch's income, no tax is withheld on transfers of profits to head office. INCOME DETERMINATION Inventory valuation/ Stock valuations are generally made at the lower of cost or market value. LIFO is not accepted for taxation purposes. In general, the book and tax methods of inventory valuation will conform. Obsolescence is accepted where proved, but there are no provisions to take account of monetary inflation on the inventory valuation. Capital gains/Tax is chargeable on capital gains realized on the transfer of immovable property (real estate), shares and other securities (excluding investments that yield a fixed rate of return and securities listed on the Malta Stock Exchange other than shares held in collective investment schemes investing a certain level of their assets outside Malta), business goodwill, copyrights, patents, trade names, and trademarks. If the asset is transferred between group companies, no loss or gains is deemed to arise from the transfer. Gains realized from the transfer of other assets fall outside the scope of the tax. Gains arising outside Malta and derived by a company that is either not domiciled or not ordinarily resident in Malta are not subject to tax. There are also a number of exemptions provided in the law. Capital gains realized by nonresidents on disposals of units in collective investment schemes, similar investments relating to linked long-term insurance business and shares or securities in companies (except companies whose assets consist solely or mainly of Maltese immovable property) are exempt from tax. Rollover relief/ Group relief and reorganization relief are granted. Intercompany dividends/ Dividends received by one company from another, whether or not a subsidiary, are taxable on the gross amount in the recipient's hands. If the distributed profits have been taxed, no further tax should be chargeable to the recipient company. However, for resident shareholders, if the corporate rate of tax in the year in which the profits are earned is lower than that in the year in which they are distributed, an amount equivalent to the difference in rates (topping up) is payable. If the distribution is made from untaxed income, the dividend would be tax-free in the hands of the recipient company. Foreign income/ A company is taxable on its worldwide income when it is ordinarily resident and domiciled in Malta. A company that is either not ordinarily resident or not domiciled in Malta is taxable on its foreign income, only insofar as, such income is remitted to Malta. Foreign tax is relieved by way of tax credits. This may occur under the terms of a double taxation treaty. Where no treaty exists, the foreign tax can be relieved through a system of unilateral relief. Relief for underlying tax is also granted, either in terms of a double taxation treaty or as unilateral relief in the case of a Maltese company. Such reliefs may be available if, inter alia, evidence of tax paid abroad is produced. Profits of Malta-resident companies are subdivided for tax purposes into three accounts, the Maltese Taxed Account, the untaxed Account and the Foreign Income Account. The last of these includes, among other things, taxable profits of Maltese-resident companies resulting from foreign investments; profits of a foreign permanent establishment; and profits resulting from foreign investments, assets or liabilities of an onshore bank licensed in Malta. Income allocated to the Foreign Income Account for which no evidence of tax paid abroad is required can qualify for a flat-rate foreign tax credit of 25%. Depending on the nature of the income distributed by the company, nonresidents receiving distributions from the Foreign Income Account will be entitled to a two-thirds or full refund of tax paid on such profits by the distributing company. Stock dividends/ A Maltese company can distribute bonus shares from profits, whether of an income or of a capital nature, and from share premium and capital redemption reserves. When bonus shares represent a capitalization of profits, they are deemed to be dividends for tax purposes. Such bonus shares are subject to tax in the recipients' hands, gross of any tax paid at the corporate level on the relative profits, but tax credits equivalent to the grossing-up made are then available to stockholders. DEDUCTIONS Depreciation and depletion/ depreciation is generally computed by the reducing-balance method, but in the case of buildings that qualify for an allowance the straight-line basis applies. The rate of depreciation on machinery and equipment varies according to the category of the equipment in question. The rate on industrial buildings and structures (including hotels) cannot exceed 2% per annum. New acquisitions are entitled to a concurrent extra 20% allowance in the year of acquisition (or a 10% allowance in the case of industrial buildings or structures). Tax depreciation is not required to conform to book depreciation. The total allowances over the asset's useful life cannot exceed 100% of its cost. If on disposal of a tax-depreciated asset a surplus arises, it is either added to the year's income or utilized to reduce the cost of any replacement. If the asset has been underdepreciated, a balancing allowance is granted. No deduction is available for the depletion of natural resources. Some changes in respect of the applicability and rates of tax depreciation are currently being envisaged and new rules are expected to be issued in the near future. Net operating losses/Net operating losses can be carried forward indefinitely until absorbed. There is no carryback of losses, not even in terminal years. Unabsorbed capital allowances can be carried forward only against the same underlying source of income. Where the source ceases to exist, any remaining balance is lost. Payments to foreign affiliates/There are no restrictions on the deductibility of royalties, interest and service fees paid to foreign affiliates, provided the transactions are carried out at arm's length. Interest and royalties derived by nonresidents are exempt from tax, subject to the applicable statutory requirements. Taxes/ Taxes of an income tax nature are not deductible (though a credit against the Maltese tax charge may be obtained-See "Foreign income" above). Other taxes form part of expense and are deductible in full. Other significant items/ Expenditure on scientific research is allowable as a deduction. GROUP TAXATION Two companies, that for tax purposes, are resident exclusively in Malta and, where one is a 51% subsidiary of the other or both are 51% subsidiaries of a third Malta-resident company qualify as members of a group of companies. Allowable losses may be surrendered by a company to another company within the group where both companies have concurrent accounting periods and form part of such group throughout the entire basis year for which this relief is claimed. Each company makes a separate tax return, and no combined grouping or consolidated returns are possible. TAX INCENTIVES Inward investment/ Investments by foreigners may be readily repatriated together with profits. The industrial Development Act provides a comprehensive package of incentives, including the following. 1. Ten-year tax holidays for export-oriented new industries. 2. Exemption of increased export profits for established industries. 3. Exemption of increased export profits, depending on the level of new investment. 4. Reduced rate of tax on profits reinvested in the business for certain approved projects. 5. Distribution tax free of tax-free profits to the shareholders; this benefit is extended to amounts granted by way of investment allowances (see below). 6. Deduction for tax purposes at 120% for training costs and research and development expenses. Export promotion costs incurred are deductible at 140% for tax purposes. 7. Deduction for costs of feasibility studies. 8. Reduction of tax on dividends under double taxation treaties is attributable to the appropriate portion of the company's profits. 9. Deductions in respect of research and development expenses are, in cases where the company is enjoying a tax holiday, deferred to the first year after the tax holiday expires, however, that qualifying companies are now being given the right of using research and development deductions in tax holiday years in which the company does not reach the required export threshold. 10. Carryforward without limitation into taxable years of residual losses made during a tax holiday period. Substantial changes to the Industrial Development Act have just been enacted in Parliament and the law has been renamed as the Business Promotion Act. The updated Act makes a substantial rehaul in the applicable incentives in order to reflect Malta's world trade organization obligations and forthcoming obligations if Malta joins the Europian Union. The purpose of the law would remain that of encouraging the establishment of new businesses and the expansion of existing ones. However, the Business Promotion Act removes export-related benefits and substitutes then by new incentives mainly for target activities and for companies making certain increases in value added. The new law will also remove discrimination between residents and non-residents. The date of entry into force of the new incentives is expected to fall in basis tax year 2001, but some transitionary provisions are expected so as to take into account the changeover to the new regime (in particular, companies which qualified for benefits under the old regime are expected to be given the option to continue availing themselves of the said incentives until the earlier of expiry or basis tax year 2020). Capital investment/ In the case of companies qualifying for benefits under the Industrial Development Act, an investment allowance of 33% on plant and machinery and of 16.5% on industrial buildings and structures is available (being raised to 50% and 20%, respectively , as from basis tax year 2001), bringing the total allowances granted during the lifetime of the assets up to 133% and 116.5%, respectively. Accelerated depreciation of 25% and of 4% per annum (calculated by the straight-line method) is granted on plant and machinery and on industrial buildings and structures, respectively, but these may be subject to changes in the process of shifting to the Business Promotion Act. Shipping profits/ Under the Merchant Shipping Act, ships can be registered with the Minister of Finance to obtain exemption for shipping profits. These profits can be distributed tax free. The related company shares are exempt from the provisions of the Duty on Documents and Transfers Act (stamp duties). International business profits/ Tax benefits are given to shareholders in onshore companies as regards distributions by such companies of specified types of income. Some tax incentives are also granted as regards collective investment schemes and investment services companies. Trusts registered with the Malta Financial services Centre are taxed at a fixed annual rate of Lm200. Withholding taxes Domestic corporations paying certain types of income are required to deduct tax as follows: Recipient Dividends(1) Interest Royalties % % % Resident corporations 35 35(2) Nil Resident individuals 35 25(2) Nil Nonresident corporations: Nontreaty 35 Nil(3) Nil(3) Nonresident individuals: Nontreaty 35 Nil(3) Nil(3) Nonresident corporations and individuals: Treaty (4) Nil(3) Nil(3) Australia 35 Austria 32.5 Belgium 35 Bulgaria 30 Canada 35 China, P.R 35 Croatia 35 Cyprus 35 Czech Republic 35 Denmark 35 Finland 35 France 35 Germany 35 Hungary 35 India 35 Italy 35 Korea, Rep. Of 35 Latvia 35 Lebanon 35 Libya 15 Luxembourg 35 Netherlands 35 Norway 35 Pakistan 35 Poland 35 Romania 30 Slovakia 35 South Africa 35 Sweden 35 United Kingdom 35 Treaties relating to international air and shipping traffic are in force with Switzerland and the USA. Notes: 1. Malta makes no distinction between portfolio and substantial holdings. The tax at source is not actually a withholding tax because no additional tax is imposed on distributions other than the tax charged on the company in respect of distributed profits. Under Malta's full-imputation system of taxation of dividends the corporate tax is assimilated with the personal income tax of the shareholder in respect of the dividend. In the shareholder's hands the dividend is charged to tax gross, and the relevant amount of corporate tax is set off against the shareholder's tax liability on income from all taxable sources. Special provisions exist for taxation of distributions from income which would not have suffered tax at corporate level. 2. Deduction is required only where the interest is debenture interest or interest on any other loan advanced to a corporation for capital purposes. Tax deductions are, in effect, prepayments of the recipient's final liability, because a reassessment on income is made upon the submission of returns. Any resulting overpayment is refunded. 3. Interest and royalty income derived by nonresidents is exempt from tax in Malta as long as certain conditions are complied with (e.g., they are not effectively connected to a permanent establishment of the recipient situated in Malta). 4. Under its treaties, Malta retains the right to tax dividends at a rate not exceeding that paid by the company in question on the profits out of which the dividends are distributed. This rate is currently 35%. In a number of treaties the rate of deduction and of tax is reduced to 15% in the case of companies enjoying certain tax incentives. See also Note 1 with regard to Malta's full-imputation system of taxation of dividends. Tax administration Returns/ A return of the income earned during the previous year must be filed for every year of assessment. The year of assessment is a calendar year, but the accounts during the basis year may, with Revenue permission, be made up to a day prior to December 31. Companies are assessed and pay tax in the currency in which their share capital is denominated. The tax return for a company must be submitted at the later of nine months following the end of the financial year, or on March 31 of the year of assessment. Penalties are incurred on late filing of returns. The tax return submitted by the company is a self-assessment, and the Commissioner of Inland Revenue will not raise an assessment unless he does not agree with the self-assessment. Payment of tax/During the basis tax year a company is required to make provisional tax (PT) payments every four months. The PT payments are based on the last self-assessment filed by the company and payments are divided into three installments of 20%, 30%, and 50%, respectively. Any 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. Tax on profits allocated to the Foreign Income Account becomes payable at the earlier of the date of distribution of those profits and 18 months after the end of the relative accounting period. The employer is required to deduct income tax and social security contributions from the employee's salaries and pass on such tax/contributions to the Office of Inland Revenue. This system of withholding tax at source is referred to as the Final Settlement System (FSS) and the employer is legally required to operate such system. The salary from which the deduction is to be effected should include the value of any taxable 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 retrospective 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 which are (I) use of motor vehicles, (ii) use of other assets including accommodation, and (iii) other benefits. The method of valuation in each case varies and the employer is required to refer to the Guidelines and also to the Regulations (once they are issued ) so as to calculate the correct value of any fringe benefits being provided to the employees and to deduct the right amount of tax accordingly. CORPORATION TAX CALCULATION Local income Foreign income Lm Lm Lm Lm Net profit before tax as shown in the accounts for fiscal year 2001 800,000 200,000 Add back amounts not allowable for tax purposes or that require adjustments: Depreciation 200,000 10,000 Donations 5,000 - Increase in provision for bad or Doubtful debts 5,000 - Structural alterations of a capital nature 65,000 - Contributions to unapproved Pension scheme 5,000 280,000 - 10,000 1,080,000 210,000 Less: Initial allowances 125,000 - Wear-and -tear allowance 118,000 20,000 Balancing allowance 2,000 245,000 - 20,000 835,000 190,000 Add-Flat-rate foreign tax credit - 7,500 (25% of 30,000) Taxable income 835,000 197,500 Tax thereon at 35% 292,250 69,125 Less: Double taxation treaty relief (1) - 12,000 Unilateral tax relief (2) - 10,000 Flat-rate foreign tax credit (25%) (3) - 7,500 Tax deducted at source from dividend Received (4) 35,000 (35,000) - (29,500) Net tax payable (5) 257,250 39,625 Notes: 1.double taxation treaty relief is in respect of gross royalty income of Lm120,000 taxed at 10% in a foreign country. 2.Unilateral tax relief is in respect of income of Lm40,000 taxed abroad at 25%. 3.The flat-rate foreign tax credit is computed on income before payments or other deductions of Lm30,000 allocated to the Foreign Income Account, in respect of which double taxation treaty relief and unilateral tax relief are not claimed. 4.Tax ha been deducted at source at 35% for dividends included gross at Lm 100,000 in the net profits. 5. The net tax payable is Lm296,875, being the total of the tax payable on local income and the tax payable on foreign income. 6.Average exchange rate for the Maltese lira for the year 2000: US$1=Lm0.4375 (3)