22 March 2024

Malta Transposes The EU Directive Relating To The Global Minimum Tax

The European Union Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-Scale Domestic Groups Regulations...
European Union Tax
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The European Union Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-Scale Domestic Groups Regulations, 2024 (the ‘Regulations') which was published on the 20 February as Legal Notice 32 of 2024 transposes Council Directive (EU) 2022/2523 (the ‘Directive') through which the OECD's Pillar Two Rules also known as GloBE Rules, have been adopted throughout the European Union.

A Guidance Note published by the Malta Tax and Customs Administration clarifies the purpose of these Regulations and the implications of Malta's decision to delay for a maximum period of six years the application of certain provisions of the Directive and the ensuing compliance obligations on in-scope Constituent Entities (CE) located in Malta.

The Regulations published pursuant to Articles 52B and 96 of the Income Tax Act are deemed to come into force on 31 December 2023.

Overview of the Directive

The Directive is designed to ensure that Multinational Enterprise (MNE) Groups and large-scale domestic groups within the EU, having an annual revenue in excess of €750 million during two of the last four years, pay a minimum tax which is set at an effective tax rate (ETR) of 15% on the income from each jurisdiction in which they operate.

The Directive provides a set of specific rules for the computation of the tax base, referred to as ‘qualifying income or loss' and for the taxes paid, referred to as ‘covered taxes' for the purposes of the ETR computation. If these calculations result in an effective tax rate (ETR) that is below 15%, the rules stipulate that the MNE Group must pay a top-up tax in order to bring the total amount of tax in that low-tax jurisdiction up to the 15% rate.

The obligation to top-up tax for a member of an in-scope MNE Group arises primarily under the Income Inclusion Rule (IIR). Under this rule the ultimate parent entity if located in the EU incurs the primary obligation to apply the IIR. The IIR is applied in proportion to the ownership interests in each of the constituent entities that have low-taxed income, regardless of where the entities are located, within or outside the European Union. The Undertaxed Profit Rule (UTPR) acts as a backstop to the IIR through the reallocation of any residual amount of top-up tax in cases where the entire amount of top-up tax relating to low-taxed entity could not be collected by parent entity through the application of the IIR. The share of the top-up tax is calculated based on a substance-based income exclusion in proportion to the relative share of assets and employees in the locality where an MNE Group or large-scale domestic group carries out its economic activities and where a material presence is required in a low-taxed jurisdiction. Member States may decide to apply a Qualified Domestic Top-Up Tax (QDTT)  which operates to increase the domestic tax liability of in-scope MNE Groups within a jurisdiction to the minimum ETR.

Article 50(1) of the Directive provides for an election by Member States in which there are no more than twelve ultimate parent entities of in-scope groups to postpone the adoption by up to six years of the IRR and the UTPR.

The Transposed Provisions

Malta has transposed only those provisions in Chapters 1, VIII, IX and X of Article 50(1) of the Directive that were deemed necessary to ensure the proper functioning of the system of global minimum level of taxation. In addition, Malta will not introduce a Qualified Top-Up Tax (QDTT).

The transposed provisions of the Directive which are substantive and administrative in nature include:

Chapter 1 General Provisions

  • Article 2 outlines the scope of the Directive to be applied to Constituent Entities (CEs) located in Malta that are members of either a Multinational Enterprise (MNE Group) or a large-scale domestic group having an annual revenue in excess of €750m; CEs meeting certain criteria are excluded from the scope of the Directive.
  • Article 3 provides a list of definitions.
  • Article 4 establishes rules to determine the location of each type of CE.

Chapter VIII Administrative Provisions

  • Article 44 outlines the filing obligations in particular:
    • The top-up tax information return due by a CE located in Malta and instances where this obligation would not apply.
    • The information that must be reported in a top-up tax information return.
    • The deadlines applicable in Malta to file such return.
  • Article 45 establishes the validity period of the elections in the various articles in the Directive.
  • Article 46 imposes administrative penalties on CEs located in Malta for non-compliance in respect of provisions in this Directive.

Chapter IX Transition Rules

  • Article 47 outlines the tax treatment of deferred tax assets, deferred tax liabilities and transferred assets in ‘transition year' i.e. the first fiscal year in which an MNE Group or a large-scale domestic group falls within the scope of the Directive.
  • Article 48 provides the percentage rates applicable in terms of the substance-based income exclusion with respect to the payroll and tangible asset carve-out for each CE located in each jurisdiction during the transition period.
  • Article 49 provides for an initial phase of exclusion from the IIR and UTPR for in-scope groups.
  • Article 50(2) imposes an obligation on any MNE Group whose ultimate parent entity is located in Malta to nominate a designated filing entity in another Member State or in a third country jurisdiction as the case may be.
  • Article 50(3) provides that the UTPR percentage for Malta shall be deemed to be zero for the fiscal year.
  • Article 51 extends the deadline for the submission of the tax information return and other notifications to eighteen months in the transition year which is the first fiscal year of the in-scope entities.

Chapter X Final Provisions

  • Article 52 lays down the legal parameters to be met in the domestic law of a third country jurisdiction to be considered equivalent to a qualified IIR.
  • Article 55 provides for bilateral agreements to simplify reporting procedures with third country jurisdictions whose legal frameworks have been assessed as equivalent to a qualified IIR.

These Regulations will continue to apply insofar as Malta continues to adopt a delayed application of the IIR and the UTPR for a maximum period of six years. The entire directive will be transposed into domestic legislation at the earlier of:

  • The lapse of the maximum period of six years;
  • Malta rescinding the election to adopt a delayed application before the expiration of the six-year period; or
  • Malta exercising its option to introduce a QDTT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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