BDO Corporate Tax News

This article has been updated. It was originally published on 26 February 2024


In a legal notice published on 20 February 2024 (Legal Notice 32 of 2024), Malta transposed the EU minimum taxation directive into its domestic law, and on 27 February, the tax authorities released a guidance note on the measures (for an analysis of the guidance note, see the tax alert prepared by BDO in Malta).

The rules are deemed to have come into force on 31 December 2023 but are restricted to the limited transposition of Chapters I, VIII, IX and of the directive, as the minimum measures that are relevant to ensure the proper functioning of the global minimum level of taxation for MNE groups and large-scale domestic groups as Malta’s Minister of Finance announced on 27 October 2023 that Malta intends to postpone the application of the IIR and the UTPR for six years as provided in article 50(1) of the directive). This effectively results in the postponed application (by up to six years) of an Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR) and also means that Malta is not introducing a Qualified Domestic Minimum Top-up Tax (QDMTT) for the time being.

The rules apply to constituent entities (CEs) located in Malta that are members of an MNE group or a large-scale domestic group that has annual revenue exceeding EUR 750 million (including the revenue of excluded entities) in its ultimate parent entity’s (UPE) consolidated financial statements in at least two of the four fiscal years immediately preceding the tested fiscal year.

In line with the EU directive, the rules do not apply to the following entities: government entities, international organisations, non-profit organisations, pension funds, investment funds or real estate investment vehicles that are UPEs and to entities at least 85% owned (95% in certain cases) by such entities and subject to specified conditions. There is a possibility not to treat an entity as an excluded entity.

The substantive and administrative provisions of the rules transposed into Malta’s law include the following:

Establishing the location of a CE

• A CE is deemed to be in the jurisdiction where it is considered resident for tax purposes based on its place of management, place of establishment or similar criteria, and where this cannot be determined, the jurisdiction where it was created. 
• A flow-through entity is deemed to be stateless unless it is a UPE or required to apply an IIR, in which case it is deemed to be located in the jurisdiction where it was created.
• Additional rules apply to determine the location of a permanent establishment, depending on the rule under which such an establishment would be deemed to be created. 
• Reference is made to tax treaties when a CE is deemed to be resident in two jurisdictions, and in the absence of an applicable treaty, a deeming rule assigns the location of the CE to the jurisdiction that charged the higher amount of covered taxes for the fiscal year.

 Obligation to file a top-up tax information return

• A CE located in Malta must file a top-up tax information return with the Commissioner, using the form and in such manner as required by the Commissioner (see below). If there are multiple CEs in Malta, a designated local entity may be appointed to file the information return.
• A CE will not be required to file a top-up tax information return if the return for the reporting fiscal year was filed by the UPE or the designated filing entity located in a jurisdiction that has a qualifying competent authority agreement in effect with Malta. In this case, the Malta CE must notify the Commissioner of the identity of the entity that is filing the return, as well as the jurisdiction in which that entity is located.
• The top-up tax information return is to be filed in a standard template and should include the following information:
  • Identification of the CEs (including their tax identification numbers, if any), the jurisdiction in which they are located and their status;
  • Information on the overall corporate structure of the MNE group or large-scale domestic group, including the controlling interests in the CEs held by other CEs;
  • Information necessary to compute (i) the ETR for each jurisdiction and the top-up tax of each CE; (ii) the top-up tax of a member of a joint venture group; (iii) the allocation of top-up tax under the IIR and the UTPR to each jurisdiction; and (iv) a record of any elections made in accordance with the rules.
• Additional provisions apply in the case of a CE located in Malta with a UPE in a third country that applies rules that are determined to be equivalent to the Maltese rules.
• The top-up tax information return must be filed within 15 months from the last day of the reporting fiscal year and any notification within 12 months from the last day of the reporting fiscal year. However, in the first year of application of the rules, both the top-up tax information return and the notification can be filed no later than 18 months after the last day of the reporting fiscal year. 
• The rules indicate the validity period of the various elections under the EU directive.
• Penalties apply for failure to comply:
  • A penalty of EUR 200 plus an additional EUR 100 per day of default, capped at EUR 20,000, for failure to file the top-up tax information return;
  • A penalty of EUR 200 plus an additional EUR 50 per day of default, capped at EUR 5,000, for failure to report the required information in the top-up tax information return; and
  • A penalty of EUR 200 plus an additional EUR 500 per day of default, capped at EUR 5,000, for failure to notify the Commissioner of the identity of the entity that is filing the top-up tax information return and the jurisdiction in which it is located. The same penalty applies when the designated local entity fails to notify the Commissioner of the start of the initial phase of the MNE group’s international activity. 

 Transition rules

• When determining the ETR for a jurisdiction in a transition year, and for each subsequent fiscal year, the MNE group or large-scale domestic group must take into account all deferred tax assets and deferred tax liabilities reflected or disclosed in the financial accounts of all CEs in a jurisdiction for the transition year. Deferred tax assets and liabilities are to be taken at the lower of the minimum tax rate and the applicable domestic tax rate. However, a deferred tax asset that has been recorded at a tax rate lower than the minimum tax rate may be taken into account at the minimum rate if the taxpayer is able to demonstrate that the deferred tax asset is attributable to a qualifying loss.
• The impact of any valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset is disregarded. In addition, deferred tax assets arising from items excluded from the computation of qualifying income or loss are also excluded from the computation above, when such deferred tax assets are generated in a transaction that takes place after 30 November 2021.
• Special rules apply to establish the taxation basis of assets transferred between CEs after 30 November 2021 and before the commencement of a transition year.

Substance-based income exclusions 

• The directive provides that when computing the top-up tax, the net qualifying income for a jurisdiction will be reduced (although there is a possibility of a voluntary election to ignore this rule) by an amount equal to the sum of the payroll carve-out and the tangible asset carve-out for each CE located in the jurisdiction. The carve-outs for the first 10 years is as follows: