Professional Level – Essentials Module

The Association of Chartered Certified Accountants

The Malta Institute of Accountants

Time allowedReading and planning: 15 minutesWriting: 3 hours

This paper is divided into two sections:

Section A – BOTH questions are compulsory and MUST be attempted

Section B – TWO questions ONLY to be attempted

Tax rates and allowances are on pages 2–5

Do NOT open this paper until instructed by the supervisor.During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.This question paper must not be removed from the examination hall.

Advanced Taxation(Malta)

Friday 5 June 2015

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SUPPLEMENTARY INSTRUCTIONS1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future2. Calculations and workings need only be made to the nearest Euro3. All apportionments should be made to the nearest month unless stated otherwise4. All workings should be shown

TAX RATES AND ALLOWANCES

The following tax rates and allowances for 2014 (year of assessment 2015) are to be used in answering the questions.

Individual income tax

Resident individual tax ratesMarried couples – joint computation Other individuals€ €

0 – 11,900 0% 0 – 8,500 0%Next 9,300 15% Next 6,000 15%Next 7,500 25% Next 5,000 25%Next 31,300 29% Next 40,500 29%Remainder 35% Remainder 35%

Parent rates€

0 – 9,800 0%Next 6,000 15%Next 5,400 25%Next 38,800 29%Remainder 35%

Non-resident individuals€

0 – 700 0%Next 2,400 20%Next 4,700 30%Remainder 35%

Returned migrants

Married couples Others€ €

0 – 5,900 0% 0 – 4,200 0%Remainder 15% Remainder 15%

Capital allowances – Income Tax Act

Industrial buildings and structuresInitial allowance 10%Wear and tear allowance 2%

Plant and machineryWear and tear allowance as indicated in the question where applicable

Capital allowances – Business Promotion Act

Investment allowances Industrial buildings and structures 20%Plant and machinery 50%

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Corporate income tax

Standard rate 35%

Value added tax (VAT)

Standard rate 18%Reduced rate 5%Reduced rate – accommodation 7%

Car fringe benefit

Annual value of benefit = (vehicle use + fuel value + maintenance value) x private use percentage

Vehicle use % of vehicle valueVehicle not more than six years old 17%Vehicle more than six years old 10%

Fuel value % of vehicle valueVehicle value not exceeding €28,000 3%Vehicle value exceeding €28,000 5%

Maintenance value % of vehicle valueVehicle value not exceeding €28,000 3%Vehicle value exceeding €28,000 5%

Car value Private usepercentage

Not exceeding €16,310 30%Exceeding €16,310 but not €21,000 40%Exceeding €21,000 but not €32,620 50%Exceeding €32,620 but not €46,600 55%Exceeding €46,600 60%

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Capital gains

Index of inflation

1988 439·621989 443·391990 456·611991 468·211992 475·891993 495·601994 516·061995 536·611996 549·951997 567·951998 580·611999 593·002000 607·072001 624·852002 638·542003 646·842004 664·882005 684·882006 703·882007 712·682008 743·052009 758·582010 770·072011 791·022012 810·162013 821·342014 823.89

Applicability of increase for inflation

Cost of acquisition/improvementsx

index(yd) – index(ya)–––––––––––––––––––––––––––– ––––––––––––––––––

1 index(ya)

Where:index(yd) is the index for the year immediately preceding that in which the transfer is made;index(ya) is the index for the year immediately preceding that in which the property in question had been acquiredor completed, whichever is the later, or, when it relates to improvements, for the year immediately preceding that inwhich the cost of carrying out the improvements was incurred.

Transfer of value

Y = (A – B) + C – D

Where:‘Y’ represents the value transferred or acquired by a person‘A’ is the market value of the shares held in the company immediately before the change‘B’ is the market value of the shares held in the company immediately after the change‘C’ is the consideration paid by the person for the acquisition of shares or additional shares issued by the company,

where the change consists of an issue of share capital for consideration‘D’ is the amount paid by the company in respect of a cancellation of shares held by the person, where the change

consists of a reduction of share capital

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Cost of acquisition of shares in the transfer of value

Z = ((A – B)/A) x E

Where: ‘Z’ represents the amount to be determined‘A’ is the market value of the shares held by the transferor immediately before the change‘B’ is the market value of the shares held by the transferor immediately after the change ‘E’ is the cost of acquisition of the shares held by the transferor immediately before the change

Investment Aid Regulations

Definition of a medium sized enterprise

An enterprise which is not a small enterprise and:

– has fewer than 250 employees; and– has an annual turnover not exceeding €50 million and/or annual balance sheet total not exceeding €43 million;

and– is to be treated as being independent.

Definition of a small enterprise

An enterprise which:

– has fewer than 50 employees; and– has an annual turnover and/or annual balance sheet total not exceeding €10 million; and– is to be treated as being independent.

Stamp duty

Standard rate €2 for every €100 in value or part thereofProperty companies (as defined) €5 for every €100 in value or part thereof

Annual market rent (tax accounting)

The annual market rent of immovable property situated in Malta owned and used by a company for the purpose ofits activities (excluding property which is rented by the said company to other parties) is calculated by multiplying theaggregate surface area in square metres of all floors of such premises so owned and used by €250 per annum.

Tax refund calculation when a company benefits from a reduced rate in terms of a tax treaty

Y = (R – 5%)/R

Where: ‘Y’ represents the rate to be determined; and‘R’ represents the reduced rate.

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Section A – BOTH questions are compulsory and MUST be attempted

1 You should assume that today’s date is 1 September 2014

Qatar Co is a company incorporated and managed and controlled in Qatar. Mrs Becker, an individual resident in Qatar,owns 100% of Qatar Co. Qatar Co holds as its sole asset 50% of the shares of JV Co, a company incorporated andmanaged and controlled in Malta. The other 50% of the shares in JV Co is held by Borg Co, a company incorporatedand managed and controlled in Malta. Mr Borg, an individual resident in Malta, owns 100% of Borg Co.

JV Co was set up in 2002 with an issued share capital of €10,000,000, divided into 10,000,000 shares of €1each, and this remains JV Co’s current share capital. Following its incorporation, JV Co set up Listed Co, a companyincorporated and managed and controlled in Malta, as a 100% subsidiary, also with an issued share capital of€10,000,000. The only assets on JV Co’s balance sheet are its bank account and its investment in Listed Co. As at31 December 2013, JV Co’s financial statements show a net asset value of €12,000,000.

In 2002, Listed Co started the construction of two five star hotels in Malta. In 2009, 60% of Listed Co’s shares werelisted on the Malta Stock Exchange in order to obtain further capital for this expansion of its business. JV Co kept theremaining 40% shareholding in its own name.

JV Co’s profits for the five-year period 2009 to 2013 consisted solely of dividends distributed by Listed Co in the samefinancial year in which they were earned. These dividends, gross of tax, were as follows:

2009: €300,0002010: €300,0002011: €400,0002012: €200,0002013: €800,000

Listed Co currently owns four five star hotels in Malta, which were built in 2003, 2003, 2010 and 2010 respectively.The book value of the hotels (comprising the cost of acquisition of the land and cost of construction of each of thehotels) is €4,000,000, €5,000,000, €4,500,000 and €4,000,000 respectively. However, their market value as atthe end of 2013, as determined by an architect, is €7,000,000, €8,000,000, €8,500,000 and €7,750,000respectively. No debt was used to fund the construction of any of the hotels.

Listed Co’s profits before tax for the last five years have been as follows:

2009: €1,000,0002010: €750,0002011: €850,0002012: €450,0002013: €1,750,000

As at 31 December 2013, the financial statements of Listed Co show a net asset value of €30,000,000. Thecompany did not transfer or acquire any immovable property, or rights over any immovable property, in 2013, but islooking to build further hotels outside Malta in the future.

Qatar Co wishes to sell its investment in JV Co. US Co, a company incorporated and managed and controlled in theUnited States, has approached Qatar Co with an offer to acquire Qatar Co’s holding in JV Co for €14,000,000.

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Qatar Co Borg Co

JV Co

Listed Co

Two alternative options are being considered for the transfer of the shares as follows:

Option 1: Qatar Co will transfer its 50% shareholding in JV Co to US Co.

Option 2: JV Co will transfer its 40% shareholding in Listed Co equally to Qatar Co and Borg Co so that Qatar Co andBorg Co will each hold 20% of the shares in Listed Co. Following this transfer, the shares in Listed Co held by QatarCo will be listed on the Malta Stock Exchange and may then be transferred to US Co.

Whichever option is chosen, the proposed transfers will take place in November 2014.

Required:

(a) Draft a letter to Mrs Becker explaining the Maltese income tax and stamp duty implications of each of theproposed alternatives (Option 1 and Option 2) for the disposal of Qatar Co’s interest in JV Co.

Note: In answering this question, you should assume the following:

1. The book value of Listed Co’s hotels is equivalent to their respective costs of acquisition.2. The proposed transfer of the listed shares in Listed Co (under Option 2) will be allowed in terms of the

applicable listing rules.3. Malta and Qatar have signed a double tax treaty which is similar in all relevant respects to the OECD

Model Tax Convention.4. There will be no tax payable in Qatar under either Option 1 or Option 2.5. JV Co’s holding in Listed Co is accounted for at its cost of acquisition. (24 marks)

(b) Support the explanations in your answer to part (a) with calculations of the Maltese income tax payable, ifany, under Option 1. (7 marks)

Professional marks will be awarded for the format and presentation of the letter and the effective communicationof the information. (4 marks)

(35 marks)

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2 You should assume that today’s date is 5 June 2015

International Milk is a multinational group of companies which are ultimately owned by persons who are not residentand not domiciled in Malta. International Milk Co is the ultimate parent company of the group and it holds 100% ofthe shares in IM Hold Co. Both International Milk Co and IM Holdco are incorporated outside Malta and are notmanaged or controlled in Malta.

IM Hold Co has various interests in Malta as follows:

– 100% of the shares in IM (Malta) Co, a company resident and domiciled in Malta. IM (Malta) Co is a minorityshareholder in two companies which are neither resident nor domiciled in Malta, British Milk and Dubai Trade.IM (Malta) Co derives no income except for the dividend income it receives from these two holdings.

– British Milk, is a company resident and domiciled in the United Kingdom, which owns a large farm andsurrounding land in England. IM (Malta) Co has a 7·5% shareholding in British Milk, which entitles it to7·5% of the dividend and voting rights in British Milk. This shareholding was acquired for €2 million in July2013 and in 2014, IM (Malta) Co derived dividend income of €500,000 from British Milk.

– Dubai Trade is a company resident and domiciled in Dubai, which is a distributor of various consumablesin Dubai. IM (Malta) Co has a 5% shareholding in Dubai Trade, which entitles it to 5% of the dividend andvoting rights in Dubai Trade. Dubai Trade’s income, which is wholly derived from its trading activities, is notsubject to any tax in Dubai. In terms of an agreement signed by the shareholders of Dubai Trade, IM (Malta)Co has the right to nominate a representative on the board of directors of Dubai Trade. In 2014 IM (Malta)Co derived dividend income of €1,700,000 from Dubai Trade.

– 100% of the shares of IM (Malta) Fin Co, a company resident and domiciled in Malta. In 2010, IM (Malta) FinCo provided a loan of €5 million to British Milk for the acquisition of a large tract of land in England to extendthe farm. In 2014, IM Hold Co derived interest income from this loan, via IM (Malta) Fin Co, of €275,000, grossof foreign tax. This interest income was subject to withholding tax in the United Kingdom at the rate of 10%.

– A branch in Malta which owns the intellectual property rights of the group. This Malta branch of Malta Hold Coreceives royalty income from the rest of the group, of €1 million of royalty income per annum, which is deemedto arise in Malta. None of this royalty income is subject to any withholding tax.

– 100% of the shares of IM (Malta) Prop Co, a company resident and domiciled in Malta. IM (Malta) Prop Co ownstwo buildings from which it derives rental income in Malta:

– An office block, all of which is rented out to third parties except for an area of 200 m2 which it has kept forits own use. IM (Malta) Prop Co derives €800,000 per annum from the rental of these offices. The incomeis all treated as being of a trading nature.

– An apartment block of five high-end apartments which are rented out to individuals for residential purposes.IM (Malta) Prop Co derives income from the rental of these apartments totalling €300,000 a year.

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InternationalMilk Co

IM Hold Co

IM (Malta) Fin CoIM (Malta) Co Malta BranchIM (Malta)

Prop Co

BritishMilk

DubaiTrade

Required:

Advise International Milk Co on the Maltese income tax treatment of the income of IM (Malta) Co, IM (Malta) FinCo, the Malta branch of IM Hold Co and IM (Malta) Prop Co. Indicate the manner in which the profits should beallocated to the various tax accounts and the implications of these allocations for any refunds which may beavailable if the profits are fully distributed as dividends to IM Hold Co and/or International Milk Co.

Note: You are not required to provide supporting calculations of the actual tax payable/refundable.

(25 marks)

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Section B – TWO questions ONLY to be attempted

3 Ms Ambrosio, an Italian national, recently moved her residence to Malta. Ms Ambrosio has acquired an old house inMalta, which she is looking to convert to her specification. As she has lived all her life in Sicily, she has chosen tocontinue using Italian service providers.

Ms Ambrosio has engaged Boccati Design, an architecture firm registered as a company and managed and controlledin Italy, to assist her with the design of the house and to oversee the structural changes to be made. The contractbetween Ms Ambrosio and Boccati Design relates to two separate services: (1) the design of the house, which workwill be fully carried out in Italy, and (2) the supervision of the works being carried out on the house, for which theemployees of Boccati Design will visit Malta for approximately five days a month. Boccati Design’s services under thesecond part of the contract are expected to continue for approximately six months but, while its employees will visitMalta on a regular basis during this period, the company will not have an office in Malta. Boccati Design’s fees forthe entire contract have been estimated to be in the region of €30,000. Boccati Design is registered for value addedtax (VAT) in Italy.

Ms Ambrosio will also employ Eugenio, an individual resident in Italy, to carry out all the plumbing and electricalworks on the house. Eugenio expects to need a month to carry out these works and, to avoid the regular commute,intends to stay in Malta for the whole month. Eugenio will continue to be resident in Italy and will not be deemed tobe resident in Malta. His fees for the work are estimated to be in the region of €10,000, which will amount to lessthan 50% of his annual worldwide income. Eugenio is a self-employed individual, who is registered for VAT in Italy.

Neither Boccati Design nor Eugenio currently have, nor expect to have, any other work engagements in Malta.

Required

(a) Advise on the Maltese income tax implications, including any withholding tax obligations, arising from thework to be carried out by Boccati Design and Eugenio for Ms Ambrosio in terms of Maltese domestic law andexplain how, if at all, these implications will be modified by the application of the double tax treaty betweenMalta and Italy.

Note: You should assume that Malta and Italy have signed a double tax treaty that is similar in all relevantrespects to the OECD Model Tax Convention. (13 marks)

(b) Comment on the value added tax (VAT) implications of the work to be carried out by Boccati Design andEugenio for Ms Ambrosio. (7 marks)

(20 marks)

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4 (a) Finance Co, a company incorporated and managed and controlled in Ireland, is to acquire a Boeing 777 froman Irish company while the aircraft is physically located in Ireland.

Finance Co will then enter into a six year lease with Fly Co, an airline incorporated and managed and controlledin Malta, which holds an Airline Operator License and carries passengers for reward between Malta and NorthernAfrica.

The lease will contain a clause whereby on the fifth anniversary of the lease Fly Co will have the right, but notthe obligation, to acquire the aircraft at a pre-determined value (‘call option’); and a further clause wherebyFinance Co will have the right, but not the obligation, to sell the aircraft at that date at a pre-determined value.

The contract for the lease will be signed in Malta while the aircraft is physically located in Malta, and throughoutthe lease term, the base of the aircraft will be Malta.

Should the aircraft be sold to Fly Co, it will be sold when the aircraft is physically located in Malta.

Required:

Explain the Maltese income tax and value added tax (VAT) implications, if any, for Finance Co on the leaseand the potential sale of the aircraft to Fly Co.

Note: You should assume that Ireland and Malta have signed a double tax treaty that is similar in all relevantrespects to the OECD Model Tax Convention. (10 marks)

(b) Pear Intellectual Co (PIC), a company incorporated and managed and controlled in the British Virgin Islands,owns the intellectual property of the Pear Group in Europe. PIC is owned as to 100% by Pear Bahamas Co, acompany incorporated and managed and controlled in the Bahamas. PIC has no subsidiaries. PIC derives royaltyincome for the use of the intellectual property in various European countries (but excluding Malta) from its relatedPear group companies that are incorporated in Europe (and all of which have the same parent company, PearBahamas Co).

PIC acquired the intellectual property for the European Union (but excluding Malta) from Pear Bahamas Co in2011 for €1,250,000, which is still the value that appears in PIC’s financial statements. However, in view ofthe growth of the Pear Group in Europe, the market value of the intellectual property is considered to haveincreased significantly.

PIC is considering re-domiciling to Malta by means of the Continuation of Companies Regulations.

Required:

Advise on the tax implications, if any, arising in respect of the following on the re-domiciling to Malta of PearIntellectual Co:

– the valuation of the intellectual property;– the use of capital allowances;– the application of the EU Interest and Royalty Directive;– the application of Malta’s double tax treaties with the countries of residence of the companies that pay

the royalties; and– the application of value added tax (VAT).

Notes:

In answering part (b) you should assume that:

1. The intellectual property will be treated as assets situated outside Malta. 2. All the double tax treaties concluded by Malta with the other EU countries are similar in all relevant

respects to the OECD Model Tax Convention. (10 marks)

(20 marks)

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5 Mr Agustsson, a national of Iceland, is looking to take up residence in Malta. Together with his estate agent he hasapproached you for advice on the residence scheme set out in The Residence Programme Rules, 2014 (‘theProgramme’). The estate agent has offered to file the application for the Programme on Mr Agustsson’s behalf.

Mr Agustsson currently rents an apartment in Sliema for €1,500 a month but is looking to buy a property in Maltawithin the next year, although he is still not sure of the location. Mr Agustsson is married and lives with his wife, hiswife’s eight year old daughter from a previous marriage and a housekeeper, who has been living with the family inIceland for the last five years. Mr Agustsson and his family (including the housekeeper) will not live in Malta for thewhole of the year. They have a chalet in Switzerland which they use from the beginning of June to the beginning ofOctober every year. They also expect to spend at least a month each year skiing in Austria or Switzerland.

Mr Agustsson’s main source of income is director’s fees of approximately €300,000 a year, which he derives fromvarious funds registered in the Cayman Islands. Now he has moved to Malta, he may also act as a director for anumber of Maltese licensed funds for further fees of €20,000 a year. In addition, he has significant investments inbonds and shares which are managed on his behalf by an international broker in London.

Required:

(a) Set out the conditions which an applicant must satisfy in order to be considered eligible for the special taxstatus under the Residence Programme Rules, 2014 (‘the Programme’). (6 marks)

(b) List the persons who qualify as a dependant in terms of the Programme. (4 marks)

(c) State, giving reasons, whether Mr Agustsson’s estate agent is qualified to apply for the special tax statusunder the Programme on Mr Agustsson’s behalf. (3 marks)

(d) Assuming a successful application is made, advise Mr Agustsson on:

(i) The special tax status that he and his household will enjoy and the manner in which his income will betaxed. (3 marks)

(ii) The circumstances arising from the scenario set out above which have the potential to result in hisbecoming ineligible for the special tax status, and the consequences of becoming ineligible. (4 marks)

(20 marks)

End of Question Paper

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