EU Anti-Tax Avoidance Directive implemented in Malta

On the 11th December 2018, Legal Notice 411 entitled ‘European Union Anti-Tax Avoidance Directives Implementation Regulations’ was published in the Malta Government Gazette.

These Regulations, which shall come into force on 1st January 2019, implement the provisions of Directive (EU) 2016/1164 of 12 July 2016 adopted by the Council of the European Union lays down rules against tax avoidance practices that directly affect the functioning of the internal market. They apply to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies, including entities that are not resident in Malta but that have a permanent establishment in Malta provided that they are subject to tax in Malta as companies.

The Directive presents key tax policy changes to Maltese law which include an interest limitation rule where exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA). This rule is meant to deter artificial debt arrangements intended to minimise tax.

Also introduced is an exit tax on capital gains at an amount equal to the market value of the transferred assets, at the time of exit of the asset. This tax, as an exception to the other regulations, shall come into force on 1st January 2020 and is directed at preventing companies from avoiding tax when relocating assets.

The Directive also includes a general anti-abuse rule (GAAR rule) as a response to aggressive tax planning, and also a controlled foreign company rule (CFC rule) addressed at deterring profit shifting to a low or zero tax country, which requires that an entity, or a permanent establishment of which the profits are not subject to tax or are exempt from tax, shall be treated as a CFC when certain conditions are met.

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