Businesses have been exploiting gaps in the architecture of the international tax system to artificially shift profits to low-tax or no-tax jurisdictions, thus eroding the tax-base (“BEPS”). Exit Taxation has the function of ensuring that where a taxpayer moves assets or its tax residence out of the tax jurisdiction of a State, that State taxes the economic value of any capital gain created in its territory even though that gain has not yet been realised at the time of the exit.
Regulation 5 (of Exit Taxation) of Subsidiary Legislation 123.187, implementing the provisions of Directive (EU) 2016/1164 (the Anti-Tax Avoidance Directive, or simply “ATAD I”), shall come into force on 1st January 2020. The Regulation will apply to all companies as well as other entities, trusts and similar arrangements that are subject to tax in Malta in the same manner as companies, including entities that are not resident in Malta but have a Permanent Establishment (“PE”) in Malta provided that they are subject to tax in Malta as companies.
Under same, a taxpayer shall be subject to tax on capital gains that are to be calculated at an amount equal to the market value of the transferred assets (based on the arm’s length principle), less their value for tax purposes, at the time of exit, in any of the following circumstances:
(a) where a taxpayer transfers assets from its head office (“HO”) in Malta to its PE in another EU Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
(b) where a taxpayer transfers assets from its PE in Malta to its HO or another PE in another Member State or in a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer;
(c) where a taxpayer transfers its tax residence from Malta to another EU Member State or to a third country, except for those assets which remain effectively connected with a PE in Malta;
(d) where a taxpayer transfers the business carried on by its PE from Malta to another EU Member State or to a third country in so far as Malta no longer has the right to tax capital gains from the transfer of such assets due to the transfer.
The taxpayer may elect to immediately (by not later than the Tax Return date) pay the amount of exit tax assessed or, in specific cases, defer payment of the amount of tax assessed by paying it in instalments over five (5) years, together with interest and possibly a guarantee.
If you are doing business in the European Union, ATAD I and ATAD II might well affect you. Contact us for further assistance.
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