The Maltese legislation clearly specifies the types of assets for which the capital gains tax is imposed; usually, such gains are included in the taxable income of the company or individual in the calculation of the tax rate Malta. It is worth stating that the capital gains arising outside of Malta are only taxable in Malta if they accumulate to taxpayers who are residents and domiciliated in Malta.
The transfer of immovable property in Malta is subject to the Property Transfer Tax instead of capital gains tax.
In other words, the Property Transfer Tax is the cost of the transaction and not a tax imposed on the element of gain. The tax is set at 8% of the selling price or transfer value, yet there are a few exceptions for properties acquired before 2004. Also, if the property is sold within 5 years from the acquisition, the PTT is set at 5%.
Let’s dwell on each point separately opening up most important aspects.
I. Capital Gains Rules Malta -
Article 5 of the Income Tax Act
What is a capital gain?
A capital gain is a gain derived on the transfer of a capital asset.
The distinction between capital gains and income:
- certain capital gains fall outside the scope of the ITA (no blanket tax) à as example, antiques;
- different rules apply to chargeable capital gains and income à deduction for inflation;
- certain exemptions that apply under Article 5 do not apply to trading profits à transfer of shares listed on the MSE.
Territorial base – relevance in the context of capital gains tax in Malta:
A person who is ordinarily resident and domiciled in Malta is subject to tax on a worldwide basis, including tax on capital gains arising outside Malta.
However, when it comes to the remittance basis of taxation, whereas income that arises outside of Malta which is remitted to Malta by persons who are ordinarily resident in Malta but not domiciled in Malta is taxable in Malta, foreign source capital gains derived by the aforesaid persons are not taxable in Malta at all (i.e., even if the funds from the capital gain are remitted to Malta).
Article 5 of the Income tax Act applies to capital gains derived from the transfers of specific assets. Tax on capital gains is also governed by the Capital Gains Rules (S.L. 123.27) which set out detailed regulations on how the capital gain derived from such assets is to be computed.
Capital assets are chargeable to tax under Article 5:
- Immovable property – including rights over property (e.g., emphyteusis (‘cens’) and usufruct);
- Securities – ownership or usufruct thereof or rights over securities (including transfers of value from one person’s shares into another person’s shares without there being an actual transfer of shares);
- Business, goodwill and business permits;
- Certain types of intellectual property including assignment or cessation of rights under copyright, patents, trademarks and trade names and other intellectual property, ownership or usufruct thereof or rights over such assets;
- Beneficial interest in a trust whether a full or partial beneficial interest in a trust and interests in a partnership (gains arising on transfers are of beneficial interests and interests in a partnership fall outside the scope of the syllabus).
Transfers of assets which are not included in the list above are not chargeable to tax on capital gains. Thus, the transfer of assets such as antiques, fine arts, coins, stones and gems held as capital assets will not give rise to tax liability because capital gains arising on the transfer of such assets are still not considered to constitute “income” and thus fall outside the scope of the ITA charging provisions.
Thus, a capital gain may also arise on a donation (i.e., a consideration need not be paid for a transfer to occur) and on an exchange of assets (indeed this is treated as involving two transfers).
Furthermore, the legislation also deems that a transfer has occurred in certain specific instances despite the fact that no actual transfer of any asset has taken place from a legal perspective (such as in the case of transfers of value from one person’s shares into shares of another person).
The legislation specifically excludes transfers causa mortis (i.e., transfers of assets occurring on the death of a person from him to his heirs). Accordingly, transfers causa mortis do not give rise to income tax on capital gains.
Capital gains tax in Malta on transfers of securities:
“Securities” are defined in the ITA as:
- shares and stocks and such like instruments that participate in any way in the profits of the company and whose return is not limited to a fixed rate of return,
- units in a collective investment scheme, and
- units and such like instruments relating to linked long term business of insurance.
The definition includes only those securities that participate in any way in the profits of a company and excludes securities with a fixed rate of return, for example, non-participating preference shares, debentures and bonds.
Therefore, if a person transfers, for example, preference shares that carry a fixed dividend (e.g., 5% of nominal value per annum), the capital gain arising on the transfer of those shares will fall outside the scope of the charging provisions of the ITA and will not be subject to income tax.
Transfers of securities are taxable under Article 5 of the ITA only if they are held as a capital asset.
Otherwise, if the securities are held for trading purposes gains arising on their transfer fall to be taxable as business profits.
Capital gain / (loss) = Transfer value of securities (whether received or not) less Cost of acquisition and other allowable deductions in terms of the Capital Gains Rules.
Transfer value of shares:
The first component of the capital gains calculation is the Transfer Value.
Transfer value of shares → consideration which is paid on such transfer.
Consideration → the price determined by the parties involved in the transfer of the shares.
Transfer of shares → transfer of a “controlling interest” → the gain is calculated on the basis of the higher of the agreed consideration and the market value of the shares.
The market value need only be computed if the transfer of “shares in a company” is a transfer of a controlling interest in that company.
The term “shares in a company” means shares in:
- a company which is resident in Malta;
- a non-resident company that is wholly or partly (more than 1 share) owned by residents whose assets consist wholly or principally of immovable property; or
- a non-resident company that is wholly owned by non-residents (disregarding ownership by a resident of 1 share) whose assets consist wholly or principally of immovable property situated in Malta.
Meaning of “controlling interest”:
The first component of the capital gains calculation is the Transfer Value.
Transfer value of shares → consideration which is paid on such transfer.
Consideration → the price determined by the parties involved in the transfer of the shares.
Transfer of shares → transfer of a “controlling interest” → the gain is calculated on the basis of the higher of the agreed consideration and the market value of the shares.
A transfer is a transfer of a controlling interest when any one of the following criteria apply to the shares held by the transferor at any time during the period of 18 months preceding the transfer:
- The aggregate nominal value represents at least 25% of the nominal value of the issued share capital;
- The total voting rights attached to the shares represent at least 25% of the total voting rights;
- The total rights attached to the shares entitle the holder to be appointed or to nominate/elect or to withhold the appointment of a director;
- The holder was entitled to at least 25% of the total rights to profits available for distribution to the ordinary shareholders of the company.
The test is applied to the shares held by the transferor regardless of the number of shares that he transfers.
In all events, however, where a transfer of shares is considered to occur due to a reduction in the share capital of a company, irrespective of the rights attributable to the shares held by the shareholder whose shares are being reduced, the transfer is never considered to be a transfer of a controlling interest.
Transfers by related parties:
Where two or more transfers of shares in the same company are made by the same or related persons within a period of 18 months or less, then the relevant transfers are deemed to be one global transfer made by the same person on the date of the last transfer.
Thus, when considering a share transfer, one must not limit oneself at taking into account transfers effected by the same shareholder in the preceding 18 months, but one must also consider share transfers effected by related parties as defined below within the same period.
The share transfers in the same company made by the same or related parties within 18 months of the transfer at hand are aggregated.
The controlling interest test is applied to the total shares transferred by the relevant transactions, i.e., it is applied to the global transfer.
If the global transfer satisfies the controlling interest test, the consideration for the last transfer would be equal to the market value of the global transfer less the considerations for the previous transfers.
For instance, if the market value (arrived at in accordance with the Capital Gains Tax Rules Malta) of the Global Transfer is €5,000 and transfer values of prior relevant transfers amount to €2,000, the Market value of the last transfer will be €3,000.
For the purposes of the Capital Gains Tax Rules Malta, the term ‘related persons’ refers to the following:
Individuals: spouse, descendant in direct line, adoptive child, spouse of descendant or adoptive child, brother/sister, a company of which the individual is directly or indirectly a shareholder.
Bodies of persons: two bodies of persons are deemed to be related if they are companies within the same group of companies in term of Art.16, ITA, or directly or indirectly, controlled and beneficially owned as to more than 50% by same persons.
Determination of the market value of shares:
The market value of shares for capital gains purposes is by default considered to be a percentage of the total market value of the company for tax purposes. The market value of the company is determined on the basis of a prescriptive formula set out in the legislation.
The percentage of the market value of a company attached to a shareholder’s shares is determined in accordance with a weighted average formula:
Y = (0.4 x A) + (0.2 x B) + (0.4 x C)
A = percentage of the issued share capital represented by the nominal value of the shares,
B = percentage of the total voting rights in the company represented by the total voting rights attached to the shares, and
C = percentage of the profits available for distribution to the ordinary shareholders represented by the profits available for distribution to the holder of the shares.
Calculation the market value of a company:
Starting point is the market value of a company, it’s the Net Asset Value of the company resulting from the financial statements for the year preceding that in which the transfer is made, adjusted for:
- the value of immovable property held by the company (book value of the IP is replaced by the market value of the IP established through an architect`s valuation);
- Goodwill (calculated at two years’ average profits calculated by reference to the company’s profits before tax for the five financial years preceding that in which the transfer is made.
Calculating the value of goodwill:
- where the company holds an investment of at least 10% in another company, any dividends paid to the company out of the profits for the years being considered for the determination of goodwill are excluded from the calculation; and
- in the case of negative goodwill, the value to be taken is nil.
Non-equity shares (The book value of shares whose return is limited to a fixed rate of return is reduced from the Net Asset Value (i.e., these are treated as though they are a liability).
The value of shares held by the company in other companies (holding of shares in another company and such shares represent at least 10% of the nominal value of the issued share capital of that other company, the book value of the shares is replaced by the market value of those shares computed as per above.)
In all cases, the market value of a company cannot be negative.
The market value of a company computed in accordance with the Capital Gains Tax Rules Malta is:
- the Net Asset Value of the company in the year preceding that in which the transfer is made;
- +/- difference between the net book value and the market value of immovable property (established through an architect’s valuation);
- +/- difference between the net book value and the market value of 10%+ holdings – if the market value of the subsidiary is negative, the market value = nil;
- + goodwill (2 years of last 5 years’ average profits) – if the resulting figure is negative, goodwill = nil;
- book value of shares with a fixed rate of return.
In the event that in the year of transfer of the shares, but before the transfer, the company acquired or transferred immovable property, rights over immovable property or shares in a company representing at least 10% of the nominal value of the issued share capital of that company, the Net Asset Value used for the market valuation is that based on Balance Sheet prepared as at the date of the transfer (rather than for the previous financial year).
Where the market value calculated in accordance with the formula set out above is significantly higher than the market value resulting from a proper share valuation, the transferor is able to submit a share valuation prepared by an expert who is independent of the company
The Commissioner may at his absolute discretion accept such valuation and in such case the market value of the shares is considered to be the amount as determined by the expert. The share valuation is to be accompanied by the expert’s report which includes a detailed description of the methods of valuation which have been used in determining the market value of the shares.
The market value of shares quoted on a recognized stock exchange is in all cases taken to be the last quoted price before the date of transfer.
Cost of acquisition of the shares:
Capital gain / (loss) = Transfer value less Cost of acquisition and other allowable deductions.
The other component which is relevant to the capital gains computation is the cost of acquisition.
Shares acquired inter vivos:
Shares → acquired after 25 November 1992, the cost of acquisition → the actual purchase price. If the shares were acquired before 25 November 1992, the cost of acquisition is the higher of: actual purchase price; and Net Asset Value on the last balance sheet submitted to the Commissioner for Revenue by 18 December 1992 as adjusted for the market value of immovable property in the books at the time. This adjustment is represented by an increase for inflation from the year of acquisition of the property to 1991, i.e.
Shares acquired by donation or causa mortis:
In this case, the value of shares is established by reference to the lower of:
- The value declared in the causa mortis declaration; and
- The price they would have fetched if sold on the open market at the time of the acquisition.
Sale of shares acquired in different tranches:
When shares have been disposed of which had previously been acquired in different stages (and those shares belong to the same class of shares), the legislation deems that the shares that had been acquired earlier are the first ones that are deemed to have been transferred (i.e., FIFO basis).
Other allowable deductions:
A deduction for inflation in the context of a transfer of shares can be claimed when: the transfer is a transfer of a Controlling Interest; and the company owns, directly or indirectly, immovable property at the time of the transfer and an adjustment has been made to reflect the market value of the property.
Inflation is apportioned according to the portion of the property represented by the shares.
Provisional tax and other administrative requirements:
As with transfers of immovable property, provisional tax at 7% of the transfer value is payable within 15 days from the date of the share transfer.
When effecting payment of the provisional tax, certain schedules are required to be submitted.
When the transfer consists of a transfer of a controlling interest, 7% is taken on the higher of the consideration and the market value of the shares.
No provisional tax is payable on exempt transfers and on transfers of shares in public companies.
Capital gains on transfers of immovable property:
Transfers of immovable property are taxable under Article 5 of the ITA only where Article 5A does not apply.
Capital gain / (loss) = Consideration for the transfer (whether received or not) less Cost of acquisition and other allowable deductions in terms of the Capital Gains Rules.
Value of the asset being transferred:
As a general rule, the capital gains computation is based on the consideration. However, a transfer for a low price will be investigated.
In a donation, the property is deemed to be sold at a price equivalent to the market value (but certain donations are exempt).
When the consideration is paid in kind (for example in an exchange), the price is the market value of the asset acquired plus any cash consideration.
Cost of Acquisition is calculated as including the following:
- Purchase price or value as per declaration causa mortis (depending on the mode of acquisition),
- Duty paid on acquisition,
- Agency fees, legal and notarial fees,
- Expenditure wholly & exclusively incurred in developing property,
- Expenditure on improvements to the immovable property,
- A maintenance allowance established as 0.4% X cost price/cost of completion X number of years between acquisition or completion and disposal of the property,
- Other expenses directly related to the transfer (not exceeding 5% of the sale price), and
- Inflation allowance, where the cost is inflated in accordance with a formula and subject to limitations – this allowance cannot create or increase a capital loss.
The inflation allowance allowed as a deduction in the course of computing the capital gain on the transfer of immovable property as set out in point (viii) above is calculated in line with the following formula:
Index “yd” = inflation index for the year preceding the year of transfer index “ya” = inflation index for the year preceding the year in which the property was acquired or completed, whichever is later.
The inflation index for every year is published in the Housing (Decontrol) Ordinance.
A deduction is computed separately for improvements. In this case, the index “ya” would be the index for the year preceding the year in which costs for carrying out the improvements was incurred.
The deduction for inflation can never produce a loss or increase a loss. In other words, the inflation allowance can never exceed the transfer price less cost of acquisition less other deductions.
Malta capital gains tax rate on transfers of immovable property, provisional tax:
Upon a transfer of immovable property, provisional tax at 7% of the transfer value is payable on the deed of transfer (the requirement to pay provisional tax applies irrespective of whether or not the immovable property was held as a capital asset or for trading purposes)
The Commissioner may authorize a reduced rate of provisional tax only such authorization can only be given when the property was held as a capital asset.
Such authorization is given where the capital gain is less than 20% of selling price (this is so since if the capital gain is 20% of selling price, the 7% provisional tax on the selling price should approximately be equal to 35% of the capital gain).
Provisional tax is available as a credit as long as the gain is declared in a tax return. A refund of the provisional tax may be taken for instance in a situation where the company would have trading losses which are set off against the capital gain or if the tax on the capital gain is lower than the amount of provisional tax that was paid.
No provisional tax is payable on exempt transfers and on deeds of partition.
A capital loss is computed in the same manner as a capital gain. Any capital losses which are not absorbed or not entirely absorbed against capital gains during the same year of assessment, are carried forward to be set off against capital gains arising in subsequent years.
Capital losses can only be set-off exclusively against other capital gains. They cannot be set off against any other income.
Exemptions and relief for capital gains tax in Malta:
Whilst all capital gains arising on the transfer of the capital assets are in principle subject to income tax, Article 5 provides for certain exemptions or relief to be given in specific cases.
The exemptions and reliefs applicable under Article 5 apply only in the case of transfers of capital assets – they do not apply to trading profits.
Donations to close relatives:
A donation is considered as a deemed sale made at the market value of the asset being donated.
However, no tax is due when the transfer of the capital asset consists of immovable property or securities and the donation is made to: a spouse, descendants and ascendants in direct line and their spouses, or in absence of descendants to brothers, sisters and their descendants; and to certain philanthropic institutions.
This exemption applies to transfers of immovable property, securities, business, goodwill, trademarks, trade- names, copyright and patents.
The exemption incorporates a “claw back” provision. Where the asset which had been donated is disposed of by the donee within five years of the donation, the donee is charged on the gain ascertained by taking into account the cost of acquisition of the property at the time it was acquired by the donor (in other words, the gain that was previously exempt is recaptured).
However, when the property is sold by the donee after the lapse of five years the cost of acquisition is taken as being the value of the property as declared in the deed of donation.
Transfer of one’s own residence:
Own residence is defined as ‘principal residence’ that is the only or main residence (not summer home), but including a small garage (70 square meters), either attached or underlying the property or close-by (500m) and land which the owner has for his or her own occupation and enjoyment with that residence as its garden or grounds consisting of an area which is required for the reasonable enjoyment of the residence and sold through the same contract with the principal dwelling house. Any part of the house used for commercial purposes within 2 years of transfer is not considered to be ‘own residence’ and is excluded from the exemption.
The exemption applies when the following conditions are met: the residence is owned and occupied by the transferor; for a period of 3 years immediately prior to transfer. Periods of absence from Malta for instance for work / holiday / illness / studying are included in the 3 years; and disposed of within 12 months from vacating.
Transfer of shares listed on a recognized Stock Exchange:
Capital gains arising on the transfer of shares listed on a stock exchange recognized under the Financial Markets Act are exempt from tax.
However, this exemption does not apply where the transferor held the shares being transferred immediately prior to listing and the shares were admitted to listing on or after 1 January 2010. In such a case, the normal rules with respect to the capital gains tax rules Malta computation on share transfers will apply.
However, the transfer value taken into account is capped at the market value of the shares immediately upon listing. In addition, the cost of acquisition taken into account is the cost of acquisition of the original shares.
The gain from the transfer of these shares is deemed to constitute separate chargeable income and is subject to tax at a rate of 15%.
Assignments of property between spouses upon personal separation: the assignment of assets between spouses upon a judicial or consensual separation is exempt from income tax.
Roll-over relief: Article 5 grants an exemption from capital gains derived from the transfer of immovable property used in a business for at least 3 years if it is sold and replaced within 12 months by a similar property used solely for a business purpose. If the capital gain derived on the transfer of the ‘old’ immovable property exceeds the cost of the “new”’ property, tax will be charged on the excess. Furthermore, a claw-back provision applies if the new asset is subsequently sold without replacement.
Transfers of capital assets between companies that are considered to form part of the same group for capital
gains purposes are deemed to take place for no gain and no loss.
Accordingly, no income tax is chargeable on capital gains derived from the transfer of an asset by a company to another company if the two companies form part of the same group.
However, when the asset is subsequently sold by the group company to a person falling outside of the group, the cost of acquisition that is taken into account for computing the capital gain is the original cost of the asset. Accordingly, the capital gain that was previously exempt is recaptured.
Furthermore, where an asset is transferred intra-group and the acquiring company issues shares in exchange for the acquired assets, the legislation establishes how the cost of acquisition of the shares is calculated if such shares are subsequently sold.
For the purpose of calculating the gains made on the sale of the shares, the cost of acquisition of the said shares is reduced by the gain that was not taxed on the transfer of the asset. This rule however does not apply where a de-grouping charge is triggered as a result of the sale of the shares.
Transfers consisting of falling value shifts do not qualify for an intra-group tax income tax deferral.
“Definition of a group”:
For the capital gains purposes, two companies are considered to form part of the same group if: the two companies form part of the same group for group relief purposes (See Chapter 4); or the two companies are beneficially owned and controlled as to more than 50% by the same persons. Persons who do not fall within the definition of ‘company’ cannot benefit from the intra-group exemption.
However, when transfers of immovable property or shares in a “property company” are involved, the definition of a group is more restricted:
In this regard, the legislation also requires that the two companies must be ultimately owned and controlled by the same individuals and the shareholding and voting rights of each individual in the two companies must be substantially the same.
Where an individual holds different percentage interests in the two companies, as long as the difference does not exceed 20%, the individual is deemed to hold substantially the same percentage interest in either company.
Where one individual holds less than 20% of the nominal share value and voting rights in only one company, that individual can be ignored for the purposes of the ‘group test’.
Where there is more than one individual that holds less than 20% of the nominal share value and voting rights in only one company, such individuals are only ignored for the purposes of the ‘group test’ if collectively the said individuals hold less than the said 20%.
When the asset transferred intra-group is subsequently transferred outside the group, the base cost and the date of acquisition of the asset are taken as the original cost and the date when the asset was first acquired before the transfer from the first group company took place, i.e. when computing the gain/loss that is chargeable to tax upon a subsequent transfer, the cost and date of acquisition to be used will be the cost of the asset and the date when it was first purchased from the person outside the “group”, i.e. when the asset first entered the “group”.
Therefore, tax is triggered when the asset is ultimately transferred outside the group – article 5(9) provides for a deferral from tax in respect of gains derived on the transfer of ‘an asset’ from one company to another company in the same group.
Transfers upon the conversion of a business into a company:
No tax is chargeable on a transfer by an individual or a partnership to a limited liability company of a business as a going concern together with all the assets of the business in exchange for shares issued by that company.
For this exemption to apply, the company which is incorporated must be a limited liability company which is beneficially owned to the extent of at least 75% by the previous owner.
upon a subsequent transfer of the assets by the company, the cost of acquisition is deemed to be an amount equal to the original cost; and
upon a subsequent transfer of the shares allotted in exchange, their cost of acquisition is reduced by the exempt gain.
Exchange of shares upon a restructuring / re-organization:
No tax is chargeable under Article 5 on a transfer involving the exchange of shares on restructuring of holding upon mergers, demergers, divisions, amalgamations and re-organizations.
Such relief applies only where exchange does not produce changes:
in the individual direct or indirect beneficial owners of the companies involved; or
in the proportion in the value of each of the companies involved represented by the shares owned beneficially directly or indirectly by each such individual.
Furthermore, upon a subsequent transfer, the cost of the original shares will be deemed to be the cost of acquisition of the new shares. In this way, the exemption is clawed back.
Application for a ruling in the context of a merger, demerger, division, amalgamation or reorganization:
Subsidiary legislation provides the possibility for a taxpayer to obtain a ruling from the Commissioner in the context of a merger, demerger, division, amalgamation or reorganization of one or more companies.
The rules allow for the possibility for tax neutral mergers, demergers, divisions, amalgamations and reorganizations as long as they are carried out for bona fide purposes and approved accordingly through a ruling granted by the Commissioner.
Through the ruling, the Commissioner may disapply certain charging provisions contained in the ITA or to allow the application of certain tax relieving provisions outlined above in respect of one or more transactions carried out in the course of the merger, demerger, division, amalgamation or reorganization.
The issue of a ruling is subject to the submission of an application to the Commissioner for Revenue and to any information which the Commissioner may request for the purposes of providing a ruling.
In order to issue the ruling, the Commissioner must be satisfied that the transaction/s are to be effected for bona fide reasons and do not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is avoidance of liability to duty or tax.
In granting a positive ruling, the Commissioner is entitled to impose any condition whatsoever on any person (whether in existence or otherwise).
II. Property Transfer Tax Malta -
Article 5A of the Income Tax Act
Article 5A transfers of immovable property and rights over immovable property situated in Malta. Such tax
is governed also by the Property Transfer Tax Rules (S.L. 123.92).
The final tax on transfers of immovable property – Article 5A:
From 1 November 2005, the tax treatment of transfers of property was changed such that as a default rule any transfer of property in Malta is subject to a final tax that is imposed on the “transfer value” of the property rather than on the gain or profit that was derived from the transfer of the property. These rules have been substantially changed by virtue of Act XIII of 2015 (Budget Measures Implementation Act).
Indeed, this final tax is a separate and distinct tax from income tax (despite the fact that the rules imposing it are set out in the ITA).
Furthermore, as a general rule, the final tax does not distinguish between situations where the property being transferred was held as a capital asset or otherwise and therefore applies to any transfer of property.
Transfer of property → subject to the final tax → the gains or profits are exempt from income tax otherwise subject to double taxation).
Article 5A sets out various situations in which a transfer of the property can fall outside of the scope of the final tax. In which case, the normal rules already outlined will apply (i.e., the gains or profit derived on the transfer would be subject to income tax under Article 4 and Article 5 in the normal manner).
Administration of the final tax:
The final tax system is a self-assessment system. Tax at the applicable rate is declared on the deed of transfer and the Notary publishing the deed is obliged to collect the final tax and to remit the tax to the Inland Revenue Department on behalf of the transferor.
Assessment and additional tax:
Additional tax → whenever the Commissioner determines that tax is payable upon a transfer where no tax was paid or more tax should be paid than declared in the deed (e.g., the market value is greater than the transfer value as per the deed).
When the transfer value is less than 85% of the market value as determined by the Commissioner and the order is made within 12 months of the transfer notice to the Commissioner, the amount of additional tax is equal to the incremental tax charged.
Additional tax can be reduced if payment is made within specified periods, for example, if made within 90 days from the date of the order – only 10% of the additional tax is due.
Allocation of profits:
In the case of a company, distributable profits derived from transfers to which the final tax applies should be allocated to the Final Taxed Account.
The amount to be allocated to the Final Taxed Account is the consideration after deducting acquisition value, development costs and brokerage fees and the tax itself.
“Property” meaning for the purposes of Article 5A:
Property is defined by Article 5A as “immovable property situated in Malta and any right over such property”.
However, the term “immovable property” is not defined in the ITA and therefore, one must determine whether property qualifies as immovable by relying on the definition under the Civil Code. Under such definition, immovables include: lands and buildings; springs of water; conduits which serve for the conveyance of water in a tenement; trees attached to the ground; any movable thing that is attached to a tenement permanently to remain incorporated with it (e.g., a beam holding up a ceiling).
Accordingly, as a general rule, any transfer of immovable property as outlined above are subject to a final withholding tax under Article 5A, ITA unless: the immovable property being transferred is situated outside Malta, in which case Article 5A would not be applicable; or the transferor has the option to have the transfer not chargeable to tax under Article 5A – this option is only available in specific circumstances; or the transaction is exempt from tax under Article 5A.
Tax is typically chargeable at rates ranging from 2% to 12% on the transfer value of the property, depending on the specific circumstance as explained below.
Characteristics of a final tax, Malta property tax rates:
The tax is payable fully and finally at the time of the transfer.
Transferor → a company → the profits are allocated to the Final Taxed Account → no further tax is charged when they are distributed to the shareholders.
The final tax cannot be relieved by any expenditure, losses, bad debts, allowances or tax credits related to income or capital gains from other sources.
Any expenses, losses or bad debts related to transfers governed by the final tax system cannot be used to reopen the tax computation or to relieve the tax on income or capital gains from other sources or to relieve the final tax on any subsequent transfer.
Transfer value, Malta property tax rates:
For transfers of immovable property that took place until 17 November 2014, tax under Article 5A was generally charged at 12% of the transfer value.
As from 1 January 2015 the following new rates have been introduced:
8% of the transfer value → transfers of property acquired on or after 1 January 2004.
10% of the transfer value → transfers of property acquired before 1 January
5% of the transfer value → transfers of property not forming part of a project made not later than 5 years from the date of Similarly, to above, in cases where the property being transferred was acquired by virtue of an exempt intra-group transfer, the date of acquisition is deemed to be that when the property had previously last been acquired by a company by means of a transfer that did not qualify for the intra group exemption.
In addition, this provision does not apply where the said property was at any time within the period of 5 years preceding the transfer, owned by a person related to the transferor and the property formed part of a project.
2% of the transfer value → transfers of property owned by an individual or co-owned by two individuals who had acquired the property for the purpose establishing his or their sole ordinary residence, and the transfer is made not later than 3 years after the date of acquisition This provision only applies where the individual does not own any other residential property at the time of the transfer.
5% of the transfer value → Transfers of property situated in Valletta, acquired by the transferor before 31 December 2018 where such property has been restored or rehabilitated after the date of acquisition in accordance with a permit issued by MEPA and such restoration or rehabilitation is certified as completed by MEPA before the 31 December 2018, also provided that the transfer of the property is made not later than 5 years from the 31 December 2018.
7% of the transfer value → Property which has been restored in accordance with any scheme issued for this purpose by the Malta Environment and Planning Authority providing for the restoration of grade 1 or grade 2 scheduled property or property situated in an urban conservation area. This rate is applicable to transfers made on or after 1 January 2015 and before 1 January 2016 in respect of which a notice of a promise of sale has not been given to the Commissioner for Revenue before 17 November
5% of the transfer value → Transfers of immovable property situated in an urban conservation area or scheduled by MEPA and where the transferor declares to the notary receiving the deed that he has carried out works on the property in compliance with a permit issued by MEPA (application for permit has to have been done on or after 1 January 2015) for the rehabilitation or restoration of that immovable property are now subject to tax at this rate if all the following conditions are satisfied:
- transfer is made on or after 1 January 2016;
- property was not subject to a previous transfer that satisfied either these conditions or the conditions mentioned in the above paragraph;
- restoration or rehabilitation works have been certified by MEPA as having been completed in compliance with the relevant permit;
- the certificate in the point above is produced to the notary receiving the deed and notary produces a certified copy of this certificate to the Commissioner;
- transferor needs to submit to the Commissioner any forms or documentation that the Commissioner may require in connection with the said works and with the transfer
7% of the transfer value → In the case of transfers of immovable property acquired through a transmission causa mortis that happened before 25 November 1992.
The tax chargeable under Article 5A is not a tax on income or profits, but is calculated on the transfer value.
The ‘transfer value’ is the higher of: the consideration (whether received or not and whether in cash or in kind); and the market value, i.e., the price that the property would fetch if sold on the open market. The transferor is obliged to declare the market value when it is higher than the consideration.
Acquisition value, Malta property tax rates:
Since the taxation of transfers of immovable property under Article 5A is based on the transfer value, the acquisition value of the property being transferred is, in most cases, irrelevant.
However, in the case of transfers of immovable property:
- that was acquired by the transferor in terms of a transmission causa mortis that happened after 24 November, 1992; or
- that was acquired by the transferor in terms of a donation made more than five years before the date of the transfer in question, (this provision does not apply in those cases where the property is developed into more than one transferable property by the donee– i.e., a project) tax is charged at 12% on the difference between the transfer value and the acquisition value of the property.
Rule 4 of the Property Transfer Tax Rules regulates the determination of the acquisition value of property in these two cases.
In general, the acquisition value of property acquired by donation is the market value of the property at the time of acquisition.
The acquisition value of inherited property is the value declared in the notice of transmission causa mortis if such notice is filed within 6 months from the transmission. It is therefore the same value on which stamp duty would have been chargeable under the Duty on Documents and Transfers Act at the time of the acquisition (the declared value). If this is not filed within the 6-month time frame, then the acquisition value is considered to be the market value of the property at the time of its acquisition.
However, there are circumstances where the Commissioner for Revenue considers that the value declared at the time of acquisition is lower than the market value. In such cases, the Commissioner may raise an assessment. If such an assessment would have been raised and has become final and conclusive, the acquisition value would be that value as finally determined by the Commissioner.
The main focus behind the introduction of a Malta property tax was to tax the value of the transaction at a special rate instead of allowing for any deductions. However, brokerage fees are deductible from the amount on which tax is payable, subject to the satisfaction of the following conditions:
- signed receipt with brokers’ details,
- details entered in deed, and
- notary to produce certified copy of receipt to Commissioner for Revenue.
Where fees are paid in respect of more than one transfer, the deduction allowed is proportionate to the value that the property bears when compared with the total value of all the transfers.
Transfers of property acquired under different acquisitions:
In the case of property that was acquired under more than one acquisition, two (or more) transfers are deemed to take place, and the transfer value is apportioned in accordance with the Property Transfer Tax Rules.
The transfer of the whole and the transfer value are apportioned as follows:
- a separate acquisition of an undivided share is allocated a proportionate part of the whole transfer value;
- a separate acquisition of land the area of which has been defined in the deed of transfer is allocated such proportion of the whole transfer value that the area of that part bears to the whole area of the property being transferred;
- any other separate acquisition may be allocated a proportion of transfer value equivalent to the proportion that the area of that part bears to the whole area, provided that: a report on the areas is drawn by an architect; where the acquisition consisted of a construction which has not been demolished, the area is calculated by reference to the surface area of each level.
What if only part of the property is transferred? How will the acquisition value be apportioned?
When there is a transfer of part of the property, the acquisition value is apportioned in accordance with rules 13 – 16 of the Property Transfer Tax Rules, as follows:
- A transfer of an undivided share shall be attributed a proportionate part of the whole.
- A transfer of a divided part of land (or property developed over it, including airspace) the area of which has been defined in the deed, shall be attributed such proportion of the acquisition value that the area of that land bears to the whole area of land.
- Where costs cannot be determined as above mentioned, the apportionment is based on the area determined by a calculation showing the whole area of the property which is to include airspace and exclude any areas over which the transferor retains rights of ownership.
- If an apportionment is not made in accordance with these rules, no deduction for the acquisition value is allowed.
Transfers excluded from Article 5A:
Certain property transfers are not subject to tax under Article 5A, i.e., not subject to the final tax system.
The transfers that are excluded are either transfers to which the provisions of Article 5A do not apply or transfers which may be excluded at the option of the transferor.
Such transfers are not exempt from tax – rather they are instead subject to income tax in the normal manner, in terms of Article 5.
Mandatory exclusions from Article 5A:
- Transfers causa mortis, they’re excluded also under Article 5, ITA.
- Transfers that took place before 1st November 2005;
- Transfers of property situated outside Malta (given that immovable property situated outside of Malta is not considered to be property for the purposes of Article 5A);
- Transfers pursuant to a lease agreement concluded before 1st November 2005 that included the option to purchase of the property at an agreed price;
- Transfers made by means of a judicial sale by auction or in the course of a winding up of a company when there is a winding up by Court.
Transfers on which an opt out from Article 5A may apply (option):
- Transfers in respect of a property which is co-owned by two individuals and where one of the co-owners makes a transfer to the other co-owner and the co-owners had declared in the deed of the acquisition of that property that they had acquired it for the purpose of establishing therein or constructing thereon their sole ordinary residence
- Transfers of property that had been used in a business for a period of at least three years and that is replaced within one year by property used solely for a similar business purpose,
- Transfers by a non-resident who is also subject to tax in his home country on the profits from the As from 1 January 2015, any provisional tax payable on such transfer is not available for refund and therefore this results in a minimum taxation of 7% on the consideration received for the property.
- Transfer of property forming part of a project made by a company which has issued bonds to the public and such bonds are listed on a stock exchange recognized under the Financial Markets Act, and if the transferor elects. Such election may only be made if the first transfer is made on or after 1 April 2015 and where the reason for the offer and use of the proceeds from the bonds, as disclosed in the prospectus published when the bonds are offered to the public, is solely to develop and construct the said project.
Malta property tax, exemptions from tax under Article 5A.
Article 5A grants exemptions on transfers that qualify for an exemption or relief under Article 5, subject to some variations in the conditions.
Transfer of own residence:
Own residence is defined as a dwelling house being the sole or main residence (not a summer home), but including a small garage (70 square metres) sold through the same contract and either attached or underlying the property or close-by (within 500m from the house).
Any part of the house used for commercial purposes within 2 years of transfer is not considered to be ‘own residence’ and is excluded from the exemption.
The exemption applies when the following conditions are met:
- the residence is owned and occupied by the transferor;
- for a period of 3 years immediately prior to Periods of absence from Malta for instance for work / holiday / illness / studying are included in the 3 years; and
- disposed of within 12 months from
When the transferor had occupied the property as his own residence for at least three years but had not owned it for the full three-year period, the period of ownership of transferor occupier is deemed to be longer in the following cases:
- When he had acquired the property from the Housing Authority and had been allowed to occupy the property pursuant to the konvenju is deemed to be a period in which the property was owned by the
- When he had inherited the property from a direct ascendant or from his spouse and the dwelling was used as the main residence of the deceased, the period of ownership of the deceased is added to that of the
- When he had owned the property jointly with his spouse and had acquired it pursuant to a personal separation or, following the death of his spouse, upon a partition with the heirs, the period of ownership of the spouse is added to that of the
A donation is considered as a deemed sale made at the market value of the property; however, no tax is due when the transfer is a donation to: spouse, descendants and ascendants in direct line and their spouses, or in absence of descendants to brothers, sisters and their descendants; or to philanthropic institutions that are exempt from tax.
A transfer of property which is held as a capital asset from one company to another which are considered to form part of the same group is exempt from tax.
Companies are considered to form part of the same group where such companies are ultimately owned and controlled by the same individuals and the shareholding and voting rights of each individual in the two companies is “substantially” the same.
An intra-group transfer of property that is not held as a capital asset would still be exempt under Article 5A but only if: the transfer is part of a restructuring involving the transfer of the whole or part of a company’s business to another company; and the property had been owned by the transferring company for more than 12 years.
A claw back provision applies in the case of intra-group transfers. If a company owns property which it had acquired under an exempt intra-group transfer and, within 6 years from that transfer, it does not remain within the original group (“de-grouping”), that company is deemed to have transferred and re-acquired that asset and becomes subject to tax accordingly.
Property assigned between spouses as a result of (judicial/consensual) separation or divorce:
Property forming part of the community of acquests or owned in common (co-ownership) between spouses that is:
- assigned to one of the spouses on dissolution of community of acquests (not necessarily as a result of separation);
- partitioned between spouses, in the case of co-owned property;
- partitioned between the surviving spouse and the heirs is exempt from tax in terms of Article 5A.
Conversion into a limited liability company:
Property transferred upon the incorporation of a business or a partnership en nom collectif as a going concern into a limited liability company is exempt from tax.
Transfer of property in the course of a liquidation of a company:
A transfer of property in the course of a winding up or pursuant to a scheme of distribution of a company to the shareholder or persons directly related to the shareholder subject to a number of conditions:
- the shareholder is an individual who owns, directly or indirectly, not less than 95% of the share capital and voting rights of the company being liquidated;
- the shares must have been held for more than 5 years;
- the said property consists of any immovable property including land; and
- the property must have been held as a capital asset by the company for more than 5 years.
On a subsequent transfer of the property, the transfer will be subject to the final withholding tax at the appropriate rate on the transfer value without the possibility of opting out.
This rule applies even if the transfer is made to a related person which qualifies for an exemption on donated property and such person transfers the property within 5 years from the donation.
Article 5A also grants an exemption from tax on the transfer of property in any other case where the law grants an exemption from income tax. For instance, exemptions on transfers of property under Article 12(1) of the ITA (e.g., where the transfer is made by a tax-exempt philanthropic organization).
Tax on property Malta, transfers of rights:
The transfer value of rights over property is the higher of (e.g., the sale of property under a title of emphytheusis): premium or any other capital sum received by the transferor; and market value reduced by the capitalized value of the ground rent or any other income payable.
The acquisition value of emphyteusis for a period of more than 50 years (relevant for property that has been acquired through inheritance or by donation) is determined as if a transfer of the property is being effected.
8% final tax applies on the consideration when there is an emphyteutical concession for less than 50 years and a concession of any other right over property.
The acquisition value (relevant for property that has been acquired through inheritance or by donation Article 5A(5)(b)) of the right transferred on redemption when the owner of the directum dominium is not the person who made the emphyteutical concession, is the value of the directum dominium declared in the declaration causa mortis (or the market value at the time of succession as the case may be).
Property transfer tax Malta in case of conversions of companies into partnerships and partnerships into companies:
Conversion of partnership into a company:
A commercial partnership may be converted into another commercial partnership of any other kind.
The ITA provides that where a commercial partnership en nom collectif or a commercial partnership en commandite is converted into a company or elects to be treated as a company for Maltese income tax purposes no transfer or acquisition of assets is deemed to take place for tax purposes.
However, on a subsequent transfer of the said assets by the company, the cost and date of acquisition taken into account for the purpose of determining the chargeable income or gains is the cost and date of acquisition by the commercial partnership that has been converted.
Conversion of company into partnership:
When a company is converted into a commercial partnership en nom collectif or a commercial partnership en commandite which does not elect to be treated as a company for Maltese income tax purposes, different rules apply.
Upon the conversion, no transfer or acquisition of assets is deemed to take place for tax purposes.
On a subsequent transfer of the assets, the partnership will be deemed to have acquired the assets on the date and at the cost at which they had been acquired by the company.
However, on conversion, any balance of distributable profits allocated to any of the tax accounts, existing on the day the company ceases to be a company, are deemed to have been distributed by way of dividend on the said day – this includes a deemed distribution of any profits allocated to the untaxed account, with the consequent liability to the 15% withholding tax.
When the company being converted into a partnership, had acquired property that had qualified for the intra-group exemption within the preceding 6 years, the conversion will trigger the de-grouping provisions.
The conversion does not constitute a de-grouping event when the transferor of an asset transferred under an exempt intra-group transfer is converted into a partnership.
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