SIGNIFICANT DEVELOPMENTS 1. There have been substantial changes to the method of depreciating assets for tax purposes. Moreover, further conditions and restrictions have been introduced on claims for tax deductions with respect to the use of cars and the payment of emoluments. 2. An investment registration scheme has been introduced which provides a one-time opportunity for Maltese persons (including companies) having undeclared investments outside Malta to regularize their position. 3. New regulations issued in terms of the Business Promotion Act have been issued which provide for new incentives for certain industries. 4. It was announced in the government’s budget for 2002 that simplification measures for small businesses will be introduced in order, inter alia, to alleviate compliance requirements. 5. Consistent with previous years, a further liberalization of exchange controls has been effected. TAXES ON CORPORATE INCOME Income tax/Companies are subject to tax at a 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. Customs and excise duties/Goods imported from outside the European Union (EU) are subject to customs duties at a rate which in most cases is set at 8.1%. A new Customs Code is being launched so as to incorporate certain current customs legislation and new customs procedures and concepts that are based on European Community requirements. 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 Lm12.73 per week for annual salaries exceeding Lm6,618. Stamp duty/Stamp duty is charged on, inter alia, transfers of immovable property (5% for both residents and nonresidents) and marketable securities (2%; 5% in the case of transfers of shares in property companies). 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 gain is deemed to arise from the transfer. 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 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 New rules for income tax deductions/The basic condition for deductibility of expenses, which is that deductions are only allowable with respect to expenditures incurred in the production of income, is confirmed by the new rules. However, they set down certain further conditions on claims for deductions with respect to the use of cars and the payment of emoluments. The law already provided for a restriction on the capital allowances that may be claimed in respect of certain motor vehicles in that the cost on which the allowance was to be calculated could not exceed Lm3,000. This restriction has been removed from the main Act and inserted (almost entirely but with some minor relaxation of the applicability of the restriction) in subsidiary legislation, that is, the deductions regulations. As from year of assessment 2002, deductions for lease payments on cars to be restricted in a manner that corresponds to the restriction that applies to capital allowances on owned cars. The new rules on deductions also require that in order for payments of emoluments to be allowed for tax purposes in the hands of the company they must have been duly accounted for; in particular, the emoluments must have been reported on the appropriate forms and within the statutory time limit to the Office of Inland Revenue. Restrictions on deductibility of emoluments have also been introduced in respect of the payment of certain fringe benefits to employees. Depreciation and depletion/New rules specifically regulating tax deductions for wear and tear of plant and machinery have also been introduced. The new rules represent a shift in the method of calculating deductions for wear and tear for plant and machinery from the reducing-balance method to the straight-line method. In respect of industrial buildings and structures the straight-line basis has been maintained. The rate of depreciation on plant and machinery varies according to the category of the plant and machinery in question. The wear and tear rate on industrial buildings and structures (including hotels) cannot exceed 2% per annum. New acquisitions of industrial buildings and structures are entitled to a concurrent extra 10% allowance in the year of acquisition. 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. The new rules on tax deductions for wear and tear of plant and machinery provide for certain specific treatment in particular situations including, inter alia, the following: (a) To establish the cost of an asset when it is transferred between related companies, one should take the lower of the actual cost of the assets or the tax written-down value adjusted by any balancing charge or allowance incurred by the transferring company; (b) A transitional provision applies in that assets on which deductions for wear and tear have already been claimed under the old method will be deemed to have been acquired by the taxpayer at their closing tax written-down value in year of assessment 2001 and shall be written down under the new rules as if they were acquired in year of assessment 2002; (c) A proportional deduction is allowed where an asset is used partly in the production of income and partly for other purposes. 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 “Income determination, Foreign income” above). Other taxes form part of expenses and are deductible in full. Other significant items/Capital expenditure on scientific research, patents and intellectual property rights is written off over a number of years. In the case of scientific research carried on in Malta a deduction is granted at 120% of the expenditure. Certain pre-trading expenses are allowed 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. During the year 2001 the Industrial Development Act, which provided a comprehensive package of incentives, was subject to substantial changes and it was also renamed as the Business Promotion Act. The updated Act together with the Regulations issued in terms of that Act make a substantial overhaul of the applicable incentives in order to reflect Malta’s world trade organization obligations and forthcoming obligations if Malta joins the EU. The purpose of the law remains that of encouraging the establishment of new businesses and the expansion of existing ones. However, the Business Promotion Act removes export-related benefits and replaces them with new incentives. The new law also removes discrimination between residents and nonresidents. Most of the provisions of the Business Promotion Act and the Regulations came into force on November 1, 2000. Some transitional provisions have been included so as to provide for the changeover to the new regime. The most attractive incentives are reserved for enterprises carrying on activities in Malta which are included among the list of target activities. The accent is on high-value-added activities. Approval of a project’s eligibility for benefits by the Malta Development Corporation is required. In general eligibility does not depend on whether the enterprise produces for the local or for export markets. The main tax incentives provided by the Regulations issued in terms of the Business Promotion Act include the following: 1. New enterprises engaged in a trade consisting solely of target activities in Malta are entitled to reduced tax rates of 5% for the first seven years, 10% for the next six consecutive years and 15% for the next consecutive five years. Qualifying companies registered in Malta before November 1, 2000 can only qualify for the tax rate of 10% for six years and 15% for the following 5 years. 2. Enterprises qualifying for the reduced tax rates would also qualify for investment tax credits whereby a percentage of up to 50% (65% in the case of small and medium-sized enterprises) of qualifying expenditure is set off against the tax charge (not against taxable income). Any unutilized credits are carried forward and added to the credits for subsequent years. The amount carried forward is increased by 7%. 3. Enterprises that do not carry on target activities but that carry on a trade consisting solely of manufacturing, assembly, processing and similar activities, or analogous services of an industrial nature, may qualify for the operation of the value-added incentive scheme which basically grants reduced rates on a part of the trading profits. The same rates applicable in 1 above apply, but the difference here is that the reduced rates only apply to a multiple/factor (based on increased value added) of the increased chargeable income. 4. Investment allowances are granted over and above tax depreciation in the year of acquisition of plant and machinery or industrial buildings/structures. 5. No further tax is charged on distributions out of profits that had been taxed at a reduced rate; this benefit is also extended to amounts that had not suffered any tax on account of the investment allowance. 6. The tax rate applicable to profits reinvested in the enterprise pursuant to a project approved by the Malta Development Corporation is set at 15.75%. 7. The combination of certain tax treaties and Maltese domestic law lowers the Maltese tax rate on certain companies receiving certain industrial assistance to 15%. Capital investment/In the case of companies qualifying for benefits under the Business Promotion Act, an investment allowance of 50% on plant and machinery and of 20% on industrial buildings and structures is available, bringing the total allowances granted during the lifetime of the assets up to 150% and 120%, 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. 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. Substantial changes to Maltese trust law are in the pipeline and such changes are aimed, inter alia, at ensuring that trusts are as transparent as possible for local tax purposes and that any income is taxed as if it were received by the beneficiaries. 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) Albania…………………………………… 35 Australia ………………………………… 35 Austria…………………………………… 32.5 Belgium ………………………………… 35 Bulgaria ………………………………… 30 Canada…………………………………… 35 China, P.R ……………………………… 35 Croatia…………………………………… 35 Cyprus…………………………………… 35 Czech Republic ………………………… 35 Denmark………………………………… 35 Egypt …………………………………… 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 Syria …………………………………… 35 United Kingdom………………………… 35 Treaties relating to international air and shipping traffic are in force with Switzerland and the US. 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 that 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 the treaties with Austria, Bulgaria, Libya and Romania the tax rate is set at a lower rate). 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 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 provisions 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 eighteen months after the end of the relative accounting period. The employer is required to deduct income tax and social security contributions from the employees’ 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. The FSS Rules have been amended and updated mainly in order to take the new fringe benefits regulations into consideration. The definition of emoluments found in the FSS Rules now includes any fringe benefits provided to an employee. The fringe benefits regulations came into force as from January 1, 2001. Three main categories of fringe benefits have been identified by the regulations. These 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 Regulations (and also to the fringe benefits guidelines) 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 2002…………………… 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 on industrial buildings……………………………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 (25% of 30,000) ……………………………… - 7,500 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 has been deducted at source at 35% from dividends included gross at Lm100,000 in the net profits. 5. The net tax payable is Lm 296,875, 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 2001: US$1 =Lm0.4492. (3)