Category: Corporate Services

Malta is an attractive and progressive jurisdiction for company incorporations. Located within the EU, it is introducing new laws and regimes, on an on-going basis, to consolidate this position. New laws include ‘New Consolidated Group Rules,’  introduced in May 2019, and new ‘Patent Box Regime Rules,’ implemented in August 2019.

NEW CONSOLIDATED GROUP RULES

Malta Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid, by the company distributing dividends, is made available to shareholder as a tax credit.

A non-Malta resident shareholder receiving profit dividends, can request a tax refund.

New Consolidated Group Rules – Cash Flow Benefits

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These come into  effect for tax year 2020, relating to relevant organisations with accounting periods in calendar year 2019.

• One of the advantages of the new consolidation regime is that cash flow benefits can be enjoyed by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

Further details can be found in Article: IN609 Malta Introduces Consolidated New Group Rules – Offering Cash Flow Advantages.

NEW PATENT BOX REGIME

Malta’s New Patent Box Regime

Malta published new Patent Box Regime (Deduction) Rules in August 2019 and the Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that can be deducted from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Further details can be found in Article: IN610: Malta’s New Patent Box Regime.

   Additional Information

If you would like further information regarding The New Consolidated Group Rules or the New Patent Box Regime in Malta, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Malta published new Patent Box Regime (Deduction) Rules  in August 2019. The rules apply to relevant income derived from qualifying intellectual property (qualifying “IP”) as from 1 January 2019.

Qualifying Intellectual Property

Qualifying IP is defined as:

• a patent or patents, whether issued or applied for (if applied for it assumes the patent is granted);
• assets for which protection rights have been granted in relation to national, European or international legislation;
• utility models;
• software, protected by copyright, under national or international legislation;
• in relation to small entities, other IP assets defined as being, ‘useful, novel and having features similar to those of patents’. Malta Enterprise will define and confirm this category by issuing certificates as appropriate

Marketing related intellectual property assets including; brands, trademarks tradenames do not constitute qualifying IP.

Conditions

Detailed information regarding the conditions, to claim the deduction, are available from the Dixcart office in Malta.

Deduction Calculation

The Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that is deductible from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Qualifying IP Expenditure

The income or gains derived from qualifying IP include:

• taxable income which is derived from the use, enjoyment and employment of the qualifying IP;
• royalty or similar income;
• advances and similar income derived from the qualifying IP;
• any sum paid for the granting of a licence in relation to the qualifying IP;
• compensation for infringements in respect of qualifying IP;
• gains on disposal of qualifying IP.

The determination of qualifying income or gains must always be made using an appropriate Transfer Pricing method.

The costs taken into account when calculating Qualifying IP Expenditure consist of:

• expenditure incurred directly and/or relevant subcontracting costs; and
• other equivalent expenditure but excluding; interest payments, building costs, acquisition costs and/or any costs that cannot be directly linked to a specific qualifying IP asset.

Expenditure for general and speculative R&D which cannot be included in the qualifying IP expenditure of a specific qualifying IP asset can be divided pro rata across all of the qualifying IP assets.

Total IP Expenditure

Qualifying IP Expenditure can never exceed Total IP Expenditure.

Total IP Expenditure comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP:

• relevant expenditure incurred by the beneficiary and constituting qualifying IP expenditure and other expenditure incurred by another person which would constitute qualifying IP expenditure had it been incurred by the beneficiary; and
• acquisition costs and expenditure for outsourcing activities.

Losses from Qualifying IP

If the beneficiary incurs a loss in respect of the qualifying IP which he is entitled to set against income or gains he can elect to benefit from one of the following:

• a deduction corresponding to 5% of the loss; or
• a deduction corresponding to the full amount of the loss subject to:
  • the beneficiary not being entitled to claim the tax treatment for any subsequent year of assessment; and
  • in any subsequent year of assessment, any such loss being deducted from the “Income or Gains derived from qualifying IP” until such losses are fully utilised.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Background

On 3 May 2019, Portugal introduced amendments to Portuguese Taw Law, in accordance with the European Union (EU) Anti-Tax Avoidance Directive (ATAD). ATAD provides a set of anti-tax avoidance provisions across EU Member States. Provisions include:

• Controlled Foreign Company (CFC) rules – to deter profit shifting to a low, or zero tax country
• Exit Taxation – to prevent companies avoiding tax when transferring assets
• General Anti-abuse rule – to counteract aggressive tax planning when other rules do not apply
• Hybrid Mismatch rule – to prevent double non-taxation of defined income between jurisdictions
• Interest Limitation – to discourage artificial debt arrangements, designed to minimise taxes

With the exception of the Hybrid Mismatch rule, Portugal has introduced new rules to implement the above measures into Portuguese Tax Law.

Controlled Foreign Company Rules (CFC Rules)

To be subject to the Portuguese CFC rules, the following criteria apply:

• The territory is included in the Portuguese tax haven list, OR
• The corporate tax rate, relevant to the subsidiary, is less than 50% of the tax rate due under Portuguese corporate tax rules (less than 10.5%, as the Portuguese corporate tax rate is 21%).

CFC rules do not apply if the “passive” income does not exceed 25% of the total income of the entity – i.e. royalties, dividends, income from financial leasing, sale of shares, operations exclusive of the banking system, interest, and defined commercial income obtained from related parties, that add little or no economic value.

The minimum participation threshold has been reduced from 25% to 10% of the share capital or voting rights, for taxpayers resident in Portugal. This applies when at least 50% of the shares and rights are held, directly or indirectly by taxpayers (corporate or individuals), resident in Portugal. Share capital and rights, held by related parties to the CFC, are also taken into account.

If certain conditions are met, it may be possible to deduct tax losses.

Depending on the specific circumstances, a number of additional rules may apply, relating to the taxation of CFCs.

Exit Taxation

Key changes relate to the transfer of assets from Portugal to another country.

The exit tax provision has been amended; the taxpayer of a Portuguese resident company, transferring tax residence abroad to an EU or EEA Member State, can no longer opt for the payment of tax when the gains are realised.

There are two options:

• Immediate payment of the full tax amount, OR
• Payment of the full tax amount in equal instalments over a five year period (under certain circumstances).

If the second option is chosen, a bank guarantee may be requested, late payment interest charged and annual tax returns will be required. Specific procedures and criteria must be met and Dixcart recommend that professional advice should be sought.

General Anti-Abuse Rule

The General Anti-Abuse rule is now applicable to ALL matters considered to be abusive (tax avoidance and evasion), that do not have a “genuine” reason taking into account “all facts and circumstances”.

Where the situation is considered to be abusive, any corresponding tax advantage will be assumed to have been enjoyed by the Ultimate Beneficial Owner (UBO).

Hybrid Mismatch Rule

Portugal will implement the Hybrid Mismatch rule at a future date.

Limit: Tax Loss Deductibility

The Portuguese Corporate Income Tax (CIT) Code already included an interest deduction limitation rule, under which the deduction of net financing expenses was capped by the higher of the following two amounts:

• 30% of the taxpayer’s earnings, before interest, tax, depreciation and repayment, adjusted for tax purposes, OR
• €1 million.

To comply with ATAD requirements, the definition of “net financing expenses” has been amended. Comprehensive details are available on request.

Additional Information

For additional information on the changes made to the Portuguese Tax Law, and the implementation of the Anti-Tax Avoidance Directive in Portugal, please contact the Dixcart office in Portugal: advice.portugal@dixcart.com. Alternatively, please speak to your usual Dixcart contact.

Malta – Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid by the company distributing dividends, is made available to the shareholder as a tax credit, to avoid double taxation on the same income (for the company and subsequently for the shareholder).

A shareholder receiving profit dividends can request a tax refund on those profits paid by the company in Malta. The amount of the refund depends on the nature of the distributed profit and if these have benefited, or not, from double taxation relief.

Cash Flow Benefits of New Consolidated Group Rules

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These will come into  effect for year of assessment 2020, relating to ‘fiscal units’ with accounting periods commencing in calendar year 2019.

• One of the advantages of the consolidation regime is the cash flow benefits that can be enjoyed, by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

The new ‘Consolidated Group Rules’ will make income tax calculations, reporting of group companies and other group matters, easier, as detailed in the next section. This is because all income, outgoings and expenses derived by ‘transparent companies’ will be considered as if incurred by the principal taxpayer. The same applies to  transactions between the principal taxpayer and ‘transparent subsidiaries’.

What is a ‘Fiscal Unit’ and How is it Established?

The parent company, and any relevant subsidiaries, can make an election to form a ‘fiscal unit’, provided that each subsidiary has the same accounting period as the parent company and as long as two of the following conditions are met:

• The parent company holds at least 95% of the voting rights in the subsidiary company;
• The parent company is beneficially entitled to at least 95% of the profit available for distribution to the ordinary shareholders of the subsidiary company;
• The parent company would be beneficially entitled to at least 95% of the assets of the subsidiary company available for distribution to its ordinary shareholders, in the event of a winding up.

Where such an election has been successfully made, each ‘95% subsidiary’ will form part of the ‘fiscal unit’ of the parent company, with such subsidiaries being referred to as ‘transparent subsidiaries.’ Where a ‘transparent subsidiary’ is itself a parent company, its ‘95% subsidiaries’ will also join the fiscal unit.

Companies which are not resident in Malta can form part of a ‘fiscal unit’, however the principal taxpayer must at all times be a company registered in Malta, and with a permanent establishment in Malta.

The ‘Fiscal Unit Regime’ is optional.

Chargeable Income

Members of a fiscal unit, other than the principal taxpayer, will be considered transparent entities for Maltese income tax purposes. As a result, income and gains earned by these transparent subsidiaries will be attributed to the principal taxpayer. Similarly, expenditure and capital allowances incurred by transparent subsidiaries will be attributed to the principal taxpayer.

Transactions between members of the fiscal unit will not be taken into account, with the exception of transfers of immovable property situated in Malta, and transfers of property companies.

Income or gains allocated to the principal taxpayer will retain their nature and source. The ‘rules’, however, incorporate a number of ‘deemed source rules’.

One such rule is that income or gains, earned by a non-Malta tax resident transparent subsidiary, will be attributed to the permanent establishment of the principal taxpayer situated outside of Malta, as long as the transparent subsidiary maintains sufficient substance in that particular jurisdiction.

Compliance Obligations

The principal taxpayer will be required to prepare a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit.

The principal taxpayer will also be responsible for filing the tax return of the fiscal unit. The other ‘members’ of the fiscal unit are exempt from filing their respective tax returns, however, all members are jointly and severally liable for the payment of tax.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

The EU Code of Conduct Group (Business Taxation) (“the COCG”) have been working with the Crown Dependencies (Guernsey, Isle of Man and Jersey) to review ‘economic substance’. The EU Code Group concluded that the Isle of Man and Guernsey were compliant with most of the EU principles of good tax governance, including the general principles of “fair taxation”. However, one area that raised concern was the area of  substance.

The Isle of Man and Guernsey, have made a commitment to address these concerns by the end of 2018 and the islands have subsequently worked together with the COCG to develop proposals to meet their commitments.

Implications

Increasingly substance must be demonstrated, and clients are advised to use professionals such as Dixcart, who are experienced in providing the level of substance needed to ensure that the appropriate measures are in place.

The main elements of the COCG proposals include:

Identification of Organisations Conducting “Relevant Activities”

The classification of “relevant activities” has been derived from ‘categories of geographically mobile income’, as identified by the OECD Forum on Harmful Tax Practices. These include organisations undertaking the following activities:

• banking
• insurance
• intellectual property (“IP”)
• finance and leasing
• fund management
• headquarter type activities
• holding company activities; and
• shipping

Impose Substance Requirements on Organisations Undertaking Relevant Activities

This is a two part process.

Part 1: “Directed and Managed”

Resident companies undertaking relevant activities will be required to demonstrate that the company is “directed and managed” in the jurisdiction, as follows:

• Meetings of the Board of Directors in the jurisdiction at adequate frequency, given the level of decision-making required.
• During these meetings, there must be a quorum of the Board of Directors physically present in the jurisdiction.
• Strategic company decisions must be made at the meetings of the Board of Directors and the minutes must reflect those decisions.
• All company records and minutes must be kept in the jurisdiction.
• The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Part 2: Core Income Generating Activities (“CIGA”)

Tax resident companies, in any of the Crown Dependencies must demonstrate that the core income generation activities are undertaken in that location (either by the company or a third party – with suitable resources and receiving appropriate payment).

Companies conducting a relevant activity must demonstrate:

• That an adequate level of (qualified) employees are employed in the appropriate Crown Dependency location, or that there is an adequate level of expenditure on outsourcing to a suitably qualified service company in that location, proportionate to the activities of the company.
• That there is an adequate level of annual expenditure incurred in the appropriate Crown Dependency, or an adequate level of expenditure on outsourcing to a service company in that location, proportionate to the activities of the company.
• That there are adequate physical offices and/or premises in the appropriate Crown Dependency location, or an adequate level of expenditure on outsourcing to a service company in that location, commensurate with the activities of the company.

Enforcement of the Substance Requirements

In order to demonstrate the effective enforcement of these measures, companies that refuse to comply with the provisions will suffer penalties and sanctions, and could ultimately be struck off.

Impact on Other Jurisdictions

These measures, and the relevant processes, apply to jurisdictions other than Guernsey, Isle of Man and Jersey, and include Bermuda, BVI, Cayman Islands, UAE, and an additional 90 other jurisdictions.

Summary

Whilst the measures are significant, much of what is required is already in place in a number of the relevant jurisdictions.

Clients, however, need to appreciate that if a business is based ‘offshore’ it must have a ‘Permanent Establishment’ with real substance and value in that specific jurisdiction.

How Dixcart can Help Provide Substance, Management and Control in Guernsey and the Isle of Man

Dixcart has Business Centres in Guernsey and the Isle of Man which offer serviced office space and can also assist with the recruitment of staff and the provision of professional services, if required.

The Dixcart Group also has a long history of providing professional management to the shareholders of companies, with services including:

• Full management and control of companies through the appointment of Dixcart directors. These directors not only manage and control the company in the Isle of Man and Guernsey, but also provide an auditable record of that management and control.
• Full administration support, including day to day bookkeeping, accounts preparation and tax compliance services.
• In certain circumstances Dixcart can provide non-executive directors to sit on the Boards of companies. These non-executive directors will monitor developments in the company and help protect the clients’ interests.

Additional Information

If you would like additional information, please speak to the Dixcart office in Guernsey: advice.guernsey@dixcart.com or to the Dixcart office in the Isle of Man: advice.iom@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey. Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

History –  The ‘Substance Regime’

On 1^st January 2019 the ”substance-based regime” was introduced into the Crown Dependencies (Guernsey, Jersey and the Isle of Man).

This has meant that since January 2019, companies engaging in “relevant activities” have had to demonstrate that they meet specific substance requirements, to avoid sanctions.

This ‘Order’ is in response to a comprehensive review, carried out by the EU Code of Conduct Group on Business Taxation (COCG), to assess over 90 jurisdictions, including the Crown Dependencies, against standards of:

– Tax transparency;

– Fair taxation;

– Compliance with anti-BEPS (base-erosion profit shifting).

The review process took place in 2017 and although the COCG were satisfied that generally the Crown Dependencies met the standards for tax transparency and compliance with anti-BEPS measures, the COGC raised concerns that the jurisdictions did not have:

“A legal substance requirement for entities doing business in or through the jurisdiction.”

Crown Dependencies – Response

Stage 1  –  To identify  “relevant activities”.

The type of structures that were reviewed, included:  banks, insurance, shipping, and fund management. It would generally be expected that substance obligations would need to be met for these “relevant activities”.

Where it is greyer and more challenging is in relation to corporate and private client relevant activities, where substance is not straightforward. Specific areas that need to be considered, by professional advisors, include:

• Financing and leasing operations;
• Headquarter Companies and activities;
• Holding Company activities;
• The holding of Intellectual Property;
• Distribution and service centres.

These latter five areas have the potential to be forgotten, by many private client and group organisations.

Not only are offshore jurisdictions being challenged but also onshore jurisdictions, such as: Ireland, Netherlands and Luxembourg, are starting to bring in their own version of the substance requirements.

Stage 2 – To impose substance requirements on companies undertaking relevant activities.

This will be achieved through the completion of local tax returns in the jurisdiction where the entity is established. Additional detail is required in several areas, including; levels of employment (in and out of the jurisdiction), outsourcing services, permanent establishment (rent, infrastructure), true control and management, and the use of local skills.

Failure to meet substance requirements will result in penalties, and ultimately ‘striking off’ of the company, and the assets de-faulting to the state.

Why are Jurisdictions Enforcing Such Regimes?

Each jurisdiction has agreed to undertake assessment by the Organisation for Economic Cooperation and Development (OECD), to monitor the implementation of the substance based regime. The failure of a jurisdiction to implement a suitable economic regime will result in it becoming a “grey” or “black” list regime, which will ultimately lead to economic sanctions against the jurisdiction. No jurisdiction, at a political or economic level, can afford for this to happen.

Tax transparency and substance must be met by organisations. They need to comprehensively address these requirements through action and investment to help find long term solutions.

The “True” Tool Kit to Meet the Requirements of a Substance Based Regime   

Dixcart have invested extensively, over the past ten years, to help establish economic substance with clients. This has been achieved through investment in several different aspects of the business:

1. The provision of serviced offices across five locations within the Dixcart Group – many Dixcart clients have taken up the opportunity to use serviced offices within the Dixcart Group.

2. The provision of suitably qualified and experienced Dixcart professionals to appropriate company boards, often where specific industry knowledge is required.

3. The provision of cross border arrangements where the client and Dixcart directors provide a joint working environment to deliver a long-term solution for the client position. Dixcart provide the statutory legal support and the client the in-depth specific knowledge in relation to the industry and business.

4. ‘Local’ advice regarding the recruitment of staff and Non-Executive Directors to the Board.

5. Introductions locally to other services providers with relevant skills: banks, compliance, regulators, IT, etc.

Please visit the Dixcart Business Centre website for further information regarding the Dixcart serviced office facilities: www.dixcartbc.com

Additional Information

If you would like additional information regarding the Dixcart Business Centres in: Guernsey, Isle of Man, Malta, Portugal and the UK, please speak to your usual Dixcart contact or to the Dixcart offices in Guernsey or the Isle of Man: advice.guernsey@dixcart.com and advice.iom@dixcart.com.

An additional Dixcart Business Centre is opening in Cyprus, later this year (2019).

 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Historically, Swiss companies have enjoyed a zero tax regime for capital gains and dividend income.

Trading companies, however,  have always attracted a local canton (region) tax rate. The new tax changes focus on trading profits.

New Corporate Tax Rate – Geneva

As from January 2020, the corporate tax rate (combined federal and cantonal tax) for all companies in Geneva, will be 13.99%.

The Swiss federal tax rate is consistent but corporate tax rates (federal tax, plus cantonal tax) will vary across different Swiss cantons, depending on the specific cantonal tax rates approved in the referendums, which took place in May 2019.

Background

The European Union (EU) gave Switzerland until the end of 2018 to abolish a number of tax privileges that are not internationally acceptable. The main objective of the reforms is to achieve this while retaining the international attractiveness of the Swiss Corporate Tax Regime

On 28 September 2018, the final draft of the ‘Federal Act on Tax Reform Financing’ (“TRAF”) was approved by the Swiss Parliament.

Results of the Referendum

The referendum on TRAF took place on 19 May 2019, and the new Law is to be implemented on 1 January 2020.

A large majority of Swiss voters accepted the 2020 Swiss federal tax reforms and a large majority of Geneva voters also accepted the Geneva cantonal tax reforms (each canton had its own vote on its specific cantonal tax reforms).

Summary of Principles

At the federal level, the profit allocation rules of principal companies and Swiss finance branches are to be repealed.

At the cantonal level, tax privileges for holding companies, domicile companies and mixed companies will be abolished.

Patent Box

Net profit from domestic and foreign patents are to be taxed separately with a maximum reduction of 90% (precise rate subject to cantonal discretion). This Patent Box Regime meets the OECD2 standard and the 90% maximum relief is mandatory at the cantonal level.

Before the Patent Box is applied for the first time, the corresponding tax deducted R&D expenditures must be recaptured and taxed.

R&D Super Deduction

An R&D super deduction of 50% for domestic R&D is optional, at the cantonal level.

Additional Measures

• Overall tax relief of 70% is mandatory at the cantonal level; the patent box, R&D super deduction and a notional interest deduction (NID), in addition to possible depreciations from an early transition from ‘privileged’ to ‘ordinary’ taxation, are subject to an overall tax relief of 70%.

• Extension of the flat-rate tax credits on the permanent establishments of foreign companies; Swiss permanent establishments of foreign companies will, in most circumstances, be able to claim withholding tax on income from third countries, with a flat-rate tax credit.

• So called ‘high’ tax cantons have the option to introduce a notional interest rate deduction (NID) on excess capital. It is anticipated currently that only the canton of Zurich will meet the specified requirements.

• Adjustments are being made to the taxation of dividend income from qualifying participations. At the federal level, the tax rate increases to a standard rate of 70% (previously 50% for business investments and 60% for private investments). At a cantonal level there is a harmonisation of the relief method and a minimum tax rate of 50% (precise rate at cantonal discretion).

• Swiss-listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends equal to the same amount.

Summary

Cantons are expected to receive an increased share of federal tax: 21.2% (previously 17%).

• This will enable the majority of Swiss cantons to provide attractive corporate tax rate of between 12% and 18% (combined federal and cantonal tax).

Additional Information

If you would like additional information regarding the changes to the Swiss Corporate Tax Regime, please contact Christine Breitler at the Dixcart office in Switzerland: advice.switzerland@dixcart.com. Alternatively please speak to your usual Dixcart contact.

Background

Malta has established itself as an innovative island.

Practical, workable regulations have been successfully introduced for gaming and blockchain/crypto businesses and Malta is now preparing for the next generation of development within the financial service sector. New initiatives include Malta ‘FinTech Vision 2021’ and the ‘Artificial Intelligence Project’.

FinTech Vision 2021

The Malta Financial Services Authority (MFSA) has launched its strategic vision and values for the next three years.

MFSA is currently assessing viable solutions to nurture innovation and to facilitate access to FinTech.

Ongoing assessments include:

• Regulatory sandbox – an environment in which businesses can test innovative products, services, business models and delivery mechanisms, without immediately having to be governed by the compliance regulations for that specific type of business. Several international financial service regulators have adopted this strategy to scrutinise innovator proposals, on a case by case basis, against a set of eligibility criteria.
• Innovation Hub – the ‘Innovation Hub’ was set-up to support and provide guidance to innovative firms, in particular regarding the understanding and interpretation of applicable regulations. This guidance can be supplied by email/written correspondence, as well as via face-to-face meetings, between the relevant, innovative firm and Malta MFSA personnel.
• Innovation partnerships – an innovation partnership, or innovation accelerator, is a partnership arrangement between innovators, incumbent firms and/or public sector authorities, to accelerate the growth or development of a particular new initiative.
• New MFSA website – as part of FinTech Vision 2021, the MFSA has replaced its website with one that is more user centric.
• Interactive rulebooks – interactive rulebooks form an integral part of the new website. These interactive rulebooks provide the industry with a ‘state of the art’ online platform, facilitating access to the Maltese regulatory framework and helping to ensure that the regulations are consistently implemented.
• Use and application of supervisory technology – the MFSA is implementing technically sophisticated supervisory technology. This technology, commonly termed ‘SupTech’, will enable the MFSA to automate certain processes and will make the supervision of licence holders more efficient.
• MFSA ‘Licence Holder Portal’ – the ‘Licence Holder Portal’ is currently being upgraded, to meet changing and additional business demands, and new European Union obligations. This Portal will shortly be renamed the ‘FinHub Portal’.
• Cyber-security – the MFSA will be issuing guidelines on cybersecurity for regulated entities, with the aim of enhancing licence holders’ cyber-resilience, particularly for those firms reliant on technology. The proposed guidelines will set out the Authority’s minimum expectations as to how entities should be addressing cyber-risk, and the necessary safeguards they should have in place. The guidelines will also provide assessment methodology that will be used to determine compliance in this key area.

Artificial Intelligence

Malta is developing a national Artificial Intelligence (AI) strategy as part of an initiative to become one of the leading nations in this category.

The Maltese Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri, has stated: “With this strategy Malta is set to gain a strategic commercial advantage in the global economy sphere, generating investment and positioning itself as a leader in the AI field. The Maltese Government aspires to be a country that can help companies that invest in and serve Malta, not only to establish their business, but to commercialise and scale up using public policy.”

Malta is developing a coherent strategy to attract foreign AI companies to establish themselves in Malta.

Silvio Schembri explained that the Malta AI Taskforce has identified three ‘Strategic Pillars’:

• Investment, start-ups and innovation;
• Public sector adoption;
• Private sector adoption.

These ‘Pillars’ will be supported by three ‘Enablers’:

• Education and workforce;
• Legal and ethical framework;
• Ecosystem infrastructure.

Conclusion and Additional Information

Malta is positioning itself as a dynamic jurisdiction, across a number of new high-tech sectors. It is vital that the regulatory framework is appropriate and robust and Malta is developing, not only a coordinated compliance strategy, but is also identifying the Government support needed to optimise growth opportunities.

If you would like further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Background

Malta is one of the countries most advanced in terms of legislation regarding crypto-currencies and has developed a pragmatic approach in relation to the taxation of this asset type.

The Malta Commissioner for Revenue has issued three guidelines regarding the tax treatment of distributed ledger technology (‘DLT’) assets. Each of the guidelines relates to a different tax: income tax, VAT, and the duty payable on documents and transfers.

Categories of DLT Assets

For the purposes of taxation DLT assets are categorised as follows:

• Coins – this category refers to DLT assets, that do not have any characteristics of a security, that have no connection with any project or equity relating to the issuer, and whose utility, value or application is not directly related to the redemption of goods or services. Functionally coins represent the cryptographic equivalent of ‘fiat currencies’.
• Financial tokens – this category refers to DLT assets with characteristics that are similar to equities, debentures, units in collective investment schemes, or derivatives, and include financial instruments. Generally, they are known as ‘security’, ‘asset’ or ‘asset-backed’ tokens. Alternatively, such tokens may provide potential reward, based on performance or voting rights, or represent ownership in assets, or rights secured by an asset, as in asset-backed tokens, or a combination of the above.
• Utility tokens – this category refers to a DLT asset whose use, value or application is restricted solely to the acquisition of goods or services, either within the DLT platform, or within a limited network of DLT platforms. This category also includes all other DLT assets that are tokens and whose use is restricted solely to the acquisition of goods or services, whether or not listed on a DLT exchange. They have no relation to the equity of the issuer and do not have the characteristics of a security.

It may be possible for a token to contain the features of a financial and a utility token, depending on the terms and conditions of the relevant token. In this case the token is referred to as a ‘hybrid’ and taxation will depend on how the hybrid token is used; as a financial token, as a utility token, or as a coin.

Income Tax Treatment of DLT Assets

A transaction involving DLT assets, in terms of income tax, is treated in the same way as any other transaction, with reference to the nature of the activities, the status of the parties and the specific facts and circumstances of the particular case.

Ultimately, the tax treatment of any type of DLT asset will not necessarily be determined by its categorisation, but will depend on the purpose for and context in which it is used.

When a payment is made or received in a cryptocurrency it is treated like a payment in any other currency, for income tax purposes. Accordingly, for businesses which accept payment for goods or services in cryptocurrency, there is no change to when revenue is recognised or the manner in which taxable profit is calculated. The same applies to payments of remuneration, such as salaries or wages, which are regarded as taxable in terms of the general principles. When a payment is made by means of the transfer of a financial or utility token, it is treated like any other ‘payment in kind’.

For the purpose of income tax, transactions involving DLT assets, are evaluated with reference to the market value of the DLT asset:

• the rate established by the relevant Maltese Authority, OR (if such a rate is not available);
• by reference to the average quoted price on a reputable exchange, on the date of the relevant transaction or event, OR;
• other methodology that meets the requirements of the Maltese Commissioner of Revenue.

Examples of the Application of General Tax Principles to Transactions Involving DLT Assets

• Transactions in COINS

The tax treatment of transactions involving DLT coins is identical to the tax treatment of transactions involving fiat currency. The profit realised from exchanging coins is treated in the same manner as the profit derived from the exchange of fiat currency. Gains and/or profit within the revenue account, from the mining of cryptocurrency, represent income. DLT coins fall outside the scope of capital gains tax.

• Return on FINANCIAL TOKENS

Returns derived from the holding of financial tokens, for example, payments such as dividends, interest, premiums etc., in a cryptocurrency or in another currency, or in kind, are treated as income for tax purposes.

• Transfers of FINANCIAL and UTILITY TOKENS

The tax treatment of the transfer of a financial or utility token, depends on whether the transfer is a trading transaction or the transfer of a capital asset.

If the transfer is a trading transaction, the consideration will be treated as a receipt in the revenue account and will be treated as a trading profit.

In the case of the transfer of a financial token, if it is not a trading transaction, the transfer may fall under the scope of capital gains tax.

• Treatment of INITIAL OFFERINGS

An initial offering of financial tokens (or token generation event), typically  involves raising capital. The proceeds of such an issue are not treated as the income of the issuer and the issue of new tokens is not treated as a transfer, for the purposes of capital gains tax. Gains or profits realised from the provision of services or the supply of goods will represent income.

• VAT

In relation to VAT, a transaction involving DLT assets is analysed in the same manner as any other transaction, with the place of supply of the goods or services always being taken into consideration.

• DUTY on Documents and Transfers

When a transfer involves DLT assets that have the same characteristics as ‘marketable securities’, they are subject to duty, in accordance with the provisions of the Malta ‘Duty on Documents and Transfers Act’.

Additional Information

If you would like further information on this subject, please contact the Dixcart office in Malta:advice.malta@dixcart.com or your usual Dixcart contact.

Malta’s Strategic Location in the Mediterranean

Malta is a country located in a strategic position in the middle of the Mediterranean. Due to its location Malta has been a major centre for maritime operations for generations. This historical heritage and robust transport links, via air and sea, help to make Malta an ideal hub to establish an international company.

Malta’s strategic geographical location make it the gateway port into Europe from Africa, Israel and beyond. Malta is an attractive place to do business, offering year-round great weather and short commutes to and from Europe with direct flights to several European capitals.

Malta Free Port

As one of the Mediterranean’s key transhipment ports, Malta Freeport represents a strategic platform for shipping lines that have chosen it as their Mediterranean hub port, being located at the crossroads of some of the world’s greatest shipping routes and at the heart of the Europe/Maghreb/Middle East triangle.

Since 1988, Malta Freeport has enjoyed remarkable growth and is now a major transhipment port in the Mediterranean region, enjoying positive international recognition, as a reliable and credible port, with global carriers.

Malta Freeport focuses on the ‘hub’ concept, whereby cargo is discharged from large mother vessels and relayed to a network of regional ports by regular and frequent feeder vessels. Around 96% of Malta Freeport’s container traffic is transhipment business. This logistical concept offers various benefits to Malta Freeport clients, including; fewer mainline port calls, and reduced voyage times through minimal diversions and shorter transit times, enabling shipping companies to concentrate on profitable voyage legs.

New Free Zones – Authorised Undertakings and Permitted Activities

EU member states can introduce free zones, where non-European Union goods may be stored in the EU, without being subject to import duty, other charges and/or relevant commercial policies, as long as the activities being undertaken in the free trade zones do not prohibit the entry or exit of goods into or from the customs territory of the European Union.

To meet the increasing demand for Malta Freeport services, the Maltese Authorities have created new legislation, the ‘Malta Free Zones Act’. This provides for the regulation and administration of the business of the Free Zones in Malta, with the objective of encouraging economic development and the generation of employment in Malta.

The Free Zones Act provides a regulatory framework and has introduced the concept of public/private partnerships to operate in the free zones.

What Type of Activities Can be Carried Out In the Malta Free Trade Zones?

A trade or business being undertaken in the Free Trade Zone must principally be:

• the production or manufacturing of goods, materials, commodities, equipment, plant or machinery;
• the assembly, testing, repair and/or maintenance of goods, materials, commodities, equipment, plant or machinery;
• the labelling,  packaging,  sorting,  dividing, warehousing,  storage,  exhibition,  assembly and any related activities, in relation to goods, materials, commodities, equipment, plant or machinery, including where such goods are acquired in bulk and are to be processed within a Free Zone in preparation for their eventual sale or distribution;
• any activity involving the provision of services relative to, or concerning logistics as may be approved by the Maltese Authorities;
• the carrying out of any activities as may be approved by the Maltese Authorities during the time that the goods are being held in a Free Zone or in preparation for their eventual transhipment;
• any activity concerned solely with the conduct of a Free Zone including, but not limited to; stevedoring, wharfage, operation of terminals and container handling;
• the rendering   of   services   analogous   or complementary to the activities referred to above; and
• the carrying out of industrial, commercial or service activity as prescribed in guidelines issued by the Maltese Authorities.

Additional Information

The Dixcart office in Malta has extensive experience in establishing and advising trading companies including those choosing to use the Free Port in Malta.

For further assistance please contact us on advice.malta@dixcart.com or speak to your usual Dixcart contact.