Principles of Maltese Income Tax Law 2019

Principles of
Maltese IncomeTax Law

2019
MALTA
INSTITUTE
OF
MANAGEMENT
The views expressed in this book are the personal views of the author and
not those of any organisation with which the author may be associated.
The information in this book is provided without any express or implied
warranties. The author shall not be responsible for omissions, errors or
mistakes. In the preparation of this book, the author tried to offer correct
information. However, the information is intended solely to provide very
general knowledge. The author makes no claims, promises, undertakings
or guarantees about accuracy, completeness, or adequacy of the contents
of this book. This book was written with the understanding that the
author is not responsible for the result of any actions taken on the basis of
information in this book. The author is not attempting to provide advice
in this book, and the information in this book should be used as a research
tool only. The information contained in this book includes information
from different sources and, as far as possible, specific individuals or bodies
of persons are credited as a source.
PRINCIPLES OF
MALTESE INCOME TAX LAW
2019
ROBERT ATTARD
MALTA
INSTITUTE
OF
MANAGEMENT
Published by the
Malta Institute of Management
‘58, Mons. Mikielang Mifsud Street,
Mosta, MST 2362, Malta
Tel: (+356)21 456819
Fax: (+356) 21 451167
www.maltamanagement.com
First published in 2019
Copyright © Robert Attard, 2019
This book is being sold on condition that it cannot be

re-sold. No change in its format and no part of this book
may be reproduced in any form or by any means, mechani
cal or electronical, including photocopy, recording or any
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invented, without permission in writing from the author or
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magazine, newspaper or broadcast.
Produced by
Mizzi Design & Graphic Services
Printed at
Gutenberg Press, Malta
ISBN: 978-99957-1-562-5
To Roberta and Renée Marie.
The views expressed in this book are the personal views of the author and
not those of any organisation with which the author may be associated.
The information in this book is provided without any express or implied
warranties. The author shall not be responsible for omissions, errors or
mistakes. In the preparation of this book, the author tried to offer correct
information. However, the information is intended solely to provide very
general knowledge. The author makes no claims, promises, undertakings
or guarantees about accuracy, completeness, or adequacy of the contents
of this book. This book was written with the understanding that the
author is not responsible for the result of any actions and omissions taken
on the basis of information in this book. The author is not attempting
to provide advice in this book, and the information in this book should
be used as a research tool only. The information contained in this book
includes information from different sources and, as far as possible, specific
individuals or bodies of persons are credited as a source. Descriptions of
laws, regulations, judgments, guidelines and opinions tend to incorporate
extracts drawn from such documents. Reports may incorporate excerpts
from official press releases and reproductions of the full text of original
documents.
Contents
Preface.............................................................................................. xxiii
Chapter 1 - The Maltese Income Tax System.............................. 1
1. Sources of Income Tax Law...................................................... 1
2. The Taxes Contemplated in the Income Tax Act................ 4
2.1 The Taxation of Income............................................... 5
2.2 Taxation on Certain Capital Gains............................ 5
2.3 Property Transfers Tax.................................................. 6
Chapter 2 - Interpreting the Income Tax Acts........................... 7

1. Authentic Interpretation.......................................................... 7
1.1 The British Legacy..............................................................8
1.2 The Interpretation Act................................................ 10
2. Doctrinal Interpretation........................................................13
3. Literal and Logical Interpretation....................................... 14
4 Maxims of Interpretation...................................................... 18
4.1 Interpretation by Analogy......................................... 18
4.2 Lex prospicit, non respicit
(The law looks forward, not backward).................. 20
4.3 Dilationes in lege sunt odiosae
(Delays in law are odious)..........................................22
4.4 Affirmati, non neganti incumbit probation
(The proof lies upon him who affirms,
not on him who denies)............................................ 25
viii Principles ofMaltese Income Tax Law 2019
4.5 Ipsae legis cupiunt ut jure regantur

(The laws themselves require that they
should be governed by right)..................................... 26
4.6 In Dubio Pro Reo
("when in doubt, for the accused")........................... 27
4.7 The Judgment in Christine Borda vs id-Direttur
(Taxxi Interni) u Hum maghruf bhala
il-Kummissarju tat-Taxxi............................................28
Chapter 3 - Taxation and Human Rights.................................. 31

1. Disrupting the Class ............................................................ 31
1.1 Taxation and the Right to Property......................... 32
1.2 The European Convention on Human Rights
(ECHR), the Right to Property and Taxation.... 32
1.3 Tax as Expropriation.................................................. 33
1.3.1 di Belmonte v. Italy.......................................... 33
1.3.2 Shchokin v. Ukraine........................................ 37
1.3.3 Case ofN.K.M. v. Hungary............................ 39
1.3.4 The Yukos Case on the Right to Property... 40
1.3.4.1 Complains about various aspects
of the tax assessment...................... 42
The allegation that the prosecution for the alleged
tax evasion for the year 2000 was time-barred...... 42
The allegation that the tax assessment 2000-
2003 had not been based on a reasonable and
foreseeable interpretation of domestic law............ 43
The complaint that the tax assessments 2000-
2003 did not pursue a legitimate aim and were
disproportionate......................................................... 45
Complaints relating to the enforcement of the
debt ............................................................................. 46
1.3.5 The 2017 Cases................................................ 47
1.4 The Right to Property and the Right to a
Legitimate Tax Advantage......................................... 50
1.4.1 The Right to a Tax Advantage as a Right
to a ‘Possession’................................................. 50
Contents ix
1.4.2 Maltese Cases on Taxation and the right

to Property...................................................... 51
1.4.3 The Farrugia Case.............................................52
2. Protection from Inhuman and Degrading Treatment
and Forced Labour ............................................................ 54
3. The Right to a Fair Hearing.................................................56
3.1 The ECHR on the Right to a Fair Hearing............ 56
3.1.1 The Ferrazzini Judgement............................... 56
3.1.2 The Classification of Taxes Disputes, Bakers
‘Engel Criteria’................................................. 61
3.1.3 Developments after Baker 2000.................... 62
3.1.4 A Case which has been mentioned by the
Maltese Courts, Case of Paykar Yev
Haghtanak Ltd v. Armenia............................. 63
3.1.5 The Finnish Cases............................................ 65
3.1.6 The Yukos Case on the Right to a
Fair Hearing..................................................... 66
3.1.6.1 Attachment of Assets Pending
Outcome of Tax Case................... 67
3.1.6.2 Complaint about the allegedly
insufficient time for preparation
of defence...........................................67
3.1.6.3 Complaint about the trial hearings
held in Russia and alleged quality
of the first instance judgement..... 68
3.1.7 Chambaz v. Switzerland................................. 68
3.1.8 Protection from Self-Incrimination............ 72
3.2 Judgments of the Constitutional Court on Fair
Hearing and Non Bis In Idem...................................73
3.2.1 The Long road to Clayton Communications74
3.2.2 The Carter Case............................................... 76
3.2.3 The Case ofJohn Geranzi Limited vs
Kummissarju tat-Taxxi interni et................. 78
3.2.4 Tax Litigation after John Geranzi Limited. 80
3.2.5 The Zahra Case............................................... 83
X Principles ofMaltese Income Tax Law 2019
4. Taxation and the Right to Privacy....................................... 90

5. The Right to an Effective Remedy and the Right to
Freedom of Movement, the Case of Riener v. Bulgaria... 96
6. Protection from Discrimination..........................................98
7. A Note on Constitutional Procedure in Taxation
Disputes.................................................................................. 103
7.1 The Legitimate Defendant....................................... 103
Chapter 4 - Taxable Receipts...................................................... 107

1. The Concept of Chargeable Income................................. 107
2. Capital, Income & Capital Gains...................................... 108
2.1 Capital and Income, the Words of the Maltese
Courts ........................................................................ 109
BSC 46/58, 5/91,7/94 and ART 138/11 VG -
Supplementary Work...............................................110
BSC 1/97 - Incidence of Transactions............................... 115
BSC 5/60 - Nature of the Goods....................................... 117
BSC 28/65 - Profit Seeking Motive................................. 117
BSC 43/86 - Quantity of the Goods................................ 118
BSC 35/87,6/99 - Interval of Time Between Purchase
& Re-Sale............................................................................... 118
2.2 Other Cases on Income & Capital......................... 119
2.3 Pronouncements of the Court of Appeal............. 120
3. The Classification of Income..............................................122
3.1 Trading Income......................................................... 123
3.1.1 Vocations and Illicit Trades.......................... 123
3.2 Employment Income, Rewards for Services......... 125
3.3 Dividends, Premiums, Interests or Discounts..... 125
Dividends............................................................................... 125
Premiums............................................................................... 128
Discounts............................................................................... 128
Interest.................................................................................... 128
3.4 Pension, Charges, Annuities and
Annual Payments...................................................... 130
Pensions.................................................................................. 131
Contents XI
Annuity and Annual Payments......................................... 133

Alimony Payments............................................................... 135
3.5 Income from Immovable Property......................... 137
Rents...................................................................................... 137
Special Rate of Witholding Tax on Rental Income...... 137
Article 3IB ITA - Housing Scheme.................................. 138
Article 31 C ITA - Restored Property............................. 138
Article 31 D ITA - Taxation of Rental Income from
the Letting of a Tenement.................................................. 139
Article 3 IE ITA - Rental Income Housing Authority
Scheme................................................................................... 141
Maintenance Allowance..................................................... 141
3.6 Royalties...................................................................... 142
3.7 Any other profits arising from property................ 143
3.8 Any other Income..................................................... 144
Chapter 5 - The Classification of Taxpayers.......................... 145

1. Classifying Taxpayers.......................................................... 145
2. ‘Bodies of Persons’................................................................ 147
3. Companies, ‘Opaque’ Entities............................................147
Group Relief.......................................................................... 150
Company Registered in Malta........................................... 157
Single Taxable Person Basis
(Consolidation).................................................................... 158
4. Transparent Entities............................................................. 158
5. Residents................................................................................ 159
5.1 Joint and Separate Computations.......................... 160
5.2 Parental Computation..............................................164
The 90% Rule........................................................................ 165
6. Non-Residents...................................................................... 166
Chapter 6 - Jurisdiction to Income Tax.................................... 167

1. General Jurisdictional Rules............................................. 167
Worldwide Basis v. Remittance Basis of taxation.......... 170
xii Principles ofMaltese Income Tax Law 2019
Exclusions from the Remittance Basis of Taxation 170

Introduction of Remittance Base Charge...................... 172
Temporary Residents......................................................... 173
1.1 Agricultural, Manufacturing and other Productive
Undertakings .......................................................... 173
1.2 Shipping and Air Transport...................................... 174
1.3 The Concept of an Alter-Ego................................... 175
2. The Concept of Income Derived from Malta................. 176
2.1 ‘Income Arising in...’................................................. 176
2.2 ‘Malta.......................................................................... 178
3. The Concepts of Domicile and Ordinary Residence
When Applied to Individuals.............................................179
3.1 Ordinary Residence.................................................. 179
3.2 Domicile of Individuals............................................ 180
3.3 The Decision in Gaines-Cooper............................. 182
The Facts of The Case......................................................... 182
The Concept of Temporary Residence............................. 184
Ordinary Residence............................................................. 184
Domicile................................................................................. 185
3.4 The Concept of Ordinary Residence When
Applied to Bodies of Persons.................................. 186
3.5 Management and control under Common Law... 187
3.6 Domicile of Bodies of Persons................................ 196
Chapter 7 - Tax Deductions........................................................ 199

1. Rules on Deductions.......................................................... 199
2. Tax Profit & Accounting Profit......................................... 200
3. Outgoings and expenses incurred wholly and exclusively
incurred in the production of the Income’...................... 201
3.1 ‘Outgoings and expenses incurred’....................... 201
3.2 Wholly and Exclusively Incurred...........................202
3.3 ‘To the extent to which such outgoings
and expenses’ ......................................................... 202
3.4 ‘In the production of the Income’..........................204
3.5 Point of law or fact?................................................. 205
Contents xiii
3.6Judge Made Rules................................................... 206

3.6.1 The Case 31 Rules........................................ 206
3.6.2 Strict Literal Interpretation........................ 207
3.6.3 Proportionality.............................................209
4. Expenses incurred in the production of Income from a
Trade Business Profession or Vocation........................... 212
4.1 Bad debts [14 (1) (d) ITA].................................... 212
4.2 Losses [14 (1) (g) ITA].......................................... 213
4.3 Expenditure on Scientific Research
[14 (1) (h) ITA]....................................................... 215
4.4 Promotional and Marketing Expenditure
[14 (1) (1) ITA]....................................................... 216
5. Expenses incurred in the production of any income...... 216
6. Traditional Capital Allowances....................................... 217
6.1 Plant and Machinery............................................... 218
6.2 Industrial Buildings or Structures........................ 219
6.3 Repairs of Premises Plant and Machinery......... 221
6.4 Wear and Tear of any Plant and Machinery........ 221
6.5 Initial Allowance...................................................... 224
6.6 Article 24 ITA - Balancing Statement................ 224
6.7 Roll-Over Relief, Capital Allowances.................. 225
7. Deductions Available to Employers................................. 226
8. Expenses in respect of Immovable Property................... 226
9. The Rule in 14 (5) ITA...................................................... 228
10. Expenses of a Private Nature which are
expressly deductible ......................................................... 228
10.1 Alimony Payments................................................... 228
10.2 School Fees ......................................................... 230
10.3 Childcare fees ......................................................... 232
10.4 Fees in respect of homes for the elderly
and the disabled....................................................... 233
10.5 Sports Fees................................................................. 234
10.6 Studies at a Recognised Tertiary Education
Institution................................................................. 234
xiv Principles ofMaltese Income Tax Law 2019
10.7 School Fees Paid to Cultural and Creative

Teaching Institutions............................................... 235
10.8 School Transport Fees.............................................. 236
11. Other Deductions............................................................... 236
11.1 Article 74 VAT Act.................................................. 236
11.2 The Donations (National Heritage)
Rules (‘DNHR’)....................................................... 237
11.3 Tax Credit for Women Returning to Work........ 239
11.4 The Pre-Trading Expenditure Regulations
of2002 (‘PTER’)...................................................... 241
12. Art. 26 ITA -Expenses which are not allowed
for Tax Purposes.................................................................. 242
13. The Deduction (Pharmacy Of Your Choice)
Rules, 2010 (‘The PYOC’ Rules).................................... 247
14. Donations (University Research, Innovation
and Development Trust) Rules, 2010..............................248
15. Deduction (Electric Vehicles) Rules................................ 248
16. Subsidiary Legislation 123.137 Donations (Creativity
Trust) Rules........................................................................... 249
17. Subsidiary Legislation 123.113 Donations (University
Research, Innovation and Development Trust) Rules.. 250
18.Subsidiary Legislation 123.102 Donations (Sports and
Culture) Rules...................................................................... 250
Sports.................................................................................... 251
Cultural Organisations....................................................... 252
Scholarships and Artistes................................................... 252
The Notional Interest Deduction Rules 2018................. 253
Chapter 8 - The Taxation of Employment Income.............. 259

1. The Taxation of Employment Income.............................. 259
2. The Taxation of Fringe Benefits.......................................... 259
2.1 Deemed Fringe Benefits.......................................... 260
2.2 The Benefits.................................................................... 262
Contents XV
2.2.1 Category 1 Benefits - Benefits Relating

To Motor Vehicles....................................... 263
Use of a Motor Vehicle........................................... 263
Vehicle Allowances................................................... 267
2.2.2 Category 2 Benefits - Use Of Property..... 268
Use Of Movable Property....................................... 268
2.2.3 Use of Immovable Property......................... 270
2.2.4 Category 3 Benefits - Other benefits......... 273
2.2.5 The In-House Benefit Reduction................ 283
3. The Final Settlement System.............................................. 283
4. A Note on Deductions against Employment Income.... 286
5. The Part-Time Rules 286
6. Income from Employment Exercised Abroad
-Art. 56(17) ITA............................................................... 290
7. Football Income.................................................................... 293
8. Terminal Benefits................................................................. 294
8.1 British Precedents on Fringe Benefits....................295
8.2 Maltese judgements on Terminal Benefits............ 299
8.3 Damages for Sexual Harassment........................... 300
Chapter 9 - Compliance Obligations 303

1. Year of Assessment and Basis Year...................................... 303
2. Statutory Deadlines.............................................................. 303
3. Provisional Tax Payments.................................................... 305
4. The Obligation to File a Tax Return................................. 306
5. The Self-Assessment System................................................ 306
6. Powers of the Revenue upon the Receipt of a Return.... 307
6.1 Pre-Year of Assessment 1999.................................. 308
6.2 Post-Year of Assessment 1999................ 309
7. Case Law on Assessments................................................... 312
8. Investigative Powers .......................................................... 315
9. The Procedure to Contest an Assessment........................322
10. Appeals to the Administrative Review Tribunal
(ART’).................................................................................. 323
11. Procedure of the ART......................................................... 324
xvi Principles ofMaltese Income Tax Law 2019
12. Appeals to the Court of Appeal........................................ 328

13. Evidence on Appeal............................................................. 329
14. Additional Tax..................................................................... 331
14.1 Additional Tax for Default..................................... 331
14.2 Additional Tax for Omissions................................ 332
15. Additional Tax as an Arbitrary
and Mechanical Charge...................................................... 333
16. Additional Tax as a Criminal Charge...............................337
17. Record Keeping.................................................................... 339
18. Withholding Tax on Payments to Non-Residents....... 342
Chapter 10 - The Obligations of Officers of Bodies of

Persons that are subject to Tax in Malta under the
Income Tax Act.............................................................................. 345
1. The Interpretation Act......................................................... 345
2. The Income Tax Acts and Subsidiary Legislation............ 346
3. Case Law on the Matter....................................................... 348
3.1 Criminal Cases............................................................... 348
The O’ Dea Case................................................................... 348
3.2 The 2011 Cases.............................................................. 349
FSS Offences as ‘Reati Permanenti’.................................. 349
Resignation and Self-Inflicted Impossibility to Abide
by the Law..............................................................................349
3.3 The 2012 Judgements............................................... 351
3.4 The Judgement in Busuttil....................................... 354
3.5 The 2013 Judgements............................................... 358
3.6 The Judgment in Spiteri........................................... 361
4. Civil Cases...............................................................................362
Chapter 11 - Important Tax Exemptions................................ 367

1. Exemptions for Non-Residents.......................................... 367
1.1 Interest, discount, premium or royalties
accruing to or derived by non-residents...............367
1.1.2 An Indigenous Concept of Permanent
Establishment ?.............................................. 368
Contents XVÌÌ
1.2 Gains derived by non-residents upon transfers

of securities and similar interests...........................371
1.3 The Anti-Avoidance Provision which applies to
12(l)(c) (i) and (ii) ITA ...................................... 374
1.3.1 The Concept of Beneficial Ownership..... 375
2. The Participation Exemption............................................ 379
2.1 Remit of the Tax Exemption................................... 379
2.2 Eligible Person.......................................................... 381
2.3 Optional Exemption................................................ 381
2.4 Equity..........................................................................381
2.5 Participating Holding System................................. 383
2.6 The Anti-Abuse Provision....................................... 386
2.7 The Anti-Abuse Provision Inspired by the
Amendments to the Parent Subsidiary
Directive.....................................................................387
3. The Royalty Exemption...................................................... 388
4. Retirement Schemes .......................................................... 389
5. ‘EU Tax exemptions’ .......................................................... 390
Chapter 12 - Special Cases 391

1. The Taxation of Collective Investment Schemes
(‘CISs’).................................................................................. 391
1.1 The Special Nature CISs.......................................... 391
1.2 Ad hoc Local Rules.................................................... 391
1.3 Two Types of CISs..................................................... 392
1.4 Tax Benefits Which Apply to
Non-Prescribed Funds............................................. 394
1.5 Taxation of Prescribed Funds.................................. 394
1.6 Distributions by Non-prescribedFunds................. 395
1.7 Distributions by Prescribed Funds......................... 395
1.8 Transfers of UNITS in a CIS................................. 396
2. Shipping Companies......................................................... 397
2.1 The 2018 Tonnage Tax System............................... 403
3. Permanent Residents......................................................... 412
xviii Principles ofMaltese Income Tax Law 2019
4. Returned Migrants ......................................................... 415

5 . Non-Resident Entertainers................................................. 419
6. The Taxation of Trusts......................................................... 420
6.1 Sources of Law Relating to the Taxation of Trusts 421
6.2 Settlement of Property on Trust............................ 422
6.3 Taxation of Income Derived by the Trust............ 424
6.4 Taxation of Resident Trusts.................................... 425
6.5 Taxation of Non-Resident Trusts.......................... 426
6.6 The ‘Exempt Income’ ‘Non-Resident’ trust........ 426
6.7 The ‘Holding’ ‘Non-Resident’ Trust......................427
6.8 The ‘Endowment’ ‘Non-Resident ‘Trust...............428
6.9 Distributions of Trust Income to Beneficiaries... 429
6.10 Distributions of Trust Property to Beneficiaries. 430
6.11 Transfers of Beneficial Interest............................... 430
7. Revaluation of assets on Relocation................................. 432
8. Investment Services and Insurance Expatriates............... 433
8.1 Definition of Investment and Insurance
Expatriate....................................................................433
8.2 The Tax Benefits........................................................ 434
9. The Highly Qualified Persons Rules (‘HQPR’)............... 435
9.1 Beneficiary.................................................................. 437
9.2 Eligible Offices.......................................................... 438
9.3 The Competent Authority...................................... 439
9.4 The Benefit................................................................. 440
9.5 Claw-Back of Benefits.............................................. 441
10. Foundations..........................................................................442
11. Petroleum Profits................................................................. 443
11.1 Profits derived by ‘Contractors’............................. 443
11.2 Profits derived by Sub-Contractors..................... 445
12. Tax Schemes for High Earners......................................... 446
12.1 S.L. 123.148 Global Residence Programme
Rules (‘GRPR’)......................................................... 447
12.1.1 The Benefit..................................................... 447
12.1.2 Computational Rules.................................. 447
Contents xix
12.1.3 Beneficiary..................................................... 447

12.1.4 Qualifying Property Holding.................... 448
12.1.5 Cessation of Status....................................... 449
12.2 Subsidiary Legislation 123.160 Residence
Programme Rules (‘RPR’)...................................... 450
13. Subsidiary Legislation 123.134 Malta Retirement
Programme Rules (the ‘MRPR’)....................................... 450
13.1 Beneficiary................................................................... 450
13.2 Qualifying Property Holding under the MRPR... 452
13.3 The Tax Benefit under the MRPR........................... 452
13.4 Cessation of Status...................................................... 453
15. Subsidiary Legislation 123.142 Repatriation of
Persons Established in a Field of Excellence Rules
(the‘RPEFE Rules’)............................................................454
15.1 The Benefit................................................................... 454
15.2 Scope of the RPEFE Rules........................................ 455
15.3 Eligible Person and Beneficiary................................ 455
16. L.N. 324 of 2011 Income Tax Act (cap. 123)
Securitisation Transactions (Deductions) Rules, 2011
(the ‘STDR’)........................................................................ 457
17. Insurance Companies......................................................... 459
17.1 Special Tax Accounting Rules.................................. 459
17.2 Insurance Managers.................................................... 460
17.3 Special Computational Rules................................... 460
General Business...................................................................460
Long Term Business.............................................................461
Non-Residents Deriving Income from
Long Term Business.............................................................463
Aligning Tax Laws to EU Directives................................ 463
18. Investment Managers......................................................... 464
19 Subsidiary Legislation 123.90 Venture Capital Fund
(Tax Credit) Regulations................................................... 466
20. The Financial Leasing Rules (‘FLR’)................................ 467
21. FLR Aviation....................................................................... 469
XX Principles ofMaltese Income Tax Law 2019
22.Branches of Oversea Companies...................................... 470

The 56 (20) ITA Regime.................................................... 471
Consolidated Tax .......................................................... 473
The Article 27G Regime..................................................... 474
L.N. 228 of 2017 INCOME TAX ACT (CAP. 123)
Voluntary Occupational Pension Scheme Rules,
2017 (‘VOPS’)......................................................................474
Deduction (Embellishment Project) Rules, 2017.......... 476
Chapter 13 - Tax Accounting and the Refundable Tax Credit.

System.................................................................................. 479
1. The Tax Reform of2007................................................... 479
2. The Implementation of the Agreement reached
with the EU.......................................................................... 482
3. Tax Accounting.................................................................... 482
4. Profits that stand to be allocated to the Final
tax account............................................................................ 485
5. Profits that are allocated to the Immovable Property
Account................................................................................. 488
5 (2) TAR.............................................................................. 489
5 (3) TAR.............................................................................. 489
Profits or Gains from the Transfer of Immovable
Property Situated in Malta................................................. 489
Net profits or gains which are deemed to have been
derived from immovable property situated in Malta.... 490
Gross amounts which are deemed to have been
derived from immovable property.................................... 493
Annual Market Rent .......................................................... 493
Check-the-Box IPA (Rule 9)............................................. 495
Allocations to Related Party.............................................. 496
6. Profits that stand to be allocated to the Foreign
Income Account...................................................................497
7. Profits that stand to be allocated to the Maltese taxed
account.................................................................................. 499
Contents XXÌ
8. Profits that stand to be allocated to the

Untaxed account.................................................................. 500
9. The Taxation of Dividends................................................. 500
9.1 Distributions from the Final tax account............ 503
9.2 Distributions from the Immovable
Property Account.................................................... 503
9.3 Distributions from the Foreign
Income Account....................................................... 503
The Full Refund and the Two-Thirds Refund
[Article 48 (4) ITMA]........................................... 504
The Six-Sevenths AC IT Refund [Article 48
(4A)ITMA]............................................................. 506
The Five-Sevenths ACIT Refund [Article 48
(4A) ITMA].............................................................. 506
9.4 Distributions from the Maltese Taxed Account
[Article 48 (4A) ITMA]......................................... 507
9.5 Distributions from the Untaxed Account............ 507
Chapter 14 - The Investment Income Provisions................... 511

1. Relevant Definitions............................................................511
1.1 ‘Investment Income’.................................................. 511
1.2 Interest Income........................................................... 512
1.3 Capital Gains............................................................. 513
1.4 Foreign Investment Income..................................... 514
1.5 Net Dividends and Net Refunds............................514
1.6 The Definition of‘Payor’......................................... 515
1.7 The Definition of‘Recipient’................................. 516
2. Applicable by Election....................................................... 517
3. The Characteristics of Tax Charged in terms of the
Investment Income Provisions.......................................... 517
4. The Tax Rate......................................................................... 518
Chapter 15 - The Elimination of International Double

Taxation............................................................................................ 519
1. Double Tax Treaty Relief.................................................... 520
xxii Principles ofMaltese Income Tax Law 2019
2. Unilateral Relief................................................................... 522

3. Commonwealth Relief....................................................... 527
4. The Flat Rate Foreign Tax Credit (‘FRFTC’)................. 528
Chapter 16 - Income Tax on Capital Gains.............................533

1. The Special Jurisdictional Rule Contained in
4(1) (g) (ii)ITA................................................................. 533
2. Taxable Transfers................................................................. 534
3. General Rules Relating to the Taxation of Capital
Gains..................................................................................... 536
4. Transfers of Immovable Property, 3 Mutually Exclusive
Taxes ..................................................................................... 537
4.1 Computational Rules............................................... 538
4.2 Exchanges of immovable Property........................ 541
4.3 Exemptions on Transfers of Immovable
Property...................................................................... 541
4.3.1 Contracts of Partition When An Owelty
is Not Paid ..................................................... 541
4.3.2 Transfer of Own Residence.......................... 542
4.3.3 Property Taken Over by the Government
of Malta.......................................................... 543
4.3.4 Assignments of Emphyteusis of 50 years
or less................................................................ 543
5. Transfers of Securities......................................................... 544
5.1 Definition of Securities........................................... 544
5.2 Valuation Rules......................................................... 545
5.3 Transfers of a Controlling Interest......................... 546
6. Exemptions Applicable to Transfers of Securities,
Business, Goodwill, Trademarks, Trade-names,
Copyright and Patents........................................................ 550
7. Donations to Close Relatives............................................. 551
8. Dissolution of the Community of Acquests................... 551
9. Exemption which applies to all taxable transfers -
Intra-Group Transfers......................................................... 552
Contents xxiii
10. Restriction of the Intra-Group Exemption..................... 553

11. Roll Over Relief................................................................... 553
12. Value Shifting and De-Grouping..................................... 554
12.1 De-Grouping............................................................. 555
12.2 Value Shifting............................................................. 556
13. Assignments and Cession of any rights over any
interest in a Partnership...................................................... 559
Chapter 17 - Property Transfers Tax........................................ 567

1. Scope of Article 5A............................................................. 567
2. Rates of Tax......................................................................... 568
2.1 The 8% Rate..............................................................568
2.2 12% of the Excess...................................................... 569
2.3 7% of Transfer Value................................................ 569
2.4 10% of Transfer Value.............................................. 570
Case 1..................................................................................... 570
Case 2..................................................................................... 570
3. The Cases When the Application of Article 5 A is
excluded.................................................................................572
4. Exemptions - Article 5A ITA........................................... 574
5. Degrouping in Property Transfers Tax............................. 576
Chapter 18 - Anti-Avoidance Provisions................................. 579

1. Recent Developments......................................................... 579
2. Evasion, Avoidance and Mitigation................................. 579
2.1 Tax Evasion................................................................ 580
2.1.1 Case 66/11VG on ‘the avoidance of tax... due
to evasion or fraud’................................................... 580
2.2 Tax Avoidance.......................................................... 583
2.2.1 Tax Avoidance in Civil Law.................................... 585
2.2.2 Sniper Approach Tax Avoidance Provisions....... 587
Act II of2009 and Act I of2010...................................... 587
xxiv Principles ofMaltese Income Tax Law 2019
Surrendering of Losses......................................................... 587

3. The Investment Income Provisions.................................. 588
4. Deemed Distributions........................................................ 589
4.1 43 (6) (a) ITA - When a resident individual is
directly/indirectly entitled to a tax refund in
terms of either Article 48 (4) ITA or
48 (4A)ITA............................................................... 590
4.2 43 (6) (b) ITA - When a resident individual is
direct/indirectly entitled to the profits of an
entity which receives a tax refund and a
net dividend............................................................... 591
4.3 43 (6) (c) ITA - When a resident individual is
directly/indirectly beneficially entitled to the
profits of a company which has applied the 14
(1) (o) ITA deduction.............................................. 592
4.4 43 (6) (d) ITA - When a resident individual
becomes entitled to undistributed profits
consisting in a net dividend and a tax refund...... 592
5. Advances to Shareholders................................................... 592
6. Flat Rate Foreign Tax Credit............................................. 594
6.1 Article 5 (6) ITMA.................................................. 594
6.2 Article 5 (7) ITMA.................................................. 595
6.3 Conversions of Commercial Partnerships............ 596
6.4 TheHQPR................................................................. 596
6.5 Gunshot Approach................................................... 597
7. Article 51 (l)ITA.................................................................597
8. Article 51 (2) ITA.................................................................598
9. Article 51 (3) ITA................................................................ 600
10. Article 51 (4) ITA................................................................. 602
11. Local Case-Law on Tax Avoidance................................. 602
11.1 Old Judgments from the BSC................................ 602
11.2 The Most Recent Judgements................................ 604
11.3 Refund Blocking....................................................... 610
11.4 Power to Make Rules............................................... 610
12. Advance Revenue Rulings................................................. 610
Contents XXV
13. The Transposition of the ATAD 1................................... 613

Exit Taxation........................................................................ 614
The CFCRule...................................................................... 617
The Interest Deductibility Limitation Rule....................619
The GAAR Rule...................................................................622
Appendix: The 2019 Tax Consolidation Rules......................... 623

Bibliography..................................................................................... 633
General Index.................................................................................. 637
Disclaimer......................................................................................... 645
Preface
The more I write about the Income Tax Acts, the more I become
conscious of the fact that the Income Tax Acts are an invaluable
source of historical data. The Income Tax Acts are a veiled history
book because the evolution of the Income Tax Acts charts the
history of the Maltese people. The Income Tax Acts do not only
chart the economic ambitions, challenges and aspirations of
successive Governments but they also reflect changes to the fabric
of the Maltese Society. Tax deductions are especially interesting
because they refer to expenditure incurred by many a Maltese
household. Rules on tax deductions speak of exclusive schools and
homes for the elderly and of social patterns in sports and recreation.
Tax rates are very telling too because they chart mutations in the
nature of the Maltese family. As anticipated in an earlier edition of
this book, the tax concepts of marriage and family have changed.
Rules on tax advantages disclose pressures and constraints
pushed from outre-mer. The Income Tax Act had to ensure that
the generosity of the Maltese tax system would not be abused of.
Malta’s historic remittance basis of taxation was changed because it
was felt that a remittance base charge had to be introduced. BEPS
and the EU’s response to it has moved the goalposts introducing
anti-abuse’ rules which were previously thought as unthinkable
(exit taxation is but one of them). Back in 1948, the fathers of the
Income Tax Acts were adamant that their law would not impinge
on the duty of professional secrecy but recent changes have eroded
the concept. Malta’s absolute tax sovereignty is not what it used
xxviii Principles ofMaltese Income Tax Law 2019
to be and important decisions relating to Malta’s fiscal policy are

being driven from outside Malta.
Malta’s tax jurisprudence is still in an early phase in its
development. It will be interesting to see whether judges will take
pro persona approach in their interpretation of BEPS driven pro
auctoritate measures.
The role played by tax law in the Maltese legal system has
changed too. Tax law has grown within the Maltese legal system,
with its jurisprudence evolving from an obscure and peripheral
subject to a trail blazer. Recently, Maltese tax jurisprudence has
shaped the development of the Maltese legal system. The current
constitutional crisis caused in the wake of the Constitutional
Court’s famous judgment in The Federation of Estate Agents vs
Director General (Competition) Et would not have happened
without our tax jurisprudence. All the legal principles applied in the
Federation of Estates case were concepts established several years
earlier in the John Geranzi Case and, closer to home, in the Angelo
Zahra case. In the history of Maltese tax law, what has happened in
the last decade is quite unprecedented. No one would have thought
this arcane piece of legislation would give us so many important
judgments balancing the public good with private interests.
Acknowledgements
I am grateful to the MIM, in particular, to Reuben Buttigieg for

supporting this project. The MIM has invested heavily in tax
learning and has created a number of projects which are of a great
benefit to the financial services industry. The MIM has given
our students tools which should help them understand the rules
contained in the Income Tax Acts. I find the MIM s initiatives in
the fields of tax learning quite impressive. The MIM s initiatives
would not have succeeded without the support of Philip Baker and
Pasquale Pistone. I am grateful to friends and colleagues at EY who
have contributed to this project. I must single out Silvio Camilleri
and Miraine Falzon for helping me update the book. I am also
grateful to the Court of Appeal, the First Hall Civil Court and the
Administrative Review Tribunal for citing earlier editions of this
book in some judgments.
Chapter I
The Maltese Income Tax System
The legal system which regulates Income Tax in Malta is a

voluminous piece of legislation which comprises almost two
hundred legislative instruments and hundreds of judgements.
Our Income tax law is a special law but it exists in a constitutional
and administrative legal system which governs it. Violations of
our tax system are punishable as acts of fraud and evasion and,
in reality, many tax provisions are provisions of a penal nature
which should be interpreted and applied with the guarantees of
due process which are applied in a criminal law context. Recent
judgments speak for themselves. In a way, important tax laws
are contained in the Constitution of Malta and the Criminal
Code too. I must not dismiss the importance of the Civil Code
because our tax system taxes transactions which find their legal
classification and regulation in the Civil Code.1 Finally, general
principles of law, customary principles of international tax law
especially, are part of the system too.
/. Sources of Income Tax Law
The main sources of Income Tax law in Malta are the Income
Tax Act, Chapter 123 of the Laws of Malta (the ‘ITA’) and the
Income Tax Management Act, Chapter 372 of the Laws of Malta
(the ‘ITMA’). The ITA was passed in 1948 and created a tax on
1 The Civil Code notion of emphyteusis is particularly important.
2 Principles ofMaltese Income Tax Law 2019
income. The ITMA was enacted in 1994 and evolved in a ‘stand

alone’ administrative tax law. In Article 3 ITMA, the ITA and
ITMA are collectively referred to as the Income Tax Acts.
The ITA and ITMA have been passed by Act of Parliament

and, generally,2 amendments to the ITA and ITMA must be
passed by Act of Parliament. The ITA and ITMA incorporate
rules [e.g. 4 (1) (b) ITA] which empower the Minister of Finance
to prescribe regulations (subsidiary legislation passed by legal
notice) which create subsidiary rules to those contained in the
ITA and ITMA. The Minister has passed 186 subsidiary laws to
the ITA and 29 subsidiary laws to the ITMA.
The ITA contains the substantive rules determining taxable

profits; the rules on jurisdiction to tax, deductions, exemptions,
rates of tax, taxable receipts and taxable persons. The ITMA is
meant to be the law which contains the administrative component
of the legal system. It contains the rules on the judicial review
process and the principal rules on tax compliance obligations.
Judicial decisions remain another important source of law.
The Maltese Income Tax System does not exist in a vacuum

and judgements delivered in the context of VAT litigation and
litigation over Duty on Documents and Transfers are relevant too.
Recent experiences have shown that principles of constitutional
and administrative law dictate our tax policy. Our Constitutional
Court composed of the Chief Justice Mr. Justice Camilleri, Mr.
Justice Caruana Demajo and Mr. Justice Cuschieri delivered
2 In exceptional cases, amendments by legal notice are allowed. This was the case with Legal
Notice 4 of 1963, Legal Notice 46 of 1965, Legal Notice 148 of 1975, Legal Notice 238 of
2000, Legal Notice 409 of 2007, Legal Notice 98 of 2009, Legal Notice 336 of 2010 Legal
Notice 218 of 2012 amending the ITA. The ITMA was amended by Legal Notices 336
and 390 of 2010. Recently, we witnessed the phenomenon of an amendment to the ITA by
Legal Notice with the divorce amendments but the divorce amendments were executed by
legal notice because an d hoc act of parliament provided for these.
The Maltese Income Tax System 3
a series of judgments that have created a legally enforceable

taxpayers charter.
In Malta we do not follow the doctrine of judicial precedent

and a number of tax judgements3 confirm that stare decisis’ does
not apply. In Case 1 of 2010 the Court of Appeal held that,
“Dan anke ghaliex, kif ben saput, fis-sistema legali taghna 1-principju
“stare decisis” ma ghandu ebda assolutezza. Qawwija kemm hi qawwija,
1-awtorita tal-gurisprudenza tezisti de facto u bhala materja ta’ perswasjoni,
u mhux de jure bhala “binding authority”4
More recently, even the ART has, for good and sufficient
cause, departed from an earlier judgment of the Court of Appeal.
In Case 63/2013, a VAT Case, the Tribunal chose to depart from
the conclusions reached in a judgment delivered previously by
the Court of Appeal. The Tribunal held that:
Tl-Kummissarju tat-Taxxi bbaza c-cahda tieghu ghat-talba tas-socjetà

Rikorrenti fuq is-sentenza fl-ismijiet “Aprilia Hotel Ltd. v. Il-Kummissarju
tat- Taxxa fuq il-Valur Mizjud”, Appell Nru. 2/11, pronuncjata mill-
Qorti ta’ 1-Appell (Sede Inferjuri) fis-27 ta’ Ottubru 201120, fejn dik il-
Qorti cahdet lapel tas-socjetà Aprilia Hotel Ltd. minn decizjoni tal-Bord
ta’ 1-Appelli dwar Taxxa fuq il-Valur Mizjud li biha ma gietx milqugha
1-pretensjoni taghha li in segwitu ghad-decizjoni taghha li tikri 1-units
f’zewg blocks ta’ appartamenti minnha mibnija bl-iskop originali li
jinbieghu kellha dritt titlob it-tnaqqista’ linput VAT fir-rigward ta’ spejjez
minnha inkorsi fis-snin precedenti ghal tali tabla ghall-kostruzzjoni ta’
zewg blocks ta’ appartamenti.
It-Tribunal qara 1-imsemmija sentenza b’attenzjoni u bir-rispett
kollu lejn il-Qorti ta’ 1-Appell (Sede Inferjuri) ihoss li fil-kaz in ezami
ma ghandux jistrih fuq dak deciz f’dik is-sentenza, u dana ghal zewg
3 On this point Court of Appeal, Appell numru 1/10 Seduta ta’ nhar il-Gimgha, 9 ta’ April,
2010 Numru 1,
“Dan anke ghaliex, kif ben saput, fis-sistema legali taghna 1-principju “stare decisis” ma
ghandu ebda assolutezza. Qawwija kemm hi qawwija, 1-awtorita tal-gurisprudenza tezisti
de facto u bhala materja ta’ perswasjoni, u mhux de jure bhala “binding authority” (ara
“Romeo Fenech Pace et -vs- Francis Sciberras”, Prim’ Awla, Qorti Civili, 7 ta’ April, 1964,
per Imhallef Maurice Caruana Curran).”
4 Case 1 of 2010.
ragunijiet fondamentali: (i) linterpretazzjoni li 1-Qorti ta’ 1-Appell (Sede

Inferjuri) tagliti tar-Regolamenti introdotti bl-Awiz Legali 318 ta’ 1-2004,
ossia r-Regolamenti dwar Taxxa fuq il-Valur Mizjud (Aggustamenti li
Ghandhom X’Jaqsmu Ma’ Oggetti Rapitali), ma hijiex korretta u lanqas
hija in konformità mal-posizzjoni tal-Qorti ta’ Gustizzja Ewropea fir
rigward ta’ 1-interpretazzjoni ta’ 1-Artikoli 167, 187 u 189 tad-Direttiva
2006/112 li kif iktar ‘1 fuq osservat giew trasposti fil-Ligi nostrali tramite
1-imsemmija Regolamenti; u (ii) fit-tieni lok, f’dak il-kaz hem cirkostanza
fondamentali li tohloq distinzjoni netta bejn il-legittimità tat-talba tas-
socjetà Aprilia Hotel Limited u 1-legittimità tat-talba tas-socjetà Rikorrenti.
In kwantu rigwarda r-Regolamenti introdotti bis-sahha ta’ 1-Awiz
Legali 318 ta’ 1-2004 il-Qorti ta’ 1-Appell osservat illi 1-Awiz Legali 318
tat-2004 jipprovdi ghal posizzjoni fl-oppost ta’ dak pretiz mis-socjetà
appellanti, u cioè f’kazi fejn tkun saret inizjalment u fil-perjodu relevanti
tnaqqis ta’ input tax fuq 1-infieq kapitali, ghandha dritt li taggusta dan
1-input tax f’kaz ta’ uzu ta ...
Dawn huma fatti li joholqu distinzjoni netta bejn dak li ttentat taghmel
issocjetà Aprilia Hotel Limited u 1-pretensjoni tas-socjetà Rikorrenti
filproceduri odjerni...”
The ART’s judgment resonated and was confirmed on appeal.
2. The Taxes Contemplated in the Income Tax Act
In reality, the name of the ITA is a misnomer because the ITA

does not exclusively charge to tax income. The ITA contemplates
three distinct taxes. The ITA was originally conceived as a law
which would create a tax on Income5 but it was later6 extended
to incorporate a tax on certain Capital Gains. The addition of
Article 5A to the ITA, in 2006, resulted in the introduction of a
Property Transfers Tax within the purview of the ITA. Thus, the
ITA charges to tax:
5 Original title of ITA.

6 Cap gains
The Maltese Income Tax System 5
1. All Income;
2. Certain Capital Gains (Including phantom gains);
3. The transfer value of Immovable Property situated in
Malta.
2.1 The Taxation of Income
The principal rules relating to the taxation of income are

contained in 4 ITA which is known as the charging provision. It
includes an illustrative list of what constitutes ‘income’:
(a) Gains from a trade, business, profession or vocation;

(b) Gains from any employment or office;
(c) Dividends, premiums, interest or discounts;
(d) Pensions, charges, annuities or annual payments;
(e) Rents, royalties, premiums and any other profits arising
from property;
(f) Income from gains not mentioned above.
2.2 Taxation on Certain Capital Gains
Article 4 ITA speaks of capital gains too, but it establishes that

tax on capital gains applies only with respect to any capital gains
made on or after the 25th November 1992’. The temporal element
is important because income tax on income was introduced in
1948 but a capital gains tax was introduced under the purview of
the ITA only with effect from 1992.
In 1992, the ITA did not only remain a tax on income but
became a tax on certain capital gains, as well. An emphasis on
the word certain must be added because all income is taxable but
only capital gains derived from the disposal (or deemed disposal)
of taxable assets gives rise to taxable capital gains.
Income tax charges to tax two distinct types of receipts

(income and capital gains) but the tax is one and the definitions
of ‘total income’ and chargeable income’ include income and
chargeable capital gains implying that both types of receipts must
be reported in the same tax return.
The most important Article which regulates capital gains is

Article 5 ITA which is a law within a law. Article 5 ITA sets
out the rules relating to the tax treatment of capital gains, it
lists chargeable assets, establishes deductions and exemptions
and creates a number of computational rules. Important rules
relating to the tax treatment of capital gains are contained in
subsidiary legislation.
2.3 Property Transfers Tax
In 2006, Article 5A was added to the ITA creating a third tax,

Property Transfers Tax (‘PTT’). Unlike income tax on income
and income tax on capital gains, PTT is not a tax on profit but
a tax on ‘turnover’. The scope of PTT tax is quite limited. It
applies only to transfers of immovable property situated in Malta.
PTT tends to over-lap with tax on capital gains which, like PTT,
applies to transfers of immovable property too but the two taxes
are mutually exclusive. PTT applies by default and, in a number
of cases established by law, a person can opt-out of PTT and pay
tax on the transfer in terms of the capital gains rules. Recently,
the right to opt-out of the system has been severely restricted.
Chapter 2
Interpreting the Income Tax Acts
The ITA regulates complex transactions and the wording of the

ITA reflects such complexity. Convoluted provisions in the ITA
create a sense of nostalgia for the wonderful simplicity of the texts
of our well-written Constitution and Civil Code. The time is ripe
to revamp the text of the ITA and to simplify some clauses. Case-
law has shown that literal constructions of the ITA are dangerous
because, at times, the letter of the law is logically defective.
Jurisprudence demonstrates that the interpretation of tax law tends
to converge with the interpretation of penal law.
Discussions on points of interpretation are far from being a

’piece of useless information’. Interpretation is a core subject.
From the participation exemption to the refundable tax credit
system and from the refundable tax credit system to treaty relief,
questions of interpretation must be resolved via references to a
scientific discipline which has been developed in hundreds of years
of judicial experience.
/. Authentic Interpretation1
The ITA contains a number of ‘interpretation’ clauses. Article

2 ITA is, by definition, the main interpretational clause but a*
1 ‘the authentic interpretation is that provided by the legislature itself as in what are called
interpretational clauses’. Marno, Anthony, Lectures in Criminal Law (UOM 1975) p.20.
number of interpretational provisions are contained in subsidiary

legislation and in a number of articles. In subsidiary legislation,
interpretation clauses are necessary but the recent trend of creating
interpretational clauses specific to particular clauses should be
avoided because such an approach is bound to create confusion.
The Interpretation Act is another source of authentic interpretation
but the Court of Criminal Appeal has limited its use in tax law.
I. I The British Legacy
Paragraph 2 of Article 2 ITA contains an important rule of

interpretation which prescribes that:
“(2) Words and expressions used in this Act which are not known to the law
of Malta but are known to the English Law, shall, so far as may be necessary
to give effect to this Act and consistently with the provisions thereof,
have the meaning assigned to them in the English Law and be construed
accordingly.”
In 1948, when the resolution to introduce Income Tax in

Malta was passed, Dr. Arturo Colombo decided to base his first
income tax law bill on the laws of Cyprus and Palestine. Colombo’s
decision was understandable. Colombo was following the norms
of his colonial masters. Drawing from continental sources was out
of the question. Since 1934, English had been one of the official
languages of Malta and after World War Two, ‘Italianità was taboo.
Italian sympathies were at a low and Government was pursuing a
pro-British policy by drawing its financial laws from the laws of the
British Empire.
One of the lawyers on the discussion table, Dr. Francesco Masini

of the Gozo Party speculated that Colombo’s decision to base his
law on a colonial piece of legislation could give rise to problems
with interpretation, eventually.2 In 1948, most of the laws of
2 Attard, Robert, An Introduction to Income Tax Theory (Agenda Books 2005) pp. 10-15.
Interpreting the Income Tax Acts 9
Malta were styled on continental law and Masini who was a lawyer
by profession pointed out that, in his opinion, the addition of a
motley model law in a continental system could give rise to juridical
problems, problems of interpretation included. To a limited extant,
Masini was proven right but the problems have been resolved with
some judicial activism.
The importance of the interpretational rule contained in Article

2 (2) ITA has been somewhat overstated. What the interpretative
norm prescribes is that should the ITA refer to a principle which is
alien to domestic law but known to English law, then that principle
should be interpreted in terms of English law. Thus, recourse to
English law on issues relating to the tax treatment of notions which
were known to Maltese law before to the introduction of the ITA is
not necessary. The latter interpretative rule has been confirmed in
Case 8 of2003 of the Court of Appeal decided on 6 October 2004.
Case 8 of2003 involved the interpretation of the meaning of the

word premium’ {rigai), a concept which was envisaged in Maltese
law hundreds of years before the enactment of the ITA. The Board
had used an English text to interpret the term ascribing an English
meaning to a ‘Maltese’ word. The Court of Appeal warned against
the blind adoption of alien concepts observing that,
“Fir-rigward ta’ dawn 1-osservazzjonijiet, li fuqhom jidher li strah il-Bord,

jibda biex jigi rilevat qabel xejn illi in kwantu ghar-riferiment ghall-
principji tad-dritt Ingliz fuq il-materja dawn mhux necessarjament jistghu
jservu ta’ direzzjoni fìt-trattazzjoni tal-materja in diskussjoni. Apparti li
kull kaz ghandu 1-fattispeci tieghu wiehed ma ghandux jaddotta fil-ghama
dawk il-principji. Dan anke ghaliex dawn 1-istess principji jistghu jkunu
aljieni ghall-principji tal-ligi taghna u mhux dejjem joffiru soluzzjoni
gusta. Evidentement, infatti, jidher li 1-ligi Ingliza thares lejn il-kwestjoni
tal-hlas tal-premium mimi perspettiva li ma hijiex ghal kollox konciljabbli
mad-disposizzjonijiet espressi tad-dritt Malti. Ara in referenza 1-opra ta’
Kath Nightingale “Taxation (Theory and Practice), 4th Edition, pagna 199,
et sequitur.”
The Court of Appeal proceeded to interpret the word ‘premium’

by referring to traditional domestic law.
“Ghal dak li jghodd 1-interpretazzjoni u applikazzjoni tad-disposizzjonijiet

rilevanti tal-income tax ma tistax tigi insulata mid-definizzjoni li 1-ligi civili
ordinarja tghti lill-kelma “kiri” fl-artikolu 1526 tal-Kodici Civili. Bhala
element essenzjali tal-lokazzjoni, 1-korrispettiv ghall-godiment tal-haga hu
maghmul jikkonsisti fi flus, f’kwantita' ta derrati jew ta sehem tal-frottijiet
li 1-haga tipproduci (Ara f’dan is-sens “Xuereb -vs- Camenzuli” Appell
Civili, 12 ta Dicembru 1969 u kollez. Vol XX pl p96). Huwa mbaghad
rilevanti minn disposizzjonijiet ohra illi 1-hlas isir fuq bazi perjodika u hu
essenzjalment rikorrenti u mhux maghmul “once only consideration”.
Invece, minn dak dezunt mill-artikolu 8 ta’ 1-Ordinanza li trazzan il-kera

fuq id-Djar (Kap. 116) il-premium jew rigai, in kwantu kondizzjoni, anke
jekk projbittiva b’dik il-ligi fil-kaz ta’ djar, tal-ghoti, tigdid jew issuktar tal-
kirja, hu konsidrat bhala hlas jew ghoti ta xi haga “minbarra 1-kera”. (Ara
Kollez. Vol XLVIII pH p826). Xejn allura ma jiswa illi 1-hlas kontemplat
bhala premium hu kompriz fl-iskrittura bhala hlas li 1-kumpanija appellata
ghamlet ghall-uzu tai-“premises”.”
A final note on the language question, the Constitution of Malta

contains an important rule relating to interpretation. All tax laws
are published in English and in Maltese and practitioners tend to
consult English versions of the law but the prevailing text remains
the Maltese text. Article 74 of the Constitution is clear enough.3
1.2 The Interpretation Act
Tax laws cannot be read in a vacuum. Tax laws regulate special

matters but are subject to the general rules on hermeneutics.
Practitioners tend to forget that tax laws are part and parcel of
general Maltese law and are governed by the interpretative rules
contained in an ad hoc piece of legislation, the Interpretation Act,
Chapter 249 of the Laws of Malta. The Interpretation Act (TA)
3 “Save as otherwise provided by Parliament, every law shall be enacted in both the Maltese and
English languages and, if there is any conflict between the Maltese and the English texts of any
law, the Maltese text shall prevail.”
contains its very own paragraph 2 Article 2 and it has a very far
reaching affect:
“(2) No provision of this Act limiting its application, or that of any of its
provisions, to certain Acts shall be construed as implying that other Acts,
or any provision thereof or any expression occurring therein, are to be
interpreted, construed or applied in a manner different from that provided
in this Act.”
Article 3 of the IA incorporates a number of definitions which

should be used to interpret tax law. The ITA and ITMA make
extensive use of the word ‘document’. Use of the term is applied in
provisions dealing with official secrecy,4 requests for information5
Flat-rate Foreign Tax Credit.6 The IA defines the word document
as meaning:
“any matter expressed or described on any substance by means of letters,

figures or marks, or by more than one of those means, intended to be used or
which may be used for the purpose of recording that matter”
Does a computer file fall under the definition of‘document’?
The definition of the word law is interesting, too. The word ‘law’
is used in a number of articles in the ITMA. It is used in provisions
dealing with criminal proceedings7, refunds8, record-keeping9 and
other provisions. The IA contains a very wide definition of the
term. The definition includes unwritten rules too.
“"law" includes any instrument having the force of law and any unwritten
rule of law, and "lawful" and "lawfully" shall be construed accordingly;”
4 Article 4 ITMA.
5 Article 10A and 14 ITMA and others
6 Article 92 ITA.
7 Article 55 ITMA
8 Article 48 ITMA.
9 Article 19 ITMA.
This definition above confirms that general principles of law

and custom form part of the Maltese tax code.
The IA and ITA incorporate two illustrative definitions of

the word person’. The two definitions are not incompatible.
Predictably, both definitions refer to the concept of bodies
corporate. Both IA and ITA, the ITA indirectly so,1011 are prepared
to attribute personality’ even to a person which is not vested with
legal personality. The IA specifies that:
“the expression "person" shall include a body or other association of persons

whether granted legal personality, in accordance with the provisions of the
Second Schedule to the Civil Code, or not.”11
For the purposes of the ITA and ITMA is a branch or a fixed

place of business, a person?12
Drafters of early versions of the ITA could not rely on the IA

and this explains the element of duplication one finds in the IA and
ITMA. This is the case with the definition of the word contravene’
which in the IA is defined as including a failure to comply. The
original drafters of the ‘penal’ provisions contained in the ITMA
did not have the definition of contravene’ of the IA at their
disposal and felt that they had to add or fail to comply’ wherever
it occurred.13
Other norms contemplated in the LA should apply to tax law too.

These include rules on grammatical variations, construction ofprovisions
as to exercise of powers and duties and rules on commencement.
10 The ITA defines a person as including a body of persons’ and ‘body of persons’ is defined as a
body vested with legal personality or not.
11 Article 41 A.
12 Implying that it would be eligible to benefit from the remittance basis of taxation.
13 See Articles 23 (13) ITMA, 42 (8) ITMA, 49 ITMA and others.
2. Doctrinal Interpretation
The drafters of our ITA have drawn from a number of sources.

British law was the main source of interpretation. In many cases
our legislator followed commonwealth laws, word for word. This
is the case with Article 51 (3) ITA on anti-avoidance which was
copied from the British Finance Act, 193614, Article 13 ITA which
was copied from Section 336 of the British 1988 Finance Act,
our provisions on transfer of losses and several other provisions.
Therefore, the theoretical interpretations of British jurists tend to
be an important interpretative tool.
In x4n Introduction to Income Tax Theory, I referred to a number

oflocal tax judgements which refer to commonwealth authors15 and
14 Articles 21 (1) and 21 (9) (b) of the Finance Act, 1936. Minor differences exist between the
British and Maltese texts (whereas our provision speaks of‘dispositions’, the British text speaks
of settlements’). The word ‘settlement’ was said to be an alien term in Maltese law and its
principal codes in Case 10 of the Court of Appeal.
15 For references to Silke’s South Africa Income Tax see Case 23 of the Court of Appeal a
case which dealt with deductions. See also Case 42 of the Court of Appeal decided on 13
December, 1961, when the Court of Appeal observed:
“Issa kif jghid Silke (South African Income Tax 1957 p.462, 554) ‘It is trite law that where a
matter is left to the discretion of an official, his decision, even if erroneous cannot be interfered
with, provided that he has applied his mind to the point and has exercised his discretion bona
fide and his decision was not in conflict with statutory provisions or the decisions ofcompetent
courts of law’. Hemm kazjijiet fil-ligi stess meta d-decizzjoni diskrezzjonali tal-Kumissarju hi
espressament soggettata ghall-appell. Ezempji ta’ dawn insibuhom per ezempju fl-artikli...F’
dawn il-kazjijet espressi t-taxpayer li jhossu aggravar jista’ jappella u 1-Kummissarji Specjali
jkollhom allura d-dritt li jezaminaw il-kaz mill-gdid u jistotwixxu d-decizjoni taghhom ghal
dik tal-Kummisarju ankorke hu jkun mexa bil-bona fide. Issa dawn id-disposizzjonijiet specjali
juru bl-akbar evidenza illi fl-kazijiet 1-ohra fejn hemm moghtija diskrezzjonali blaxejn aktar, ii-
Bord ma jistax imur oltre, hlief biss li jara li ma gewx vjolati 1-limiti fuq imsemmija u gie ritenut
illi d-decizjoni tal-Bord fis-sens illi d-diskrezzjoni tal-Kummissarju ma wjolatx dawk il-limiti
u kwindi m’hix sindakabbli hi decizjoni ta’ fatt li mhix appellabli bhala kwistjoni legali lil din
il-Qorti (ara Rand Ropes pty Ltd v. CIR 13 SATC 1). Fil-kaz prezenti 1-Bord ghar-rigward
tad-diskrezzjoni moghtija lill-Kumissarju esprima ruhu f’dan il-mod cioè’ illi diskrezzjoni
simili ma hix sindikabbli hlief f’kazi ta’ ezercizzju arbitrarju li jimporta vjolazzjoni ta’ gustizja
naturali...”
For another important reference to Silke see Case 51 of the Court of Appeal on the meaning
of‘fictitious transactions’.
For references to Hannan and Farnsworth see Case 31 of the Court of Appeal. Recently, the
courts are citing Kath Nightingale too (see quote from the Wellcome Europe Case above).
precedents.16 The trend has remained consistent. With respect to

core substantive law, Commonwealth authors remain exceedingly
important. Thus, in the 2009 judgement Welcome Properties
Limited vs. Il-Kummissarju tat-Taxxi Interni17 the Court of Appeal
based its judgement on a British precedent,
“Illi minn hawn il-Bord kompla sabiex analizza 1-operazzjonijiet u zvilupp

tai- umpanija in kwistjoni u hawn il-Qorti tirreferi ghal dak kontenut fir-
raba’ (4) pagna 1-quddiem tal-istess decizjoni, fejn jidher car li 1-istess Bord ha
in konsiderazzjoni diversi fatturi fosthom in-numru ta’ bejgh li sar u 1-medda
ta zmien li dan sar fih, punti li huma kkunsidrati bhala Badges ofTrade fil-kaz
“Morton vs Morton (1986 - 59 TC 381) li huma deskritti bhala “common
features of trade” u li hemm riferenza ghalihom fil-ktieb “An Introduction to
Income Tax Theory” ta’ Dr. Robert Attard (pagni 77 sa 95). Hawn il-Qorti
taghmel riferenza ghal dak li nghad bhala motivazzjoni ta’ 1-istess decizjoni
tal-Bord fil-pagni 4 sa 5 tal-istess u partikolarment fil-bran hawn taht citat u
tikkondividi listess, fejn 1-istess Bord sostna li:-“
The Administrative Review Tribunal has adopted a similar

approach and in recent judgements has extensively referred to
a number of British precedents and authors. In a recent case on
badges of trade, Case 138/201118 the Tribunal referred to a number
of British judgements19 and Commonwealth writers,20
“d-dottrina u 1-gurisprudenza Ingliza hija cara ferm fiiq dan il-punt...L-awturi

Hannan & Farnsworth (The Principles of Income Taxation) pagna 14 huma
ta’ kjarezza kristallina fuq dan il-punt...Iddecizjoni klassika in materja hija
“Leeming vs. Jones” 1930. A.C. 415. 15 T.C. 333. fejn inghad an accretion
to capital does not become income merely because the original capital was
invested in the hope and expectation that it would rise in value...kif intqal
fil-kaz Hudons Bay Co. v. Stevens (5 T.C. 424): “Where property has not
been acquired by purchase, sales are more likely to constitute realizations of
16 Attard Robert, An Introduction to Income Tax Theory For references to commonwealth

judgements see pp. 80, 213, 82, 105, 123, 126, 160, 161, 164,195, 198, 222, 232, 234, 235,
236 and 316.
17 Seduta tat-18 ta' Gunju, 2009 Appell Civili Numru. 1/2007.
18 Seduta ta' 1-24 ta' Jannar, 2013 per Magistrate G. Vella.
19 Rand vs The Alberny Land Company Limited u Hudson’s Bay Co vs Stevens.
20 Hannan & Farnsworth’s The Principles of Income Taxation and Taxation, Income Tax
Manual” (A.L. Chapman, 14th Ed. p.66).
capital” u fil-kaz William v. Davis (26 T.C. 371): “and merely realizing it
is not trading”. Anki, jekk ghall-grazzja ta’ 1-argument 1-appellanti rrangat
il-proprjetà jew hadet mizuri biex iggib prezz ahjar, kif donnu gie ventilat
millappellat waqt it-trattazzjonijiet tal-kaz, xorta jibqa’ li dawn il-mizuri
ma jelevawx it-transazzjonijiet ghal trading. Infatti, kif insibu fit-“ Taxation,
Income Tax Manual” (A.L. Chapman, 14th Ed. p.66...”
The Administrative Review Tribunal regularly refers to leading

British judgments on issues of avoidance and evasion. The Tribunal
has referred to the judgments in Inland Revenue Commissioners
v. Burmah Oil, Furniss v. Dawson and Schofield v. HMRC several
times.
3. Literal and Logical Interpretation
Determining the meaning of the wording of the Income Tax Acts

is not always easy. Several provisions contain cryptic wording. How
should the provisions of the Income Tax Acts be interpreted? Must
the provisions contained in the Income Tax act be interpreted in
a literal manner? Should the Income Tax Act be interpreted in a
teleological manner? Should the law be interpreted in a logical way
only when a literal interpretation does not make sense ? In Case 2
of 2004,21 the Court of Appeal followed traditional jurisprudence
dealing with the interpretation of wills. The Court favoured a
literal interpretation and suggested that recourse to a logical
interpretation should be a measure of last resort. In 2004 the Court
of Appeal observed,
“(1) Fl-applikazzjoni tal-ligi wiehed ma jistax u ma ghandux jattribwixxi

sens iehor hlief dak li jirrizulta palesi mis-sinjifikat tal-kliem stess tal-ligi
skond il-konnessjoni taghhom u I-intenzjoni tal-legislatur. Din wara kollox
hi espressjoni ta’ koncezzjoni ermenewtika relattivament elementari u
tikkontjeni t-teorija kompleta ta’ 1-interpretazzjoni. Dan jghodd mhux biss
ghal-ligi izda, b’ mod generali wkoll, ghat-testmenti u ghall-kuntratti. Ara in
partikolari Artikolu 1002 u 1003 tal-Kodici Civili;
21 Seduta ta’ nhar 1-Erbgha, 26 ta’Jannar, 2005-

(2) F’ materja fiskali 1-interpetazzjoni 1-aktar akkreditata hi dik

letterali (Kollez. Vol. XXVIII PI p523). Dintikkonsistifid-determinazzjoni
tas-sinifikat ta’ 1-espressjoni legislattiva in bazi ghall-valur semantiku skond
1-uzu lingwistiku generali;
(3) Tendenzjalment, il-gurisprudenza tirritjeni li r-rikors ghall-
intenzjoni tal-legislatur hi wahda sussidjarja u ssostni li ghandhom jigu
eskluzi 1-uzu ta’ kriterji ermenewtici ohrajn meta 1-interpretazzjoni letterali
tikkonduci ghall-ezitu car u inekwivoku. Ara b’ ezemplari sentenza fl-ismijiet
“John Bartolo et -vs- Alfred Petroni et nomine”, Appell, 7 ta’ Ottubru 1997 u
Vol.XXXVI PI p 191;
(4) Naturalment fit-tfittxija ta’ 1-interpretazzjoni awtentika
huwa accettat ukoll illi “avolja 1-kelma tal-legislatur tkun cara huwa lecitu
li tigi ezaminata r-ratio legis biex tittiehed interpretazzjoni aktar preciza”
(Kollez. Vol. XXXIII Pip 103). Jokkorri ghalhekk li wiehed jezamina
1-iskop persegwit mil-legislatur ghat-tehid in konsiderazzjoni ta’ certi normi
u ligijiet fil-mument storiku tad-dhul in essere taghhom. Dan dejjem u
apparti, s’ intendi, is-sinjifikat immanenti tal-ligijiet infushom;”
In 2005,22 I had commented on the older23 judgements of the

22 Attard, Robert, An Introduction to Income Tax Theory p. 26.
23 Case law dealing with the interpretation of the Income Tax Act tends to be slightly confusing
as cases frequently draw from sources, which appear not to be entirely harmonious. Should
the Income Tax Acts be interpreted in a literal manneror should this law be interpreted in a
teleological manner? Or should it be interpreted in a literal manner in so far the words of the
law are clear? Translations from extracts from original judgements will be quoted extensively
in a bid to clarify this crucial matter.
BSC Case 32 of 1967 (which was not appealed from) seemed to imply that the Income Tax
Act should be interpreted in a strict literal manner. The Board quoted Newport's Income Tax,
Law and Practice which states that "... the decisions of the Courts only interpret the statutory
provisions which must, moreover, he interpreted strictly to the letter even where the result may be
quite out ofkeeping with the apparent intention ofthose who drafted and enacted the provisions
in question. It is a settled principle that where a Taxing Act has wording which can strictly be
construed only in one way, the Court cannotgo behind the Taxing Acts themselves in an endeavour
to ascertain whether Parliament intended the wording in question to have the effect in law which
the Court hasfound that it infact has"
It also quoted Konstam, The Law of Income Tax,
"It is often said that a taxing Act must be construed strictly infavour ofthe subject; it may perhaps
be more correct to say that a taxing Act must be construed against either the Crown or the person
sought to be charged, with perfect strictness, sofar as the language ofthe Act enables theJudges to
discover the intention ofthe Legislature. No tax can be imposed on the subject without words in
an Act ofParliament clearly showing an intention to lay a burden upon him. The only safe rule is
to look at the words ofthe enactment and see what is the intention expressed by those words"
The interpretation of the Income Tax Act was also discussed in Case No. 8 of 1954 of the
Court of Appeal,
“...the interpretation oftax law must be in line with logic (mar-raguni) on the basis ofthe maxim
Court of Appeal and asked whether tax law should be interpreted

in a teleological manner because there are provisions in the ITA
which tend to be unclear and equivocal. Mr. Justice Sciberras’s
Court of Appeal answered our questions in 2010. In Case 1 of
2010, the Court of Appeal24 (Inferior Jurisdiction), concluded that
in interpreting the Income Tax Acts adjudicators had to search for
the ‘mens legis’ and ‘ratio’ of the law suggesting that the law must be
interpreted in context, in a teleological manner. Historical context
and purpose must be given due consideration.
“Ma jistax ikun dubitat illi skop ta’ 1-interpretazzjoni hi d-determinazzjoni

tal-volontà tal-legislatur kif inkorporata fit-test tal-ligi, ossija dik tar-
ricerka tat-tifsira oggettiva tal-proposizzjoni tan-norma tal-ligi li trid tigi
applikata, il-kontenut tas-sens taghha u s-sinjifikat ermenewtikament rikavat
minnha. Tqum il-kwestjoni b’liema kriterju ghandha tigi kondotta din
1-interpretazzjoni;
Fil-ktieb tieghu “An Introduction to Income Tax Theory” (Ed. 2005), 1-awtur
Dr. Robert Attard iponi d-domanda importanti jekk 1-interpretazzjoni taht
1-Income Tax Act ghandhiex issir fis-sens letterali jew fis-sens teleologiku (ara
footnote 10 pagna 26). Bl-adozzjoni ta’ dan 1-ahharkriterju 1-interpretazzjoni
tfisser li 1-kontenut tan-norma tal-ligi jikkonnetti ruhu in definitiva ghal
dak il-fini li 1-legislatur kellu f’mohhu li jippersegwi permezz taghha.
Hu proprju dan il-kriterju ghall-iskop persegwit mil-legislatur li, skond
1-awturi, jikkoincidi mal-kriterju objettiv-teleologiku. Dan jinneccessita,
’Semper ea est arcenda interpretatio quam lex omni ratione destituatur...’ and it is not logical
(ragonevoli) for the legislator to admit a dedction the cost of repairs and to disallow the same
deduction in the same provision...Konstam...remarks that in Income tax matters, Judges must
discover the intention ofthe legislatorfrom the words used”.
In case 8 reference was meant to Lord Simons City of London v. Gibbs (1942) A.C at p.414,
“Our duty...is to find out what the Legislature must be taken to have really meant by the
expressions which it has used, without necessarily attributing to (it) a precise appreciation ofthe
technical appropriateness ofthe language"
Kr\ identically composed court held in Case 10 of the Court of Appeal that,
“The case warrants that we should repeat what has been said in Income Tax Commissioners v.
Pemsel (1891) A.C. 534, 543, published in Maxwell on the Interpretation of Statutes, 1953
Edit. P.2, note (c) that “ifthe words ofthe Statute are in themselves precise and unambiguous
no more is necessary than to expound those words in their natural or ordinary sense, the words
themselves in such case best declaring the intention of the legislature...the fundamental rule oj
interpretation to which all others are subordinate’”.
In Case 18 the words of the statute must have been imprecise and ambiguous our Court of
Appeal deemed fit to refer to parliamentary debates.
24 Seduta ta’ nhar il-Gimgha, 9 ta’ April, 2010.
s’intendi, li wiehed jaghmel riferiment ghall-iskop li ragjonevolment, fuq

1-istregwa tal-valuri espressi minn norma partikolari u fil-mument storiku ta
1-introduzzjoni taghha, kien hekk mahsub li jkun persegwit;”
According to the Court ofAppeal fiscal laws must be interpreted

in a manner which is compatible with the will of the legislator.25
Tax laws must be interpreted holistically in a manner which was in
line with the legislator’s ultimate purpose:
“Huwa accettar fost id-diversi trattisti illi jekk dan il-kriterju ma jaghtix
rizultat univoku jew ihalli zona, anke periferika, ta’ incertezza, allura
ghandha tkun preferita dik 1-interpretazzjoni li 1-aktar tikkorrispondi ghall-
ghaqda tas-sinifikati rizultanti mill-kunsiderazzjoni tad-diversi partijiet ta’
1-istess disposizzjoni jew tad-diversi disposizzjonijiet ta’ 1-istess ligi u li kapaci
taghti sens organiku u intelligibbli ghall-iskop determinat;
Haga naturali, 1-interpretazzjoni verament awtentika trid tigi mil-ligi
nnifisha in kwantu hi din li tistabilixxi t-tifsira li trid tinghata lill-kliem
jew espressjonijiet u tirrendihom esplikattivi u definitavi tat-test tad-
disposizzjoni b’ mod li tesprimi s-sinjifikat volut mil-legislatur, ad eskluzjoni
ta’ tifsiriet ohrajn;”26
The Administrative Review Tribunal has adopted an approach

which is consistent with that of the Court of Appeal. The Tribunal
tends to be very thorough and is known to carry out extensive
research to establish mens legis’ and in a number of judgements
has gone to the extent of referring to parliamentary debates.27
4 Maxims of Interpretation
4.1 Interpretation by Analogy
Case 40 of the Court of Appeal, a case which involved the

deductibility of interest expenditure established that in the
25 Kollez. Vol. XXXVII PI p. 179 and Vol. XLV PI p. 408.
26 Case 14/05.
27 Extensive references to parliamentary debates are contained in a number of judgements and
interlocutory decrees delivered by the Administrative Review Tribunal including Case 39,
12VG, Case 193/12VG, Case 125/llVGand Case 235/11VG.
interpretation of the ITA, interpretation by analogy should not be

used.28
In Paul Ciantar vs Kummissarju tat-Taxxi Interni29 the Court
of Appeal (Inferior Jurisdiction) has taken the same approach. The
principles established in the Ciantar case have been confirmed by
the Court of Appeal (Superior Jurisdiction). 30 The Ciantar case, a
case on time-barring, has become a leading case on interpretation.
Jibda biex jigi osservat illi 1-kummentaturi lokali prevalent f ’materja fiskali
jirritjenu, fid-dawl tad-dixxiplina akkolta taht il-ligi fiskali vigenti, u, in
ispecje, ta’ dak dettat fl- Artikolu 31 (6) tal-Kapitolu 372, illi t-terminu ta’
hames snin f’dan 1-artikolu ikkontemplat huwa wiehed ta’ preskrizzjoni. Ara
para. 26.3.iii relattiv ghal “post 1999 assessments” fl-opra “Direct Taxation
Manual”, 2009, ippubblikata mill-Malta Institute of Taxation. Similiment
taht ir-ras “Powers of the Revenue upon the Receipt of a Return” fl-opra
ta’ 1-Avukat Dottor Robert Attard “Principles of Maltese Tax Law”, 2008,
pagna 143. Salv ghal dak li ser jinghad aktar 1-isfel, evidentement, dik
ilpreskrizzjoni (jekk inhi hekk), bhala modalità' ta’ estinzjoni, ghandha
b’esigenza li tassikura c-certezza firrapporti guridici-fiskali, u dan skond
prospettiva li tassorbi in se kull esigenza ohra. Tqum hawn il-kwestjoni
jekk allura dik 1-istess preskrizzjoni ghandhiex tinftiehem fissens wiesgha
interpretat mill-Bord jew, invece, skond ittifsira restrittiva akkordata mill-
Kummissarju appellant;Fiz-zgur ukoll, ma jidherx lanqas li kien fil-forma
mentis tal-legislatur, meta ddetta 1-ligi, illi 1-vojt jigi kolmat blistrument ta’
interpretazzjoni analogika permezz ta’ applikazzjoni jew referenza ghal xi
norma tal-ligi civili komuni, kif hekk qed jippretendi 1-appellanti li ghandu
jkun. Ikollu jinghad illi b’ragonament bhal dan wiehed mhux biss ikun qed
jesorbita mill-kamp ta’ linterpretazzjoni proprja, izda jkun qieghed ukoll
jittanta, permezz tal-procediment anologiku, jillimita s-sinjifikat veru tan-
nukleu centrali ampju ta’ 1-espressjoni fl-Artikolu 31 (6) predett.’
28 The Court dismissed the argument that the obligation to pay tax was imposed by law. Similarly
the Court ruled that it could not admit an analogy between the payment of the tax and the
payment of rents etc. Interpretation by analogy does not apply in the realm of taxation.
29 Seduta tat-18 ta1 Gunju, 2010 Appell Civili Numru. 3/2010.
30 Emanuel Zammit v. Kummissarju tat-Taxxi Interni Seduta tad-29 ta Mejju, 2009 Appell
Civili Numru. 258/2005/1.
4.2 Lex prospicit, non respicit (The law looks

forward, not backward)
Rules relating to the entry into force of amendments, budget

amendments especially, have retained their practical significance.
The main rules governing entry into force have been drawn from
Italian authors, laws and jurisprudence.
Entry into force of laws is regulated in paragraph 4 of Article 72

of the Constitution of Malta which provides that:
“(4) When a law has been assented to by the President it shall without delay
be published in the Gazette and shall not come into operation until it has
been so published, but Parliament may postpone the coming into operation
of any such law and may make laws with retrospective effect.”
Generally, an amendment comes into force on the date of

publication of the relevant legal instrument but the legal instrument
itself may contain provisions providing for a future date when
such an amendment will come into force.31 The Constitution of
Malta does not exclude the contingency of laws contemplating
a retrospective effect but our courts have created important
guidelines on retrospective laws.
The leading case on retrospective amendments to the ITA is

the judgement of the Court of Appeal in Kummissarju tat-Taxxi
31 Article 8 of Act V of 2012, the most recent Budget Act, contained clear rules onthe date of
entry into force of a number of legal provisions,
‘(a) article 12 shall be deemed to have come into force as from the year of assessment 2011;
(b) article 18 shall come into force as from the year of assessment 2012; and
(c) articles 11(b), 13 to 17,19,20,21, and 22(a), (b) and
(d) shall come into force as from the year of assessment 2013.’
Article 8 of Act V was silent in relation to the date of entry into force of the amendments
contained in Articles 9 and 10 of the Act. Articles 9 and 10 contained important definition,
a change to the definition of ‘participating holding’ included. Given that Article 8 did not
provide for a date of entry into force of the said rules, Articles 9 and 10 are, in terms of the
Constitution of Malta, deemed to come into force on 14 May 2012, the date of publication
of the Government Gazette which published the amendment.
Interni vs Alfred Caruana,3233a judgement which enhanced the

principles established in the 1950 Court of Appeal judgement
Chev. Antonio Cassar Torreggiani -vs- Nutar Dr. Vincenzo Gatt
nomine, a case I had discussed in An Introduction to Income Tax
Theory!0 In Caruana, the Court of Appeal applied concepts of
Italian Constitutional law which established that retrospective
laws must respect a number of core principles namely:
(a) The principle of reasonableness;

(b) The need to strike a fair balance between the rights of the
state and those of the subject;
(c) The need for legal certainty;
(d) Allowing for judicial discretion.34
The Court observed that the constitution does not prohibit

retrospective tax laws but retrospective taxation is allowed only if it
is does not result in unfairness.
“Huwa dezumibbli minn dak li appena nghad illi rretroattivita' ta’ ligi ma
tesponix ruhha awtomatikament ghac-censura tal-kostituzzjonalita' taghha.
Biex dan jissucciedi jrid jirrizulta li jkunu gew vjolati precetti kostituzzjonali
jew principji inerenti ghall-istat tad-Dritt. In partikulari, il-principju tar-
ragonevolezza 1-ghala giet dettata 1-ligi u dak ta’ 1-affidament tac-cittadini, jew
talkontribwenti fil-materji fiskali, fl-istabilita' u c-certezza ta’ lordinament
guridiku;”
Referring to a 1919 judgement, the Court observed that a

transaction which had been completed could not be subject to
a tax burden created by a law which was promulgated after the
completion of a transaction,
32 Seduta ta 1-10 ta Jannar, 2007 Appell Civili Numru. 266/2005/1

33 Ibid p. 67.
34 “principio generale di ragionevolezza”, “la tutela dell’ affidamento legittimamente sorto nei
soggetti quale principio connaturato allo Stato di diritto”, “la coerenza e la certezza dell’
ordinamento giuridico” u “il rispetto delle funzioni costituzionalmente riservate al potere
giudiziario” (ara Sentenza Numru 6 ta’ 1-1994);
“Dan premess, ghandu jigi notat illi 1-Qrati taghna ma baqghux lura milli
huma wkoll jissottolinejaw certi principji in materja ta’ retroattività' ta’ ligi
fiskali. Minn dak ricerkat il-kwestjoni jidher li qamet fil-kawza fl-ismijiet
“Michele Muscat -vs- L-Onor. Roberto Briffa, Collettore delle Dogane”,
Prim’ Awla, Qorti Civili, 12 ta’ April 1919. Fiha nghad illi di regola ligi
promulgata m’ ghandhiex ikollha effett hlief ghal quddiem b’ mod li ma
ghandhiex testendi ruhha “ai fatti già compiuti e consumati: La legge di
regola, quindi, non ha effetto retroattivo ed è di diritto volgare il broccardo
che ‘lex non habet oculus retro’.” Affermata din ir-regola generali ssokta
jinghad f ’ din listess sentenza illi “quantunque sia in facolta del legislatore
espressamente dichiarare che la legge debba comprendere nel suo impero
anche gli atti, che non fossero ancora compiuti, tuttavia i diritti quesiti sono
sempre di giustizia dalla legge rispettati”;”
The Court referred to the Cassar Torregiani judgement

involving the retrospective restriction of an exemption when the
Court of Appeal followed Gabba35 who observed that in matters
of tax law the only limits to retroactive laws were posed by vested
rights. Therefore the Court reached the following conclusions:
1. Like other laws, tax law is subject to the principle of non

retroactivity;
2. Fiscal laws apply to and regulate transfers which take place
when such fiscal laws are in force;
3. It follows that transfer that took place under previous laws
were governed by such previous laws;
4. Activities that were initiated under previous laws and were
completed under a new law are governed by the new law;
5. Whenever a right was vested in a holder such vested right
completed under a previous law resisted changes in the law.
4.3 Dilationes in lege sunt odiosae (Delays in

law are odious)
The Income Tax Act is extremely detailed in laying down the

time-limits within which a taxpayer is bound to comply with his
35 Gabba, Retroattività Delle Leggi (Torino 1897) Vol. Ili p. 200.
obligations but the law is silent on time-limits within which the tax
authority should fulfil its duties.
How long should a tax investigation take? Within which time

frame must the tax authorities process a tax objection? How long
should the tax authorities take to issue a notice of refusal? The
Income Tax Acts suggest that in cases of evasion of fraud the tax
authorities’ can investigate taxpayers even after the lapse of the
prescribe time-bars, does this mean that in cases of evasion or fraud
time-bars do not apply? The tax authorities were taking the view
that the absence of clearly defined timeframes implied that the
Revenue had the power to work at its own pace. Recently, both the
Constitutional Court36 and the Administrative Review Tribunal
have taken a different approach. The law is to be interpreted on the
basis that Dilationes in lege sunt odiosae.
In the Caruana case37 the Court of Appeal remarked that

administrative workloads and bottlenecks could not be used to
justify inexcusable delays in collecting taxes.
“F’ dan il-kumpless kollu tal-principji affermati tad-dritt u wkoll fuq

1-interpretazzjoni taghha tal-fatti din il-Qorti tara li f ’ dan il-kaz partikolari,
u 1-Qorti taghmel debita enfasi fuq dan, ma kellux ikollu applikabilita'
d-dispost tas-subinciz (4) ta’ 1-Artikolu 47 izda pjuttost dak tas-subinciz (2)
ta’ listess artikolu. Ghalkemm certament il-Qorti tapprezza li 1-ingranagg
amministrattiv ta dipartimenti kbar, bhal ma hu dak tat-Taxxi Interni, mhux
dejjem jahdem b’ mod imghaggel, minn naha 1-ohra hi tal-ferma konvinzjoni
illi fi stat ta’ dritt 1-legislazzjoni ma ghandhiex issir biex, temporanjament,
tkopri d-deficjenzi li jkunu jezistu u biex, bhal f ’ dan il-kaz, tinnewtralizza
“quanto fosse posto in essere a norma di legge” (Kollez. Vol. XXIV P II p
16), daqskemm biex tittutela ahjar r-relazzjonijiet tal-partijiet involuti.
Minn dak li rrizultalha, ma jistax ragonevolment zgur jinghad illi 1-aggunta
fil-ligi bl-Att II ta’ 1-2004 hi, f ’ dan il-kaz, predisposta u voluta fl-interess ta’
1-appellanti taxpayer imma ghall harsien rigidu u esklussiv tal-fisco.”
The First Hall Civil Court made a similar observation in
36 John Geranzi Limited vs Kummissarju tat-Taxxi interni et Rikors Numru. 22/2009.

37 Seduta ta 1-10 ta Jannar, 2007 Appell Civili Numru. 266/2005/1.
Emanuel Zammit vs CIR38 when it held that:
‘Il-fatt li hargu stimi riveduti tant snin wara minhabba 1-oggezzjoni li kien
ghamel it-taxpayer ma jintitolax lill-Kummissarju tat-Taxxi Interni li jigi
minghajr limitu fil-ligi ghall-ammont ta’ zmien li jista’ jiehu biex johrog
kont rivedut. Li kieku wiehed jinterpreta bil-mod kif qed jippretendi
1-Kummissarju tat-Taxxi Interni li m’hemmx limitu ta’ zmien biex
oggezzjoni tigi processata konna naslu fi stat li 1-Kummissarju jista’ jdum
mitt sena u xorta wahda ma tiddekorrix il-preskrizzjoni. It-terminu ta’
tmien snin huwa fatali u fih trid tkun saret it-talba permezz tal-ittra ufficjali
ghax altrimenti t-taxpayer ikun intitolat li jissolleva 1-eccezzjoni dwar il-
preskrizzjoni.’
In Case 66/11 VG,the ART applied the same principle,
“Naturalment però, ghad illi f’tali sitwazzjonijiet iz-zmien ghall-

investigazzjoni u konsegwenti hrug ta’ stima ma jkunx delimitat b’perijodu ta’
zmien specifiku, xorta wahda 1-Kummissarju tat-Taxxi Interni jkollu jespleta
1-inkarigu tieghu fi zmien ragonevoli skond ic-cirkostanzi tal-kaz biex
ma jigix vjolat id-dritt tat-taxpayer li jkollu c-certezza fattwali u legali
tal-posizzjoni tieghu vis-à-vis il-Fisco.
Huwa biss bl-applikazzjoni korretta u ragonevoli ta’ dawn id-
disposizzjonijiet tal-Ligi li 1-Kummissarju tat-Taxxi Interni jista’ jaqdi
d-dover tieghu li jassigura li kull individwu jhallas dak minnu effettivament
dovut lill-Fisco u fl-istess hin jirrispetta id-drittijiet tat-taxpayer.
Nonostante 1-fatt li 1-Kummissarju tat-Taxxi Interni ghandu tali poter
wiesgha li f’kaz ta’ frodi jew evazjoni johrog stima fil-konfront tat-taxpayer
f’kull zmien, ma hemmx dubju li kull kaz ghandu 1-fattispecie partikolari
tieghu Konsegwentement ghalhekk il-Kummissarju tat-Taxxi
Intern ma jistax jippretendi li invarjabilment jiggustifika kull stima
li tohrog wara t-terminu preskritt fil-Ligi fuq il-bazi ta’ allegata frodi jew
evazjoni da parte tat-taxpayer. Apparte minhekk meta 1-Kummissarju tat-
Taxxi Interni jirribatti ghal kontestazzjoni ta’ taxpayer bil-premessa li kien
hemm frodi jew evazjoni da parte ta’ 1-istess taxpayer, ghandu loneru li
jipprova dak minnu allegat.”
38 (Rik.Nru. 285/2005 5/04/07)

4.4 Afffirmati, non neganti incumbit probation

(The proof lies upon him who affirms, not on him
who denies)
Article 35 (3) ITMA prescribes that in a tax appeal,
“(3) The onus of proving that the assessment complained of is excessive shall
be on the appellant.”
The Court of Appeal has interpreted the rule as implying that

should the Revenue omit to file a reply, the Revenue would still
have a right to be heard. In Case 8 of2006, the Court of Appeal has
held that in tax appeals the concept of contumacy does not apply,
“Issa huwa veru li r-Regolament 12 ta 1-Awiz Legali 173 ta 1-1994 dwar

1-Amministrazzjoni tat-Taxxa jahseb ghar-risposta mill-Kummissarju fiz-
zmien utli hemm preskritt. Korrettement interpretat, pero', dik ir-risposta
f ’ dak it-terminu hi hekk mahsuba ghall-iskop li jkun maghruf li 1-proceduri
introduttivi jkunu maghluqa u 1-Bord ikun konsegwentement in grad li
jiffissa, ex-Regolament 13 (1) ta’ 1-imsemmi Awiz Legali, il-gurnata ghas-
smiegh ta’ 1-appell introdott quddiemu. Minn imkien pero', la f’ dawn 1-istess
Regolamenti u lanqas fil-ligi principali, ma jinghad illi n-nuqqas ta’ risposta
jew wahda tardiva ghandha b’ mod awtomatiku tassarraf fis-sokkombenza
jew li 1-Kummissarju appellat ikollu, nolens volens, jissogjaci ghall-provi
li ggib il-parti awersarja fil-procediment. A skans ta’ ripetizzjoni fuq din
it-tematika 1-Qorti taghmel referenza ghall-konsiderazzjonijiet minnha
ampjament zvolti fis-sentenza taghha in re “Maltacom pic -vs- Kummissarju
tat-Taxxa fuq il-Valur Mizjud” (23 ta’ Gunju 2004) fejn, incidentalment, gie
mis-socjeta' appellanti f’ dak il-kaz sollevat 1-istess identiku aggravju bhal
dak tal-kaz prezenti;”39
The norm which establishes that the onus ofproof in a tax appeal
always lies on the appellant is not an absolute rule. The Courts have
recognised exceptions to the rule. Case 3 of 2009 the Court of
Appeal has taken the view that if the Revenue alleges avoidance the
onus of proof reverts on the Revenue,
39 lam not sure whether, with the entry into force the Administrative Justice Act, the principle
established in Case 8 of2006 would still hold water.
“Minn din il-fehma interpretativa tinzel il-konsegwenza illi biex tissussisti

fil-konkret xi wahda minn dawk 1-iskemi din ghandba tigi provata gjaladarba
1-ligi ma tikkreja ebda presunzjoni, favur jew kontra, u, barra minnhekk,
skond il-principju generali tad-dritt, min jallega 1-mala fede jew it-tentattiv
ta evazjoni ghandu, b’oneru, iressaq il-prova, soda u konvincenti, ta din
1-allegazzjoni tieghu. Jikkonsegwi fil-kaz partikolari illi kien jinkombi fuq
il-Kummissarju appellanti li jipprova li giet prattikata mill-kumpanija skema
bi hsara tal-Fisco. Ragonevolment, prova bhal din setghet anke tigi estratta
minn indizzji basta li dawn ikunu gravi, determinanti u konklussivi b’mod li
jingeneraw il-konvinzjoni illi t-transazzjoni kienet tabilhaqq mahsuba biex
tigi raggirata 1-ligi;”
4.5 Ipsae legis cupiunt ut jure regantur (The

laws themselves require that they should be
governed by right)
Recent judgements of the Constitutional Court and the Court of

Appeal refer to administrative fairness as a core value of our tax
law. Our judges have interpreted our tax law in a manner which
reconciles with the principles that the Maltese State is a ‘Stat ta
Dritt’, a term which translates literally to a State of Right’. It is
more or less equivalent to the British concept of Rule of Law which
governs the operations of all administrative authorities.
In a number of tax judgements, our Courts have spoken of this

‘Stat ta’ dritt’ interpreting tax laws in a way that presupposes that
tax must be administered fairly. Our Courts have established that
our tax administration must act on the basis that the Revenue is a
limb of a ‘Stat ta’ Dritt’ implying that tax authorities must respect
principles of equity and fairness. Our Courts have referred to this
concept in some of our leading tax judgements.40
Tax norms must be interpreted in a way which is consonant
40 Including the Alfred Caruana Case,

to reasonableness.41 The Court of Appeal explained that the

fundamental ratio of income tax law is fiscal justice,
“(4) Jibqa’ dejjem veru li skop fundamentali tal-ligi fiskali hu dak li kulhadd
irodd dak li hu dovut skond il-ligi, imma dan fl-ambitu ta’ dak li hu hekk
gustifikat u mhux ukoll skond dak li jkun hekk stabbilit minn xi diskrezzjoni
assoluta tal-Kummissarju;”42
The leading case on this point is the Constitutional Courts
Judgement in John Geranzi Limited v. Kummissarju tat-Taxxi
Interni et43 when the Court developed core principles which create
a judge-made taxpayers charter:
“20. Is-setgħa tal-istat li jimponi u jiġbor it-taxxi ġejja mil-liġi, u hija setgha li
jista’ jinqeda biha biss kif tgħid u trid il-liġi.
Fi stat ta’ dritt hija 1-qorti 1-organu li jghid jekk il-liġi tharsitx jew le.”
4.6 In Dubio Pro Reo ("when in doubt, for the

accused")
In a number of judgements on the interpretation of tax law, the

Court of Appeal applied principles which are associated with
criminal law. The criminal law nature’ of tax law is becoming
exceedingly prevalent.
The Court of Appeal acknowledged that tax law shares some

elements in common with criminal law and he borrowed from
the rules of criminal procedure in the creation of his principles of
taxpayer protection.
In Case 1 of 2010 the Court of Appeal noted that,
“iii. F’materja fiskali, bhal fil-kamp penali, ma hemmx lok li wiehed jipprova
41 Appell numru 3/04 Seduta ta’ nhar 1-Erbgha, 23 ta’ Frar, 2005, “L-interpretazzjoni tal-ligi
ghandha tkun konsona mar-raguni u ma jidherx ragonevoli, fuq ir-rizultanzi processwali ta’
dan il-kaz kif ri-epilogati fis-sentenza appellata, illi 1-imsemmi proviso jikkolpixxi 1-kaz de quo
agitur meta, kif jirrizulta, il-fatti - 1-istima u n-notifika taghha - kienu gja kompjuti fiz-zmien
meta 1-proviso kien ghadu ma giex introdott.”
42 Appell numru 5/07 Seduta ta’ nhar 1-Erbgha, 12 ta’ Dicembru, 2007.
43 Seduta tat-30 ta1 Novembru, 2012 Appell Civili Numru. 22/2009/1.
interpretazzjonijiet mgebbda jew jipprova jaghmel tajjeb ghal xi lakuna fil-

ligi dovuta ghal fatt li 1-legislatur ma jkunx ikkontempla 1-ipotesijiet kollha
possibbli jew immaginabbli;”
In tax law, does the concept of in dubio pro reo apply ? Traditional
jurisprudence said ‘No!’. In 1962, in Case 44, the Court of Appeal,
had observed that the penal law notion of in dubio pro reo finds
no application in tax law but Case 44 was overturned in 2001,
when, in a VAT case, the Court of Appeal (Superior Jurisdiction)
established that in case of a reasonable doubt on interpretation, the
law should be interpreted in favour of the taxpayer,
“Din il-Qorti qed taghmel ezercizzju minuzjuz ta’ interpretazzjoni ta’ dan
ir-regolament ghaliuex hi tal-fehma li, f’ materja fiskali, 1-interpretazzjoni
kellha tkun rigoruza biex jigi accertat li kulhadd ihallas dak li kien minnu
dovut f ’ taxxa imma wkoll li had ma jigi mgieghel ihallas dak li ma kienx
minnu dovut u f ’ kaz ta’ dubju ragjonevoli, li jippersisti wara ezercizzju ta’
interpretazzjoni oggettiva, d-dubju kullu jmur favur 1-individwu u mhux
favur il-fisco”.44
Since 2001, the interpretative principle of in dubio pro reo has

been applied in income tax cases in a very consistent manner.
In case 8 of 200445 the Court of Appeal remarked:
“F’ materja fiskali anke kieku stes kien jezisti dubju fl-interpretazzjoni
dak id-dubju ghandu jmur favur it-taxpayer u mhux favur il-fisco;”
4.7 The Judgment in Christine Borda vs id- Direttur

(Taxxi Interni) u llum magħruf bhala il-Kummissarju
tat-Taxxi46
Some of the principles of interpretation discussed above47 were

applied in the 2016 judgment in Borda, a text-book case on
44 Case 9 of the Court of Appeal.
45 Seduta ta’ nhar 1-Erbgha, 6 ta’ April, 2005 Numru 2 Appell numru 8/04.
46 Rik.Nru.21/14JRM.
47 Albeit not by specific reference.
interpretation. This well-researched case involved Duty on

Documents and the meaning of a key definition contained in
Article 2. The Maltese text was not in line with the English text.
Furthermore, the Court was asked to determine whether an
amendment applied retrospectively. The Court was very clear.
First of all, the Court applied authentic interpretation:
“Illi wara li qieset sewwa 1-kwestjoni, il-Qorti tqis li ma tistax taqbel mat-
tifsira tal-liġi li qiegħed jagħti 1-Kummissarju mħarrek. Din il-fehma tasal
għaliha għal għadd ta’ raġunijiet. Fl-ewwel lok, tibda biex tosserva li permezz
tal-Artiklu 2 tal-Kap 364, il-leġislatur innifsu jagħti tifsira (imsejħa ‘tifsira
awtentika’ fid-dottrina legali) ta’ għadd ta’ kliem li jintuża fl-istess Att,
fosthom ta’ “trasferiment”
The Court proceeded to confirm that the Maltese text is the

prevailing text:
“Illi, fit-tieni lok, fit-test tal-liġi kif iċċitata mill-partijiet kontendenti, filwaqt
li t-test Malti jeżenta mit-taxxa kull assenjazzjoni (il-leġislatur għażel li
jsejħilha “assenjament”) li ssir “wara” firda personali bejn il-konjuġi, it-test
Ingliż jagħmel din 1-eżenzjoni għal assenjazzjoni bħal din li ssir “consequent
to” 1-firda personali. It-test Malti huwa għalhekk usa mit-test Ingliż. Skont
it-test Malti, kulma hu meħtieġ għall-eżenzjoni mit-taxxa hu li t-trasferiment
iseħħ kronoloġikament fi żmien sussegwenti għall-firda personali. It-test
Ingliż, iżda, jinħtieġ mhux biss li kronoloġikament it-trasferiment iseħħ
wara 1-firda, imma wkoll li jkun sar b’konsegwenza tagħha. Issa kif inhu
magħruf, bis-saħħa tal-Artikolu 8(3) tal-Att tal-1980 dwar ir-Revizjoni
tal-Ligijiet Statutorji (li jidher li jirrifletti dak li jipprovdi 1-artikolu 74 tal-
Kostituzzjoni), huwa stabbilit li “Jekk ikun hemm xi konflitt bejn it-test
Malti u t-test Ingliz ta’ xi edizzjoni riveduta, it-test Malti ghandu jipprevali”
u dan sakemm 1-istess liġi ma tkunx tipprovdi mod ieħor20. Għalhekk skond
il-liġi kif kienet fis-seħħ fiż-żmien rilevanti għal dan il-każ, 1-attriċi hija
intitolata għall-eżenzjoni mill-boll dwar is-sehem ta’ nofs mhux maqsum li
hija kisbet b’riżultat tal-bejgħ b’irkant taħt 1-awtorita’ tal-Qorti tal-fond li
għal xi żmien kien id-dar taż-żwieġ tagħha u ta’ żewġha;”
Lastly, the Court referred to vested rights, concluding that tax laws
should not apply retrospectively:
“Bia dubju, dan ma jolqotx u lanqas jibdel il-pożizzjoni tal-attriċi, billi

kif ingħad qabel il-liġi, u iktar u iktar liġi fiskali, mgħandhiex tapplika
retroattivament bi ħsara għal dritt akkwiżit mit-taxpayer. B’danakollu, b’din
1-emenda 1-leġislatur gharaf li t-test Malti kien usa’ mit-test Ingliż għax kieku
kien mod ieħor ma kien ikollu għalfejn ibiddel il-liġi;”
Chapter 3
Taxation and Human Rights
I, Disrupting the Class
Judgments of the Constitutional Court have left a deep impact on

Maltese tax policy and controversy. The past decade has witnessed
an unprecedented wave of successful cases that have disrupted the
whole tax system. The European Convention on Human Rights
and the Constitution of Malta have led to major changes in several
areas of tax law and policy; the tax collection process, the tax
penalty system and even the tax adjudication process. Judgments
have improved the local system.
‘The expansionist trend in the dicta of the European Court

of Human Rights’ (ECtHR’) has been described as being
“unstoppable”.1 The ECtHR has developed a corpus of tax cases
which have significantly strengthened the arsenal of taxpayers’
rights. Pronouncements of the ECtHR on the classification of tax
penalties have led to major changes in the tax laws of parties to the
Convention, Malta especially.12
1 Del Federico, Lorenzo, I Principi Della Convenzione Europea dei Diritti Dell’ Uomo in
Materia Tributaria published in Rivista di Diritto Finanziario e Scienze Delle Finanze Anno
LXIX Fase. 2 - 2010 (Giuffre’ Editore) p. 225.
2 Finland is a case in point.
I. I Taxation and the Right to Property
Most taxpayers think of taxation as an interference with their right

to property. The Income Tax Acts impose a system of norms which
create the legal infrastructure which allows an annual confiscation
of private property. Undoubtedly, income tax is an instrument of
expropriation but laws on human rights do not contain an outright
prohibition of expropriation incorporating saving provisions
allowing for expropriation and taxation. This does not mean that
all expropriation is allowed.
Up till relatively recently, judgements declaring tax laws to be

in violation of human rights were unique rather than rare but we
are living in exciting times and judicial decisions are leaving a deep
impact on tax policy.

(ECHR), the Right to Property and Taxation
Article 1 of the First Protocol ECHR provides that:
“Every natural or legal person is entitled to the peaceful enjoyment of his

possessions. No one shall be deprived of his possessions except in the public
interest and subject to the conditions provided for by law and by the general
principles of international law.
The preceding provisions shall not, however, in any way impair the right
of a State to enforce such laws as it deems necessary to control the use of
property in accordance with the general interest or to secure the payment of
taxes or other contributions or penalties.”
Decisions of the ECtHR3 provide that, in order to comply with the
3 Including, in particular, Travers v. Italy (ECtHR 15117/1989),

‘... The interference in question should strike a ‘fair balance’ between ‘the demands of the
general interest of the community and the requirements of the protection of the individual’s
fundamental rights... there must be a reasonable relationship of proportionality between the
means employed and the aims sought to be realised’. Consequently, ‘the financial liability
Taxation and Human Rights 33
standards of fundamental human rights of the ECHR, a tax law of

a state signatory to the Convention must:
(a) Be imposed according to law;

(b) Pursue a legitimate purpose;
(c) The means employed must not be disproportionate to the
ends involved 4;
(d) Serve a valid purpose in the public or general interest; and
(e) Provisions adopted must be reasonable and proportionate
means to achieve that end5.
1.3 Tax as Expropriation
A state has a right to tax but its discretion in laying down its tax
policy is not absolute. A tax law is compliant with the ECHR if
it satisfies certain minimum standards and, recently, the ECtHR
delivered a number of judgments that have struck down tax laws
imposed by State Signatories.
1.3.1 di Belmonte v. Italy6

The facts of the case in di Belmonte v. Italy were tragic-comic.
The applicant, Pietro Bruno di Belmonte, was an Italian national
who was born in 1923 and lived in Ispica (Ragusa, Italy). He died
on 27 June 2004 and his sole heir, his cousin Francesco Bruno di
Belmonte, pursued the proceedings before the Court.
arising out of the raising of tax or contributions may adversely affect the guarantee secured
under this provision if it places an excessive burden on the person or the entity concerned or
fundamentally interferes with his or its financial position’ and Kaira v. Finland,
‘...It is in the first place for the national authorities to decide what kind of taxes or contributions
are to be collected. Furthermore, the decisions in this area will commonly involve the
appreciation of political, economic and social questions, which the Convention leaves within
the competence of the Contracting States. The power of appreciation of the Contracting
States is therefore a wide one...’
4 Baker P, ‘Taxation and the European Convention on Human Rights’ (British Tax Review
2000) pp.211-377
5 Ibid Baker supra p. 7
6 (application no. 72638/01). My analysis is based on the press release.
The applicant owned a plot of building land in Ispica. In 1983

the district council expropriated more than 50,000 sq. m of the land
with a view to buildinglow-rent housing on it. The applicant brought
proceedings against the district council, seeking compensation
for the expropriation. In a judgment of 23 February 1990, which
became final on 8 May 1991, the Catania Court of Appeal held that
di Belmonte was entitled to compensation corresponding to the
market value of the land, together with interest for late payment.
It awarded him approximately 1.85 million euros (EUR) for the
land, plus statutory interest and further compensation to offset the
effects of inflation.
The Court reiterated that States have a wide discretion in

determining the types of taxes or contributions to be levied.
States alone are competent to assess the political, economic and
social issues to be taken into account in this regard. The 1991 tax
law to which the case related to fell within the State’s margin of
appreciation in such matters.
The 1991 law had come into force between the final assessment of
the compensation payable to Mr di Belmonte for the expropriation
of his land and the payment of the sums due. The Court observed,
however, that the possibility of retrospective application of the
law would not in itself have raised an issue under the Convention,
since Article 1 of Protocol No. 1 did not prohibit as such the
retrospective application of a law on taxation. The question arising
was whether, in the circumstances of the case, the application of the
1991 law had imposed an excessive burden on the applicant.
In that connection, the Court noted that the law had come into
force more than seven months after the final assessment, by the
Catania Court of Appeal, of the amount of compensation for the
expropriation. Accordingly, the delay by the authorities in executing
that judgment had had a decisive impact on the application of the
new tax system, since the compensation awarded to the applicant

would not have been subject to the tax provided for by the new
tax legislation if the judgment had been executed properly and
punctually.
The Court concluded unanimously that there had been

a violation of Article 1 of Protocol No. 1. It did not consider it
necessary to examine separately whether there had also been a
violation of Articles 6 and 14.
The Court lastly reiterated that a judgment in which it found a

violation imposed on the respondent State a legal obligation to put
an end to the violation and make reparation for its consequences
in such a way as to restore as far as possible the situation existing
before the violation. In the present case, the Court had sufficient
evidence to make its own assessment of the financial losses sustained
by the applicant as a result of the violation of the Convention.
Under Article 41 (just satisfaction), it therefore awarded him EUR
1,100,000 for the pecuniary damage sustained (reimbursement of
the sum deducted in tax, adjustment of that amount to offset the
effects of inflation, and interest). The Court also awarded EUR
3,000 in respect of non-pecuniary damage and EUR 10,000 for
costs and expenses.
The Maltese Constitutional Court referred extensively to the

di Belmonte Case in the 2011 case Enrietta Bianchi, Michael
Sammut, Stephen Sammut, Nathalie u Joanna Debono v. 1.
L-Avukat Generali 2. Kummissarju tat-Taxxi Interni u 3. Segretarju
Permanenti fil-Ministeru ghall-Finanzi ghal kull interess li jista’
jkollhom.7
Bianchi sought to impugn capital gains tax on the basis of
the right to property. Bianchi held that the non-retrospective
introduction of property transfers tax, a tax that was lighter
7 Appell Civili Numru. 12/2008/1.

than capital gains tax, created a disproportionate burden on her.

The Bianchi case is Malta’s most important judgment relating
to taxation and the right to property. The Constitutional Court
dismissed the application concluding that the measures that were
being challenged met the Travers criteria reproduced above. The
Court noted that:
“Ma hemmx dubbju wkoll li 1-ammont imhallas mill-appellanti gie hekk

imhallas bhala taxxa skont il-ligi u lappellanti ma jikkontestawx li 1-istess
ammont kien intierament dovut bhala taxxa skont il-ligijiet vigenti fi zmien
il-hlas. Ghalhekk, il-hlas tal-ammont in kwistjoni jaqa’ biex jigi kunsidrat
taht it-tieni paragrafi! tal-Artikolu 1 imsemmi u jekk jirrizulta li dak il-hlas
jinkwadra f’wiehed mill-ipotezijiet kontemplati f’dak il-paragrafu u huwa
ghalhekk gustifikat skont 1-istess Artikolu ma jkunx jista’ jigi rawizat ksur
tal-artikolu msemmi. Ghaldaqstant, huwa opportun li din il-Qorti 1-ewwel
tezamina jekk 1-interferenza konsistenti fl-impozizzjoni tat-taxxa in kwistjoni
hix gustifikata skont it-tieni paragrafi! tal-Artikolu 1 imsemmi qabel tghaddi
biex tikkunsidra, jekk ikun il-kaz, jekk il-htigijiet tal-ewwel paragrafu tal-
istess artikolu humiex sodisfatti f’dan il-kaz.
Kif inghad, ma hemmx kontestazzjoni bejn il-partijiet li 1-ammont
imhallas mill-appellanti kien interament dovut bhala taxxa skont il-
ligijiet fiskali vigenti fiz-zmien relevanti. Biex 1-impozizzjoni ta’ taxxa tkun
gustifikata skont it-tieni paragrafu tal-Artikolu 1 fuq imsemmi, izda, hu
mehtieg li t-taxxa imposta ma timponix piz eccessiv fuq il-persuna intaxxata
jew tinterferixxi fondamentalment fis-sitwazzjoni finanzjarja taghha2
ghaliex altrimenti dik limposta tirrientra fil-qasam tal-ewwel paragrafu tal-
Artikolu 1 u jkun mehtieg li tigi ezaminata ghall-konformità o meno ma’ dak
il-paragrafu.
Necessarjamet, tenut kont tal-materja sotto ezami, 1-iStat ghandu
latitudini pjuttost wiesgha fl-ezercizzju tad-dritt sovran tieghu li jiddeciedi
meta, kif u f ’liema dimensjoni ghandu jimponi taxxi jew kontribuzzjonijiet
ohra meta jitqiesu r-realtajiet politici, ekonomici u socjali fil-pajjiz minn
zmien ghal zmien u sabiex jaghmel 1-aggustamenti necessarja fil-legislazzjoni
relevanti kif jidhirlu gust u xieraq. Dawn huma mizuri ceratment ghal skop
pubbliku u fl-interess generali.
F’dan il-kaz gara li b’emendi fil-ligi giet introdotta Capital Gains Tax ta’
massimu ta’ 35%. Ma hux minnu, kif jallegaw 1-appellanti, li kien hemm xi
element ta’ retrospettività fl-emendi introdotti ghaliex din it-taxxa kienet
imponibbli fuq il-qliegh minn trasferimenti li jsiru wara d-data li fiha bdew
isehhu 1-emendi in kwistjoni. Ittaxxa imsemmija kienet imponibbli u giet
imposta fuq lappellanti fuq il-qliegh taghhom mit-trasferimenti partikolari li

ghazlu li jaghmlu. F’dawn ic-cirkostanzi ma jirrizultax li bit-taxxa msemmija
gie milqut id-dritt ta’ proprjetà tal-assi tal-appellanti jew li kien hemm dik
linterferenza fis-sitwazzjoni finanzjarja taghhom b’mod li din tista’ titqies
bhala sproporzjonata u li timmina sostanzjalment il-qaghda finanzjarja tar-
rikorrenti jew li tammonta ghal abbuz mill-iStat tad-dritt tieghu li jimponi
taxxi skont 1-Artikolu 1 tal-ewwel Protokoll tal-Konvenzjoni.
Dan apparti li 1-fatt 1-Artikolu 1 tal-ewwel Protokoll tal- Konvenzjoni
ma jipprojbix in kwantu tali applikazzoni retrospettiva ta’ ligi fiskali.
Ghaldaqstant il-mizura in kwistjoni hi gustifikata skont il-proviso tal-
Artikolu 1 tal-ewwel Protokoll tal-Konvenzjoni u ghalhekk ma hemm ebda
ksur tal-istess Artikolu.”
1.3.2 Shchokin v. Ukraine

In October 2010,the ECtHR delivered another landmark
judgement on taxation and the right to property. It took many
by surprise. In the case of Shchokin v. Ukraine8 the ECtHR held
that a Ukrainian tax measure was incompatible with the right to
property. The applicant argued that the Ukrainian tax authorities
had unlawfully increased his income tax liability by applying a
withholding tax rate which was higher than the applicable rate.
The Ukrainian Government took the view that the measure which
Shchokin was complaining of was a ‘law’ which was foreseeable.
“45. The applicant insisted that the tax authorities had unlawfully increased
his income tax liability. He argued that the authorities had disregarded
Article 7 § 3 of the Income Tax Decree establishing a special 20% tax rate
in respect of the income earned outside the principal place of business.
Moreover, when so doing, the authorities relied on the Instruction which, by
virtue of Article 67 of the Constitution of 28 June 1996, could not change
the applicable rates of tax and the procedures for their payment.
46. The applicant further contended that the increased tax liability
imposed an excessive financial burden on him and could not be considered
proportionate for the purposes of Article 1 of Protocol No. 1.
47. The Government admitted that those measures constituted an
interference with the applicant's property rights. They maintained however
that the interference was lawful. In particular, the Instruction had been
8 (Applications nos. 23759/03 and 37943/06).

validly adopted and was foreseeable in its application. In their opinion the
Instruction could be viewed as “law” for the purpose of the Convention.
Moreover, the application of progressive taxation to all types of the
applicant's income was supported by the Presidential Decree and the Income
Tax Decree.
48. The Government further submitted that those measures were
compatible with the proportionality requirement provided by Article 1 of
Protocol No. 1 and did not impose an excessive burden on the applicant.”
The ECtHR found for Schokin. The Court referred to the legal
principles of Spacek s.r.o. v. the Czech Republic9 which established
that tax measures should have a basis in domestic law and that tax
measures must be accessible to the persons concerned, precise and
foreseeable in their application. The ECtHR acknowledged states’
margin of appreciation in tax policy but the ECtHR retained
the residual power to test whether policies were compatible
with the right to property. The Ukrainian tax measure of which
Schokin complained of was much more onerous than the measure
contemplated at law.
“Turning to the present case, the Court notes that the Income Tax Decree,
which had the legal force of the law of Parliament, explicitly established a
20% fixed tax rate for income earned outside a principal place of business.
Nevertheless, the tax authorities and the courts ignored that rule and applied
a progressive tax rate with respect to that type of income, thereby increasing
the applicant's overall income tax liability. They relied on the Instruction of
the Principal Tax Inspectorate as authority to do so. Subsequently, they also
relied on the Income Tax Decree and the Presidential Decree...
In this regard the Court notes that the Income Tax Decree had a legal force
of the law of Parliament and provided special rules for the taxation of specific
types of citizens' income. It is remarkable that, in contrast to the rates fixed in
the Presidential Decree, the tax authorities continued to apply, for example,
the special rule of Article 7 § 2 of the Income Tax Decree (see paragraph 40
above). In these circumstances it is unclear why the Presidential Decree had
to be understood as prevailing over Article 7 § 3 of the Income Tax Decree.”’
The Court found that the confusing state of the law created a
violation because the Ukrainian State had failed to create a tax law
9 no. 26449/95, § 54,9 November 1999.
which incorporated the ‘qualitative requirement’ of the ECHR.

The ECHR does not allow cryptic tax measures.
“57. In this regard the Court cannot overlook the requirement of section
4.4.1 of the Law “On the procedure for payment of taxpayers' liabilities to
budgets and state purpose funds” of 21 December 2000 which provided that
if domestic legislation offered ambiguous or multiple interpretations of the
rights and obligations of the taxpayers the domestic authorities were obliged
to take the approach which was more favourable to the taxpayer. However,
in the present case the authorities opted for the less favourable interpretation
of the domestic law which resulted in the increase in the applicant's income
tax liability.
58. The foregoing considerations are sufficient to enable the Court to
conclude that the interference with the applicant's property rights was not
lawful for the purpose of Article 1 of Protocol No. 1. It holds for this reason
that there has been a violation of that provision.”
1.3.3 Case of N.K.M. v. Hungary10

In N.K.M. v. Hungary, the ECtHR struck down a Hungarian
tax that was blatantly disproportionate. The case originated
in an application lodged by a Hungarian national, Ms N.K.M
complaining that the imposition of a 98% tax on the upper bracket
of her severance constituted an unjustified deprivation of property,
or else taxation at an excessively disproportionate rate, with no
remedy available.
The ECtHR held that a measure to secure payment of taxes,

must strike a “fair balance” between the demands of the general
interest of the community and the requirements of the protection
of the individual’s fundamental rights. The Court held that there
must be a reasonable relationship of proportionality between the
means employed and the aims pursued. The Court held that the
question that had to be be answered was whether, in the applicant’s
specific circumstances, the application of the tax law imposed an
10 Application no. 66529/11.

unreasonable burden on her or fundamentally undermined her

financial situation - and thereby failed to strike a fair balance
between the various interests involved.
The Court noted that the applicant, who was entitled to

statutory severance on the basis of the law in force and whose acting
in good faith has never been called into question, was subjected to
a tax whose rate exceeded about three times the general personal
income tax rate of 16%. In the Courts view, the applicant, together
with a group of dismissed civil servants, was made to bear an
excessive and disproportionate burden, while other civil servants
with comparable statutory and other benefits were apparently not
required to contribute to a comparable extent to the public burden,
even if they were in the position of leadership that enabled them to
define certain contractual benefits potentially disapproved by the
public. Moreover, the Court observed that the legislature did not
afford the applicant a transitional period within which to adjust
herself to the new scheme. Against this background, the Court
found that the measure complained of entailed an excessive and
individual burden on the applicants side. In this connection the
Court recalled that taxation at a considerably higher tax rate than
that in force when the revenue in question was generated could
be regarded as an unreasonable interference with expectations
protected by Article 1 of Protocol No. 1. The Court found for Mrs.
NKM awarding financial compensation.
1.3.4 The Yukos Case on the Right to Property

On 20 September 2011 the ECtHR delivered its much awaited
Chamber decision11 in the case brought forward by the Russian
company Oao Neftyanaya Kompaniya Yukos (‘Yukos’) against
Russia. The Yukos case is the ECtHR’s leading case on taxation
and human rights.11
12

12 The Chamber judgement is not a final judgement. The parties to the case have the right to refer
the case to the Grand Chamber within 3 months. Decisions of the Grand Chamber are final
The merits of the case were very complex but the salient facts are
the following:
1. In 2002, Yukos became the subject of a series of tax

investigations and, eventually, Yukos was found guilty
of repeated tax fraud involving the use of letter-box
companies;
2. In April 2004, pending the outcome of the case, assets of
Yukos were seized in enforcement proceedings;
3. In May 2004, Yukos was ordered to pay €2,847,497,802 in
taxes, interest and penalties for infringements committed
in 2000;
4. In 2004 proceedings were extended to cover infringements
occurring in 2001 and 2002.
5. Yukos appealed the decision which ordered it to pay taxes,
interest and penalties but in June 2004 it lost its appeal;
6. In July 2004, Yukos filed another appeal to the court of
cassation claiming that the case against it had been time-
barred but it lost this appeal, too.
7. Yukos was ordered to pay over €8,000,000,000 in taxes,
interest and penalties for years 2001 and 2002, on top of
which Yukos was ordered to pay a bailiff’s enforcement fee
of 7% of the total debt.
8. Yukos was ordered to effect all payments within a very
short time and requests to delay enforcement were denied.
9. In December 2004, Yukos’s assets were auctioned and in
2006 Yukos was declared insolvent.
10. In 2007 Yukos was liquidated.
Yukos’s case case took several years to decide with both parties
filing extremely lengthy submissions and arguments. Yukos
complained of violation of its fundamental human rights including
its right to property and its right to a fair hearing. The tax
and will become binding on the Russian state.

I. I Taxation and the Right to Property
Most taxpayers think of taxation as an interference with their right

to property. The Income Tax Acts impose a system of norms which
create the legal infrastructure which allows an annual confiscation
of private property. Undoubtedly, income tax is an instrument of
expropriation but laws on human rights do not contain an outright
prohibition of expropriation incorporating saving provisions
allowing for expropriation and taxation. This does not mean that
all expropriation is allowed.
Up till relatively recently, judgements declaring tax laws to be

in violation of human rights were unique rather than rare but we
are living in exciting times and judicial decisions are leaving a deep
impact on tax policy.

(ECHR), the Right to Property and Taxation
Article 1 of the First Protocol ECHR provides that:
“Every natural or legal person is entitled to the peaceful enjoyment of his

possessions. No one shall be deprived of his possessions except in the public
interest and subject to the conditions provided for by law and by the general
principles of international law.
The preceding provisions shall not, however, in any way impair the right
of a State to enforce such laws as it deems necessary to control the use of
property in accordance with the general interest or to secure the payment of
taxes or other contributions or penalties.”
Decisions of the ECtHR3 provide that, in order to comply with the
3 Including, in particular, Travers v. Italy (ECtHR 15117/1989),

*... The interference in question should strike a ‘fair balance’ between ‘the demands of the
general interest of the community and the requirements of the protection of the individual’s
fundamental rights ... there must be a reasonable relationship of proportionality between the
means employed and the aims sought to be realised’. Consequently, ‘the financial liability
standards of fundamental human rights of the ECHR, a tax law of

a state signatory to the Convention must:
(a) Be imposed according to law;

(b) Pursue a legitimate purpose;
(c) The means employed must not be disproportionate to the
ends involved4;
(d) Serve a valid purpose in the public or general interest; and
(e) Provisions adopted must be reasonable and proportionate
means to achieve that end5.
1.3 Tax as Expropriation
A state has a right to tax but its discretion in laying down its tax
policy is not absolute. A tax law is compliant with the ECHR if
it satisfies certain minimum standards and, recently, the ECtHR
delivered a number of judgments that have struck down tax laws
imposed by State Signatories.
1.3.1 di Belmonte v. Italy6

The facts of the case in di Belmonte v. Italy were tragic-comic.
The applicant, Pietro Bruno di Belmonte, was an Italian national
who was born in 1923 and lived in Ispica (Ragusa, Italy). He died
on 27 June 2004 and his sole heir, his cousin Francesco Bruno di
Belmonte, pursued the proceedings before the Court.
arising out of the raising of tax or contributions may adversely affect the guarantee secured
under this provision if it places an excessive burden on the person or the entity concerned or
fundamentally interferes with his or its financial position’ and Kaira v. Finland,
‘...It is in the first place for the national authorities to decide what kind of taxes or contributions
are to be collected. Furthermore, the decisions in this area will commonly involve the
appreciation of political, economic and social questions, which the Convention leaves within
the competence of the Contracting States. The power of appreciation of the Contracting
States is therefore a wide one...’
4 Baker P, ‘Taxation and the European Convention on Human Rights’ (British Tax Review
2000) pp.211-377
5 Ibid Baker supra p. 7
6 (application no. 72638/01). My analysis is based on the press release.
The applicant owned a plot of building land in Ispica. In 1983

the district council expropriated more than 50,000 sq. m of the land
with a view to buildinglow-rent housing on it. The applicant brought
proceedings against the district council, seeking compensation
for the expropriation. In a judgment of 23 February 1990, which
became final on 8 May 1991, the Catania Court of Appeal held that
di Belmonte was entitled to compensation corresponding to the
market value of the land, together with interest for late payment.
It awarded him approximately 1.85 million euros (EUR) for the
land, plus statutory interest and further compensation to offset the
effects of inflation.
The Court reiterated that States have a wide discretion in

determining the types of taxes or contributions to be levied.
States alone are competent to assess the political, economic and
social issues to be taken into account in this regard. The 1991 tax
law to which the case related to fell within the State s margin of
appreciation in such matters.
The 1991 law had come into force between the final assessment of
the compensation payable to Mr di Belmonte for the expropriation
of his land and the payment of the sums due. The Court observed,
however, that the possibility of retrospective application of the
law would not in itself have raised an issue under the Convention,
since Article 1 of Protocol No. 1 did not prohibit as such the
retrospective application of a law on taxation. The question arising
was whether, in the circumstances of the case, the application of the
1991 law had imposed an excessive burden on the applicant.
In that connection, the Court noted that the law had come into
force more than seven months after the final assessment, by the
Catania Court of Appeal, of the amount of compensation for the
expropriation. Accordingly, the delay by the authorities in executing
that judgment had had a decisive impact on the application of the
new tax system, since the compensation awarded to the applicant

would not have been subject to the tax provided for by the new
tax legislation if the judgment had been executed properly and
punctually.
The Court concluded unanimously that there had been

a violation of Article 1 of Protocol No. 1. It did not consider it
necessary to examine separately whether there had also been a
violation of Articles 6 and 14.
The Court lastly reiterated that a judgment in which it found a

violation imposed on the respondent State a legal obligation to put
an end to the violation and make reparation for its consequences
in such a way as to restore as far as possible the situation existing
before the violation. In the present case, the Court had sufficient
evidence to make its own assessment of the financial losses sustained
by the applicant as a result of the violation of the Convention.
Under Article 41 (just satisfaction), it therefore awarded him EUR
1,100,000 for the pecuniary damage sustained (reimbursement of
the sum deducted in tax, adjustment of that amount to offset the
effects of inflation, and interest). The Court also awarded EUR
3,000 in respect of non-pecuniary damage and EUR 10,000 for
costs and expenses.
The Maltese Constitutional Court referred extensively to the

di Belmonte Case in the 2011 case Enrietta Bianchi, Michael
Sammut, Stephen Sammut, Nathalie u Joanna Debono v. 1.
L-Avukat Generali 2. Kummissarju tat-Taxxi Interni u 3. Segretarju
Permanenti fil-Ministeru ghall-Finanzi ghal kull interess li jista’
jkollhom.7
Bianchi sought to impugn capital gains tax on the basis of
the right to property. Bianchi held that the non-retrospective
introduction of property transfers tax, a tax that was lighter

than capital gains tax, created a disproportionate burden on her.

The Bianchi case is Malta’s most important judgment relating
to taxation and the right to property. The Constitutional Court
dismissed the application concluding that the measures that were
being challenged met the Travers criteria reproduced above. The
Court noted that:
“Ma hemmx dubbju wkoll ii 1-ammont imhallas mill-appellanti gie hekk

imhallas bhala taxxa skont il-ligi u lappellanti ma jikkontestawx li 1-istess
ammont kien intierament dovut bhala taxxa skont il-ligijiet vigenti fi zmien
il-hlas. Ghalhekk, il-hlas tai-ammont in kwistjoni jaqa’ biex jigi kunsidrat
taht it-tieni paragrafu tal-Artikolu 1 imsemmi u jekk jirrizulta li dak il-hlas
jinkwadra f’wiehed mill-ipotezijiet kontemplati f’dak il-paragrafu u huwa
ghalhekk gustifikat skont 1-istess Artikolu ma jkunx jista jigi rawizat ksur
tal-artikolu msemmi. Ghaldaqstant, huwa opportun li din il-Qorti 1-ewwel
tezamina jekk 1-interferenza konsistenti fl-impozizzjoni tat-taxxa in kwistjoni
hix gustifikata skont it-tieni paragrafu tal-Artikolu 1 imsemmi qabel tghaddi
biex tikkunsidra, jekk ikun il-kaz, jekk il-htigijiet tal-ewwel paragrafu tal-
istess artikolu humiex sodisfatti f’dan il-kaz.
Kif inghad, ma hemmx kontestazzjoni bejn il-partijiet li 1-ammont
imhallas mill-appellanti kien interament dovut bhala taxxa skont il-
ligijiet fiskali vigenti fiz-zmien relevanti. Biex 1-impozizzjoni ta’ taxxa tkun
gustifikata skont it-tieni paragrafu tal-Artikolu 1 fuq imsemmi, izda, hu
mehtieg li t-taxxa imposta ma timponix piz eccessiv fuq il-persuna intaxxata
jew tinterferixxi fondamentalment fis-sitwazzjoni finanzjarja taghha2
ghaliex altrimenti dik limposta tirrientra fil-qasam tal-ewwel paragrafu tal-
Artikolu 1 u jkun mehtieg li tigi ezaminata ghall-konformità o meno ma’ dak
il-paragrafu.
Necessarjamet, tenut kont tal-materja sotto ezami, 1-iStat ghandu
latitudini pjuttost wiesgha fl-ezercizzju tad-dritt sovran tieghu li jiddeciedi
meta, kif u f’liema dimensjoni ghandu jimponi taxxi jew kontribuzzjonijiet
ohra meta jitqiesu r-realtajiet politici, ekonomici u socjali fil-pajjiz minn
zmien ghal zmien u sabiex jaghmel 1-aggustamenti necessarja fil-legislazzjoni
relevanti kif jidhirlu gust u xieraq. Dawn huma mizuri ceratment ghal skop
pubbliku u fl-interess generali.
F’dan il-kaz gara li b’emendi fil-ligi giet introdotta Capital Gains Tax ta’
massimu ta’ 35%. Ma hux minnu, kif jallegaw 1-appellanti, li kien hemm xi
element ta’ retrospettività fl-emendi introdotti ghaliex din it-taxxa kienet
imponibbli fuq il-qliegh minn trasferimenti li jsiru wara d-data li fiha bdew
isehhu 1-emendi in kwistjoni. Ittaxxa imsemmija kienet imponibbli u giet
imposta fuq lappellanti fuq il-qliegh taghhom mit-trasferimenti partikolari li

ghazlu li jaghmlu. F’dawn ic-cirkostanzi ma jirrizultax li bit-taxxa msemmija
gie milqut id-dritt ta’ proprjetà tal-assi tal-appellanti jew li kien hemm dik
linterferenza fis-sitwazzjoni finanzjarja taghhom b’mod li din tista’ titqies
bhala sproporzjonata u li timmina sostanzjalment il-qaghda finanzjarja tar-
rikorrenti jew li tammonta ghal abbuz mill-iStat tad-dritt tieghu li jimponi
taxxi skont 1-Artikolu 1 tal-ewwel Protokoll tal-Konvenzjoni.
Dan apparti li 1-fatt 1-Artikolu 1 tal-ewwel Protokoll tai- Konvenzjoni
ma jipprojbix in kwantu tali applikazzoni retrospettiva ta’ ligi fiskali.
Ghaldaqstant il-mizura in kwistjoni hi gustifikata skont il-proviso tal-
Artikolu 1 tal-ewwel Protokoll tal-Konvenzjoni u ghalhekk ma hemm ebda
ksur tal-istess Artikolu.”
1.3.2 Shchokin v. Ukraine

In October 2010,the ECtHR delivered another landmark
judgement on taxation and the right to property. It took many
by surprise. In the case of Shchokin v. Ukraine8 the ECtHR held
that a Ukrainian tax measure was incompatible with the right to
property. The applicant argued that the Ukrainian tax authorities
had unlawfully increased his income tax liability by applying a
withholding tax rate which was higher than the applicable rate.
The Ukrainian Government took the view that the measure which
Shchokin was complaining of was a law’ which was foreseeable.
“45. The applicant insisted that the tax authorities had unlawfully increased
his income tax liability. He argued that the authorities had disregarded
Article 7 § 3 of the Income Tax Decree establishing a special 20% tax rate
in respect of the income earned outside the principal place of business.
Moreover, when so doing, the authorities relied on the Instruction which, by
virtue of Article 67 of the Constitution of 28 June 1996, could not change
the applicable rates of tax and the procedures for their payment.
46. The applicant further contended that the increased tax liability
imposed an excessive financial burden on him and could not be considered
proportionate for the purposes of Article 1 of Protocol No. 1.
47. The Government admitted that those measures constituted an
interference with the applicant's property rights. They maintained however
that the interference was lawful. In particular, the Instruction had been
8 (Applications nos. 23759/03 and 37943/06).

validly adopted and was foreseeable in its application. In their opinion the
Instruction could be viewed as “law” for the purpose of the Convention.
Moreover, the application of progressive taxation to all types of the
applicant's income was supported by the Presidential Decree and the Income
Tax Decree.
48. The Government further submitted that those measures were
compatible with the proportionality requirement provided by Article 1 of
Protocol No. 1 and did not impose an excessive burden on the applicant.”
The ECtHR found for Schokin. The Court referred to the legal
principles of Spacek s.r.o. v. the Czech Republic9 which established
that tax measures should have a basis in domestic law and that tax
measures must be accessible to the persons concerned, precise and
foreseeable in their application. The ECtHR acknowledged states’
margin of appreciation in tax policy but the ECtHR retained
the residual power to test whether policies were compatible
with the right to property. The Ukrainian tax measure of which
Schokin complained of was much more onerous than the measure
contemplated at law.
“Turning to the present case, the Court notes that the Income Tax Decree,
which had the legal force of the law of Parliament, explicitly established a
20% fixed tax rate for income earned outside a principal place of business.
Nevertheless, the tax authorities and the courts ignored that rule and applied
a progressive tax rate with respect to that type of income, thereby increasing
the applicant's overall income tax liability. They relied on the Instruction of
the Principal Tax Inspectorate as authority to do so. Subsequently, they also
relied on the Income Tax Decree and the Presidential Decree...
In this regard the Court notes that the Income Tax Decree had a legal force
of the law of Parliament and provided special rules for the taxation of specific
types of citizens' income. It is remarkable that, in contrast to the rates fixed in
the Presidential Decree, the tax authorities continued to apply, for example,
the special rule of Article 7 § 2 of the Income Tax Decree (see paragraph 40
above). In these circumstances it is unclear why the Presidential Decree had
to be understood as prevailing over Article 7 § 3 of the Income Tax Decree.”’
The Court found that the confusing state of the law created a
violation because the Ukrainian State had failed to create a tax law
9 no. 26449/95, § 54,9 November 1999.
which incorporated the qualitative requirement’ of the ECHR.

The ECHR does not allow cryptic tax measures.
“57. In this regard the Court cannot overlook the requirement of section
4.4.1 of the Law “On the procedure for payment of taxpayers' liabilities to
budgets and state purpose funds” of 21 December 2000 which provided that
if domestic legislation offered ambiguous or multiple interpretations of the
rights and obligations of the taxpayers the domestic authorities were obliged
to take the approach which was more favourable to the taxpayer. However,
in the present case the authorities opted for the less favourable interpretation
of the domestic law which resulted in the increase in the applicant's income
tax liability.
conclude that the interference with the applicant's property rights was not
lawful for the purpose of Article 1 of Protocol No. 1. It holds for this reason
that there has been a violation of that provision.”
1.3.3 Case of N.K.M. v. Hungary10

In N.K.M. v. Hungary, the ECtHR struck down a Hungarian
tax that was blatantly disproportionate. The case originated
in an application lodged by a Hungarian national, Ms N.K.M
complaining that the imposition of a 98% tax on the upper bracket
of her severance constituted an unjustified deprivation of property,
or else taxation at an excessively disproportionate rate, with no
remedy available.
The ECtHR held that a measure to secure payment of taxes,

must strike a “fair balance” between the demands of the general
interest of the community and the requirements of the protection
of the individual’s fundamental rights. The Court held that there
must be a reasonable relationship of proportionality between the
means employed and the aims pursued. The Court held that the
question that had to be be answered was whether, in the applicant’s
specific circumstances, the application of the tax law imposed an

unreasonable burden on her or fundamentally undermined her

financial situation - and thereby failed to strike a fair balance
between the various interests involved.
The Court noted that the applicant, who was entitled to

statutory severance on the basis of the law in force and whose acting
in good faith has never been called into question, was subjected to
a tax whose rate exceeded about three times the general personal
income tax rate of 16%. In the Courts view, the applicant, together
with a group of dismissed civil servants, was made to bear an
excessive and disproportionate burden, while other civil servants
with comparable statutory and other benefits were apparently not
required to contribute to a comparable extent to the public burden,
even if they were in the position of leadership that enabled them to
define certain contractual benefits potentially disapproved by the
public. Moreover, the Court observed that the legislature did not
afford the applicant a transitional period within which to adjust
herself to the new scheme. Against this background, the Court
found that the measure complained of entailed an excessive and
individual burden on the applicants side. In this connection the
Court recalled that taxation at a considerably higher tax rate than
that in force when the revenue in question was generated could
be regarded as an unreasonable interference with expectations
protected by Article 1 of Protocol No. 1. The Court found for Mrs.
NKM awarding financial compensation.
1.3.4 The Yukos Case on the Right to Property

On 20 September 2011 the ECtHR delivered its much awaited
Chamber decision11 in the case brought forward by the Russian
company Oao Neftyanaya Kompaniya Yukos (‘Yukos’) against
Russia. The Yukos case is the ECtHR’s leading case on taxation
and human rights.11
12

12 The Chamber judgement is not a final judgement. The parties to the case have the right to refer
the case to the Grand Chamber within 3 months. Decisions of the Grand Chamber are final
The merits of the case were very complex but the salient facts are
the following:
1. In 2002, Yukos became the subject of a series of tax

investigations and, eventually, Yukos was found guilty
of repeated tax fraud involving the use of letter-box
companies;
2. In April 2004, pending the outcome of the case, assets of
Yukos were seized in enforcement proceedings;
3. In May 2004, Yukos was ordered to pay €2,847,497,802 in
taxes, interest and penalties for infringements committed
in 2000;
4. In 2004 proceedings were extended to cover infringements
occurring in 2001 and 2002.
5. Yukos appealed the decision which ordered it to pay taxes,
interest and penalties but in June 2004 it lost its appeal;
6. In July 2004, Yukos filed another appeal to the court of
cassation claiming that the case against it had been time-
barred but it lost this appeal, too.
7. Yukos was ordered to pay over €8,000,000,000 in taxes,
interest and penalties for years 2001 and 2002, on top of
which Yukos was ordered to pay a bailiff’s enforcement fee
of 7% of the total debt.
8. Yukos was ordered to effect all payments within a very
short time and requests to delay enforcement were denied.
9. In December 2004, Yukos’s assets were auctioned and in
2006 Yukos was declared insolvent.
10. In 2007 Yukos was liquidated.
Yukos’s case case took several years to decide with both parties
filing extremely lengthy submissions and arguments. Yukos
complained of violation of its fundamental human rights including
its right to property and its right to a fair hearing. The tax
and will become binding on the Russian state.

proceedings had resulted in the financial ruin of Yukos.
Yukos alleged violations of Article 1 of Protocol No. 1 taken

alone (the right to property) as well as in conjunction with Articles
1, 7, 13, 14 and 18 ECHR.13 Yukos complained that the 2000-
2003 Tax Assessments were imposed and enforced in an unlawful,
disproportionate and unlawful manner.
The ECtHR’s decided to examine the complaint under 3

separate headings:
1. Complaints about various aspects of the tax assessment

2. Complaints concerning measures taken by the domestic
authorities to enforce debts resulting from the tax
assessment proceedings;
3. Complaints concerning Russia’s intentions in the
proceedings.
1.3.4.1 Complains about various aspects of

the tax assessment
The allegation that the prosecution for the alleged

tax evasion for the year 2000 was time-barred.
The ECtHR observed that in Yukos’s case the Russian lower courts
had decided that the rules on statutory time-bars were inapplicable
because Yukos had acted in bad faith. The Court referred to rules
of criminal law and referred to the rule that criminal law must not
be extensively construed to an accused’s detriment. Only law can
define a crime and prescribe a penalty. The ECtHR found that
Russia’s change of the applicable rules by creating an exception from
a rule which had had no previous exceptions represented a reversal
and a departure from the well-established practice of the Russian
Supreme Commercial Court. The ECtHR found a violation of the
13 Namely protection from discrimination and double jeopardy and right to an effective remedy.
right to property on account of the 2000-2001 tax assessments in

the part relating to the imposition and calculation of penalties. It
observed that:
“Overall, notwithstanding the State’s margin of appreciation in this sphere,

the Court finds that there has been a violation of Article 1 of Protocol No.
1 on account of the change in interpretation of the rules on the statutory
time-bar resulting from the Constitutional Courts decision of 14 July 2005
and the effect of this decision on the outcome of the Tax Assessment 2000
proceedings.”
The allegation that the tax assessment 2000-

2003 had not been based on a reasonable and
foreseeable interpretation of domestic law
The ECtHR proceeded to examine the allegation that the tax
assessment 2000-2003 had not been based on a reasonable and
foreseeable interpretation of domestic law. The ECtHR observed
that it is not its task to take the place of domestic courts. It referred
to the merits of the case and discussed some topical issues in
international tax law. For the first time, the ECtHR discussed in
detail issues relating to transfer pricing and the use of letter-box
companies.
“591. From the findings of the domestic courts and the parties’ explanations,
the Court notes that the company’s “tax optimisation techniques” applied
with slight variations throughout 2000-2003 consisted of switching the tax
burden from the applicant company and its production and service units to
letter-box companies in domestic tax havens in Russia. These companies,
with no assets, employees or operations of their own, were nominally owned
and managed by third parties, although in reality they were set up and run
by the applicant company itself. In essence, the applicant company’s oil-
producing subsidiaries sold the extracted oil to the letter-box companies at
a fraction of the market price. The letter-box companies, acting in cascade,
then sold the oil either abroad, this time at market price or to the applicant
company’s refineries and subsequently re-bought it at a reduced price and re
sold it at the market price. Thus, the letter-box companies accumulated most
of the applicant company’s profits. Since they were registered in domestic
low-tax areas, they enabled the applicant company to pay substantially lower
taxes in respect of these profits. Subsequently, the letter-box companies
transferred the accumulated profits unilaterally to the applicant company

as gifts. The Court observes that substantial tax reductions were only
possible through the mixed use and simultaneous application of at least two
different techniques. The applicant company used the method of transfer
pricing, which consisted of selling the goods from its production division
to its marketing companies at intentionally lowered prices and the use of
sham entities registered in the domestic regions with low taxation levels and
nominally owned and run by third persons (see paragraphs 14-18,48,62-63
for a more detailed description).
592. The domestic courts found that such an arrangement was at face value
clearly unlawful domestically, as it involved the fraudulent registration of
trading entities by the applicant company in the name of third persons and
its corresponding failure to declare to the tax authorities its true relation to
these companies (see paragraphs 311, 349-353, 374-380). This being so, the
Court cannot accept the applicant company’s argument that the letter-box
entities had been entitled to the tax exemptions in questions. For the same
reason, the Court dismisses the applicant company’s argument that all the
constituent members of the Yukos group had made regular tax declarations
and had applied regularly for tax refunds and that the authorities were
thus aware of the functioning of the arrangement. The tax authorities may
have had access to scattered pieces of information about the functioning of
separate parts of the arrangement, located across the country, but, given the
scale and fraudulent character of the arrangement, they certainly could not
have been aware of the arrangement in its entirety on the sole basis on the tax
declarations and requests for tax refunds made by the trading companies, the
applicant company and its subsidiaries.
The ECtHR found nothing wrong in the anti-abuse measures

directed against tax avoidance schemes. On this ground, the
ECtHR decided in favour of Russia concluding that Russia’s anti
avoidance rules contained a sufficiently clear legal basis:
“593. The arrangement was obviously aimed at evading the general

requirements of the Tax Code, which expected taxpayers to trade at market
prices (see paragraphs 395-399), and by its nature involved certain operations,
such as unilateral gifts between the trading companies and the applicant
company through its subsidiaries, which were incompatible with the rules
governing the relations between independent legal entities (see paragraph
376). In this connection, the Court finds relevant the warning given by the
company’s auditor about the implications of the use of the company’s special
fund during the year 2002 (see paragraphs 206-209) and is not persuaded by
the applicant company’s reference to case no. A42-6604/00-15-818/01 (see
paragraphs 356-357), the expert opinion of its counsel (see paragraph 577)
and its reliance on Article 251 (1) 11 of the Tax Code (see paragraph 376).
594...Thus, the Court cannot agree with the applicant company’s allegation
that its particular way of “optimising tax” had been previously examined
by the domestic courts and upheld as valid or that it had used lawful “tax
optimisation techniques” which were only subsequently condemned by the
domestic courts. The above considerations are sufficient for the Court to
conclude that the findings of the domestic courts that applicant company’s
tax arrangements were unlawful at the time when the company had used
them, were neither arbitrary nor manifestly unreasonable.
595. The Court will now turn to the question whether the legal basis for
finding the applicant company liable was sufficiently accessible, precise
and foreseeable. In this connection, the Court notes that in all the Tax
Assessments (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213)
the domestic courts essentially reasoned as follows. The courts established
that the trading companies had been sham and had been entirely controlled
by the applicant company and accordingly reclassified the transactions
conducted by the sham entities as transactions conducted in reality by the
applicant company.”
The complaint that the tax assessments 2000-

2003 did not pursue a legitimate aim and were
disproportionate
The ECtHR declared that it was satisfied that, subject to its findings
in respect of the lawfulness of fines for the years 2000 and 2001
made earlier, that each of the Tax Assessments 2000-2003 pursued
a legitimate aim of securing the payment of taxes and constituted a
proportionate measure in pursuance of this aim. The ECtHR found
that the tax rates as such were not particularly high and given the
gravity of the tax fraud there was nothing to suggest that the rates
of the fines or interest payments can be viewed as having imposed
an individual and disproportionate burden, as such, on Yukos.
Complaints relating to the enforcement of the

debt
The ECtHR held that the manner Russia enforced the debt
resulting from the 200-2003 tax assessment proceedings violated
Yukos’ right to property. According to the ECtHR the 7%
enforcement fee was by its very nature unrelated to litigation costs.
The ECtHR observed that there is nothing wrong as a matter of
principle with requiring a debtor to pay for the expenses relating to
the enforcement of a debt or to threaten a debtor with a sanction to
incite his or her voluntary compliance with enforcement writs, but
in the circumstances of the case the resulting sum was completely
out ofproportion to the amount of the enforcement expenses which
could have possibly been expected to be borne or had actually been
borne by the bailiffs. Because of its rigid application, instead of
inciting voluntary compliance, it contributed very seriously to the
applicant company’s demise. The Court concluded that:
“656. Lastly, the Court would again emphasise that the authorities were
unyieldingly inflexible as to the pace of the enforcement proceedings, acting
very swiftly and constantly refusing to concede to the applicant company’s
demands for additional time... Nevertheless, the Court finds that in the
circumstances of the case such lack of flexibility had a negative overall
effect on the conduct of the enforcement proceedings against the applicant
company.
657. On the whole, given the pace of the enforcement proceedings, the
obligation to pay the full enforcement fee and the authorities’ failure to take
proper account of the consequences of their actions, the Court finds that
the domestic authorities failed to strike a fair balance between the legitimate
aims sought and the measures employed.
658. To sum up, the Court concludes that there has been a violation of the
applicant company’s rights under Article 1 of Protocol No. 1 on account of the
State’s failure to strike a fair balance between the aims sought and the measures
employed in the enforcement proceedings against the applicant company.”
1.3.5 The 2017 Cases

The ECtHR’s most recent tax judgments relating to the right
to property of which I am aware of are P. Plaisier B.V. v. the
Netherlands14 and Trofim Prigala v. Moldova.15
The P. Plaisier case was instituted by two financial holding
companies and the professional football club employer, Feyenoord
Rotterdam N.V. Applicants complained that an austerity tax
measure approved in 2013 but applicable retroactively to 2012
salaries, was unforeseeable, unfair and discriminatory.
The ECtHR’s decision was heavily influenced by the fact that
the Dutch austerity measure complained of had been dictated by
the Netherlands’ requirement to meet its obligations under EU
law in circumstances that had been aggravated by an economic and
financial crisis. The ECtHR referred to previous judgments wherein
it had accepted “haircuts” on the value of Greek Government
bonds, public sector wage cuts in Romania and the reduction of
public sector pension allowances in Portugal.16
16 The ECtHr referred to:
(a) the 2010 Romanian measure reducing public-sector wages by 25% for six months in order
to balance the State budget (see Mihaie$ and Sente$ v. Romania (dec.), nos. 44232/11 and
44605/11, § 8,6 December 2011).
(b) The 2012 Portugal measure reducing the holiday and Christmas allowances payable to
certain categories of public-section pensioners whose monthly pensions were higher than
EUR 600 and suspended them altogether for pensioners whose monthly pensions were higher
than EUR 1,100, which in the cases of two applicants led to a reduction of pension payments
approaching 11% (see Da Concedo Mateus and Santos Januario v. Portugal (dec.), nos.
62235/12 and 57725/12, 8 October 2013, passim); the Portuguese budget deficit had risen
steeply from 3.5% in 2008 to 10% in 2009 and 9% in 2010 (ibid.).
(c) The 2013 Portuguese measure subjecting public-sector pensions to a solidarity
contribution of 3,5% on a part corresponding to the first EUR 1,800 a month and 16% on the
part exceeding it, which in the case before the Court reduced the applicant’s pension income
by 4,6% (see Da Silva Carvalho Rico v. Portugal (dec.), no. 13341/14, § 12, 1 September
2015).
(d) Greek measures resulting in a reduction of individuals’ assets. In a measure that has come
to be known as the “haircut”, individual private investors have had to accept the outcome of
negotiations between the International Monetary Fund, the euro zone Governments and the
European Central Bank on the one hand and institutional investors - banks, hedge funds - on
the other resulting in the compulsory exchange of Greek Government bonds held by them for
replacement bonds with a nominal value 53.5% lower, reduced yield rates and much delayed
redemption dates (see Mamatas and Others v. Greece, nos. 63066/14 and 2 others, §§ 22 and
In the particular circumstances of the case, the Court did not

find a violation distinguishing the Zeitgeist of this case with that
in N.K.M v. Hungary. On the issue of retrospectivity, the Court
pointed out:
“84. The Court accepts that the surcharge had retrospective effects. It
observes, however, that retrospective tax legislation is not as such prohibited
by Article 1 of Protocol No. 1. It has accepted that the public interest may
override the interest of the individual in knowing his or her tax liabilities
in advance, provided that there are specific and compelling reasons for this.
Thus, in National & Provincial Building Society, Leeds Permanent Building
Society and Yorkshire Building Society, cited above, § 81, the Court found
that the retrospective enactment of legislation designed to deny private
entities a windfall resulting from a changeover to a new tax regime beset with
inadvertent defects did not constitute a violation. In M.A. and 34 Others
(dec.), cited above, the Court accepted as legitimate retrospective legislation
aimed at pre-empting the unintended application of a more favourable
tax rate to gains resulting from the exercise of stock options acquired
under employers’ stock options incentive programmes before the due date
originally set....”
On the issue of proportionality the ECtHR observed:
“94. In Mamatas and Others, the applicants argued as the present applicant
companies did that the positive effect of the measure to which they had been
subjected - to wit, the inclusion of private investors in the “haircut” despite
their having had no voice in the negotiations, unlike institutional investors
- had been minimal. They argued that the reduction of Greece’s public debt
had been no greater than 0.7 to 0.8%; in contrast, the corresponding loss
to small savers like themselves, and the social problems thereby caused, had
been excessive (see § 75 of the judgment). For its part, the Court held that the
involvement of the applicants in the “haircut” had been an unavoidable part
of the restructuring of Greece’s public debt and for that reason appropriate
and necessary (see paragraphs 115-116).
95. Taking a different perspective, the Court notes that the contribution of
the revenue expected to be created by the high wages tax surcharge to the
reduction of the budget deficit for 2013 (namely EUR 500 million out of
EUR 12,4 billion - see paragraphs 8 and 16 above) was in excess of 4%, a
proportion which the Court is not disposed to dismiss as insignificant.
48-51,21 July 2016).
96. Moreover, even though in percentage terms the positive effect of the
measure in issue in the present cases may well have been of a similar order of
greatness when set off against the total Government debt, it does not appear
that its individual impact on the present applicant companies was anything
like as dramatic as that of the “haircut” on private investors holding Greek
Government bonds. Also for that reason it is not possible for the Court to
find that the harm done by the measure was disproportionate in relation to
its benefits.
97. Finally and more generally, the Court cannot accept the applicants
argument that the legislative interference in issue affected so few taxpayers
that its impact on the State budget was minimal, and that other measures
would have resulted in more meaningful revenue. In this connection it
reiterates that, provided that the legislature chose a method that could be
regarded as reasonable and suited to achieving the legitimate aim being
pursued, it is not for the Court to say whether the legislation represented
the best solution for dealing with the problem or whether the legislative
discretion should have been exercised in another way (see James and Others,
cited above, § 51).
(e) Conclusion
98. Taking into account the margin of appreciation which States have
in taxation matters, the Court considers that the measure taken by the
respondent Contracting Party did not upset the balance which must be
struck between the demands of public interest and the protection of the
applicant companies’ rights. It follows that this part of the application is
manifestly ill-founded and must be rejected in accordance with Article 35 §§
3 (a) and 4 of the Convention.”
In a Maltese context, the judgment in the Feyenord case is unlikely

to have a dramatic impact because several judgments of the
Constitutional Court have created safeguards that may be perceived
as granting a higher level of protection than that provided for by
the ECtHR’s minimum standards.

Legitimate Tax Advantage
1.4.1 The Right to a Tax Advantage as a Right to

a ‘Possession*
Interestingly, the ECtHR has held that the right to a tax refund
is protected as a right to a ‘possession safeguarded in Article 1. In
the cases Intersplav v. Ukrainer and Bulves AD v. Bulgaria17 18 the
ECtHR held that the failure by tax authorities to settle a VAT
refund due resulted in an excessive burden on the taxpayer.
In Intersplav, the ECtHR held that prior judicial review of a

claim was not required to validate eligibility for a refund and that
a states margin of appreciation in tax policy is not unlimited.
The ECtHR pointed out that a signatory’s tax policy is subject to
ECHR’s right of review and that a government’s refusal to grant
a refund on the basis of abuse committed by third parties was
unjustified because it created an excessive burden on the taxpayer.
In Bulves, the ECtHR reiterated that a company's right to claim

a deduction of the input VAT amounted to at least a “legitimate
expectation” of obtaining effective enjoyment of a property right
amounting to a “possession” within the meaning of the first
sentence of Article 1 of Protocol No. 1. Bulves’s right to its VAT
refund could not be denied on the basis that one of its suppliers was
not in line with the law. The ECtHR observed that:
“71. Considering the timely and full discharge by the applicant company
of its VAT reporting obligations, its inability to secure compliance by its
supplier with its VAT reporting obligations and the fact that there was no
fraud in relation to the VAT system of which the applicant company had
knowledge or the means to obtain such knowledge, the Court finds that
the latter should not have been required to bear the full consequences of its
supplier's failure to discharge its VAT reporting obligations in timely fashion,
17 ECtHR Application no. 802/02 dated 9 January 2007.

18 Application no. 3991/03).

Legitimate Tax Advantage
1.4.1 The Right to a Tax Advantage as a Right to

a ‘Possession’
Interestingly, the ECtHR has held that the right to a tax refund
is protected as a right to a ‘possession’ safeguarded in Article 1. In
the cases Intersplav v. Ukraine17 and Bulves AD v. Bulgaria18 the
ECtHR held that the failure by tax authorities to settle a VAT
refund due resulted in an excessive burden on the taxpayer.
In Intersplav, the ECtHR held that prior judicial review of a

claim was not required to validate eligibility for a refund and that
a state’s margin of appreciation in tax policy is not unlimited.
The ECtHR pointed out that a signatory’s tax policy is subject to
ECHR’s right of review and that a government’s refusal to grant
a refund on the basis of abuse committed by third parties was
unjustified because it created an excessive burden on the taxpayer.
In Bulves, the ECtHR reiterated that a company's right to claim

a deduction of the input VAT amounted to at least a “legitimate
expectation” of obtaining effective enjoyment of a property right
amounting to a “possession” within the meaning of the first
sentence of Article 1 of Protocol No. 1. Bulves’s right to its VAT
refund could not be denied on the basis that one of its suppliers was
not in line with the law. The ECtHR observed that:
“71. Considering the timely and full discharge by the applicant company
of its VAT reporting obligations, its inability to secure compliance by its
supplier with its VAT reporting obligations and the fact that there was no
fraud in relation to the VAT system of which the applicant company had
knowledge or the means to obtain such knowledge, the Court finds that
the latter should not have been required to bear the full consequences of its
supplier's failure to discharge its VAT reporting obligations in timely fashion,
17 ECtHR Application no. 802/02 dated 9 January 2007.

18 Application no. 3991/03).
by being refused the right to deduct the input VAT and, as a result, being
ordered to pay the VAT a second time, plus interest. The Court considers
that this amounted to an excessive individual burden on the applicant
company which upset the fair balance that must be maintained between the
demands of the general interest of the community and the requirements of
the protection of the right of property.
There has accordingly been a violation of Article 1 of Protocol No. 1.”
1.4.2 Maltese Cases on Taxation and the right to

Property
In 2011, our Courts reached an analogous conclusion to the one
reached by the ECtHR in Schokin when they delivered the first
Maltese case in which an impost charged by the tax authorities
was considered to amount to violation of a taxpayers right to
property. In Neil CARTER u martu Susan, ghal kwalsijasi interess
li jista jkollha vs L-ONOREVOLI PRIM MINISTRU, 1-Avukat
Ġenerali u 1-Kummissarju tat-Taxxa fuq il-Valur Miżjud19 the First
Hall Civil Court (Constitutional Jurisdiction) presided by Mr.
Justice Micallef concluded that an impost had to be based on a law.
An impost which was not based on a valid legal instrument was
incompatible with taxpayer s right to property. The impost which
was at the root of one of taxpayer s complains in this case was an
appeal fee which was payable to the Commissioner of VAT. The
Appeal Fee was been levied irregularly,
“Illi f’xi bin issemma’ li fiż-żmien li r-rikorrent ressaq lappelli tiegbu, kien
jintalab bias ta’ dritt mal-preżentata bla ma kien gbadu nbareġ awiż legali biex
jistabilixxi kemm kien dak id-dritt. Jirriżulta tabilbaqq li kien biss f ’Mejju tal-
2010 li dabal fis-sebb awiż legali 18 li stabilixxa kemm kien il-blas li jintalab
biex wiebed iressaq appell quddiem il-Bord. Sa dak iż-żmien, kien bemm biss
tariffa ta’ preżentata ta’ appell quddiem il-Qorti tal-Appell tabt lartikolu 47
tal-Att. Dan ifisser li meta r-rikorrent ressaq lappelli tiegbu f’Ottubru tal-
200920 u ntalab iballas issomma li spicca ballas, ma kien hemm 1-ebda liġi
li tirregola bias bbal dak u ghaldaqstant, f’dak ir-rigward, it-“tebid” tal-flus
19 Seduta tat-30 ta Novembru, 2011 Rikors Numru. 59/2009.

mingband ir-rikorrent seħħ mingbajr leżistenza ta’ “kundizzjonijiet provduti

bil-liġi” kif irid lartikolu 1 tal-Ewwel Protokoll tal-Konvenzjoni. Ifisser ukoll
li 1-vot tal-paragrafu 4(l)(f ) tad-Disa’ Skeda tal-Att lanqas ma kien imwettaq
jew preskritt b’liġi u gbalhekk it-talba ta’ bias gbal “dritt amministrattiv” ma
kenitx koperta b’liġi sa dak inhar...
Tilqa’ t-tieni talba tar-rikorrenti safejn tirrigwarda 1-ksur tal-jedd taghhom
tabt 1-artikolu 1 tal-Ewwel Protokoll tal-Konvenzjoni, u dan limitatament
gbal dak li jirrigwarda ddritt li huma ntalbu li jhallsu meta ressqu 1-appelli
taghhom mill-istejjem magbmula mill-Kummissarju intimat”
The Carter case was a first step. For the first time,the Courts had
acknowledged that an impost must be based on an unequivocal
legal instrument.. In Carter, for the first time, the Court impugned
a fiscal measure. It was a baby step in a conservative environment
The real breakthrough came six years later, in the Farrugia

Case when the Constitutional Court impugned the 1998 penalty
regime.
1.4.3 The Farrugia Case20

The Farrugia case was fought on many fronts. Initially, the decisive
argument put forward by Farrugia was that of Non Bis in Idem but
the case took several years to decide and by the time the case went
to the Constitutional Court the successful outcome of the Non Bis
in Idem claim had become predictable.
Interestingly, Farrugia’s lengthy constitutional application

included a challenge to the 1998 tax penalty system. Farrugia
argued that the 1998 penalty regime violated his right to property
because of its manifest lack of proportionality. Farrugia learnt that
for his failures to pay VAT in time he had become liable to pay a
sum which exceeded his original tax debt by well over 100%. The
Constitutional Court agreed with Farrugia concluding that in the
20 Rikors numru 8/11 JRM Anthony P. Farrugia v. L-Onorevoli Prim Ministru, L-Avukat
Generali, 11-Kummissarju tat-Taxxa fuq il-Valur Mizjud, Il-Kummissarju tal-Pulizija.
1998 penalty regime the Maltese legislator had exceeded its wide
margin of appreciation; placing an excessive burden on the Maltese
taxpayer. The Court held that:
“58. Fid-dawl tal-premess din il-Qorti hi tal-fehma li 1-multi amministrattivi,

partikolarment il-late payment penalties, apparti milli huma sproporzjonati
ghall-ghan taghhom li jassikuraw il-gbir tax-taxxa, affettwaw lill-attur b’mod
li ma jistax jadempixxi obbligi finanzjarji assunti minnu fil-konfront ta’ terzi,
inkluz id-Direttur, peress li jirrizultaw ta’ xkiel serju sabiex jirnexxielu jbiegh
ir-restaurant u jissalda 1-pozizzjoni tieghu mal-istess Direttur. Ghalhekk
jirrizulta car li, fic-cirkostanzi, 1-impozizzjoni tal-multi u 1-imghax fuqhom,
imposti fuq il-kumpannija Allegro Andante Limited, ghall-perijodu li jestendi
bejn Settembru 2000 u Jannar 2009 qed jitfghu fuq 1-attur personalment u
fuq 1-imsemmija kumpanija gestita minnu piz eccessiv u sproporzjonat.
59. Inoltre, il-fatt li 1-attur ma bbenefikax mill-iskemi intizi sabiex jirriducu
1-multi sostanzjalment ma jimmilitax kontra 1-konkluzjoni premessa, stante
li 1-problema tal-likwidità tieghu setghet tittaffa sostanzjalment biss bil-
bejgh tar-restaurant. Mill-provi jirrizulta li 1-attur kien applika ghal xi whud
mill-iskemi applikabbli ghalih, izda minhabba 1-problema tal-likwidità ma
setax juzufruwixxi minnhom.
60. Ghalhekk, tenut kont tal-fatt li dawn il-multi kif komputati huma
vjolattivi tal-prinicpju tal-proporzjonalità fl-ambitu tal-Artikolu 1 tal-Ewwel
Protokoll tal-Konvenzjoni peress li jaffettwaw kwazi 1-proprjetà kollha tal-
attur, partikolarment dawk relattivi ghall-imsemmija kumpannija din il-
Qorti tikkonsidra li f’dan il-kaz ir-rimedju ghandu jkun dak li ghall-perijodu
li jestendi mill-1 ta’Jannar 1999 sal-1 ta Jannar 2009 il-multi amministrattivi
kemm fir-rigward tad-dhul tieghu mill-professjoni kif ukoll fir-rigward tal-
kumpanniji tieghu ghandhom jigu ridotti ghar-rati vigenti mill-1 ta Jannar
2009 ‘ il quddiem.”
The Constitutional Court was critical both of late payment

penalties as well as the rules relating to interest too ordering both a
mitigation of both penalties and interest.
2. Protection from Inhuman and Degrading

Treatment and Forced Labour
The Constitution of Malta21 and the ECHR22 protect the citizen

from inhuman and degrading treatment.
Contrary to popular belief, judicial experience has proven that

the right to be protected from discrimination and the right not to
be subjected to inhuman and degrading treatment are relevant in
taxation.
The leading judgement of the ECtHR on taxation and inhuman

and degrading treatment is that of Kozinets v. Ukraine.23 The facts
of the case are somewhat outlandish but the case sets an important
precedent because it establishes important guiding principles.
Kozinets’ company was investigated by the Ukrainian fiscal
authorities. When Kozinets attended a meeting at the Kharkiv
State Tax Police Inspectorate he took a tape recorder with him
and recorded his conversation with a tax inspector surreptitiously.
He later alleged that the Head of the Tax Police Inspectorate
broke his tape recorder and beat him up. Kozinets’s allegations
were corroborated by a medical report. Kozintes filed a case at
the ECtHR complaining that he had been subjected to inhuman
and degrading treatment by the Ukrainian tax authorities. The
Court held, by six votes to one, that there had not been a violation
of Article 3 (prohibition of inhuman or degrading treatment)
concerning the ill-treatment but, it held unanimously, that there
had been a violation of the latter limb of Article 3 (lack of effective
investigation) concerning the investigation. Mr Kozinets was
awarded a miserly EUR 2,000 in respect of non-pecuniary damage
and EUR 237,88 for costs and expenses but a precedent was set.
21 Article 36.
22 Article 3.
23 Application no. 75520/01 6/12/07
Article 4 ECHR24 and Article 35 of the Constitution of Malta25

prohibit forced labour but exceptions are envisaged because the
definitions of forced labour in the Constitution of Malta and the
ECHR excludes from the definition of the term any work or service
which forms part of normal civic obligations. Taxation is a civic
obligation.
The ECtHR’s leading cases on forced labour are Companies W,

X, Y & Z v. Austria26 and Adriano Borghini v. Italy.27 which dealt
with withholding tax obligations.28 In both cases the existence of
compulsory tax collecting was considered justified because tax
collecting was held to be a civic obligation. Baker29 is of the opinion
that the civic obligations may not hold ground in cases where third
parties, as opposed to taxpayers, are required ‘to expend significant
effort and incur significant expenditure in supplying information in
connection with an investigation. I have a feeling that this argument
will be tested soon.
The Constitutional Courts only judgement on taxation and

forced labour is that in Nutar Dr. Joseph Abela v. Priministru u
Ministru tal-Finanzi. Abela challenged provisions contemplated
in our capital gains law which burden Notaries with tax collecting
duties. Abela held that the law on capital gains imposed forced
labour on Notaries. Abela’s case dismissed as frivolous and vexatious
on appeal.30 In this country the most interesting challenges tend to
be dismissed as frivolous and vexatious.
24 Article 4(1) ECHR prescribes that:
No one shall be held in slavery or servitude.
No one shall be required to perform forced or compulsory labour
25 Article 35 ( 1 ) of the Constitution of Malta prescribes that:
‘No person shall be required to perform forced labour’.
26 Application 7427/1976.
27 Application 21568//93.
28 Both the Borghini case and the W, X, Y & Z case dealt with a withholding tax on salaries
similar to Malta’s final settlement system.
29 Baker op.cit. p.260.
30 Nutar Dr. Joseph Abela v. Priminister and Minister of Finance (Constitutional Court, May
8th, 1994 per Mifsud Bonnici).
3. The Right to a Fair Hearing
3.1 The ECHR on the Right to a Fair Hearing
Article 6 ECHR safeguards the right to a fair hearing.31 In the

ECHR, the right to a fair hearing applies in the determination
of civil rights and obligations and criminal charges. The right to
a fair hearing comprises the right to have access to a tribunal, the
right to justice within a reasonable time, the right to be heard by
an independent and impartial tribunal, the right to silence and the
right to legal aid.
The ECHR differentiates between the right to a fair hearing in

the determination of the civil rights and the right to a fair hearing in
criminal proceedings. In the cases involving criminal proceedings
an enhanced right to a fair trial applies and the accused benefits
from the presumption of innocence.
3.1.1 The Ferrazzini Judgement

In its human rights cases with a tax law element the Attorney
General always quotes the famous judgement in Ferrazzini. I shall
explain why I believe that the dictum in the Ferrazzini judgement
does not apply in Malta.
On 12 July 2001 in the case of Ferrazzini v. Italy the European

Court of Human Rights32 (‘ECtHR’) reached the following
conclusion:
31 (a) In proceedings under any law relating to income tax; or’
(1) In the determination of his civil rights and obligations or of any criminal charge
against him, everyone is entitled to a fair and public hearing within a reasonable time by an
independent and impartial tribunal established by law...
(2) Everyone charged with a criminal offence shall be presumed innocent until proved guilty
according to law.
(3) Everyone charged with a criminal offence has the following minimum rights:
To defend himself in person or through legal assistance of his own choosing or, if he has not
sufficient means to pay for legal assistance, to be given it free when the interests of justice so
require.’
“29....The Court considers that tax matters still form part of the hard core
of public-authority prerogatives, with the public nature of the relationship
between the taxpayer and the community remaining predominant. Bearing
in mind that the Convention and its Protocols must be interpreted as
a whole, the Court also observes that Article 1 of Protocol No. 1, which
concerns the protection of property, reserves the right of States to enact
such laws as they deem necessary for the purpose of securing the payment
of taxes (see, mutatis mutandis, Gasus Dosier- und Fordertechnik GmbH v.
the Netherlands, judgment of 23 February 1995, Series A no. 306-B, pp. 48-
49, § 60). Although the Court does not attach decisive importance to that
factor, it does take it into account. It considers that tax disputes fall outside
the scope of civil rights and obligations, despite the pecuniary effects which
they necessarily produce for the taxpayer.”
The case of Giorgio Ferrazzini was a case over a tax assessment

which took fourteen years to conclude. In essence, Giorgio
Ferrazzini argued that the length of the proceedings relating to
the determination of the issue had exceeded a “reasonable time”
contrary to Article 6 § 1 of the Convention. The ECtHR declared
the complaint admissible but held, eleven votes to six, that Article
6 § 1 of the Convention does not apply to tax disputes because
tax disputes are not civil rights and obligations to which Article 6
applies. The decision of the ECtHR in Ferrazzini implies that in a
tax dispute a litigant does not have a right to a fair hearing under
Article 6 of the Convention (‘the Ferrazzini dictum’).33
The conclusions reached by the ECtHR in Ferrazzini were

heavily criticized. Philip Baker was very vociferous in his criticism.34
The decision in Ferrazzini was tainted by a very strong dissenting

opinion. In his dissenting opinion, Giovanni Bonello, the Maltese
judge did not mince his words. He pointed out that,
33 A right which enshrines the right of access to court, justice within a reasonable time, right to
a public hearing and right to a fair and impartial tribunal.
34 Baker, Philip, The Decision in Ferrazzini: Time to Reconsider The Application of the
European Convention on Human Rights to Tax Matters. This article may be viewed at http://
www.taxbar.com/documents/Ferrazzini_Philip_Baker.pdf.
“2. The Convention does not contain any definition of what is meant by
“civil rights and obligations”.
Bonello concluded that the Ferrazzini dictum was the result of a

misreading of the term civil rights’ He pointed out that,
“3. In order to understand the present case-law and the possible need to
revise it, it is in my opinion essential to recall the historical background for
introducing the concept “civil” into Article 6 § 1 - a concept which is not
found in the English text of the corresponding Article 14 of The International
Covenant on Civil and Political Rights. Article 8 of the American Convention
on Human Rights, on the contrary, expressly covers tax disputes (“rights and
obligations of a civil, labour, fiscal or any other nature”).
The travaux preparatories relating to Article 6 of the Convention - closely
linked to those of Article 14 of the Covenant - demonstrate in my opinion
the following: (1) it was the intention of the drafters to exclude disputes
between individuals and governments on a more general basis mainly owing
to difficulties at that time in making a precise division of powers between,
on the one hand, administrative bodies exercising discretionary powers
and, on the other hand, judicial bodies; (2) no specific reference was made
to taxation matters, which are normally not based on a discretion but on
the application of more or less precise legal rules; (3) the exclusion of the
applicability of Article 6 should be followed by a more detailed study of
the problems relating to “the exercise of justice in the relations between
individuals and governments”; accordingly, (4) it seems not to have been the
intention of the drafters that disputes in the field of administration should
be excluded forever from the scope of applicability of Article 6 § 14. Against
that background it is understandable that the Convention institutions,
in the first years after the Convention came into force, applied Article 6 §
1 under its civil head on a restrictive basis in respect of disputes between
individuals and governments. On the other hand, it is hard to accept that the
travaux preparatories, dating more than fifty years back and partly based on
preconditions that have not been fulfilled or are no longer relevant should
remain a permanent obstacle to a reasonable development of the case-law
concerning the scope of Article 6 - in particular in areas where there is an
obvious need to extend the protection granted by that Article to individuals.
The present case-law clearly demonstrates in fact that the Convention
institutions have not felt bound to maintain a restrictive attitude, but have
extended the applicability of Article 6 § 1 to a considerable number of
relationships between individuals and governments, which originally must
have been held to be excluded.”
Bonello proceeded to give a long illustrative list of disputes

involving the government where the ECtHR had conceded an
application of article 6.35 Bonello emphasized that in his opinion
article 6 applied to tax disputes because article 6 impinged on
the pecuniary interests of citizens. He argued that Article 6 is a
procedural guarantee which should apply also in tax disputes,
35 “The following examples could be mentioned to illustrate what disputes between individuals
and governments the Court has so far held to be covered by the civil head of Article 6:
(a) proceedings concerning expropriation, planning decisions, building permits and, more
generally, decisions which interfere with the use or the enjoyment of property (see, for
example, Sporrong Lónnroth v. Sweden, judgment of 23 September 1982, Series A
no. 52; Etti and Others v. Austria, Erkner and Hofauer v. Austria, and Poiss v. Austria,
judgments of 23 April 1987, Series A no. 117; Hàkansson and Sturesson v. Sweden,
judgment of 21 February 1990, Series A no. 171-A; and Mats Jacobsson v. Sweden and
Skàrby v. Sweden, judgments of 28 June 1990, Series A no. 180-A and B);
(b) proceedings concerning a permit, licence or other act of a public authority, which forms
a condition for the legality of a contract between private persons (see, for example,
Ringeisen v. Austria, judgment of 16 July 1971, Series A no. 13);
(c) proceedings concerning the grant or revocation of a licence by a public authority which
is required in order to carry out certain economic activities (see, for example, Benthem
v. the Netherlands, judgment of 23 October 1985, Series A no. 97; Pudas v. Sweden,
judgment of 27 October 1987, Series A no. 125-A; Tre Traktòrer AB v. Sweden,
judgment of 7 July 1989, Series A no. 159; and Fredin v. Sweden (no. 1), judgment of 18
February 1991, Series A no. 192);
(d) proceedings concerning the cancellation or suspension by a public authority of the right
to practise a particular profession, etc. (see, for example, Kònig v. Germany, judgment of
28 June 1978, Series A no. 27, and Diennet v. France, judgment of 26 September 1995,
Series A no. 325-A);
(e) proceedings concerning damages in administrative proceedings (see, for example, Editions
Periscope v. France, judgment of 26 March 1992, Series A no. 234-B);
(f) proceedings concerning the obligation to pay contributions to a public security scheme
(see, for example, Feldbrugge v. the Netherlands, judgment of 29 May 1986, Series A no.
99, and Deumeland, cited above);
(g) proceedings concerning disputes in the context of employment in the civil service, if “a
purely economic right” was asserted, for instance the level of salary, and “administrative
authorities’ discretionary powers were not in issue” (see, for instance, De Santa v. Italy,
judgment of 2 September 1997, Reports ofJudgments and Decisions 1997-V). If, on the
other hand, “the economic aspect” was dependent on the prior finding of an unlawful act
or based on the exercise of discretionary powers, Article 6 was held not to be applicable
(see, for instance, Spurio v. Italy, judgment of 2 September 1997, Reports 1997-V). In
this respect the case-law of the Court has later been changed (see point 6 below on the
judgment of 8 December 1999 in Pellegrin v. France). It is true, however, - as stressed by
the majority - that in other situations the Court has held that Article 6 is not applicable
to disputes between individuals and governments, (see, inter alia, Pierre-Bloch v. France,
judgment of 21 October 1997, Reports 1997-VI, p. 2223, concerning the right to stand
for election, and Maaouia v. France, no. 39652/98, ECHR 2000-X, concerning decisions
regarding the entry, stay and deportation of aliens).”
“It is not open to doubt that the obligation to pay taxes directly and
substantially affects the pecuniary interests of citizens and that, in a
democratic society, taxation (its base, payment and collection as opposed to
litigation under budgetary law) is based on the application of legal rules and
not on the authorities’ discretion. Accordingly, in my view Article 6 should
apply to such disputes unless there are special circumstances justifying the
conclusion that the obligation to pay taxes should not be considered “civil”
under Article 6 § 1 of the Convention?
The Ferrazzini judgement gave rise to a lot of controversy but

the undesirable decision in Ferrazzini was neither the first nor the
last in a long number of similar judgements.36 Four years after the
ECtHR in Ferrazzini, in February 2004 the Ferrazzini judgement
was confirmed in Jussila v. Finland.37
It is important to point out that the purview of the Ferrazzini

judgement is ex admissis a limited one. The ECtHR felt that it had
to emphasize that,
“20. The parties having agreed that a “criminal charge” was not in issue,
and the Court, for its part, not perceiving any “criminal connotation” in the
instant case (see, a contrario, Bendenoun v. France, judgment of 24 February
1994, Series A no. 284, p. 20, § 47), it remains to be examined whether the
proceedings in question did or did not concern the “determination of civil
rights and obligations.”
In his dissenting opinion in Ferrazzini Judge Bonello

commented,
“Since Bendenoun v. France (judgment of 24 February 1994, Series A

no. 284), the Court has consistently considered proceedings relating to
tax disputes to be “criminal” if tax fines, surcharges, etc., with a deterrent
36 Similar conclusions were reached by ECtHR in the 1960 s in X. v. Belgium the 1960. By 1973
the ECtHR spoke of X v. Belgium as ‘jurisprudence costante’. In 1999 ECtHR expressly
stated that FHR do not apply to ordinary tax proceedings (Vidacar SA and Opergrup SL v.
Spain).
37 Application 00073053/2001. In the case the Court held that “As regards the tax inspections,
the Court notes that it has been established in its case law that tax matters fall outside the
scope of civil rights and obligations pursuant to Article 6 of the Convention”.
and punitive purpose are imposed or even if there is a risk that they may
be imposed (see, most recently, J.B. v. Switzerland, no. 31827/96, ECHR
2001-III). The result is no different if the proceedings also concern the
tax assessment as such (see the admissibility decision of 16 May 2000 in
Georgiou v. the United Kingdom, no. 40042/98, unreported). This implies
that the level of protection under Article 6 § 1 of the Convention varies
depending on how the legal framework for tax proceedings is organised in
the different legal systems; and even within one legal system it may be purely
a matter of coincidence whether penalty proceedings and tax assessment
proceedings are joined or not. An interpretation of the Convention that
leads to such random results is far from satisfactory.”
The decision in Ferrazini purports to restrict the application

of human rights safeguards to taxation disputes but this does not
mean that human rights do not apply to all cases with a taxation law
element. Classification is key. The nature of a dispute determines
the applicability of fundamental human rights to such a dispute.
In 1986 the ECtHR held in Bendenoun v. France38 that a tax case
involving penalties was to be considered as a criminal prosecution
and Article 6 applied to it. When a tax dispute is classified either
as a dispute of a criminal nature or a dispute of a civil law nature
the draconian dictum in Ferrazzini does not apply. The Bendenoun
principle begs the question as to what makes a tax dispute a criminal
dispute to which Article 6 applies.
3.1.2 The Classification of Taxes Disputes,

Baker’s ‘Engel Criteria’
When is a tax case a pure tax case, when does a pure tax case become
either a civil dispute or a criminal case? When does a tax case
become a determination of civil rights and obligations ? An answer
to the said questions may be drawn from what Baker calls the Engel
Criteria developed in the case Engel v. Netherlands.39
Baker observed that,
38 Application No. 12547/86.

39 (1976) 1EHRR 647.
“Whether or not proceedings involve the determination of a criminal

charge does not depend only upon whether the conduct in issue is regarded
by the domestic law of the State concerned as falling within the scope of the
criminal law. The term “criminal charge” has an autonomous, Convention
meaning. The ECtHR has developed a series of tests for determining
whether or not proceedings involve the determination of a criminal charge,
sometimes referred to as the “Engel criteria”. These three criteria are:
(a) the classification of the proceedings in domestic law;
(b) the nature of the offence; and
(c) the severity of the penalty which may be imposed.”40
The ECtHR’s classification of disputes erodes the Ferrazzini

dictum in a material manner. The ECtHR considers many
traditional tax disputes as being criminal disputes. The ECtHR idea
of a criminal dispute is a very broad one and most tax disputes are
treated as criminal disputes’. It would appear that few disputes are
considered to be pure tax disputes’ to which the Ferrazzini dictum
applies. The ECtHR has been very generous in its interpretation of
the third Engel criterion. The ECtHR has treated the tax penalty
systems of many jurisdictions as consisting in penalties which were
severe enough to be considered as criminal charges within the
meaning of the Convention.
3.1.3 Developments after Baker 200041

In 2000 Baker anticipated that, in the eyes of the ECtHR,
determinations over liability to substantial tax penalties would no
longer be considered to disputes subject to the Ferrazzini dictum
and that tax disputes over tax surcharges would be governed by
Article 6 guarantees,
“One practical consequence of this decision is likely to be a further extension

of the criminal aspects of Article 6 to tax proceedings. The European Court
40 Ibid Baker p.28.

41 The leading article on Taxation and Human Rights remains the seminal work by Philip
Baker entitled Taxation and the European Convention on Human Rights (Amended to 10th
September 2000) published in (British Tax Review 2000). Hereinbefore and hereinafter
Bakers article is referred to as ‘Baker 2000’. Important developments have occurred after Baker
2000. Baker publishes on the subject regularly.
has already established that the determination of a liability to substantial

penalties for incorrectly completed tax returns involves the determination of
a criminal charge, and all the criminal guarantees in Article 6 will then apply.
The issue of which tax penalties involve a criminal charge is gradually being
clarified. There may also be a tendency in some countries for taxpayers to
ask for the determination of their tax liability and the determination of any
penalties to be considered at the same court hearing: in those circumstances,
the Court has held that it is not possible to separate out the different parts of
the proceedings and that Article 6 applies to the entire proceedings3. One
of the bizarre consequences of the decision in Ferrazzini is that Article 6 will
apply in those countries where penalties and liability to tax are determined
at the same time, but not in those countries were the determinations are
separate.”
In 2000 Baker analysed decisions of the ECtHR up to that date

and concluded that,
“It now seems clearly established, therefore, that a tax-geared penalty can
entail a criminal charge, and that the issue of liability to penalties of 25%
or higher has been regarded as involving the determination of a criminal
charge.”42
In the eyes of the ECtHR a tax case which involves a tax penalty
of 25% of endangered tax or higher is deterrent and punitive and
changes the nature of a tax dispute from that of a pure tax dispute
subject to the restrictive Ferrazzini dictum to a dispute of criminal
law nature subject to Article 6. The 2007 case Case of Paykar Yev
Haghtanak Ltd v. Armenia43 is a perfect illustration of such a line
of thought.
3.1.4 A Case which has been mentioned by the

Maltese Courts, Case of Paykar Yev Haghtanak
Ltd v. Armenia44
Paykar Yev Haghtanak Ltd was involved in a a dispute with the
Tax Inspectorate over a tax assessment which included a surcharge.
42 Ibid Baker p. 30.
43 Application no. 21638/03,20 December 2007.
44 Application no. 21638/03,20 December 2007.
Applicant lost its case but when it tried to appeal to the national
court of last instance, its appeal was returned on the grounds that
applicant (which was bankrupt) had not paid a court fee. The
applicant company complained that it had been unlawfully denied
access to the Court of Cassation and that Article 6 (fair hearing)
had been infringed. The point at the issue was, in light of the
judgement in Ferrazzini, whether Article 6 applied to the case in
point. The issue revolved around a matter of classification. Article
6 does not apply (in terms of Ferrazzini) to pure tax disputes but
still applies to disputes over a criminal charge. The crux of the issue
was whether the Armenian tax surcharge amounted to a criminal
charge’ for the purposes of Article 6. The ECtHR held that the
surcharges attached to the assessment in dispute were deterrent
and punitive. Furthermore, penalties were substantial and went
and up to 43%. The ECtHR concluded that the case in point was
not a pure tax dispute subject to the Ferrazzini dictum but it was a
case over a criminal charge to which all the guarantees of Article 6
applied. The ECtHR found that applicant had been denied access
to Court in violation of Art. 6.
“The Court reiterates at the outset that tax disputes fall outside the scope of civil rights and
obligations under Article 6, despite the pecuniary effects which they necessarily produce for
the taxpayer (see, among other authorities, Ferrazzini v. Italy [GC], no. 44759/98, § 29, ECHR
2001 VII). However, when such proceedings involve the imposition of surcharges or fines, then
they may, in certain circumstances, attract the guarantees of Article 6 under its “criminal” head
... The present case concerns proceedings in which the applicant company was found to be
liable to pay profit tax, VAT and simplified tax plus additional surcharges and fines. It remains
therefore to be determined whether Article 6 can be applicable to the proceedings in question
under its “criminal” limb.
33. The Court reiterates that the concept of “criminal charge” within the meaning of Article
6 is an autonomous one (see Janosevic, cited above, § 65). In determining whether an offence
qualifies as “criminal”, three criteria are to be applied: the legal classification of the offence in
domestic law, the nature of the offence and the degree of severity of the possible penalty (see
Engel and Others v. the Netherlands ... The second and third criteria are alternative and not
necessarily cumulative: for Article 6 to apply by virtue of the words “criminal charge”, it suffices
that the offence in question should by its nature be “criminal” from the point of view of the
Convention, or should have made the person concerned liable to a sanction which, by its nature
and degree of severity, belongs in general to the “criminal” sphere (see Janosevic, cited above, §
67). Ihe minor degree of the penalty, in taxation proceedings or otherwise, is not decisive in
removing an offence, otherwise criminal by nature, from the scope of Article 6 (see Jussila, cited
above, § 35, where the Court found Article 6 to be applicable even when the surcharge imposed
amounted to only 10 per cent of the tax due).
34. Turning to the first criterion, the surcharges and fines in the present case were imposed in
accordance with various tax laws and are not classified as criminal. This is, however, not decisive
(ibid., §37).
35. As regards the second criterion, the Court notes that the relevant provisions of the Law on
Taxes and the Law on Value Added Tax are applicable to all persons - both physical and legal
- liable to pay tax and are not directed at a specific group. Furthermore, the surcharges and the
fines are not intended as pecuniary compensation for any costs that may have been incurred as
a result of the taxpayer's conduct. The purpose pursued by these measures is to exert pressure on
taxpayers to comply with their legal obligations and to punish breaches of those obligations. The
penalties are thus both deterrent and punitive.
36. The Court considers that the above is sufficient to establish the criminal nature of the
offence (ibid., § 38). It would, nevertheless, also point out that in the present case the applicant
company had quite substantial penalties imposed on it: the fines ranging from 10 to 50 per cent
and the surcharges for the period of delay cumulatively amounting from about 5 to 43 per cent
of the tax due.
37. In the light of the above, the Court concludes that the proceedings to which the applicant
company was a party can be classified as ‘criminal’ for the purposes of the Convention. It follows
that Article 6 applies.”
3.1.5 The Finnish Cases

In the cases quoted in Baker 2000 and in the Paykar Yev Haghtanak
Ltd mentioned above the ECtHR concluded that a tax surcharge
was a criminal charge because of the amount of the tax surcharge.
The ECtHR seems to have given a lot of weight to the fact that
Armenian tax surcharge ran at the rate of 34%. A year later, in two
cases decided on the same day, the ECtHR went even a step further.
The ECtHR came up with a sweeping statement that tax surcharges
are for the purposes of the ECtHR criminal charges without going
into the details of the percentage of the charge imposed.
In the case of Hannu Lehtinen v. Finland45 decided on 22

July 2008 the applicant complained, in the course of a tax
dispute involving a tax surcharge, about the refusal of the Finnish
Administrative (Tax) Court to hold an oral hearing and to hear
testimony from the applicant and three witnesses proposed by him.
Applicant claimed a violation of Article 6 ECtHR (fair hearing)

and ECtHR decided in his favour.

“Article 6 is applicable under its criminal head to tax surcharge proceedings

(see Jussila v. Finland, § 38). Regarding the parties’ differing views on the
role or impact of the taxation procedure as regards criminal proceedings, the
Court notes that under Finnish practice the imposition of a tax surcharge
does not prevent criminal charges being brought for the same conduct. That
is, however, done in separate proceedings before a criminal court...
In view of the Administrative Court’s firm conclusion that an oral hearing
could be dispensed with, the Court considers that it is not necessary to
examine separately whether the rights of the defence were violated by reason
of the court s refusal to hear oral evidence.”
The ECtHR reached the same conclusion in the Case of Kallio

v. Finland,46
“Article 6 is applicable under its criminal head to tax surcharge proceedings (see Jussila v.
Finland, cited above, § 38)...
50. In the present case the Administrative Court was called upon to examine the case as regards
both the facts and the law. The applicant disputed the facts upon which the imposition of tax
surcharges was founded, requesting an oral hearing of witness evidence in order to elucidate
the relevant events. The Administrative Court had to make a full assessment of the case. The
crucial question concerned the clarification of the facts and the credibility of the statements of
the applicant and the four witnesses who had allegedly been involved in the relevant activities.
Nevertheless, the Administrative Court decided, without a public hearing, to uphold the
decision. The Court finds that, in the circumstances of the present case, the question of the
credibility of the written statements could not, as a matter of fair trial, have been properly
determined without a direct assessment of the evidence given in person by the applicant and
by the witnesses proposed.
51. There has accordingly been a violation of Article 6 § 1 of the Convention as regards the
refusal to hold an oral hearing in the Administrative Court.”
3.1.6 The Yukos Case on the Right to a Fair

Hearing
The Yukos case was argued and won on the basis of multiple human
rights violations. The judgement of the ECtHR is an important
pronouncement on the right to a fair hearing too.
Yukos alleged that Russia had violated its right to a fair hearing
under Article 6 of the ECHR because:
1. The Moscow City Court had allowed the tax authorities
46 (Application no. 40199/02) 22 July 2008.

to seize Yukos’ assets as a security for the claim before their

claim had become final and conclusive.
2. In the course of the tax proceedings Yukos has not been
allowed to adequately prepare for trial, the time within
which it had to submit its case had been manifestly short
and the time-limit within which Yukos could file an appeal
had been unjustifiably abridged;
3. The Russian tax courts had pronounced judgement
without studying all evidence;
3.1.6.1 Attachment of Assets Pending Outcome

of Tax Case
According to the ECtHR, the seizure of Yukos’s assets pending
the outcome of the tax claim was neither arbitrary nor unfair. The
ECtHR added that the immediate enforcement of the appeal did
not prevent Yukos from filing its cassation appeal. The ECthR
observed that the right of access to court did not guarantee the
right to an automatic stay of enforcement of an unfavourable court
decision. Thus, on this count, it decided in favour of Russia.
3.1.6.2 Complaint about the allegedly insufficient

time for preparation of defence
The ECtHR observed that, at first instance, Yukos had not been
granted access to all documents in the court file. The time which
Yukos’s lawyer were allowed to examine the court dossier had been
extremely short. The ECtHr held that Yukos had only been given
four days to prepare its case, concluding that it had not been granted
facilities for the preparation of its defence. The ECtHR found that
it was incumbent on the Russian court to ensure that Yukos was
granted a sufficiently long period of time to study a voluminous
case file. The ECtHR found a violation of Yukos’s right to a fair
3.1.6.3 Complaint about the trial hearings held

in Russia and alleged quality of the first instance
judgement
The ECtHR found some of Yukos’s allegations as being vague’,
‘unspecific’ and ‘unsubstantiated ’ but it held that Yukos’s complaints
about the early beginning of the appeal hearings as being justified.
The ECtHR concluded that the effective shortening of the time
limit within which Yukos was to submit its case amounted to
another violation of Yukos’s right to a fair hearing.
The ECtHR concluded that there had been a violation of

Yukos’s right to a fair hearing.
‘551. Having regard to the above, the Court finds that the applicant
company’s trial did not comply with the procedural requirements of Article
6 of the Convention for the following reasons: the applicant company did
not have sufficient time to study the case file at first instance, and the early
beginning of the hearings by the appeal court unjustifiably restricted the
company’s ability to present its case on appeal. The Court finds that the
overall effect of these difficulties, taken as a whole, so restricted the rights
of the defence that the principle of a fair trial, as set out in Article 6, was
contravened. There has therefore been a violation of Article 6 § 1 of the
Convention, taken in conjunction with Article 6 § 3 (b).’
3.1.7 Chambaz v. Switzerland47

The ECtHR’s judgement in Chambaz is extremely important
because it redefines the relationship between tax authorities
and taxpayers by limiting the Revenue’s right to information
and increasing taxpayer’s rights to information. The Chambaz
judgement is a formidable example of the application of the
fundamental penal principle Nemo tenetur se ipsium accusare in a
tax context. The original judgement was delivered in French and my
analysis draws from the ECTHR’s official press release in English

Chambaz, a Swiss national living in Bermuda was the subject of

a tax investigation which involved a number of companies which
Chambaz incorporated in a number of offshore jurisdictions.
The Swiss Tax Authorities requested Chambaz for information
relating to his income which Chambaz refused to give. The Swiss
tax authorities fined Chambaz for failure to provide information
and Chambaz appealed the judgement which penalised him for
failing to provide the information requested. While the appeal
proceedings were pending, the federal tax authorities filed fresh
proceedings relating to tax evasion. Chambaz requested access
to his investigation file but his request was refused. Meanwhile,
Chambaz lost his appeal from the judgement convicting him for
failing to provide information. Chambaz filed a case at the ECtHR
alleging a number of human rights violations. He argued that his
right to a fair trial had been violated because the requirement to
produce information to the tax authorities amounted to forcing
him to incriminate himself. Chambaz submitted that the refusal of
access to his tax investigation fail was a violation of the principle of
equality of arms in litigation.
The ECtHR found multiple violations of Article 6 ECHR. The

ECtHR concluded that there was a violation of Article 6 ECHR
because the Swiss Courts had forced Chambaz to incriminate
himself. The ECtHRnoted that by putting Chambaz underpressure
to provide documentation which was potentially incriminating in
the course of an investigation for tax evasion the Swiss authorities
had violated Chambaz s right to silence.
The ECtHR found that the Swiss authorities denial to

give Chambaz access to the investigation file did not pursue a
legitimate aim because the authorities’ denial to provide access
to the investigation file was ascribed exclusively to Chambaz’s
uncooperative attitude’ in the course of the proceedings.
The implications of the judgement are quite far reaching. In a

decade when laws tend to grant tax authorities wide-ranging access
to information, the ECtHR is, in defined situations, restricting
the tax authorities’ rights to access to such information. In the
meantime the ECtHR continues to strengthen the rights of the
taxpayer in litigation creating a level playing field in tax controversy.
The ECtHR’s judgement in Chambaz led to the judgment of

the Court Of Appeal (Inferior Jurisdiction)48 in Case 160 /2012
delivered in 2015, only a few months after the ECtHR had delivered
its judgment in Chambaz. The judgment in Case 160 came in
the course of proceedings in front of the Administrative Review
Tribunal; after an appellant asked a tax inspector to exhibit a copy of
his tax file in Court. The tax authorities objected to the request on
the basis of official secrecy but, in a particularly strong judgment, the
Administrative Review Tribunal acceded to taxpayer’s request. The
tax authorities appealed and the case went to the Court of Appeal.
The taxpayer contended that the rationale of official secrecy is to
protect sensitive information pertaining to taxpayers and not that of
stopping taxpayers from acceding to information pertaining to them.
The taxpayer emphasized the need for transparency in the pre-trial
stage. The Court of Appeal agreed with taxpayer setting a precedent
which has been followed in several other tax cases. Since Case 160,
the annexation of taxpayers’ files to the acts of the proceedings of the
Tribunal has become the norm.
In Case 160, both the Administrative Review Tribunal and the

Court of Appeal made a number of important observations.
The Administrative Review Tribunal referred to Parliamentary

debates leading to the creation of the Tribunal, to the disclosure rule
especially. In front of the Tribunal, the administrative authority is
bound to bring evidence both in favour and against the taxpayer:
48 Appell Nru.235/11 VG.

1-amministrazzjoni pubblika li tigi mharrka quddiem it-tribunal

amministrattiv trid taghmel available lit-tribunal, id-dokumenti u
1-informazzjoni rilevanti ghall-kaz u mhux tahbi dak li ma jaqblilhiex turi
u tesebixxi dak li jaqbiliha. Jigifieri hawnhekk qeghdin nintroducu - safejn
nafjien ghall-ewwel darba - id-discovery rule li tezisti 1-Ingilterra, li dawn it-
tribunali ta’ 1-ewwel skeda jridu li 1- amministrazzjoni li tigi imharrka fihom,
trid taghti 1-informazzjoni u d-dokumenti kollha li jkunu rilevanti ghall-kaz
... Dan ifisser li ghall-ewwel darba hawnhekk ghandha 1-ligi taghna li qed
tistabilixxi bl-aktar mod car il-principji tal-gustizzja naturali, il-principji tat-
trasparenza, il-principju ta’ 1-equality of arms u 1-principju ta’ full disclosure
li t-tribunali, huma liema huma, ghandhom jimxu bihom.
Fid-dawl ta’ dan kollu osservat ghalhekk jirrizulta li d-Direttur Generali

(Taxxa fuq il-Valur Mizjud) ghandu 1-obbligu prefiss fil-Ligi li jpoggi a
disposizzjoni tas-socjetà rikorrenti 1-file tad-Dipartiment tat-Taxxa fixq il-
Valur Mizjud relattiv ghall-investigazzjoni li saret fil-konfront taghha u
ghall-konsegwenti stima li nharget kontriha.”
The Court of Appeal added that:
“Illi dana 1-kuncett ta’ “equality of arms” ghandu iktar jigi enforzat b’sahha
meta 1-kontendenti f procediment gudizzjarju ma humiex a pari passu, dana
ghaliex wiehed mill-partijiet jinsab f’posizzjoni vantagguza billi ghandu
warajh istituzzjoni, bhal dik governattiva, li certament ghandha iktar sahha
mic-cittadin ordinarju li minghajr dubbju ghandu mezzi iktar limitati ghad-
disposizzjoni tieghu biex ikun jista’ jiddefendi lilu innifsu. Huwa b’dan il-
hsieb illi il-legislatur taha il-hajja lil-legislazzjoni dwar ir-revizjoni ta’ atti
amministrattivi u waqqaf tribunal ad hoc ghas-salvagwardja tad-drittijiet tac-
cittadin. Gustament altura t-Tribunal fid-decizjoni tieghu ghamel referenza
ghad-dibattiti parlamentari li sawwru il-promulgazzjoni tal-Kapitolu 490
billi hawnhekk jinsab il-hsieb tal-legislatur. Minn qari ta’l-istess jirrizulta
indubbjament illi dan il-hsieb kien wiehed u cioè’ illi jigi salvagwardajt il-
principju tal-equality of arms u dana billi 1-amministrazzjoni pubblika tigi
kostretta tizvela kull dokument u informazzjoni li wassal ghad-decizjoni
amministrattiva fil-konfront tac-cittadin li jirrikorri lejn it-Tribunal ta’
Revizjoni Amministrattiva.
Illi anke il-Qorti Ewropeja ghad-Drittijiet tal-Bniedem fil-kaz Chambaz
vs Switerland sahhqet illi kien hemm vjolazzjoni ta’l-artikolu 6(1) tal-
Konvenzjoni fic-cirkostanzi analogi bhal f’dana il-kaz fejn sahhqet:..
U din il-Qorti sahansitra tazzarda tghid illi lanqas jista’ ikun hemm,
ghaliex fuq kollox 1-inkartament jew il-file li ic-cittadin ikollu f’kwalunkwe
dipartiment jew awtorita’ governattiva huwa proprjeta tieghu personali u

mhux tad-dipartiment billi fih hemm kontenenti informazzjoni personali
tieghu, pariri, rakkomandazzjoni u opinjonijiet li jikkoncernaw lilu u lil hadd
izjed. Dina 1-informazzjoni hija essenzjali ghat-taxpayer sabiex ikun possibbli
ghalih li jiddetermina dak li wassal lil Kummissarju ghad-decizjoni tieghu
jew ghal kalkoli/stimi minnu maghmula u allura huwa ikun f’posizzjoni
ahjar li jista jiddefendi ruhu.”
3.1.8 Protection from Self-Incrimination

The ECtHR has delivered a number ofjudgments on freedom from
self-incrimination; some of which bring to mind local realities. A
number of Articles in our Income Tax Acts, Articles 10A, 13 and
14 ITMA especially, bind taxpayers with an obligation to furnish
information to the Commissioner for Revenue. Failing to abide by
such a request is punished as a criminal offence.49 What if acceding
to the Commissioner’s request would result in self-incrimination?
I am highly intrigued by Philip Bakers interpretation of the
ECtHR’s judgment in Maurice Marcellin Marie Van Weerelt
against the Netherlands.50 Baker suggests that information
provided in violation of the nemo tenetur si ipsum accusare principle
should never result in exposure to criminal charges, tax surcharges
included. Baker points out:
49 Under Article 49ITMA which reads as follows:

“49. (1) Any person who contravenes or fails to comply with any of the provisions of the
Income Tax Acts or of any rules made thereunder shall be guilty of an offence and, unless
another punishment is specifically provided by the Income Tax Acts, he shall be liable on
conviction to a fine (multa) of not less than twenty-three euro (23) and not exceeding one
hundred and sixteen euro (116).
(2) Where a person is, on or after 1st July 1977, found guilty of an offence under any of the
provisions of the Income Tax Acts and is not sentenced to imprisonment for that offence the
court shall expressly warn him that if, within five years from the date of the warning, he is again
found guilty of another offence under any of the provisions of the Income Tax Acts (whether
of the same nature or not) he shall be sentenced, in addition to any other punishment, to
not less than three days imprisonment or to a fine (multa) of one thousand and five hundred
euro (€1500); and a person so found guilty on a second or subsequent occasion, within the
period aforesaid, shall, notwithstanding anything contained in the Probation Act, or in any
other enactment, be sentenced to imprisonment for a term of not less than three days or
a fine (multa) of five thousand euro (€5000), in addition to any other punishment except
imprisonment for a longer term.”
“In this case, the taxpayer had failed to take into account the fact that the
Supreme Court had ordered that the information should not be used for
imposing any tax fines or criminal prosecution. In those circumstances,
therefore, there was no danger that the information would be used for self
incrimination. Consequently, there was no potential breach of article 6.
The approach taken by the Netherlands Supreme Court is one that tax
authorities may also decide to take where they seek information only
available from the taxpayer and that has no existence independent of the will
of the taxpayer. To respect the freedom from self-incrimination, they will
need to guarantee that any information supplied will not be used for the
purpose of imposing fines or criminal prosecution. Those advising a taxpayer
would equally need to advise him not to supply information unless such as a
guarantee was offered.”51
3.2 Judgments of the Constitutional Court on

Fair Hearing and Non Bis In Idem
Even Article 39 of the Constitution of Malta52 protects the right to

a fair hearing overlapping with Article 6 ECHR. The Constitution
of Malta grants persons the right to a fair hearing within a
reasonable time. Our Constitutional Court has delivered a number
of excellent judgments on taxation and the right to a fair hearing.
Local judgments relating to the non bis in idem corollary turned
out to be quite avante guard.
51 Baker Philip, Some Recent Decisions of the European Court of Human Rights on Tax
Matters (and Related Decisions of the European Court of Justice) published in European
Taxation August 2016 p. 348.
52 ‘(1) Whenever any person is charged with a criminal offence he shall, unless the charge is
withdrawn, be afforded a fair hearing within a reasonable time by an independent and
impartial court established by law
(2) Any court or other adjudicating authority prescribed by law for the determination of the
existence or the extent of civil rights or obligations shall be independent and impartial;
and where proceedings for such a determination are instituted by any person before such
a court or other adjudicating authority, the case shall be given a fair hearing within a
reasonable time....
(3) Nothing in sub-article (3) of this article shall prevent any court or any authority such as
is mentioned in that sub-article from excluding from the proceedings persons other than
the parties thereto and their legal representatives - ...’
3.2.1 The Long road to Clayton Communications

The Constitutional Court had the opportunity to explain that
in Malta the Ferrazzini dictum does not apply. The Maltese legal
system offers a higher level of protection to that offered by the
ECHR.
In Anthony Frendo v. L-Avukat Generali, L’Onorevoli Prim

Ministru u 1-Kummissarju dwar it-Taxxi fuq il-Valur Mizjud,
53 the Constutional Court established that the right to a fair
hearing is inherent in our judicial review system. According to
the Constitutional Court, the right to a fair hearing applies by
implication. The creation of a tribunal established to review
the discretions of the Commissioner of VAT implies that such
tribunals must decide according to the Constitution, the right to
a fair hearing included.
I had anticipated that the Frendo judgement would lead to

change. Article 35 ITMA used to incorporate a proviso which
used to refer to a requirement to pay tax which was not in dispute
as a pre-condition to filing a valid tax appeal. In Pig Breeding
Company Limited v. Avukat Generali u 1-Kummissarju tat-Taxxi
Interni, a case which involved a taxpayer who filed an appeal
without paying tax not in dispute due to an insufficiency of funds,
the Constitutional Court declared the proviso to Article 35 ITMA
and it was promptly removed from the ITMA.
All questions relating to whether the right to a fair hearing

applies in tax disputes were settled in Clayton Communications
Company Limited v. L-Onorevoli Prim Ministru, 1-Avukat
Generali, il-Kummissarju tat-Taxxa fuq il-Valur Mizjud u 1-Bord
tal-Appelli dwar it-Taxxa fiiq il-Valur Mizjud when the point was
debated at length.5354 The Constitutional Court pointed out that
the right to a fair hearing in a tax dispute is a private right which
53 Rik. Kost. Nru. 592 of 1997 of November 30,2001.
54 Seduta tad-29 ta Jannar, 2010 Appell Civili Numru. 55/2008/1.
is protected by all safeguards mentioned in the ECHR and the

Constitution of Malta:
“Fil-kaz in ezami 1-ligi tal-VAT tipprovdi ghall-mekkanizmu biex taxpayer

ikun jista’ jiwerifika li 1-ligi qed tigi amministrata korrettement fil-konfront
tieghu, u senjatament 1-Att relattiv jaghtih id-dritt ta’ appell quddiem il-Bord
tal-Appelli, kif ukoll f certi kazijiet, id-dritt ta’ appell quddiem il-Qorti tal-
Appell, fuq punt ta’ ligi biss. Ghalhekk, la darba 1-ligi taghti dan id-dritt ta’
access ghal Tribunal kwazi gudizzjarju u gudizzjarju rispettivament, isegwi li
huma applikabbili wkoll il-garanziji kollha, fosthom dawk ghal smigh xieraq
u access ghall-Qorti. Tali dritt ta’ access huwa, ghalhekk, fih innifsu dritt
privat, b’mod li 1-garanziji msemmija ghandhom japplikaw.”
In John Azzopardi bhala rapprezentant tad-ditta J.A. Trading v.

Kummissarju tat-Taxxa fuq il-Valur Mizjud,55 the First Hall Civil
Court (Constitutional Jurisdiction), the Constitutional Court
took the Clayton principle a step further, the Court held that the
VAT Appeals Boards five year delay in appointing a VAT appeal
violated appellant s right to a fair hearing. The First Hall awarded
taxpayer financial compensation. This was the first time our Courts
awarded financial compensation against a tax authority. Extracts
from the judgement follow:
“‘Din il-Qorti tara, pero’, li z-zmien ta’ hames snin li ha 1-Board biex jibda
jisma’ 1-kaz kien wiehed esageratament twil. Hu wisq probabbli li dan it-tul
ta’ zmien kien dovut ghall-fatt li 1-Board kien impenjat fis-smigh ta’ kawzi
ohra, u ma kienx umanament possibbli ghall-membri tal-istess li jisimghu
dan il-kaz flimkien mad-diversi kawzi ohra li gew assenjati lilhom. Gie, pero’,
kemm-il darba stabbilit mill-
Qrati taghna u mill-Qorti Ewropea tad-Drittijiet tal-Bniedem, li 1-ammont
ta’ kawzi u l-“ backlog” tal-lista’ m’hiex skuza ghad-dewmien fl-istharrig ta’
kaz. Huwa obbligu tal-awtoritajiet kompetenti li jahtru numru ta’ Boards
bizzejjed, u jaghtuhom 1-istrutturi mehtiega, biex id-domandi li jitressqu
jkunu jistghu jigu mistharrga bl-ispeditezza u bir-reqqa li trid il-ligi....
Ma inghatat ebda gustifikazzjoni valida ghala 1-kaz tar-rikorrent kellu jdum
hames snin biex jibda, u kwindi tara li, taht dan 1-aspett, id-dritt tar-rikorrent li
jkollu smigh xieraq fi zmien ragjonevoli gie lez u tillikwida 1-kumpens li ghandu
jithallas lir-rikorrenti ghal dan il-ksur fl-ammont ta’ €800 (tmien mitt Ewro)”
55 Seduta tal-15 ta Ottubru, 2010 Rikors Numru. 8/2010.
The right to fair hearing in tax disputes was confirmed with

the entry into force of the Administrative Justice Act56 because it
incorporates an article which establishes that the tribunal must
apply the principles of good administrative behaviour defined as
including the right to a fair hearing.57
3.2.2 The Carter Case

The impact of the judgment in Neil Carter u martu Susan, ghal
kwalsijasi interess li jista’ jkollha vs L-Onorevoli Prim Ministru,
1-Avukat Generali u 1- Kummissarju tat-Taxxa fuq il-Valur Miżjud58
56 Chapter 490 of the Laws of Malta.
57 Article 3 of Chapter 490 prescribes that:
“(2)The principles of good administrative behaviour include the following:
(a) an administrative tribunal shall respect the parties’ right to a fair hearing, including the
principles of natural justice, namely:
(i) nemo judex in causa sua, and
(ii) audi et alteram partem;
(b) the time within which an administrative tribunal shall take its decision shall be reasonable
in the light of the circumstances of each case. The decision shall be delivered as soon
as possible and for this purpose the tribunal shall deliver one decision about all matters
involved in the cause whether they are of a preliminary, procedural or of a substantive
nature;
(c) an administrative tribunal shall ensure that there shall be procedural equality between the
parties to the proceedings. Each party shall be given an opportunity to present its case,
whether in writing or orally or both, without being placed at a disadvantage;
(d) an administrative tribunal shall ensure that the public administration makes available the
documents and information relevant to the case and that the other party or parties to the
proceedings have access to these documents and information;
(e) proceedings before an administrative tribunal shall be adversarial in nature. All evidence
admitted by such a tribunal shall, in principle, be made available to the parties with a view
to adversarial argument;
(f) an administrative tribunal shall be in a position to examine all of the factual and legal
issues relevant to the case presented by the parties in terms of the applicable law;
(g) save as otherwise provided by law, the proceedings before an administrative tribunal shall
be conducted in public;
(h) reasons shall be given for the judgment. An administrative tribunal shall indicate, with
sufficient clarity, the grounds on which it bases its decisions. Although it shall not be
necessary for a tribunal to deal with every point raised in argument, a submission that
would, if accepted, be decisive for the outcome of the case, shall require a specific and
express response.”
58 Rikors Numru. 59/2009. The Carter case is the only local tax judgment ofwhich I am aware of
when a challenge based on the right to property was successful. The case referred to an appeal
charge imposed by the VAT appeals Board. Given that the charge was not being imposed
according to law, the charge was impugned. An extract from the judgment follows:
‘Dan ifisser li meta r-rikorrent ressaq lappelli tieghu f’Ottubru tal-200920 u ntalab ihallas
was not limited to the right to property because it had a major

impact on the right to a fair hearing. The main point at issue in
the Carter case was the obligation to pay a percentage of the tax
which was in dispute. Carter argued that a provision in the Ninth
Schedule to the VAT Act which bound him to pay five percent of
the tax in dispute as a condition to file his appeal denied him of
the right to a fair hearing. Taxpayer argued that the obligation to
pay tax in dispute was a disproportionate hurdle which cluttered
his access to justice. Carter argued that a provision in the Ninth
Schedule was unconstitutional. The First Hall Civil Court agreed
with him declaring a provision in the Ninth Schedule null and void.
“Illi, madankollu, huwa minnu wkoll u din il-Qorti tagħraf li f’uħud mis-
sentenzi msemmija mill-partijiet, tqies li rrekwiżit tal-ħlas tal-preċentwali
tat-taxxa kontestata taħt ilparagrafu 4(ċ) (Frendo) u 1-ħlas kollu tat-taxxa
li hemm qbil fuqha taħt il-paragrafu 4(b) (Cilia) minnhom infushom
jikkostitwixxu ksur tal-jedd ta’ aċċess għal qorti minħabba li joħolqu pre-
kondizzjoni għat-tressiq innifsu tal-att meħtieġ biex jinbeda 1-appell mill-
istejjem magħmula. Il-Qorti ħasbet sewwa fuq dan il-punt. Tqis li, f’dak
li jirrigwarda 1-ħlas tat-taxxa li mhix kontestata, il-Qrati jidher li adottaw
il-kriterju “suġġettiv” taċ-ċirkostanzi tal-każ u qabblu 1-qagħda li tinħoloq
bi bias bħal dak malkundizzjoni finanzjarja ippruvata tal-persuna mitluba
tħallasha u jekk dak il-ħlas huwiex xkiel effettiv jew disinċentiv biex jitressaq
jew jitkompla 1-appell. Fil-każ talħlas tal-perċentwali tat-taxxa kontestata,
1-fehma dehret li hija iżjed oġġettiva, billi tqies li dik id-dispożizzjoni
“proposta f’dawn it-termini ... tidher li hi inikwa u anti-ġuridika”. Kemm
hu hekk, kemm fi Frendo u kif ukoll f’Ċilia, 1-Qorti Kostituzzjonali sabet
li 1-imsemmija dispożizzjoni nnifisha kienet tikser il-jedd taħt 1-artikolu 39
tal-Kostituzzjoni u 1-artikolu 6 tal-Konvenzjoni. Ma jidhirx lanqas li dak is-
sejbien kien marbut biss mal-fatt li dik iddispożizzjoni kienet titlob il-ħlas
issomma li spicca ħallas, ma kien hemm 1-ebda liġi li tirregola hlas bhal dak u ghaldaqstant,
f’dak ir-rigward, it-“tehid” tal-flus mingħand ir-rikorrent seħħ mingħajr leżistenza ta’
“kundizzjonijiet provduti bil-liġi” kif irid lartikolu 1 tal-Ewwel Protokoll tal-Konvenzjoni.
Ifisser ukoll li 1-vot tal-paragrafu 4( 1 )(f ) tad-Disa’ Skeda tal-Att lanqas ma kien imwettaq jew
preskritt b’liġi u ghalhekk it-talba ta’ hlas ghal “dritt amministrattiv” ma kenitx koperta b’liġi
sa dak inhar;
Illi fid-dawl ta’ din 1-aħħar kostatazzjoni (iżda limitatament ghal dan), il-Qorti tasal ghall-
fehma li r-rikorrenti sehhilhom juru li ġarrbu ksur tal-jedd taghhom taht 1-artikolu 1 tal-
Ewwel Protokoll tal-Konvenzjoni u 1-ewwel talba taghhom sejra tintlaqa’ fir-rigward tal-hlas
tad-dritt amministrativ li ntalbu jhallsu meta ressqu 1-appelli taghhom;’
ta’ ħamsa u ghoxrin filmija (25%) tat-taxxa kontestata, iżda wkoll mal-fatt
innifsu li dak il-hlas kien mistenni bħala kundizzjoni nnifisha ghassiwi ta’
kull appell imressaq kontra stima rotella’ mill-Kummissarju intimat...
Il-Qorti hija talfehma li, minkejja li sar it-tnaqqis tal-preċentwali minn kif
kienet qabel, xorta wahda jibqa’ 1-fatt li s-siwi ta’ appell ghadu jiddependi fuq
hlas ta’ parti mill-mertu tal-istess procedura tal-appell u dan sa minn qabel
ma jkun ghad hemm deċiżjoni determinanti dwar jekk dak il-hlas kienx
tassew dovut. Meta jitqies f’dan id-dawl, dak il-hlas jikkostitwixxi, fil-fehma
ta’ din il-Qorti, ksur tal-jedd ta’ access ghal qorti jew tribunal tar-rikorrenti;”
After the delivery of the judgement, the Commissioner of VAT

promptly advised the Minister to initiate the process to amend
the VAT Act but the Carter case should have left an impact on the
ITMA too. Article 41 of the ITMA contains a provision which
appears to be incompatible with the spirit of the Carter case.
Article 41 ITMA prescribes that:
“41. (1) Where notice of objection or appeal against an assessment has

been given, the Commissioner may, in his discretion, keep in abeyance the
collection of not less than ninety per cent of that part of the tax assessed
thereunder which is in dispute.
(2) This article shall not apply to the tax deductible in accordance with
the provisions of article 23 and to the tax payable in accordance with the
provisions of article 42(2).”
3.2.3 The Case of John Geranzi Limited vs

Kummissarju tat-Taxxi interni et59
The unusual fact pattern of the Geranzi case tends to
overshadow the academic and practical significance of the
judgement. The case was filed because of a blatant miscarriage
of justice. The case referred to a tax dispute for year of assessment
1977. Taxpayer had filed his tax return and in 1980 was served
with an ex officio tax assessment to raw tax and additional tax. In
1980 taxpayer filed a notice of objection against the assessment
but Commissioner of Inland Revenue issued a notice of refusal to
59 Rikors Numru. 22/2009.
the objection, 27 years later in 2007. In 2008 the case went to the
Board. This was the year when the ECtHR delivered its judgement
in Paykar Yev Haghtanak v. Armenia.
In front of the board, the company was burdened with the onus
of proof but the enormous interval of time between the date of
submission of the tax return and the date of the first hearing of the
appeal rendered the retrieval of documentation extremely difficult.
To make matters worse, all directors who were in office in 1977
were dead. On the basis of the judgements of the ECtHR, John
Geranzi Limited argued that because the case involved additional
tax which was deterrent and punitive, it had the rights to silence and
the presumption of innocence. John Geranzi Limited pointed out
the Commissioner’s delay in issuing the notice of refusal implied
that to defend itself the company had to retain books and records
for 27 years when the law stipulated shorter periods. The Board
rubbished the company’s arguments and decided in favour of the
Commissioner of Inland Revenue. John Geranzi Limited appealed
to the Court of Appeal with an application which was heavily
loaded with allegations of violations of human rights. Whilst its
case was pending in front of the Court of Appeal, John Geranzi
Limited filed a constitutional application alleging a violation of its
right to a fair hearing. The Company argued that Board’s refusal
to grant it the rights to silence and presumption of innocence had
violated its right to a fair hearing. The Company complained that
27 year delay in the issue of a notice of refusal resulted in a denial of
an effective access to justice.
The First Hall Civil Court (Constitutional Jurisdiction)

presided by the late Mr. Justice Gino Camilleri held that the
Commissioner of Inland Revenue’s 27-year delay to issue a notice
of refusal amounted to a violation of its right to justice within a
reasonable time. The Court decided in favour of the company and
ordered the Revenue to pay the company financial compensation
of EUR30,000 but both the taxpayer and the Revenue appealed

the judgement. Taxpayer was the first to file his appeal asking the
Court to declare that in a case involving punitive measures the
right to a fair hearing must apply under its criminal head resulting
in the right to silence and presumption of innocence. Furthermore,
it demanded a cancellation of the original assessment because the
First Hall, Civil Court had ordered a renvoi of the decision relating
to the asessment to the Court of Appeal). The tax authorities
appealed on the basis that the compensation constituted an
unjustified enrichment and that in tax proceedings the right to a
fair hearing does not apply. The tax authorities observed that the 27
year delay was due to circumstances outside of their control adding
that the law does not create a peremptory term within which an
assessment must be processed.
The Constitutional Court held that the case had been correctly
filed against the Attorney General implying that it was vested with
the jurisdiction to quash both the decision of the Board and that of
the Commissioner of Inland Revenue. The Constitutional Court
nullified the judgement of the Board of Special Commissioner, the
original assessment and the notice of refusal. In addition, it ordered
restitution in integrum ordering the tax authorities to accept
taxpayer’s original objection. The Court held that interest should
not run on tax due (if any at all). In the circumstance the Court
held that that payment of compensation was unnecessary because
restitution in integrum was a fair remedy. The Court confirmed
that the right to a fair hearing applies to tax disputes.
3.2.4 Tax Litigation after John Geranzi Limited

Experiece has shown that the landmark judgement in John Geranzi
Case left its mark. I am aware of around 30 judgments based on
the John Geranzi Case. . The Geranzi judgment established that
the principle of ‘pericolum in mora’ (there is danger in delay) can
be imposed on the Revenue. Tax authorities are expected to carry
out their duties within a reasonable time implying that the right to
a fair hearing applies in the pre-trial stage too. The right to justice
within a reasonable time in the pre-trial stage was the subject of
a heated debate in the First Hall, Civil Court where the taxpayer
reiterated that ‘Id-drittijiet tal-bniedem jistaw japplikaw anke fi
stadju ta accertazzjoni and referred to the ECtHR judgement
in Affaire Ravon et Autres c. France’.60 The issue was treated as a
settled issue by the Constitutional Court, which observed that,
“Ikunu xi jkunu ċ-ċirkostanzi u rraġunijiet, dewmien ta’ sebgħa u għoxrin

sena biex jiġi mitmum process amministrativ b’ebda mod ma jista jitqies
raġonevoli. Jekk il-Kummissarju ra illi l-attriċi ma kinitx qiegbda tagbti
s-sehem tagħha biex il-proċess jimxi, kien imissu ħareġ 1-awiż ta’ rifjut hekk
kif ra illi 1-attrici ma kinitx qiegbda tagħtih it-tagħrif mebtieġ.
12. Dan id-dewmien huwa ta’ relevanza ghall-jedd ta’ smigh xieraq gbax,
sakemm inhareġ 1-awiż ta’ rifjut, lattriċi ma setghetx tibda tfittex rimedju
quddiem il-Bord u, wara, quddiem il-Qorti tai-Appell.
13. L-attriċi kienet qieghda ghalhekk tiġi mċahhda min access ghall-organi
ġudizzjarji. Dan iwassal ghal ksur tal-jedd ghal smigh xieraq mhux biss ghax
id-dewmien fih innifsu - aktar u aktar dewmien ta’ sebgha u ghoxrin sena -
huwa ksur iżda wkoll minhabba n-nuqqas ghal dak iżżmien kollu ta’ access
ghal qorti.
14. Tassew illi 1-attrici kienet taf bil-vertenza u ghalhekk kien imissa hadet
ħsieb aħjar tad-dokumenti, iżda huwa inevitabbli illi wara dak iż-żmien kollu
1-memorja tal-fatti tibda tiċċajpar u, bhal ma ġara fil-każ tallum, in-nies li jafu
60 Requéte no 18497/03. An official summary of the judgement follows:
“The European Court found that the applicants did not have access to a court to contest the
lawfulness of these searches and seizures (violations of Article 6§ 1). The European Court
noted that the only avenue of appeal available to the applicants was under Article L.16B of
the Code of Tax Procedure. Such an appeal was on points of law only. It did not permit an
examination of the facts in question and did not provide sufficient guarantees of the right to a
fair hearing (see §29 of the judgment). The fact that search and seizure can only be undertaken
following a judge's order is not sufficient to overcome this gap. Furthermore, the fact that
article L.16B of the Code of Tax Procedure provides that such operations must take place
under the supervision of the judge who has ordered them does not provide any independent
control of the authorisation itself, and in any case the access to this judge appears theoretical
rather than real. Moreover, it is not possible to have access to the judge who authorised the
search proceedings once the searches have been completed. Allegations of irregularities
affecting the proceedings still could be heard by the courts possibly ruling upon the merits
of tax proceedings relying on the documents taken during the searches, but this can only be
the case where proceedings are indeed brought against the persons concerned, which did not
happen in the applicants' cases."
SOURCE: COUNCIL OF EUROPE, Supervision of execution
Implementation of judgments of the European Court of Human Rights’
ahjar il-fatti jibdew imutu. Dan ukoll iwassal għal ksur tal-jedd għal smigħ
xieraq.”
The judges of the Constitutional Court passed an extremely

interesting observation on the classification ofMaltese tax penalties.
After being deluged with copies of ECtHR judgements on the
classification of tax penalties, the judges of the Constitutional
Court remarked that:
“22. Barra minn hekk, il-Kummissarju qiegħed jesiġi ll-hlas mhux biss tat-
taxxa iżda ta’ taxxa addizzjonali li fittweġiba tiegħu ghall-appell tal-attriċi
1-Kummissarju jsejħilha “multa amministrativa” li imponiha ghax, fil-fehma
tiegħu, 1-attriċi ma għamiltx stqarrija sew u sħiħa tad-dħul taghha ghall-
ghanijiet tat-taxxa.
23. Ghall-ghanijiet tal-Kostituzzjoni u tal-Konvenzjoni, ittermini legali li
nsibu f’dawk id-dispożizzjonijiet tal-liġi ghandhom tifsira “awtonoma”. Li
ma kienx hekk, 1-istat faċilment jaħrab mill-garanziji tal-proċess penali billi
lpwieni jsejhilhom “amministrativi” flok penali. Iżda jsejħilha xi jsejħilha
1-Kummissarju, it-taxxa addizzjonali tibqa “piena” inflitta fiiq il-kontribwent
illi, fil-fehma tal-Kummissarju, ma jkunx ghamel stqarrija shiha u sewwa tad-
dhul tieghu ghall-ghanijiet tat-taxxa. Fi stat ta’ dritt iċċittadin ma jistax ikun
imċaħħad minn access għal qorti gjiad-deċiżjoni jekk ghandux jew le jkun
soġġet ghal piena.”
In John Geranzi our judges classified tax penalties as a ‘piena’,

a criminal charge. The implications of such a classification are
infinite suggesting that in the determination of a dispute involving
additional tax should attract the protection of Article 6 ECHR
under its criminal head.61 In cases involving additional tax, the
Administrative Review Tribunal has agreed to invert the onus of
proof, allowing taxpayers the right to presumption of innocence as
well as the right to silence. In Case 98/ 14VG the Tribunal observed:
“Jigi in fine osservat li 1-Qorti Kostituzzjonali nostrali wkoll tirrikonoxxi li

pieni amministrattivi imposti f’ambitu fiskali huma "piena" inflitta fuq it-
tax payer li fil-fehma tal-Kummissarju tat-Taxxi ma jkunx ghamel stqarrija
shiha u sewwa tad-dhul tieghu ghall-gahnijiet tat-taxxa u konsegwentement
61 Right to presumption of innocence and silence included.

ghalhekk japplikaw il-garanziji sanciti fl-Artikolu 6 tal-Konvenzjoni ghal

dak li jirrigwarda 1-process kriminali.
Fis-sentenza fl-ismijiet John Geranzi Limited v. Kummissarju tat-Taxxi
Interni et, Rik. Nru. 22/09 deciza mill-Qorti Kostituzzjonali fit-30 ta’
Novembru 2012, dik il-Qorti osservat inter alia li 1-kwistjoni fil-kawza ta’
ilium ghalhekk hij a dwar jedd ta’ access ghal qorti fi zmien xieraq u ghalhekk
ma tintlaqtax bl-eccezzjoni tal-Kummissarju illi f ’materja ta’ obbligazzjonijiet
fiskali ma jghoddux id-disposizzjonijiet ta’ l-art.6 tal-Konvenzjoni. Dwar
dan, il-posizzjoni legali hija cara. Barra minn hekk, il-Kummissarju qieghed
jesigi 1-hlas mhux biss tat-taxxa izda ta’ taxxa addizzjonali li fit-twegiba tieghu
ghall-appell ta’ 1-attrici 1-Kummissarju jsejhilha “multa amministrativa” li
imponiha ghax, fil-fehma tieghu, 1-attrici ma ghamlitx stqarrija sew u shiha
tad-dhul taghha ghall-ghanijiet tat-taxxa. Ghall-ghanijiet tal-Kostituzzjoni
u tal-Konvenzjoni, it-termini legali li nsibu f’dawk id-disposizzjonijiet tal-
ligi ghandhom tifsira “awtonoma”. Li ma kienx hekk, 1-istat facilment jahrab
mill-garanziji tal-process penali billi 1-pieni jsejhilhom “amministrativi” flok
penali. Izda jsejhilha x’jsejhilha 1-Kummissarju, it-taxxa addizzjonali tibqa’
“piena” inflitta fuq il-kontribwent illi, fil-fehma tal-Kummissarju, ma jkunx
ghamel stqarrija shiha u sewwa tad-dhul tieghu ghall-ghanijiet tat-taxxa. Fi
stat ta’ dritt ic-cittadin ma jistax ikun imcahhad minn access ghal qorti ghad-
decizjoni jekk ghandux jew le jkun soggett ghal piena.
Fid-dawl ta dan kollu osservat ghalhekk it-Tribunal iqis li t-talba tar-
Rikorrent ghall-inverzjoni tal-provi minnu awanzata waqt is-seduta tat-2 ta’
Frar 2015, hija gustifikata u ghaldaqstant tisthoqq li tigi milqugha.
Ghal dawn ir-ragunijiet it-Tribunal jilqa’ t-talba awanzata mir-Rikorrent
waqt is-seduta tat-2 ta’ Frar 2015 u jordna 1-inverzjoni tal-provi b'dana li
ghandu jibda bil-provi tieghu 1-Kummissarju tat-Taxxi.”62
3.2.5 The Zahra Case

The ECtHR’s decision in Ruotsalainen v. Finland63 established
that the Ne Bis In Idem defence applies in respect of administrative
penalties which are, for the purposes of the ECHR, classified as
criminal charges. A person who, because of an act or omission is
punished with a tax surcharge that is both deterrent and punitive
may not, subsequently, be tried and punished again for the same act
or omission. In Ruotsalainen the ECtHR held that:
62 See also Case 76/12VG.

63 Application no. 13079/03 16 June 2009.
“The aim of Article 4 § 1 of Protocol No. 7 is to prohibit the repetition of

criminal proceedings that have been concluded by a final decision. In the
case under consideration two measures were imposed on the applicant
in two separate and consecutive sets of proceedings. On 26 February
2001 the applicant was fined in summary penal order proceedings and
on 17 September 2001 the applicant was issued with a fuel fee debit in
administrative proceedings.
42. The Court reiterates that the legal characterisation of the procedure under
national law cannot be the sole criterion of relevance for the applicability
of the principle of non bis in idem under Article 4 § 1 of Protocol No. 7.
Otherwise, the application of this provision would be left to the discretion
of the Contracting States to a degree that might lead to results incompatible
with the object and purpose of the Convention...
44. As noted above, first, the applicant was fined in summary penal order
proceedings because he had used more leniently taxed fuel than diesel oil in
the tank of his vehicle, which constituted petty tax fraud. The proceedings
were “criminal” according to the Finnish legal classification. Those
proceedings were “criminal” also for the purposes of Article 4 of Protocol
No. 7 and consequently the applicant was “finally acquitted or convicted in
accordance with the law and penal procedure of [the] State”. The guarantee
of Article 4 of Protocol No. 7 comes into play where a new set of proceedings
is instituted after the previous acquittal or conviction has acquired the force
of res judicata. In this case, the applicant did not appeal against the summary
penal order, which therefore became res judicata.
45. Subsequently, the applicant was issued with a fuel fee debit in
administrative proceedings. Turning to the first of the Engel criteria, it is
apparent that the fuel fee debit was not classified as criminal but as part of
the fiscal regime (see paragraph 12 above). This is however not decisive. In
this connection, the Court has previously found that the sphere defined in
the Finnish legal system as “administrative” embraces certain offences that
have a criminal connotation but are too trivial to be governed by criminal law
and procedure (see Jussila v. Finland [GC], cited above, § 38).
46. The second criterion, the nature of the offence, is the more important.
The Court observes that the relevant provision of the Fuel Fee Act was
directed towards all citizens rather than towards a group possessing a special
status. The applicant was liable in his capacity as owner or user of a diesel
engine vehicle. As to the Government's argument that the fuel fee debit was
intended as pecuniary compensation for damage, the Court is however not
so convinced in the circumstances of the present case. It may well be that the
fuel fee imposed corresponded to the damage caused, namely loss of revenue.
It is however to be noted that the fuel fee collected was trebled. This must in
the Court's view be seen as a punishment to deter re-offending, recognised

as a characteristic feature of criminal penalties (see Ezeh, §§ 102 and 105).
It may therefore be concluded that the fuel fee debit was imposed by a rule
whose purpose was not only compensatory but also deterrent and punitive.
The Court considers that this establishes the criminal nature of the offence.

conclude that there has accordingly been a violation of Article 4 of Protocol
No. 7 to the Convention.”
After Ruotsalainen, the ECtHR delivered several judgments

confirming the prohibition of consecutive proceedings and the
imposition of multiple penalties for the same tax offence.64 The
ECtHR delivered several judgments against Norway, Sweden and
64 Including Application no. 758/11, Hàkkà v. Finland, Application no. 11828/11, Nykànen
v. Finland, Application no. 35232/11, Pirttimaki v. Finland, Application no. 53197/13,
Òsterlund v. Finland, Application No. 53753/12, Kiiveri v. Finland, Application no.
37394/11 and Glantz v. Finland and Application no. 7362/10.
The matter was referred to the Grand Chamber in the Case of A and B v. Norway (Application
nos. 24130/11 and 29758/11.). The A and B v. Norway case failed because in the ECtHR’s
opinion the fact that the competent authorities had responded to applicants’ reprehensible
conduct both with an administrative penalty and criminal proceedings did not in itself meet
the ‘bis’ requirement. The ECtHR agreed with the Norwegian Supreme Court holding that
whilst different sanctions were imposed by two different authorities in different proceedings,
there was nevertheless a sufficiently close connection between them, both in substance and
in time, to consider them as forming part of an integral scheme of sanctions. Consequently,
the ECtHR held that applicants had not suffered any disproportionate prejudice or injustice
as a result of the impugned integrated legal treatment of their failure to declare income and
pay taxes. The ECtHR commented that it could not be said that either of the applicants was
‘tried or punished again ... for an offence for which he had already been finally ... convicted’
in breach of Article 4 of Protocol No. 7. Nonetheless, the highly controversial Norwegian
case did not signal the death knell of successful tax cases based on Article 4 of Protocol 7. A
successful case was registered in May 2017, in Johannesson and Other v. Iceland (Application
no. 22007/11). The competent authorities of the state signatory had responded to applicants’
under-declaration of income via parallel administrative and criminal proceedings. Integration
between the two sets of proceedings was absent. There was a limited overlap in time between
the two sets of proceedings. Consequently, the ECtHR found that there was a sufficiently
close connection in substance and in time between the tax proceedings and the criminal
proceedings in the case for them to be compatible with the bis criterion in Article 4 of
Protocol No. 7. The ECtHR held that the applicants had suffered disproportionate prejudice
as a result of having been tried and punished for the same or substantially the same conduct by
different authorities in two different proceedings which lacked the required connection. See
Robert Attard, 'The ECtHR’s Recent Tax Judgments on the Non Bis in Idem Rule' (2017) 26
EC Tax Review, Issue 6, pp. 335-338
Finland.65 In Malta, the 2014 judgment in Lucky Dev v. Sweden66

received advanced media publicity because it struck a chord
bringing to mind procedures close to home.67
The ITMA contemplates instances where the two penalties

are contemplated for the same offence; additional tax and penal
sanctions. In John Geranzi, our Courts had classified additional
tax as a ‘piena’ resulting in taxpayers being subjected to two
‘pieni’ for the same offence. A few years ago, in a group of cases
involving FSS and and VAT our Courts were asked to determine
whether provisions in the ITMA, ITA and the VAT Act violate
the double jeopardy rule contemplated in Article 4 of Protocol No.
7 ECtHR.68 The leading case on the matter is the case of Angelo
Zahra v. L-Onorevoli Prim Ministru, 1-Avukat Generali, Direttur
Generali Taxxi Nterni, il-Kummissarju tal-Pulizija delivered in
2015.69
65 Baker Philip, Some Recent Decisions of the European Court of Human Rights on Tax Matters
(and Related Decisions of the European Court ofJustice), European Taxation August 2016
pp.342-351.
67 Manduca, Anthony, Strasbourg’s VAT judgment against Sweden could impact Maltese tax
system (Times of Malta) December 7,2014.
68 ‘No one shall be liable to be tried or punished again in criminal proceedings under the
jurisdiction of the same State for an offence for which he has already been finally acquitted
or convicted in accordance with the law and penal procedure of that State.’ One of the
leading cases of the ECtHR on the matter is See Oliveira V Switzerland, 30 July 1998,
Case84/1997/868/1080. ’Different courts can pass sentences on separate offences resulting
from the same criminal act. The Court notes that the convictions in issue concerned an
accident caused by the applicant on 15 December 1990 ..That is a typical example of a single
act constituting various offences (concours idéal d'infractions). The characteristic feature of
this notion is that a single criminal act is split up into two separate offences, in this case the
failure to control the vehicle and the negligent causing of physical injury. In such cases, the
greater penalty will usually absorb the lesser one. There is nothing in that situation which
infringes Article 4 of Protocol No. 7 since that provision prohibits people being tried twice
for the same offence whereas in cases concerning a single act constituting various offences
(concours idéal d'infractions) one criminal act constitutes two separate offences. It would
admittedly have been more consistent with the principles governing the proper administration
of justice for sentence in respect of both offences, which resulted from the same criminal act,
to have been passed by the same court in a single set of proceedings.’
69 Appell Civili Numru. 33/2013/1 .of a company
The Zahra case was excruciating. The outcome of the case

should have been entirely predictable but convincing our Courts
that a tax collection system that had being consistently applied
for several years violated Article 4 of Protocol No. 7 ECtHR
turned out to be extremely difficult. Before winning his case at
the Constitutional Court, Zahra had to lose his case three times
with his main arguments being dismissed as being ‘frivolous and
vexatious’. Thankfully, the Constitutional Court fixed the problem
with a landmark judgment that resonates and which has been cited
in several judgments, non-tax judgments included.
Zahra was the sole director of a company that had breached

provisions contained in the FSS Rules. For his default, Zahra
was punished with a series of administrative penalties that were
clearly deterrent and punitive. After Zahra was punished with
‘administrative penalties’ contained in the FSS Rules, Zahra
was prosecuted criminally for the same wrongdoing previously
punished with the administrative penalties. Zahra’s criminal
prosecution came shortly after the judgment in John Geranzi and
I would have thought that his arguments relating to non bis in
idem should have been well received. Nonetheless, initially, Zahra’s
claims of double jeopardy fell on deaf ears and were rubbished as
‘unintelligible’ and nonsensical. Zahra was found guilty; his guilty
verdict was confirmed on appeal and he was seriously risking an
effective prison term. Zahra was saved by the Constitutional Court
just in time and in extremis.
The judgment of the Constitutional Court follows the Geranzi

principle. For the purposes of the Convention, administrative
penalties charged in terms of the ITMA are ‘criminal charges’.
Consequently, a criminal prosecution initiated for a fact that had
been previously punished with a ‘criminal charge’ violates the double
jeopardy rule. The fact that Zahra had not only been prosecuted
but actually punished twice for the same offence rendered the
violation of his fundamental human rights even more serious. The
Constitutional Court ordered restitutio in integrum erasing the

judgments of the Criminal Courts awarding compensation too. An
extract from the judgment follows:
“24. L-Artikolu 4 tas-Seba’ Protocoll tal-Konvenzjoni fil-parti relevanti jaqra

hekk:
“1. Hadd ma jista’ jkun ipprocessat jew jerga’ jigi kkastigat ghal darb’ohra
fi procedimenti kriminali taht il-gurisdizzjoni tal-istess Stat ghal xi reat
li dwaru jkun diga' gie finalment liberat jew misjub hati skond il-ligi u
1-procedura penali ta’ dak 1-Istat.”
25. Fir-rigward din il-Qorti tosserva li hemm certu kazijiet fejn il-multa
amministrattiva tant tkun severa li tikkwalifika bhala piena penali ghax tenut
kont tas-severità taghha titqies derivanti minn akkuza kriminali ghall-finijiet
tal-Artikolu 6 tal-Konvenzjoni tal-Artikolu 39 tal-Kostituzzjoni...
29. Fid-dawl tal-premess, fil-kaz odjern jirrizulta li, fiz-zmien meta ttiehdu
passi kriminali kontra r-rikorrent konkluzi bis-sejbien ta’ htija tar-reati li
bihom kien gie akkuzat u konsegwentement ikkundannat piena, kienu già
gew imposti fuqu multi “amministrattivi” ta’ entità tant severa li ghandhom
jitqiesu sanzjoni ta’ natura penali. Ghaldaqstant fid-dawl tal-fatti kif zvolgew,
il proceduri kriminali kontra tieghu huma vjolattivi tal-Artikoli 4 tal-
Protokoll 7.
Dan ghandu jwassal ghan-nullità tas-sentenza moghtija mill-Qorti tal-
Magistrati [Malta] fid-9 ta’ Marzu 2010 kif riformata mill-Qorti Kriminali
fil-31 ta’ Ottubru 2013...
31. Rigward ir-rimedju ghall-vjolazzjoni riskontrata, din il-Qorti apparti
milli tiddikjara nulla s-sentenza fuq indikata, hi tal-fehma li ghandha taghti
ammont bhala danni mhux pekunjarju ghall-ansjetà u frustrazzjoni li tali
vjolazzjoni kkagunat lir-rikorrent...”
The judgment in Zahra influenced the outcome of a number of

VAT cases because the issue of non bis in idem was particularly
relevant in the world of VAT. The principle of non bis in idem
articulated in Zahra led to a successful challenge of Article 83 (3)
of the VAT Act.70
70 Including Rikors Numru 24/10 JZM David Mifsud v. L-Onorevoli Prim Ministru, L-Avukat
Generali, Il-Kummissarju tat-Taxxa fuq il-Valur Mizjud, Il-Kummissarju tal-Pulizija when the
Constitutional Court held that:
“...fil-fehma ta’ din il-Qorti dak li huwa vjolattiv tal-principju tan-ne bis in idem mhumiex il-
proceduri kriminali wahedhom izda I-fatt li dawn il-proceduri kienu ttiehdu fl-istess zmien li
fih il-Kummissarju kien diga' impona fuq 1-attur multi amministrattivi sostanzjali ghall-istess
nuqqas li kien jifforma 1-mertu tal-proceduri kriminali.
Undoubtedly, the judgment in Zahra set a precedent and

should become relevant with respect to the non-inheritability of
criminal charges too. If we are saying that administrative penalties
are criminal charges than they should not be inheritable.
Another issue which, after the judgment in Zahra, is bound to

acquire relevance is a possible flaw which is presently enshrined in
our tax adjudication system. In cases over assessments, the right to
appeal to the Court of Appeal is limited to points of law.71 If we are
saying that additional tax is a criminal charge we must remember
that cases involving a criminal charge should be covered by the
right to ‘doppio esame, the right to appeal both on points of fact
and on points of law. Article 2 of Protocol 7 to the ECHR is clear
in this respect.72
78. F’dan 1-istadju huwa opportun li jigi ezaminat il-quantum ta’ dawn il-multi amministrattivi
imposti fuq 1-attur. Fir-risposta taghhom ghar-rikors tal-appell il-konvenuti jissenjalaw li
“1-late payment penalty tigi kkalkulata bir-rata ta’ 1% fix-xahar. Madankollu, il-proviso tal-
artikolu 28 [ 1 ] tal-Kap. 406 li ddahhal fl-1 ta’Jannar 200 jipprovdi li f’kull kaz il-late payment
penalty hija capped ghal 250”. Din il-Qorti tosserva fir-rigward li, ghalkemm huwa minnu li
permezz tal-Att II tas-sena 20041-Artikolu 38 [1] kien gie emendat inter alia bl-introduzzjoni
tal-proviso li ghaliha jirreferu 1-konvenuti, din il-bidla fil-ligi, li skont I-istess Att kellha tigi
fis-sehh fl-1 ta’Jannar 201031, ma rista’ tkun ta’ ebda konfort ghat-tezi tal-konvenuti, ghaliex
meta dahlet fis-sehh 1-imsemmija proviso s-sentenzi tal-Qorti tal-Magistrati kienu diga'
inghataw u 1-effett legali taghhom fuq 1-attur kien diga' vigenti.
79. Mill-provi jirrizulta li 1-multi amministrattivi li 1-attur kien qed jigi mitlub li jhallas mill-
Kummissarju kienu jammontaw ghal sommom sostanzjali ta’ flus ...
89. Id-duplicita' tal-proceduri kontra 1-attur li rrizultaw f ’impozizzjoni ta’ multi amministrattivi
u kundanni fi proceduri penali ittiehdu abbazi tai-Artikolu 83 [3] fuq citar.
90. Din il-Qorti tosserva li 1-ewwel Qorti kienet korretta fil-konkluzjoni taghha li 1-Artikolu 83 [3]
tal-Kap. 406, safejn jippermetti proceduri kriminali b’zieda mal-multi u penali amministrattivi,
huwa inkonsistenti mal-Artikolu 4 tas-7 Protokoll tal-Konvenzjoni, in kwantu dak is-subinciz
jipprospetta proprju sitwazzjoni bhal dik in dizamina fejn persuna, oltre 1-impozizzjoni ta’
multa amministrattiva ghan-nuqqas taghha tigi sottoposta ghal proceduri penali ulterjuri u
sentenzjat ghall-istess nuqqas.
Tordna li a kura tar-Registratur tal-Qrati u Tribunali Civili kopja ta’ din is-sentenza tintbaghat
lill-iSpeaker tal-Kamra tad-Deputati a tenur tal-Artikolu 242 tal-Kodici ta’ Organizzazzjoni u
Procedura Civili.”
71 Article 37 (2) ITMA.
72 “ARTICLE 2
Right of appeal in criminal matters
1. Everyone convicted of a criminal offence by a tribunal shall have the right to have his
conviction or sentence reviewed by a higher tribunal. The exercise of this right, including the
grounds on which it may be exercised, shall be governed by law.
4. Taxation and the Right to Privacy
Article 38 of the Constitution of Malta73 and Article 8 EC HR74

protect the right to privacy. It is submitted that a number of
articles in the ITMA and VATA create tensions with the Articles in
the ECHR providing for the right to privacy. Article 10A ITMA
and Article 77 VAT must be singled out. Article 77VATA does not
appear to respect the principle nemo tenetur se ipso accusare, entirely
overlooking the right not to incriminate oneself. Article 10AITMA
does not appear to contemplate the necessary safeguards providing
for effective judicial control.
Over the years,he ECtHR delivered a number of judgements

relating to the tax authorities’ right to information. Over the years,
the ECtHR has established an unwritten code of conduct on the
revenues’ right to information. The ECtHR has established that
investigation techniques must be:
(a) In accordance with law;

(b) Necessary in a democratic society;
2. This right may be subject to exceptions in regard to offences of a minor character, as prescribed
by law, or in cases in which the person concerned was tried in the first instance by the highest
tribunal or was convicted following an appeal against acquittal.”
73 'Except with his own consent or by way ofparental discipline, no person shall be subjected to the
search ofhis person or his property or the entry by others on his premises.
Nothing contained in or done under the authority ofany law shall be held to be inconsistent with
or in contravention ofthis article to the extent that the law in question makes provision -
(c) that authorises a department ofthe Government ofMalta, or a localgovernment authority,
or a body corporate established by lawfor a public purpose, to enter the premises ofany person in
order to inspect those premises or anything thereon for the purpose ofany tax, rate or due in order
to carry out work connected with any property or installation which is lawfully on those premises
and which belongs to that Government, that authority, or that body corporate, as the case may
be...’
74 '(1) Everyone has the right to respect for his private and family life, his home and his
correspondence.
(2) There shall be no interference by a public authority with the exercise ofthis right except such
as is in accordance with the law and is necessary in a democratic society in the interests ofnational
security, public safety or the economic well-being ofthe country, for the prevention ofdisorder or
crime, for the protection ofhealth or morals, orfor the protection of the rights andfreedoms of
others.’
(c) In the interests of the economic well-being of the country,

for the prevention of disorder or crime.
In Funke v. France75, France was found to have breached the right

to privacy by allowing searches that did not contemplate sufficient
safeguards. In Volokhy v. Ukraine76, the ECtHR held that, in the
course of criminal tax investigations, secret surveillance is tolerable
only in such surveillance is strictly necessary, in accordance with
the law, and in pursuit of a legitimate aim. Rules on surveillance
must be foreseeable and proportional. In Volokhy the ECtHR
found a breach of the right to privacy because the rules relating
to surveillance were unclear and did not incorporate adequate
safeguards against abuse. In André and others v. France77 the
ECtHR developed the principle a step further adding that searches
and seizures which are ‘in accordance with the law’ and ‘which
have a legitimate aim’ might still be irregular. An investigation is
compatible with the ECHR only if it is not disproportionate to the
aim pursued.78
The ECtHR’s judgement in Case of Bernh Larsen Holding as

and Others v. Norway79 decided on 14 March 20 1 380 was another
impoprtant case on taxation and the right to privacy.
Bernh Larsen Holding As rented a shared server. When Bernh

Larsen Holding AS was investigated for tax purposes, the tax
inspectors asked for access to the shared server. TWhilst accepting
to grant the tax inspectos access the information in the server
referring to it, Bernh Larsen Holding refused, to comply with the tax
75 Application No. 10828/84. The aspects of this and the two related decisions of Crémieux
and Miailhe relevant to Article 8 are discussed in part 7. Article 6 was only considered in the
Funke decision.
76 23543/02.
77 18603/03-24/10/2008.
78 COUNCIL OF EUROPE, Supervision of execution Implementation of judgments of the
European Court of Human Rights.
80 I am grateful to Philip Baker from bringing this case to my attention.
authorities’ further demand to supply a mirror copy of the (entire)

server . Bernh Larsen Holding AS, pointed out thatthat its rented
server incorporated data belonging to third parties arguing that
the tax authorites’ request breached Article 8 of the Convention.
The applicant companies disputed that the interference with their
right to property was “in accordance with the law”. They argued
that the order to provide a mirror copy of the server had exceeded
the wording of the relevant statutory provisions and that the law
in question failed to fulfil the quality requirements in the Court’s
case-law.. The company argued that there had not been effective
safeguards against abuse and that the interference could not be
considered strictly proportionate to the legitimate aims pursued.
Applicant Company noted that a significant proportion of the
seized backup tape had contained information that was irrelevant
for tax audit purposes and had included private material pertaining
to employees and other persons working for the applicant
companies. In the applicant’s opinion, the national courts had
underestimated the seriousness of the interference arising from the
risk of spreading and misuse of sensitive personal data.
The ECtHR found that there had not been a violation because:
“173. It should also be observed that the nature of the interference complained
ofwas not of the same seriousness and degree as is ordinarily the case of search
and seizure carried out under criminal law, the type of measures considered
by the Court in a number of previous cases (see, for instance, the following
cases cited above: Funke; Crémieux; Miailhe; Niemietz; Société Colas Est
and Others; Buck; Sallinen and Others; Wieser and Bicos Beteiligungen
GmbH; and also Robathin v. Austria, no. 30457/06,3July 2012). As pointed
out by the Supreme Court, the consequences of a tax subjects refusal to
cooperate were exclusively administrative (see in particular paragraph 43 and
also paragraphs 106 and 153 above). Moreover, the disputed measure had
in part been made necessary by the applicant companies’ own choice to opt
for “mixed archives” on a shared server, making the task of separation of user
areas and identification of documents more difficult for the tax authorities
(see paragraphs 46-47 above).
174. Having regard to the circumstances of the case as a whole, the Court
finds that the impugned section 4-10 (1) measure in the instant case was
supported by relevant and sufficient reasons. It also sees no reason to doubt
that the tax authorities of the respondent State, acting within their margin
of appreciation, struck a fair balance between the applicant companies’ right
to respect for “home” and “correspondence” and their interest in protecting
the privacy of persons working for them, on the one hand, and the public
interest in ensuring efficiency in the inspection of information provided by
the applicant companies for tax assessment purposes, on the other hand.
175. Accordingly, there has been no violation of Article 8 of the Convention
in the present case.”
I suspect that had the consequences of non-conformity with the

request for information been of a penal character and had applicants
included data subjects who were individuals the outcome of the
judgement would have been different.
Article 8 is being mentioned more and more often in the context

of exchange of information. The ECtHRs leading case on the
matter is the 2015 judgment in Othymia Investments BV against
the Netherlands. 81 In Othymia, the point at issue was whether
the transfer of information by the Dutch Tax Authorities to the
Spanish authorities in the course of a cross-border tax investigation
constituted a breach of Article 8. The ECtHR conceded that there
had been interference with the applicant company's rights under
Article 8 adding that per se an interference does not constitute a
violation. An interference constitutes a violation only if it is not
“in accordance with the law”, does not pursue one or more of the
“legitimate aims” and is not “necessary in a democratic society”.
The ECtHR left from the premise that exchanges of information

such as those complained of were provided for in Community law
implying that the interference in issue found an adequate statutory
basis and was therefore in accordance with the law. The ECtHR did
not doubt that the aim of ensuring that taxes are paid is a legitimate
one for the purposes because even though the taxes concerned were

due to a Third State (Spain), the economies of the European Union

Member States form a unified whole.
The ECthR concluded that a request for information under

Council Directive 77/799/EEC was part of an investigation and
did not require either the requesting State or the requested State
to inform the taxpayer.The ECtHR accepted that, in the context
of “the interests of national security” and “public safety” and
“the prevention of crime”, covert investigative techniques were
allowed; even against persons who are not themselves objects of
investigation or surveillance. The ECtHR held that the applicant
company had no “arguable claim” under Article 8 because it cannot
be a requirement of Article 8 of the Convention that prior notice
of lawful tax investigations or exchanges of tax-related information
be given to all persons potentially implicated.
A few weeks later the ECtHR delivered another important

judgment on this point, the Case of M.N. and Others v. San
Marino;82 a case involving an Italian criminal investigation
relating to money laundering, abuse of a position of influence in
financial trading, embezzlement, tax evasion and fraud. The Italian
police suspected that a certain Mr EMP organised, financed and
managed, directly or indirectly a network of companies situated
in various states (including Malta) which were all traceable to
one source namely, San Marino Investimenti S.A. The Italian
authorities ordered the seizure of documents relating to applicants,
despite them not being linked to any of the criminal activities in
that decision or them having ever had relations with the Italian
companies.
Applicants argued that there had been a violation of their right

to privacy because there had been an interference in their “private
life” and “correspondence” because, according to them, documents

relating to banking and trust relationships fell under the purview

of the article. The ECtHR agreed with applicant concluding that
information retrieved from banking documents ‘undoubtedly’
amounted to personal data concerning an individual, irrespective
of it being sensitive information or not. The same principle applied
to information relating to professional dealings.
The ECtHR held that Article 8 protects the confidentiality of

all the exchanges in which individuals may engage for the purposes
of communication. The ECtHR held that applicant M.N. had
suffered an interference with his right to respect for his private life
and correspondence. The Court considered that the interference
in the present case was prescribed by law which provided for an
exception to the right of banking secrecy precisely in the context of
measures taken by judicial authorities in criminal proceedings. The
ECtHR considered that the measure pursued various legitimate
aims, namely, the prevention of crime, the protection of the rights
and freedoms of others, and also the economic well-being of the
country. Nonetheless, it remained to be determined whether the
measure, as applied to the applicant, was necessary in a democratic
society and in particular whether it was accompanied by the
relevant procedural safeguards.
The ECtHR noted the wide extent of the Italian tax authorities’
powers, which also affected the applicant, an individual not
subject to the ongoing investigation in relation to which the letters
rogatory were made, and in respect of whom no clear suspicions
had been advanced
The ECtHR proceeded to assess whether an “effective control”

was available to the applicant to challenge the measure to which
he had been subjected. The Court noted that the applicant,
like other persons in his position, only became officially aware
of the authorities’ decision and its implementation following
a notification more than a year after the measure was ordered.
Subsequently, the applicant instituted proceedings challenging the

decision. These proceedings were not however examined on the
merits, the domestic courts having considered that the applicant
had no standing to impugn the measure as he was not an “interested
person”.
The ECtHR underlined that, in the circumstances of the case,

applicant, who was not an accused person in the original criminal
procedure, was at a significant disadvantage in the protection of
his rights compared to an interested person with the result that
the applicant did not enjoy the effective protection of national
law. Thus, the ECtHR found that, despite the wide extent of the
measure which had been applied extensively and across to all
banking and fiduciary institutes in San Marino, the applicant did
not have available to him the “effective control” to which citizens are
entitled under the rule of law and which would have been capable
of restricting the interference in question to what was “necessary in
a democratic society”. In view of the above, the ECtHR concluded
that there had been a violation of Article 8 of the Convention and
the Governments objection as to non-exhaustion of domestic
remedies was dismissed.
5. The Right to an Effective Remedy and the Right

to Freedom of Movement, the Case of Riener v.
Bulgaria83
There is a degree of overlap between EU law principles and the

ECHR. We tend to forget that besides of being a Treaty right, the
right to freedom of movement is a Conventional right too. The
leading case on the matter is the case Riener v. Bulgaria decided
before Bulgaria joined the EU.
83 ECtHR Application no. 46343/99 decided on 23 May 2006.

Mrs. Riener had dual nationality, Austrian and Bulgarian. She was
the director of Austrian Company which was registered as a trader
on the Bulgarian Trade Register. Mrs. Riener s company owed Bul
garian authorities l,000K in unpaid taxes. The Bulgarian Authori
ties banned Mrs. Riener from leaving the country until she settled
all her tax dues. Thus, Riener became a tax hostage of the Republic
of Bulgaria. She tried to contest the executive act relating to her
impediment of departure from Bulgaria in terms of Bulgarian do
mestic law but she lost her case at first and second instance.
Mrs. Riener argued that the Bulgarian Republic had violated Ar
ticle 2 and ECHR which provides that;
“Everyone lawfully within the territory of a State shall, within that territory,
have the right to liberty of movement and freedom to choose his residence”
as well as Article 13 ECHR which provides that;
“Everyone whose rights and freedoms as set forth in this Convention

are violated shall have an effective remedy before a national authority
notwithstanding that the violation has been committed by persons acting in
an official capacity.”
The ECtHR held by 6 votes to 1 that there had been a violation of

Mrs. Riener s right to freedom of movement. The automatic nature of the
Bulgarian travel ban and the exclusion of the possibility of reassessing and
effectively reopening the decision relating to the travel ban violated the
principle of proportionality. The ECtHR held that the law relating to travel
ban did not adequately provide for sufficient procedural safeguards against
arbitrariness. The ECtHR also held that that there had been a violation
of Mrs. Riener s right to effective redress because the domestic appeals
procedure did not grant appropriate relief. The domestic appeals procedure
did not contemplate the striking of a fair balance between the public interest
and the applicant s rights.
The decision in Riener can turn out to be quite useful to taxpayers

who have to come to terms with a final and conclusive decisions
which breach EU law. A person acting in an official capacity who
disregards the three fundamental principles would probably be

deemed to be in violation of overlapping rights guaranteed in
terms of the ECHR. Thus, even Article 13 ECHR may offer an
opportunity to reopen non-appealable acts.
6. Protection from Discrimination
The ECtHR enunciated, in a non-tax case84, that Article 14

ECHR does not have an independent existence. There cannot
be a violation of Article 14 ECHR, in isolation, Article 14 must
be considered together with another Article of the Convention.
In a tax context, the most common allegations of violations have
involved an allegation of discrimination combined with the right
to property.
The leading tax case on discrimination is Darby v. Sweden85 a case

which involved the right to a tax advantage. The facts of the case
seem to be those of an ECJ case rather than an ECtHR case. Dr Peter
Darby was a Finnish doctor of British origin who was considered
to be Finnish resident for Double Tax Treaty purpose but was not
formally registered as a Swedish permanent resident. Dr. Darby
complained of an amendment to Swedish law that had the effect of
divesting him qua non-resident from the right to claim a church tax
exemption. Dr. Darby claimed discrimination and, the ECtHR,86 to
the surprise of some, unanimously agreed with him,
“31. Article 14 (art. 14) protects individuals placed in similar situations

from discrimination in their enjoyment of their rights under the Convention
and its Protocols. However, a difference in the treatment of one of these
individuals will only be discriminatory if it "has no objective and reasonable
justification", that is if it does not pursue a "legitimate aim" and if there is
84 Cases relating to certain aspects of the laws on the use of languages in education in Belgium,
Judgment of 23 July 1968, Series A, No. 6.
85 Application 11581/1985.
86 In a rather telegraphic judgement.
no "reasonable relationship of proportionality between the means employed

and the aim sought to be realised" (see, amongst other authorities, the above-
mentioned Inze judgment, ibidem, p. 18, para. 41).
32. It appears first that Dr Darby can claim to have been, as regards his
right to an exemption under the Dissenters Tax Act, in a situation similar to
that of other non-members of the Church who were formally registered as
residents in Sweden.
33. As regards the aim of this difference in the treatment of residents and non
residents, it is worth noting the following. According to the Government
Bill (1951:175) which gave raise to the Dissenters Tax Act, the reason
why the right to exemption was reserved for persons formally registered as
residents was that the case for reduction could not be argued with the same
force in regard to persons who were not so registered as it could in regard to
those who were, and that the procedure would be more complicated if the
reduction was to apply to non-residents (see paragraph 22 above).
The Government Bill (1978/79:58) containing the tax- law amendments
that brought about this complaint did not mention the special situation
which the amendments would create for non-residents under the Dissenters
Tax Act (see paragraph 20 above). In fact, the Government stated at the
hearing before the Court that they did not argue that the distinction in
treatment had a legitimate aim.
34. In view of the above, the measure complained of cannot be seen as having
had any legitimate aim under the Convention. Accordingly, there has been
a violation of Article 14 of the Convention taken together with Article 1 of
Protocol No. 1 (art. 14+P1-1).”
The Darby case is one of the cases which evidences the strength of the
ECtHR as an instrument of effective redress.”
The ECtHR’s 2006 judgement in Burden and Burden v. the

United Kingdom87 is a leading case on discrimination but in the
tax world its value is quite limited. The Burden case involved a
challenge brought by two elderly spinster siblings who complained
of the severity of inheritance tax. The Burdens found out that
because the fair value of the family home was in the region of
£875,000, the surviving sibling would not be able to afford to
pay inheritance tax and would be forced to sell her home. The
Burdens felt discriminated against because in similar situations
to theirs, civil partners (same sex couples included) were exempt
87 Application no. 13378/05 12 December 2006.

from inheritance tax. The Burdens argued that British Inheritance

Tax created a disproportionate burden on them which was unfairly
discriminatory. The ECtHR denied their claim of discrimination
combined with the right to property. The ECtHR held that it is for
the national authorities to assess the aims and means of the taxes
they impose and that States enjoy wide margin of appreciation in
this field. The ECtHR noted that,
“...the national authorities are in principle better placed than the international
judge to appreciate what is in the public interest on social or economic
grounds. The Court will generally respect the legislature’s policy choice in
this field unless it is ‘manifestly without reasonable foundation”
In 2012, the ECtHR delivered a very important judgement on

discrimination in the case Association Les Témoins de Jéhovah
v. France88 involving the French branch of Jehovah witnesses
which was subject to a tax audit and investigated over donations
received. The Association refused to provide information relative
to tax exempt donations on the basis of a tax exemption which
applied to authorised religious congregations. The tax authorities
raised an assessment for EUR45 million against the Association.
The association claimed that the tax assessment amounted to an
interference with its right to freedom of religion protected by
Article 9 ECHR.
The ECtHR found that the tax assessment violated the

associations right to freedom of religion. It found that a tax
assessment is compatible with the ECHR if it is ‘prescribed by law’,
and the law in question is formulated with sufficient clarity to be
foreseeable. The provisions of domestic law which were used by
the tax authorities to tax the gifts to the association Les Témoins
de Jéhovah were not sufficiently foreseeable because they were too
vague and were not detailed enough.

The Maltese Courts delivered a number of judgements on

discriminatory taxation all of which have been dismissed. In the
Bianchi case,89 applicant argued that property transfers tax was
discriminatory because, unlike tax on capital gains, it did not
contain provisions on retrospective application. The case was
summarily dismissed.
The Constitutional Courts judgement in Woodline Limited

v. Kummissarju tat-Taxxa fuq il-Valur Mizjud90 was another
interesting case. Woodline Limited had persuaded the First-Tier
Court that the VAT department had exercised discriminatory
pressure against Woodline which, unlike other taxpayers, had been
subject to particularly unpleasant tax collection procedures and had
not been informed that an amnesty was in the pipeline. Woodline
Limited alleged that its right to legitimate expectations had been
infringed in a manner which was discriminatory.91 The First-tier
89 Enrietta Bianchi et vs L-Avukat Generali et Seduta tal-15 ta' Marzu, 2010 Rikors Numru.
12/2008. Extracts from the judgement follow:
‘Ir-rikorrenti sostnew li 1-element diskriminatorju huwa lampanti fil-fatt illi filwaqt illi meta
1-legislatur impona t-taxxa ta 35% 1-istess taxxa ghamilha back dated sal-1992, meta nizzel
1-istess rata ta’ taxxa ghal 12%, u allura kienet aktar favorevoli ghat-tax payer, ma mexiex bl-
istess mod u ma ghamilhiex tapplika back dated. Ziedu li bil-mod kif gew introdotti t-tibdiliet
flr-rata tat-taxxa tal-Capital Gains gew lezi d-drittijiet fundamental! taghhom fosthom id-dritt
fondamentali ta tgawdija ta proprjeta'. Izda din il-Qorti ma taqbilx ma’ dan ir-ragunar ghax
1-ewwel nett il-Gvern tal-gurnata ghandu d-dritt li jirregola kull tip ta’ taxxa, boll etc. Ghandu
d-dritt li jgholli u jbaxxi r-rati ta’ taxxi skond dak li fil-fehma tieghu huwa fl-interesstal-pajjiz.’
‘Din hi haga li grat ripetutament kemm f’Malta kif ukoll f’diversi pajjizi ohra fosthom dawk
membri tal-EU. Gvern certament ma ghandux dritt li jadopera mizuri fiskali li jolqtu persuna
wahda jew frit nies izda min-naha 1-ohra sakemm il-mizuri fiskali jkunu intizi b’mod generali
1-Qrati ma ghandhom ebda poter ta’ sindakabilita'. Hadd ma jiehu gost ihallas it-taxxi u
certament hemm taxxi li jolqtu aktar sezzjoni tal-poplu minn ohra izda dan xorta wahda jaqa
fil-mansjonijiet tal-Gvern.’
‘Issa dan ma jistax jitqies li hu applikabbli ghall-kaz odjern, sempliciment li f’ebda punt
ma rrizulta li 1-legislatur mexa b’mod diskriminatorju fil-konfront tar-rikorrenti. Irrizulta
li 1-legislatur ghamel ligi, izda li b’ebda mod ma kienet diskriminatorja fuq xi individwi
partikolari, inkluz ir-rikorrenti. Wìehed irid izomm f’mohhu dejjem li jkun hemm ligijiet li
jolqtu aktar kategorija minn ohra, bhal ma hu 1-kaz ta’ 1-income tax bracket, capital gains, land
tax, izda dan ma jwassalx ghall-konkluzjoni li jkun hemm diskriminazzjoni. Fil-kaz odjern
ir-rikorrenti ma rnexxielhomx jaslu ghall-prova li kien hemm xi diskriminazzjoni fil-konfront
taghhom..’
91 “Skond 1-imsemmija socjeta' dan 1-agir ta’ 1-intimat - cioè' li 1-ewwel jinsisti maghha li jithallas
Court had ordered the VAT Commissioner to include Woodline

Limited in the VAT amnesty scheme92 but the Constitutional
Court reversed the judgement on the basis that the First Court had
committed an error of fact,
“Din il-Qorti, ghalhekk, ma tistax hlief tikkonkludi li lkonkluzjonijiet

milhuqa mill-ewwel Qorti fis-sentenza taghha u senjatament li “...Woodline
Limited giet trattata b’mod differenti minn pagaturi ohra tat-taxxa in
kwistjoni...” li kien hemm da parti ta’ 1-appellant
“...trattament diskriminatorju fil-konfront ta’ Woodline Limited...” li "...
jirrizulta car li 1-imsemmija socjeta' giet trattata b’mod differenti minn
debituri ohra tal-VAT...”, li 1-Pulizija ittrattat ma’ Greta Bugeja b’mod li kien
hemm “...trattament [li] ma sarx ma’ numru kbir hafna ta’ debituri ohra
u hawn tirrizulta d-diskriminazzjoni”, li b’xi mod irrizulta li “...ma’ dawk
li ma jhallsux ma jintuzawx 1-istess mizuri” u li fil-konfront tas-socjeta'
appellata intuzat“...pressjoni diskriminatorja specjali fuqha aktar milli sar
fil-kwantita' kbira ta’ kazijiet ohra...” huma kollha konkluzjonijiet ibbazati
fuq apprezzament manifestament zbaljat tal-provi (u dan anke meta wiehed
jiehu in konsiderazzjoni dak li hemm fil-verbal tal-20 ta’ April 2004,supra).
Konsegwentement 1-ewwel aggravju ta’ 1-appellant hu fondat, u din il-Qorti
m’ghandhiex ghalfejn tidhol flaggravji 1-ohra.
Ghall-motivi premessi, tilqa’ 1-appell tal-Kummissarju tat-Taxxa fuq il-Valur
Mizjud, thassar u tirrevoka s-sentenza appellata”
dak li kien lilu dovut u wara japplika amnestija firrigward ta’ min ma kienx hallas - kien
jammonta ghallksur tad-drittijiet fondamentali taghha protetti bl-Artikolu 14 tal-Konvenzjoni
u 1-Artikolu 1 ta’ 1-Ewwel Protokoll ta’ listess Konvenzjoni, u li b’dan 1-agir “diskriminatorju
da parti ta’ 1-intimat” hija sofriet pregudizzju finanzjarju konsiderevoli “...ghaliex hija dahlet
f’diffikultajiet finanzjarji kbar...halli thallas dak li kien dovut minnha lill-intimat u dak li
1-intimat kien qed jinterpellaha halli thallas...” mentri min ma kienx ottempera ruhu mal-ligi
tal-VAT gawda millamnestija u ffranka eluf ta’ liri. Hija kompliet tilmenta firrikors promotorju
li peress li I-intimat ma kienx indenja ruhu jinfurmaha illi kienet ser tohrog amnestija, gie vjolat
ukoll il-principju jew dottrina ta’ “legitimate expectations” zviluppata mill-Qorti Ewropea, u dan
senjatament billi lintimat ha decizjoni wahda (li jitlob il-hlas ta’ dak kollu dovut) kontrastanti
ma’ 1-ohra (li jirriduci t-Taxxa Addizzjonali ghal 10%). “Kieku s-socjeta'rikorrenti,” ikompli
jinghad fir-rikors promotorju, “inghatat x’tifhem jew giet informata mill-intimat illi kienet se
tinghata amnestija lil dawk li jonqsu milli jottemperaw ruhhom, bir-rispett kollu s-socjeta'
rikorrenti kienet taghmel bhal hafna ohrajn u ma thallasx halli mbaghad tgawdi mill-amnestija.”
Premess dan kollu, is-socjeta' Woodline Limited talbet li 1-Prim Awla:”
92 An extract from the Court’s judgement follows:
“Tordna li s-socjeta' kummercjali rikorrenti tigi inkluza mill-intimat fl-Iskema tat-Tnaqqis
tat-Taxxa Addizzjonali li thabbret fil-Budget tas-sena 2002 u wkoll tordna lill-istess intimat
illi jhallas u jirrifondi lura lis-socjeta' kummercjali rikorrenti dik is-somma li tirrapresenta
d-differenza bejn dak li effettivament hija hallset bhala penali u imghax ghall-VAT 1995 u dak
li setghet gawdiet mill-Iskema hawn fuq imsemmija”
Interestingly, in 2015 the Constitutional Court delivered a case

involving an allegation of tax discrimination in the case Castle
Hill Limited (C 14270) v. L-Onorevoli Prim Ministra93. Castle
Hill Limited unsuccessfully alleged discriminatory VAT treatment
related to the application of the reduced rate of VAT, The case
failed on the merits.
7. A Note on Constitutional Procedure in Taxation

Disputes
For over forty years, the absolute majority of tax cases were argued
on points of fact; spreadsheets, margins and numbers but, in the past
ten years, the use of human rights as a tool of taxpayer protection
has gained traction and I would say that nowadays issues relating to
basic taxpayer protection have taken the central stage.
Recent judgements have answered a number of important

practical questions relating to the enforcement of human rights
in tax litigation. The main questions which have arisen are the
following: Against whom should a case been filed? When should a
constitutional case be filed? What are the remedies which should
be requested? Should a person use the reference mechanism or is
the application mechanism preferable? Article 18IB of the Code
of Organisation and Civil Procedures leaves too many unanswered
questions which is a pity because arguments over non-suited
defendants tend to waste years in court time.
7.1 The Legitimate Defendant
Who is the legitimate defendant in a tax/human right dispute ? The

usual suspects are the Prime Minister, the Attorney General, the
Commissioner for Revenue, the Director General, Income Tax,

the Minister of Finance, the Registrar of Courts and the Board of

Special Commissioners. When I quote the full title ( okkju’) of a
judgement I do so purposely.
Article 18 IB of the Code of Organisation and Civil Procedure

contains some guidelines,
“181B. (1) The judicial representation of the Government in judicial acts

and actions shall vest in the head of the government department in whose
charge the matter in dispute falls:
Provided that, without prejudice to the provisions of this article:
(a) actions for the collection of amounts due to Government may in all
cases be instituted by the Accountant General;
(b) actions involving questions relating to Government employment
or to obligations to serve Government may in all cases be instituted by the
Principal Permanent Secretary;
(c) actions relating to contracts of supplies or of works with Government
may in all cases be instituted by the Director of Contracts.
(2) The Attorney General shall represent Government in all judicial acts and
actions which owing to the nature of the claim may not be directed against
one or more heads of other government departments.”
Should a constitutional case involving taxation be filed against

the Prime Minister? Chief Justice Emeritus Mifsud Bonnici had
taken the view that the defendant in a constitutional case which
involves the legitimacy of a law should always be Priminister
as head of the Government.94 Mifsud Bonnici is of the opinion
that the Attorney General should also be always called in as a
defendant because the Code of Organisation and Civil Procedure
mentions the office in connection with notification requirements.95
94 Mifsud Bonnici, G, Constitutional Procedure & Practice (Malta 2005) p. 15.
95 Article 18 IB of the Code of Organisation and Civil Procedure provides that:
“(3) Every application, whether sworn or not, or other judicial act filed against Government shall
be served upon each head of a government department against whom it is directed and upon
the Attorney General and every time limit for the filing of any reply to any such act by any
head of a government department being a defendant or a respondent in judicial proceedings
shall not commence to run before the act is served upon the head or heads of the government
departments against whom it is directed and upon the Attorney General. The registrar shall
not charge any fees for effecting the service on the Attorney General.”
Unfortunately, judgements on the matter tend to be slightly

contradictory.
In February 2012, in the case of David Mifsud (ID63370M)

kontra L-Onorevoli Prim Ministru et96 the Court held that the
Prime Minister is a legitimate defendant,
“Il-Qrati ma jidhirx li stharrgu dan il-punt espressamene, ghalkemm jidher li

alludew ghalih obiter. Il-mistoqsija li tqum hijajekkl-artikolu 181B(2) jistax
jitqies li jimla dan ilvojt ukoll....
Illi fi studju analitiku li sar dwar il-procedura “kostituzzjonali”, b’riferenza
ghall-portata tal-artikolu 18 IB, inkiteb li “It is difficult to think of any claim
which cannot be directed against a department and it in fact appears that
this amendment was inspired by the question of the representation of the
Courts, or specifically Judges and Magistrates and those who somehow or
other are given the faculty of judging. No other ‘prohibition’ of this type
seems to exist. In any case, the Prime Minister is always a legitimate defendant
in actions against the government” (ara - Mifsud Bonnici - Constitutional
Procedure relative to Fundamental Rights and Freedoms - 2004 - pag.64).
Din it-tifsira turi li, f certi kazijiet, ilment ta’ ksur ta’ jedd fondamentali
jista’ jkun indirizzat lejn persuna li la hija kap ta dipartiment governattiv u
lanqas kontra 1- Avukat Generali bhala rapprezentant tal-Gvern, imma lejn
esponenti iehor tal-Gvern...
Illi, madankollu, bis-sahha tad-dispozizzjonijiet tal-Att IX tal-2006, li dahal
fis-sehh fis-7 ta Lulju, 2006, iddahlet dispozizzjoni gdida fil-Kodici tal-
Procedura [LArt.242(2)J, li bihahuwal-Prim Ministru direttament li jinghata
s-setgha u 1-fakulta’ li jagixxi f’kaz fejn xi ligi tkun instabet li tikser xi jedd
fundamentali ta’ persuna kif imhares fil-Kostituzzjoni jew fil-Konvenzjoni.
B’ din iddispozizzjoni gdida, jidher li saret kjarifika li fi kwestjonijiet li jolqtu
s-siwi “kostituzzjonali” ta’ xi ligi fis-sehh huwa 1-Prim Ministru 1-persuna
legittima biex tindirizza r-rimedju mehtieg ... F’dan ir-rigward, 1-intimat
Onorevoli Prim Ministru jkollu locus standi fil-kawza, imqar b’riferenza
ghal dik it-talba. Dan qieghed jinghad biss b’riferenza ghal dak li jidher mad-
daqqa t’ghajn f’dik ittalba u lil hinn minn kull kunsiderazzjoni dwar is-siwi
taghha jew konsiderazzjonijiet fil-mertu dwarha, li ghadu bikri wisq biex
isiru f’dan il-waqt ;”
Nevertheless, in November 2012 in the case of John Geranzi

96 RikorsNumru. 24/2010.
Limited, the Constitutional Court reached a different conclusion.

It held that the Prime Minister was non-suited confirming the
conclusion reached by the first court,
“L-intimati Kummissarju tat-Taxxi Interni u Onor. Prim’Ministru eċċipew

preliminarjament li 1-imsemmi intimat Onor. Prim’Ministru mhux il-leġittimu
kontradittur f’din 1-azzjoni. Din 1-ecċezzjoni għandha tiġi akkolta stante”
Should a constitutional case involving taxation be filed against

the Attorney General? The Constitutional Court has taken the
view that the Attorney General must be sued whenever there is an
allegation relating to an act committed by an entity which does not
answer to the tax authorities,
“28. L-Avukat Generali, iżda, kellu jkun parti fil-kawża għar-raġuni mogħtija
mill-ewwel qorti stess: illi 1-Bord huwa indipendenti mill-Kummissarju,
li gbalhekk ma jweġibx għall-għemil tal-Bord. Il-Kummissarju għalhekk,
għalkemm il-kap tad-dipartiment interessar, ma jistax jidher għall-gvern biex
iwieġeb għall-għemil tal-Bord: dan jista’ jagħmlu biss, taħt 1-art. 181B (2) tal-
Kodiċi ta’ Organizzazzjoni u Procedura Civili, 1-Avukat Generali.
29. L-aggravju għalhekk sejjer jiġi miċħud fejn jolqot ilħelsien tal-Prim’
Ministru mill-ħarsien tal-ġudizzju, iżda sejjer jintlaqa’ fejn jolqot 1-Avukat
Generali, to the validity of a law “
In the Carter judgement the same court which delivered the

judgement in Mifsud held that in a case involving the invalidity of
a law, the Attorney General is the legitimate defendant.
Should a Constitutional Case involving Income Tax be

instituted against the Commissioner for Revenue? Act XXII
of 2011, the Commissioner for Revenue Act, 201197 created a
new office. The Commissioner for Revenue is the head of all the
revenue departments. The Commissioner should be considered to
be a legitimate defendant but even his delegate Director General,
income Tax is a legitimate defendant.
97 The Minister of Finance, the Economy and Investment established the 20th January, 2012, as
the date when all the provisions of the said Act shall come into force
Chapter 4
Taxable Receipts
I. The Concept of Chargeable Income
The ITA does not charge to tax all gains and profits but only certain
gains and profits. Taxable persons are taxable on their chargeable
income. The term chargeable income’ is defined in Article 2 (1)
ITA as a persons ‘total income’ a term which is, in its own turn,
defined as meaning, in broad terms all income and certain capital
gains.1 Therefore, the ITA charges to tax:
(i) in principle, all income;

(ii) certain capital gains;12 and
(iii) transfers of immovable property situated in Malta.
The ITA contains 3 ‘taxing’ pillars and these are Article 4, 5 and
5A ITA. Article 4 charges to tax income and Article 5 charges to
tax certain capital gains. Article 5A ITA creates a sales tax on the
transfer of immovable property situated in Malta.
The tax is one and the same but the process required to determine
the income which is chargeable to tax is different from the exercise
which leads to the determination of taxable capital gains. Drawing
the distinction is important for the following purposes:
1 Left after taking exemptions and deductions into consideration and computed by reference to
special computational provisions.
2 Capital gains derived from the transfer of taxable assets. Since 2008, the list of chargeable
assets has been extended.
(i) Determining Tax Liability: Whereas all gains of an income

nature (saving exemptions) are taxable only the capital gains
derived from the transfers listed in Article 5(l)(a)(i) and
(ii) ITA are taxable;
(ii) Computational Purposes: The exercise which leads to the

determination of gains or profits which are taxable for in
come tax purposes is different from the exercise leading to
the determination of taxable capital gains;
(iii) Exemptions and Deductions: Certain exemptions and de

ductions apply exclusively to capital gains;
(iv) The tax treatment of losses of a revenue nature is different to

that applicable to capital losses;
(v) Jurisdictional Rules: Different jurisdictional rules (basis

of taxation) apply to gains of an income nature and capital
gains. Whereas income arising abroad to a person who is
domiciled in Malta but not ordinarily resident in Malta, (or
vice versa) is taxable in Malta if received in Malta, capital
gains arising abroad to persons who are domiciled in Malta
but not ordinarily resident (or vice versa) in Malta are not
taxable in Malta at all (irrespective of remittance)
2. Capital, Income A Capital Gains
Given that Malta does not tax capital, taxes all income but taxes
only certain capital gains distinguishing receipts of a capital nature
from receipts of an income nature is key. Lines of demarcation
between the two forms of receipts have been drawn in case law.
Commonwealth case law on the subject is extremely vast.
Case law has established that the hallmark of capital is its element
of permanence - capital is static but income is recurring and has a
Taxable Receipts 109
circulating nature. Capital generates income. Our Courts3 have

referred to Silke4 on the subject:
“In ordinary cases the determination of whether a receipt or an accrual is of

an income or a capital nature creates no problem. Thus, amounts received
for allowing the use of an asset to some other person e.g. interest, rents,
royalties, all partake of the nature of income and fall within the definition of
gross income. It is true that there is no definite test that can always be applied
to determine whether a gain or profit is income or, not, but it may safely be
asserted that the revenue or profit which is derived from a thing without
changing owners is rather to be considered as income than capital”.
The profit on disposal of a revenue generating source of

capital gives rise to a capital gain but payments derived from the
exploitation of capital are of a revenue (income) nature. Our
Courts and text books have consistently referred to British case
law on the doctrine of badges of trade on the matter. Repeating
such references in these notes would be unnecessary.5 On the other
hand, a detailed analysis of Maltese case law is needed.
2.1 Capital and Income, the Words of the

Maltese Courts
Over the years, Maltese tax courts have delivered numerous

pronouncements relating to the distinction which must be drawn
between capital and income and have used badges of trade to
distinguish between gains of an income nature and gains of a
capital gains nature.
Badges of trade are a British tool which was consolidated in The

Report of the Royal Commission on the Taxation of Profits and
Income published by the British Revenue in 19546 and developed
3 Case 111 Court of Appeal.
4 Silke on South African income Tax 5th Edition para. 31.
5 For a synopsis of British case law on the subject see Attard, Robert, An Introduction to
Income Tax Theory (Agenda 2005) pp. 74-104.
6 No single test, on its own, is conclusive for the purposes of identifying a trade. Vide
to distinguish between gains of an income nature and gains of a

capital nature. The doctrine of badges of trade creates a number of
rebuttable presumptions relating to the existence or otherwise of
a trade. The conclusion that an adventure in the nature of a trade
is in existence indicates that the yield from such an activity is of a
revenue (income) nature and not of a capital gains nature. Badges
of trade must be analysed holistically on a case by case basis bearing
in mind that one swallow does not make spring’.* 7
The BSC delivered one of its best decisions on badges of

trade in Case No. 23/02 decided on 19 February, 2002. In BSC
23/02 the Board used several badges of trade to determine that
the company’s transactions in immovable property amounted to
adventures in the nature of trade and that income derived from the
transactions was of an income nature. The Board applied several
badges of trade (interval of time between purchase and re-sale,
supplementary work to the properties (by dividing the property
into plots), organisation of the business (use of a well-known and
experienced estate agent) in this case. The said badges of trade
will be discussed, one by one, below. The Board attributed an
element of importance to the manner an asset is recorded in the
company’s accounting records. The classification of an asset as
trading stock clearly indicates that profits derived from the sale of
an asset are of a trading nature.
BSC 46/58, 5/91, 7/94 and ART 138/11 VG -

Supplementary Work
BSC5/91 is one of the most relevant decisions of the Board of
Special Commissioners on the badge of trade, supplementary
work8. The Board held that although appellant had acquired an
Nightingale Kath, Taxation Theory and Practice (England 2002) pp.74-76.

7 Attard, Robert ibid pp. 74-90.
8 Even this case dealt with the sale of immovable property prior to the introduction of tax on
capital gains.
asset by way of inheritance the profit derived from the disposal of

the asset was of an income nature because the appellant had divided
the asset and sold it piecemeal.
The Board delivered a similar decision two years later9 in

BSC7/94, a case which involved the disposal of a hotel, an asset
which falls to be considered as an Industrial Building or structure
under Article 2 ITA. The Board concluded that the circumstances
surrounding the sale indicated that the transaction under review
was a trading transaction because significant improvements had
been made to the asset prior to disposal. In the boards opinion
it was clear that the hotel had been acquired for re-sale and that
the improvements made on the hotel premises were intended to
increase the saleability of the hotel. The board held that gains
derived from the transfer of the hotel were of an income nature.
In Case 138/2011 VG, the ART delivered a judgement on

this badge of trade which points out that the badge of trade -
supplementary work should not be taken in isolation and its
importance should not be over emphasized. The facts of Case
138/2011 VG were quite bizarre and influenced the ART’s
conclusion. The Criminal Courts had found taxpayer guilty of
murdering his wife in the matrimonial home. While in prison,
taxpayer entered into a relationship with a police constable who
worked in prison and, after he served his full-prison sentence,
married her. For obvious reasons, he did not want to live with
his new wife in the old matrimonial home and decided to sell it
but he could not find a buyer because prospective buyers were
not too keen on living in a house which was the scene of a gory
murder. Taxpayer decided to convert the property and carried out
supplementary work by demolishing the house down and building
flats on the site previously occupied by the matrimonial home. He
reported the relevant sales as Article 5 ITA (capital gains) sales. The
9 10 October, 1994.
Revenue contended that the transaction was a trading transaction

and should have been reported as such. The Revenue classified the
transaction as a trading transaction because of the presence of the
badge of trade supplementary work
Taxpayer contested the assessment on the basis that the

assessments which had been raised were based on an error of law.
The Revenue was under the wrong impression that the sale of
the property was an adventure in the nature of trade. Taxpayer
contended that he had disposed of a capital asset.
The ART described the transfer as a transaction wherein

taxpayer was ridding himself of a property with which he felt that
he had to disengage himself. In the ART’s opinion, the sale was
clearly not a trading transaction. The Revenue had given too much
weight to the fact that taxpayer had rebuilt the property. The facts
of the case were very peculiar indicating that the transfer involved a
disposal of a capital asset.
““Fil-fehma tat-Tribunal il-konkluzjoni raggunta mill-Kummissarju tat-

Taxxi Interni, ilium Direttur Generali (Taxxi Interni), dwar in-natura tal-
qligh li ghamel ir- Rikorrent mit-trasferiment tal-proprjetà fl-2001 ma hijiex
korretta u dana billi huwa bbaza tali konkluzjoni fuq fattur wiehed biss - u
cioè li r-Rikorrent ittrasferixxa blokk ta’ sitt appartamenti u zewg garaxxijiet
u mhux id-dar residenzjali fl-istat attwali taghha - minghajr ma ha in
konsiderazzjoni 1-fatturi 1-ohra kollha li jikkaretterizzaw il-kaz in ezami. Ad
ezempju il-Kummissarju ma hax in konsiderazzjoni, jew ghall-inqas ma tax
id-debita importanza lir-raguni ghalfejn ir-Rikorrent ried ibiegh 1-ewwel dar
residenzjali tieghu, raguni din li tirrizulta bhala veritiera. Lanqas ma ha in
konsiderazzjoni jew, mill-gdid, ma tax id-debita importanza lill-istigma li fic-
cirkostanzi dik id-dar kienet iggorr maghha, liema stigma bla dubju holoq
problem mhux zghar lir-Rikorrent fil-bejgh ta’ dik id-dar u finalment wasslu
biex jiehu d-decizjoni li jwaqqa’ d-dar u minflok jibni blokk ta appartamenti
u zewg garages biex ikollu opportunità ahjar li jirnexxielu jbiegh il-proprjetà.
Iktar importanti minn hekk il-Kummissarju tat-Taxxi Interni ma hax in
konsiderazzjoni il-fatt li - kuntrarjament ghal dak li wiehed jippretendi fil-
bejgh ta’ appartamenti u garaxxijiet ghal skopijiet ta negozju - r-Rikorrent
biegh il-proprjetà flintier taghha lil kompratur wiehed (proprjament zewg
kompraturi fi shab bejniethom) ghall-prezz uniku ta’ Lm80,000, liema fatt

iwassal ghall-konsiderazzjoni ulterjuri li r-Rikorrent kien kuntent jaghmel
telf fuq dan ittrasferiment - peress illi skontu 1-prezz fuq is-suq ghallproprjetà
in kwistjoni kien prattikament id-doppju ta’ dak li ghalih ittrasferixxa
1-proprjetà kollha - basta li jehlesminnha.
Fil-fehma tat-Tribunal dawn ic-cirkostanzi kollha flimkien kellhom iwasslu
lill-Kummissarju tat-Taxxi Interni, ilium
Direttur Generali (Taxxi Interni), ghall-konkluzjoni li kif dikjarat mir-
Rikorrent fil-Prospett ta’ Taxxa tieghu ghassena
ta stima 2002, il-qligh li huwa ghamel mittrasferiment tal-proprjetà fl-2001
kien wiehed ta’ natura kapitali u mhux ta’ natura kummercjali.”
The ART referred to another badge of trade, that of incidence of

transactions, remarking that in the present case the transaction was an
isolated one,
“Din 1-osservazzjoni tat-Tribunal issib konferma f’diversi sentenzi

pronuncjati mill-Bord ta’ Kummissarji Specjali, fosthom is-sentenza A.B.
v. Kummissarju tat-Taxxi Interni deciza fis-17 ta’ Jannar 195926, fejn gie
osservat illi d-dottrina u 1-gurisprudenza Ingliza hija cara ferm fuq
dan il-punt. Il-profitt minn xi operazzjoni izolata ma jikkostitwix income
imma akkrexximent ta’ kapital, purché dejjem ma tkunx parti mit-trade u ma
tkunx saret ghall-fini ta’ rivendita bi profitt. L-awturi Hannan & Farnsworth
(The Principles of Income Taxation) pagna 14 huma ta’
kjarezza kristallina fuq dan il-punt: “What may be described as income from
a subjective standpoint is conerned with special circumstances in which it
is derived. It is sufficient to take as an example, the sale of a house at a price
greater than its cost to the vendor. There is no
ordinary concept that this financial gain is income, and generally such a
profit is an accretion to the capital. But if the vendor has made a practice of
buying and selling houses the net gains from such transactions may well be
regarded as income”. U aktar ‘il quddiem a fol. 154 dwar lintenzjoni 1-istess
awturi jghidu: “A person buys a house in a district where values are rising, or
company shares which are likely to advance in price, or a racehorse which he
expects to become more valuable. If he sells at a profit, the mere fact that he
hoped and intended to make it will not transform his acts into the carrying
on of a business nor will that fact alone put the brand of income on his profit.
There is no authority to say that a profit is not an enhancement of capital
unless it is fortuitous”. Iddecizjoniklassika in materja hija “Leeming vs. Jones”
1930. A.C. 415. 15 T.C. 333. fejn inghad an accretion to capital does not
become income merely because the original capital was invested in the hope
and expectation that it would rise in value; if it does so rise, this realisation
does not make it income, u s-sentenza fl-ismijiet A.B. Ltd.
v. Kummissarju tat-Taxxi Interni, deciza mill-Bord ta’Kummissarji Specjali
fil-U ta’ Awwissu 1980 u kkonfermata mill-Qorti ta’ 1-Appell (Appelli
dwar 1-Income Tax) b’sentenza pronuncjata fil-21 ta’Jannar 1991, fejn dwar
il-kaz in ezami 1-Bord osserva li 1-fatti tal-kaz, hawn fuq imsemmija, ma
ghandhomx il-karatteristici ta’ “trade”; fis-sens li 1-appellanti bdiet tbigh il-
proprjetà li kellha mhux biex tibda linja ta’ negozju gdida, izda biex thallas id-
dejn li kellha. Hawn jidher li kien hemm biss dak li jissejjah “a transmutation
of capital” almenu sa’ fejn ghandha x’taqsam il-proprjetà akkwistata animo
compensandi. Infatti, kif intqal fil-kaz Hudon’s Bay Co. v. Stevens (5
T.C.424): “Where property has not been acquired by
purchase, sales are more likely to constitute realizations of capital” u fil-kaz
William v. Davis (26 T.C. 371): “and merely realizing it is not trading”.
Anki, jekk ghall-grazzja ta’ 1-argument 1-appellanti rrangat il-proprjetà
jew hadet mizuri biex iggib prezz ahjar, kif donnu gie ventilat millappellat
waqt it-trattazzjonijiet tal-kaz, xorta jibqa’ li dawn il-mizuri ma jelevawx it-
transazzjonijiet ghal trading. Infatti, kif insibu fit-“Taxation, Income Tax
Manual” (A.L.Chapman, 14th Ed. p.66): “in accepting that there was no
trade of buying and selling land, it was stated that the
case (b’referenza ghall-Hudson’s case) was no different in substance from the
case of landowner minded to sell, or sell from time to time, inherited land for
building purposes at a profit; it was equivalent, it was said, in dealing withland
as owner. The fact that a landowner lays out part of his estate with roads and
sewers for sale in building lots does not constitute a trade, nor the fact that
he may have expended money in getting the property up for sale. Rowlatt J.
applied the same principle in Rand v. Alberni Land Co (7 T.C. 629), where
lands were owned in the ordinary sense (and not acquired with a view to sale)
by a number of people who set up a company purely as machinery to realise
their their interests in the land. The company expended money in clearing
the land and laying roads and even in procuring a railway company to bring
the line to open up the area. It was held that this was only a course of
enhancing the value of the lands and not of trading. In Alabama Coal, Iron,
Land and Colonization Co. Ltd. v. Mylam (11 T.C. 232) the decision as to
the company was the other way; but that was because there
was an element of buying for sale”. Ghalhekk, anki fuq liskorta ta’
dawn id-decizjonijiet, il-profitti ta’ 1-appellanti mill-bejgh tal-proprjetà
originarjament akkwistata animo compensandi m’humiex derivanti minn
“trade, business,profession or vocation”, imma huma ta’ natura kapitali u
kwindi ma jaqghux taht id-disposizzjonijiet ta’ 1-artikolu 5(l)(a) ta’ 1-Income
Tax Act 1948.”
The ART decided in favour of taxpayer,
“Fid-dawl ta dawn il-principji ghalhekk jigi ribadit li 1-fatt li r- Rikorrent

waqqa’ d-dar residenzjali tieghu u minflok bena blokk ta sitt appartamenti
u zewg garaxxijiet bl-iskop li ficcirkostanzi partikolari ta’ dan il-kaz ikollu
opportunità ahjar ibiegh dik il-proprjetà, ma jwassalx biex il-qligh li huwa
ghamel minn tali trasferiment jigi ikkunsidrat bhala qligh kummercjali u
mhux qligh kapitali.
Ghaldaqstant, fid-dawl ta dak kollu osservat jirrizulta li 1-apell tar-Rikorrent
mill-istima mahruga kontra tieghu mill-Kummissarju tat-Taxxi Interni
[ilium Direttur Generali (Taxxi Interni)] ghas-sena ta stima 2002 huwa
gustifikat u jisthoqq li jigi milqugh.”
BSC I/97 - Incidence of Transactions

BSC1/971011 involved another important badge of trade, incidence
of transactions. The frequency of a person s dealings in a particular
commodity is indicative of whether such person is engaged in a
business activity. In BSC 1/97, the Board found that an intensive
amount of transactions evidenced that the appellant habitually
acquired and re-sold properties. Consequently, the Board
confirmed that appellant s profits were taxable as trading profits.
The Board said that intention at time of purchase was not the sole
criterion to determine the existence of trade and referred to other
badges of trade11.
BSC5/200012 drew heavily from the principles enunciated in

BSC 1/97 when the Board analysed the numerous public contracts
relating to immovable property transfers which the taxpayer had
entered into. In BSC5/2000, the Board concluded that taxpayer
was not only a Government employee (as he claimed to be) but
that his property deals were so numerous and complex that he
was, for tax purposes, a person who traded in immovable property.
The Board concluded that taxpayer was assessable as a trader and
10 By the Board on September 7, 2001.

11 The fact that appellant had ‘stocked up’ properties - Quantity of goods, financing -
circumstances.
12 Decided on October 15,2001.
that profits from his property deals were taxable under Article
4 ITA and not Article 5 ITA.13 In BSC11/2000 the Board held
that gains derived from the transfer of a property were of a capital
nature because the transaction under review involved the sale of a
property by a property leasing company. The Board agreed with
appellant that the property transferred represented a fixed asset
and not a circulating asset. The Board held that the fact that the
appellant company’s objects incorporated a power to speculate in
real estate was immaterial, because the transfer of the property had
actually been forced on the company by the adverse state of the
market. The Board held that the gains derived from the transfer of
the property were clearly of a capital nature.
A decision on the same lines was delivered in BSC 28/03 when

incidence of transactions determined the nature of a sale. An
extract from the Revenue s Official synopsis follows:
“A series of transactions involving the sale of shares deemed to constitute

trading under article 4(1) (a) and not merely the realization of appellant's
capital - article 4(1)(a), ITA
The point at issue in this appeal was whether a series of sales of shares made
within a period of five years by appellant constituted trading under article
4(l)(a) or merely the realization of appellant's capital.
Appellant had purchased 2,000 shares from his father at the price of
Lm 14,000, for which he had to borrow a corresponding amount from his
father. Any dividends received therefrom were to be utilised to pay back
the Lm 14,000 loan. Subsequently appellant sold various blocks of shares,
including those purchased from his father, each time registering a profit.
The Board held that the transactions did not constitute merely an operation
by appellant to retrieve his capital. This had been a series of transactions from
which a profit of Lm22,288 had been derived and which, after all, had not
been utilised to repay the loan.”
13 The fact that appellant was in partnership indicated a trade in view of the badge of trade,
organisation of the business.
BSC 5/60 - Nature of the Goods

BSC5/60 confirmed principles established in the famous British
case on badges of trade, Rutledge^. The Board held that a sale
made by a company with a view to profit was taxable even though
it had been derived from an isolated transaction. The latter
concept is envisaged in Article 4 ITA. Yet, the loss in value of the
company’s stockholding was not allowed as a deduction because
the circumstances surrounding the acquisition of the shares, which
were subsequently resold, suggested that the stocks were purchased
15. The nature of the goods tends to indicate
for investment purposes14
whether goods were acquired by way of stock in trade or capital
investment. Items which either give rise to pride in possession or
intrinsic investment value tend to be give rise to capital gains when
disposed of and not income.
BSC 28/65 - Profit Seeking Motive

Badges of Trade were on the agenda of the Board once more in
BSC28/6516 when the Board held that that a sum received on the
granting ofland by title of sub-emphyteusis was taxable as it referred
to an adventure in the nature of trade. The Board based its decision
on the testimony of the appellant. The appellant had admitted that
he had acquired the title in question with the intention of reselling
it and amass a sum of money to enable him to build a house ‘for
free’17.
The Board of Special Commissioners delivered another

judgement on this badge of trade in BSC29/7718 dealing with
profits derived from the sale of assets19. Some of the assets were
acquired animo compensando to pay off debtors while other assets
14 Decided November 18,1960.

15 The stock had been purchased at par.
16 Decided September 30, 1967.
17 An appeal was filed from this decision but the appeal was subsequently ceded.
18 Decided on August 11,1980.
19 The case dealt with immovable property prior to the introduction of tax on capital gains but
some of the principles enunciated by the Board are still relevant.
had been purchased with a profit-seeking motive. In arriving to its

decision the Board held that the fact that the appellant company
was empowered to trade by virtue of its objects clause did not mean
that all the profits derived by the company were taxable as trading
income20. The Board examined the appellant company’s accounts
which listed some of the assets sold as ‘fixed’ assets and not ‘trading’
or ‘current assets’. The Board concluded that assets sold animo
compensandi to set off debts amounted to transmutation of capital
but assets acquired for re-sale gave rise to income.
BSC 43/86 - Quantity of the Goods

Famous British precedents such as Rutledge, the ‘Great Toilet
Paper case’ established that the quantity of the goods involved in a
transaction is indicative ofwhether a trade is in place. A transaction
which involves the sale of a large number of identical products
indicates that the sale is made by way of trade and the yield is of an
income nature. Thus, the British Courts held, in Rutledge that the
sale of millions of toilet paper rolls was made by way of trade. In
BSC43/8621 the Board of Special Commissioners reached a similar
conclusion. It allowed a taxpayer to utilise losses suffered on the
sale of shares as an allowable expense in view of the fact such losses
represented trading income because ‘the number ofshares purchased
and sold had been relatively high’.
BSC 35/87,6/99 - Interval of Time Between

Purchase & Re-Sale
The disposal of an asset within a short time from the date of
acquisition is another important badge of trade. An interesting
Maltese decision relating to this Badge of Trade was delivered in
BSC35/87,22 a case which involved a share transfer. Appellant
claimed that gains derived on the transfer of shares were of a
capital gains nature because the shares had originally been acquired
20 A decision in the same vein was delivered by the Court of Appeal in Case 5 of 2003.
21 Decided on 1 November, 1989.
22 Decided on October 30,1989-
as an investment and the sale of the shares had been dictated by

adverse financial circumstances. The Board agreed with appellant
highlighting the fact that appellants transaction in shares was
an isolated transaction and that the interval of time between the
purchase and sale of the shares was a long one.
A decision on the same lines was delivered in BSC6/9923. The

Commissioner of Inland Revenue treated a gain derived from the
transfer of a property by a company which had used the property
for the purposes of its business for a significant period of time as
income. The Board disagreed. It held that the property had been
acquired for rental and not for resale24 therefore gains derived from
the transfer of the property were of a capital nature even though
there was prima,facie affinity with appellant’s activity.
2.2 Other Cases on Income & Capital
The Board of Special Commissioners delivered several decisions

regarding the distinction between income and capital. BSC24/7025
involved a contract of assignment of a tradename, trademarks,
industrial know how and trade secrets for a substantial sum. The
sum was to be paid by instalments. Appellant argued that any gains
derived from the contract of assignment were not of an income
nature. The Board disagreed. The Board held that appellant had not
sterilised the income earning asset and that gains derived in terms
of the contract constituted a compensation for services rendered
and was consequently of an income nature. The following extract
is taken from the Revenue s official synopsis of the case,
“The Board noted that this case was unique and no provision of the Income
Tax Act specifically dealt with a typical transfer. As was the case with English
case-law, it was considered proper, in the circumstances, that it be dealt with
on the basis of the general principles governing the distinction between
23 Decided by the Board of Special Commissioners on January 17, 2000.

24 As attested by rental permits.
25 Decided 12 January, 1973.
trading and capital income. One had to consider whether appellant company
had parted with an asset that was the source, or one of the sources of its own
profits. It has to be established whether, while continuing to retain the right
to its know-how and expertise it used it to advantage to have its products
manufactured by another company against payment. It was evident that
the foreign company did not sell its rights to its asset but merely their use.
There was no sterilisation of asset, no loss of rights whatsoever so the income
earned was of a trading nature chargeable to tax.”
The Board delivered another decision on asset substitution

in BSC53/8726, which involved the payment of government
compensation for swine compulsorily destroyed because of a
disease. The Board held that the compensation received amounted
to a substitution of stock and was not taxable. Damages are capital,
not income.
2.3 Pronouncements of the Court of Appeal
In Case 111, the Court of Appeal held that the gain derived from
the redemption of a real right such as that of emphyteusis was
classified as being of a capital nature and not as of an income nature
on the grounds that redemption of ground rent resulted in the
sterilisation of an asset.
A unusual decision was delivered by the Court ofAppeal in Case

195. The decision seems to be the appeal decision in BSC28/03
quoted above. The Court of Appeal’s judgement has not been
published as yet and we must rely on the Revenues recently
published Official synopsis reproduced below:
“Appellant purchased from his father a large block of shares. The purchase
was effected on credit. Other purchases of shares were also made. Over
a period of five years, several shares were sold, including shares to the
managing director of the company. This sale was made on condition that
the shares would be re-acquired by the appellant should the general manager
terminate his appointment before a certain date. The general manager
26 Decided on February 7,1990.
had similar arrangements with the other shareholders. Finally, appellant

sold his remaining shares in the company (some 80% of his holding) to a
family company over which he had 25% control. Appellant contended that
the sales were all on capital account and that the substantial profits made
should be exempt from tax. This argument was rejected by the Board of
Special Commissioners on the grounds that the circumstances showed that,
whatever may have been the original intention on purchase of the shares,
circumstances as they evolved indicated that a trade had been brought into
existence.
The Court agreed. The tribunals preferred to look at the matter objectively
rather than purely from a subjective personal point of view concerning
appellant's intentions..
Essentially, though some irrelevant arguments may have slipped into the
tribunals' reasoning, they applied the classic tests regarding the badges of
trade.”
Reference to the badges of trade doctrine was also made in an

important decision of the Court of Appeal, Case 5 of2003 decided
on 10 May, 2006, a case which involved a large bank. The Court of
Appeal held that dividends received by a bank from a fully owned
subsidiary over which it exercised significant control could not be
classified as income from a trade.
Case 1 of 2004 of the Court of Appeal was another judgement

on badges of trade. It involved a profits from the disposal of shares.
The Court concluded that profits from sales of shares should
have been reported as income from a trade because taxpayer was
involved in a series of transactions in shares. The Court confirmed
the decision of the Board applying the badge of trade incidence of
transactions.
“F’ dan il-kuntest spiss tqum il-kwistjoni ta’ jekk individwu li jaghmel
operazzjonijiet bhal dawn (wahda, serje, sensiela relatata, u/jew bhala
operazzjonijiet ripetuti u abitwali) hux a trader in shares jew le. Il-Bord huwa
konvint li, pjuttost min jekk individwu hux abitwalment, professjonalment,
jew b’ attributi ohra a trader in shares, huwa aktar rilevanti jekk transazzjoni
hix wahda solitarja, u shiha, u terminata totalment, jew jekk ghandekx
minflok sensiela ta’ transazzjonijiet, b’ kull wahda jew singolarment mhux

relatata ma ohrajn, jew anki fil-fatt relatata ma ohrajn b’ xi ness ta’ abitwalita',
ta’ sekwenza, ta’ struttura, jew ta’ skema kemm evidenti kif ukoll le.
L-elementi ta’ profitt rizultanti f ’ dan il-kaz, 1-awment kostanti fid-differenza

bejn il-valur ta’ kull sehem f ’ kull sena skond in-Net Asset Value ipparagunat
mas-sale price (Ara Tabella C), kif ukoll il-fatt li matul il-perijodu in kwistjoni
1-Appellant ghamel anki operazzjonijiet ta’ xiri (Ara Fol 25) ta’ shares li
poggewh f’ posizzjoni dejjem vantaggjuza ghal ulterjuri transazzjonijiet
f ’ kumpanija li bdiet topera attivament u b’ certi profitti attraenti, dawna
kollha jissuggerixxu li hu kien konvint li kellu 1-pussess ta’ asset b’ valur li
jirrendi kemm jekk mizmum kif ukoll jekk zmercjat b’ certu timing b’ rikavat
akbar kif jidher hawn taht:”
Case 9 of200627 of the Court ofAppeal attributed a lot ofweight

to the badge of trade- incidence of transactions. An individual
who was a taxi driver by profession who was frequently involved
in property deals was held to be a trader and that his income from
immovable property deals should have been classified as a profit
which was chargeable under 4 (1) (a) ITA, trading income.28
3. The Classification of Income
When a taxable receipt is classified as income such a receipt would

need to be sub-classified in terms of Article 4(1) ITA. Article 4(1)
ITA classifies income in six categories. The classification of income
is relevant for computational, reporting and other purposes. Thus,
trading income is subject to specific deductions as is a certain form
of rental income. Moreover, certain tax collection processes apply
27 Seduta ta’ nhar 1-Erbgha, 7 ta’ Frar, 2007 Numru 1 Appell numru 9/06.
28 “Minn ezami tas-sentenza appellata jidher li 1-Bord kien konvint, fuq 1-evalwazzjoni tieghu
tal-provi dokumentali, illi 1-appellat, nonostante li 1-mestjier tieghu kien dak ta’ xufier tat-taxi,
kien, fuq firxa ta’ snin, ghamel diversi transazzjonijiet konsistenti f ’ akkwisti u trasferimenti ta’
immobbli u li, konsegwentement, tali operazzjonijiet kienu jikkwalifikawh bhala “temporary
trader... Dan mhux minghajr raguni gjaladarba, kif inhu maghruf, ma hemmx bzonn ghal
fini ta’ spekulazzjoni illi wiehed ikun ta’ bilfors “trader”, u li meta dan jigi stabbilit jattira
1-imposizzjoni tat-taxxa fuq il-qligh realizzat skond it-termini precizi ta’ 1-Artikolu 4(1) (a)
tal-Kapitolu 123;”.
exclusively to certain types of income. Furthermore, deductions

against employment income are allowed provided expenditure
meets particularly stringent tests.
3.1 Trading Income29
“Gains or profits from any trade30, business, profession or vocation31,

for whatever period oftime such trade, business, profession or vocation
may have been carried on or exercised including the profit arisingfrom
the sale by any person ofany property acquired by himfor the purpose
ofprofit-making by sale, orfrom the carrying on or carrying out ofany
profit making undertaking or scheme; ” are charged to tax under Art
4(l)(a)ITA.
The ITA does not define ‘trade, business, profession or vocation’

and badges of trade are used to identify the existence of a trade.
3.1.1 Vocations and Illicit Trades

The wording of Article 4(1) (a) ITA was couched in wide terms
bringing to charge the profit derived by a person exercising an
activity of an independent character. However an interesting
analysis of what the Income Tax Act means by the term ‘vocation’
29 Trading income was deemed to include compensation for loss of earning in Burmah Steamship
Co Ltd v, CIR 193016 TC 67. Similarly in Kelsall & co v. CIR (1938) 21 TC 608 the British
Courts held that compensation paid for the cancellation of an agency contract represented
revenue and was taxable as trading income.
30 ‘gains or profits from a trade’ are deemed to include any gains which are received by virtue of
a trade. Thus, in Case 14 of1952 of the Board of Special Commissioners, a performing artiste
who received conspicuous gifts from her admirers was taxable on such gifts because the gifts
were given to her on account of her trade. The word ‘trade’ includes the provision of company.
31 The terms ‘profession or vocation’ seem to imply a more noble occupation than a trade. In
C.I.R. v. Maxse 12 T.C. 41 reproduced in Vella, E, op.cit p.40 the British Courts held, “It
seems to me...that a profession in the present use oflanguage involves the idea ofan occupation
requiring either purely intellectual skill, or of any manual skill controlled, as in painting and
sculpture or singing by the intellectual skill of the operator, as distinguishedfrom an occupation
which is substantially the production, or sale, or arrangements for the production or sale of
commodities. The line ofdemarcation may varyfrom time to time. The wordprofession used to be
confined to the three learnedprofessions: the Church, Medicine, Law. It has now I think a wider
meaning".
was delivered in Case 34 of 195632 when the Board held that

gambling gains derived by a compulsive gambler were of a capital
nature and were consequently not taxable.33 The Board held that
gambling could never constitute a vocation and could therefore not
fall to be taxed as a vocation.34 The Board cited Rowlatt35 and held
that profits derived by a bookmaker were taxable as trading income.
It is important to note that Article 4 (l)(a) brings to charge

all forms of income derived from trade, income from illicit trade
included. The leading case on the matter is the British case IRC v.
Aken36 when a prostitute who confessed her trade in a television
show was assessed to tax on the gains derived from her illicit
activity. This principle was confirmed in Case 27 of 196937 when
the Board held that monies derived from overcharging were taxable
in full. The Board observed that even monies derived from a theft
constituted income and in a recent judgement, the First Hall Civil
Court confirmed that the proceeds derived from tax evasion must
be included within chargeable income38.
32 Decided March 16, 1957.

33 A decision on the same lines was delivered in Graham Green 9TC 309 when the Court held
that lottery and gambling wins are not taxable unless the taxpayer is a professional gambler or
a bookmaker.
34 It could be argued that such gains could constitute a trade.
35 "Now we come to the man who hets with the bookmaker.... I do not think he could be said to
organise his effort in the same way as a bookmaker organises his, for I do not think the subject
matterfrom his point ofview is susceptible ofit. In effect all he is doing isjust what a man does
who is a skilful player at cards, who plays every day. He plays today, and he plays tomorrow, and
he plays the next day, and he is skilful on each ofthe three days, more skilful on the whole than
the people with whom he plays and he wins. But it does not seem you can find in that case, any
conception arising in which his individual operations can be said to be merged in the way that
particular operations are merged in the conception ofa trade.... It is extremely difficult to express,
but it seems to me that people would say that he is addicted to betting, and could not say that his
vocation is betting
36 1990 STC 497.
37 Decided on April 14,1971.
38 "Naturalment dan ma jfissirx li l-konvenuti ghandhom minhabba f’ghemil illecitu li kellhom
sehem fih huma wkoll, jaghmlu qliegh gratis ghaxfuq id-dhul ghandhom ihallsu t-taxxa . il-
qorti ghalhekk tordna lir-registratur sabiex minnufuh jinnotifika lill-kumissarju tat-taxxi
interni b’kopja ta din is-sentenza sabiex il-kummissarju jaghmel dak li hu mehtieg biex jigbor
it-taxxafuq dan id-dhul tal-konvenuti.”Melita Insurance Brokers Limited v. Joseph u Margaret
Fenech Prim Awla 19.10.01.
3.2 Employment Income, Rewards for Services
Employment income is charged to tax under 4(1) (b) ITA. Chapter

8 discusses the tax treatment of employment income.
3.3 Dividends, Premiums, Interests or

Discounts
'Dividends39, premiums, interest (which includes any gainsfrom any sum

ofmoney in whatever currency deposited with a person carrying on the
business ofbanking under the Banking Act in any account whatsoever) or
discounts’axe brought to charge in Article 4 (1) (c) ITA.
Dividends
Garner defined ‘dividend’ as a portion of a company’s earnings
‘the income or profits distributed pro rata to its shareholders, usu’40.
Article 2 ITA contains an ad hoc definition of dividend. It is a wide
illustrative definition of the term dividend which is not exhaustive.
The term ‘dividend’ is defined as including’-.
(a) bonus shares

(b) any distribution made by a company, to its partners or
shareholders, as the case may be, and any amount credited
to them as partners or shareholders as the case may be; and
(c) any distribution made by a co-operative society to its
members and any amount credited to them as members,
including any patronage refund, bonus certificate or
bonus share, made, paid or allotted in accordance with the
law regulating such societies for the time being in force in
Malta;”
Predictably, the definition of the term dividend is not confined

39 An exception is made in regards to income from offshore banking subsidiary. Such income is
chargeable under Article 4 (1) (a).
40 Garner, B, A (Editor); Black’s Law Dictionary (USA 1999) p. 493.
to cash distributions, bonus shares are treated as dividends too.

Case 127 the Court of Appeal41 confirmed that bonus shares are
taxable as dividends,
“There is no doubt that for the purposes of Income Tax Law bonus shares
are considered to be dividends, and as such taxable. This does not mean that
for the purposes of civil law bonus shares are equated to dividends. In fact
in the case of a bonus share issue no transfer of cash from the company to
the shareholders takes place, as is the case with dividends ut sic. Moreover,
as was decided in the cited case Bouche v. Sproule in the context of usufruct
between the usufructuary and the nudo propietario bonus shares constitute
capital. It was on this basis that in Commissioners of Inland Revenue v. Blott
(1919) the Court held that bonus shares are not subject to income tax and
not vice versa (See Lee & Barr, op.cit p.98). It is true that our Income Tax
Law expressly provides that bonus shares are taxable, but it does not specify
in whose hands such bonus shares are taxable, but it is obvious that such
bonus shares are taxable in the hands of those who are entitled to receive
them.”
Article 47 ITA prescribes that, even distributions to shareholders

of a company or to partners in any partnership by a liquidator in the
course of winding up the company or the partnership, to the extent
to which they represent income derived by the company or by the
partnership are deemed to be dividends for income tax purposes.
Case 36 of 195842 of the Board of Special Commissioners,

established on the strength of Commonwealth authors, that a
dividend is taxable when it is declared unless the company fixes
a later date for payment43. The Board followed traditional UK
41 Decided on April 22,1980.
42 Decided February 26,1958.
43 The Board based its decision on two foreign authors, Buckley and Simon.
"The declaration ofdividend creates a debt duefrom the company to each shareholder andpayable
at the date at which the dividend is made payable... For this debt he can, when the date arrives,
sue at law..." (Buckley)
"The date when a dividend becomes due is that fixed for payment by the company when the
dividend is declared, or, ifno date is sofixed, the date ofthe declaration ofthe dividend"; " A
dividend is due when it is declared unless the company, by resolution,fixes a later dateforpayment,
andforms part ofthe recipient's total incomefor theyear in which it is due, even though paid out of
profits earned in the previous years" (Simon’s, Vol. III).
tax judgements such as Duncan v. C.I.R.44, Hurll v. C.I.R45 and

Associated Insulation Products Limited v. Golder46.
The taxation of dividends amounts to the taxation of taxed

profits47, which in turn gives rise to economic double taxation
but in Malta the spectre of double taxation is eliminated via the
full imputation system48. The said system applies when profits are
distributed from the Immovable Property Account, Foreign Income
Account and the Malta Taxed Account49. The Full Imputation
System is created via the interplay of a number of articles in the
Income Tax Acts, Articles 31, 59 and 60 ITA included. Article
31 provides that where tax has been deducted from particular
dividends, the income of the recipient is to be considered as being
the gross amount prior to effect the tax deduction. Article 59
provides that a company which is resident in Malta is entitled to
deduct from the amount of any dividend, tax at the rate paid or
payable by the company on the income out of which the dividend
is paid. Article 60 adds that a credit equivalent to the tax paid by
the company on the tax paid on the taxed profits distributed by way
of dividend must be allowed against the shareholder s tax liability
on the said dividend. The application of the said full-imputation
system50 could give rise to a situation where an individual may be
entitled to a refund of the tax paid by the company.
44 8 T.C. 433.
45 8 T.C. 292.
46 26 T.C. 231.
47 Companies distribute profits out of taxed profits.
48 Alternative methods relating to the taxation of dividends apply in other countries (countries
like Greece do not tax dividends at all). Other countries apply the partial imputation system
while others still apply the dividend deduction and split rate system. Vide Carabott, Dr. N;
The Concept of Dividend in International Tax Law (LL.D. 2002) pp.60-66.
49 Article 59 (1) (a) provides that the full imputation system applies ‘other than a dividend paid
out ofdistributable profits allocated to the untaxed accoun t and other than a dividend referred to
in article 12(1)(p)’. Ref. Attard, R & Rapa, M (for BPP); Course Notes Taxation 2.3 (Malta
Variant) (3'd Edition) (Malta 2004) Cap.8.
50 The leading case on the application of the full imputation system is Case 46 of the Court
of Appeal when the Court confirmed that the full imputation system only applies when a
company pays tax on its profits. This concept is now enshrined in the wording used in article
59(1) of the Income Tax Act.
Premiums51
The Income Tax Act charges to tax premiums twice in Article 4.
Premiums are taxed both in 4 (1) (c) ITA and 4(1) (e) ITA. It has
been suggested that Article 4(1) (c) ITA premiums are premiums
which are not derived from immovable property.52 Of course, only
premiums of a revenue nature are brought to charge under Article
4 ( 1 ) (c) ITA, premiums which are of a capital nature and which do
not fall under the umbrella of Article 5 ITA are not taxable.
Discounts
In this context, the term ‘discounts’ is taken to to mean discounts,
which are granted by financial institutions on the maturity of bills
of exchange. The discount is the difference between the cost of
acquisition of the bill and the amount actually received upon the
maturity of a bil of exchangel.53
Interest
The Income Tax Act does not define the term ‘interest’. Article
41 ITA defines ’investment income’ but whereas some forms
of investment income are interest not all investment income is
interest. In the absence of a definition of interest in the Income Tax
Acts, I would expect our Tax Courts to refer to the articles in the
Civil Code on loan for consumption or Mutuum54 and definition
of ‘interest’ contained in paragraph 3 of Article 11 of the OECD
Model providing that:
“3. The term “interest” as used in this Article means income from debt
claims of every kind, whether or not secured by mortgage and whether or
not carrying a right to participate in the debtors profits, and in particular,
income from government securities and income from bonds or debentures,
including premiums and prizes attaching to such securities, bonds or
51 The term premium has been defined as 'a sum ofmoney paid in addition to a regularprice, salary
or other amount a bonus. The amount by which a security's market value exceeds itsface value...
The amount paid to buy a securities option '. Garner B.A; op.cit pp. 1200-1201.
52 An Introduction to Income Tax Theory, p. 76.
53 Vella, E; op.cit p.50-51.
54 Articles 1842 to Article 1855 of the Civil Code.
debentures. Penalty charges for late payment shall not be regarded as interest
for the purpose of this Article.”
The Board of Special Commissioners had tried to define

the term in Case 11 of 1975.55 The Boards definition is not too
different from the definition in the OECD Model:
“the Board of Special Commissioners clarified that for the purposes of the
Income Tax Act the word ‘interest’ has a specific meaning. Case 11 dealt
with a contract of sale of immovable property, which had, prior to the
date of transfer been occupied by the acquirer for a period of years. The
contract of sale incorporated an unusual clause which bound seller to pay
by way of lump sum, over and above the purchase price, ‘interest’ at 5% per
annum in respect of the period in which buyer had occupied the premises.
Appellant claimed that such a lump sum was to be taxed by way of interest
and consequently apportioned over a number of years for the purposes of
assessment. The Board disagreed with appellant sustaining that in this case
one could not treat the payment as interest. Interest is due on existing capital
and in this case the additional payment was to be considered as a taxable
form of compensation for loss of earnings.”
Interest income should be taxed if and when received. In the

famous Japanese Bonds case the Court of Appeal observed,
“In the present case there is no doubt that interest due in arrears became
income accruing after the Japanese Government decided to pay them and
actually paid them as established. In particular, for the appellant who
acquired his titles in 1952 there was no income accruing...In truth when no
interest was being paid there was no income...”56
The traditional British judgement on chargeable event in

interest income is Leigh v. C.I.R57 establishing that,
“receivability without receipt is nothing at all for tax purposes ...receivability,

speaking of a debt which has been received is the date when it is received,
as opposed to the time when it has been accruing in the sense of growing
up. I do not think you could look upon receivability except as applicable
55 Decided 20 December, 1976.

57 11T.C.590.
to receiving debts. A debt that has long been delayed has been all along
receivable, but the receivability which is touched upon is the receivability
under which there has been a receipt’58
The right to income is ‘per se’ not taxable, the receipt of the
income is the actual taxable event59. The same principle applies in
the context of rents and salaries paid in arrears.
The Inland Revenue Department had issued the following

ruling relating to the tax treatment of interest income:
“Guidelines on the Tax Treatment of Interest from a Loan
Interest is chargeable to tax under the provisions of Article 4(l)(c) of the

Income Tax Act. Interest received from sources situated outside Malta is
taxable in Malta and does not benefit from an exemption related to income
from participating holdings under the Income Tax Act or under any other
law.
It is hereby being clarified that income from a loan, including a loan that
has characteristics of both debt and equity e.g. where the lender is entitled
to voting rights, to profits etc.) shall be considered to be interest for the
purposes of Article 4(l)(c) of the Income Tax Act and is not considered to
be income from share capital or from an equity holding for the purposes of
the Income Tax Act.”
3.4 Pension, Charges, Annuities and Annual

Payments
Article 4 (1) (d) ITA charges to tax any pension, charge, annuity or
annualpayment’.
58 Subsequently confirmed in , Dewar v. C.I.R (19 T.C. 561) and Lambe v. C.I.R. (18 T.C. 212).
59 Vella, E, op.cit pp.26-27.
pensions
The general rule is that pensions are taxable60, state pensions
included61 but exemptions are contained in the Income Tax Act
itself and in Subsidiary Legislation 123.21 Income Tax Exemption
Order.
Article 12 (1) (g) and (h) ITA exempt from income tax:
(a) Wound and disability pensions granted in respect of

wounds or disabilities caused by war and any pensions
granted to dependent relatives of members of the armed
forces of the Commonwealth killed on war service;
(b) any capital sum received by way of commutation of
pension (up to a maximum of thirty percent (30%) of
the total pension), retiring or death gratuity or received
as consolidated compensation for death or injuries.62 The
term total pension" is defined as meaning the total value
of the pension available to provide pension payments.
In the case of commutation of pensions in relation to
retirement schemes, licensed, registered or otherwise
authorised under the Special Funds (Regulation) Act or
any Act replacing the same, the maximum capital sum that
may benefit from this exemption shall, unless provided
otherwise by means of rules prescribed by the Minister, be
as provided under that Act, including any regulations or
directives issued thereunder.63
60 In practice some pension income is not taxed because the quantum of the pension tends to fall
within the tax free bracket.
61 Malta’s principal pension regime is the state pension regime established by the Social Security
Act, Cap. 318 of the Laws of Malta. The said law creates several types of pension.
62 Previously, the exemption was much wider. The exemption (the 30% limitation) was restricted
by Act XII of 2014 (the Budget Act),
63 The special rule relating to retirement schemes, licensed, registered or otherwise authorised
under the Special Funds (Regulation) was introduced by Act No. XXII of 2014, An Act to
amend the Investment Services Act. A cross-reference to 12 (1) (h) ITA is contained in L.N.
468 of 2014 INCOME TAX ACT (CAP. 123) Personal Retirement Scheme Rules, 2014
providing that all payments received by qualifying individuals from certain long term contracts
of insurance other than any capital sum received by way of commutation of a pension which
Subsidiary Legislation 123.21 Income Tax Exemption Order as

amended by Legal Notice 181 of 2015 exempts from tax:
(a) Disability Pension and Pension for the Visually Impaired

(Article 27 Social Security Act);
(b) Social Assistance (Article 30 Social Security Act);
(c) Age Pension (Article 66 Social Security Act);
(d) Marriage Grant (Article 70 Social Security Act);
(e) Maternity Benefit (Article 71 Social Security Act);
(f) Childrens Allowance (Article 76 Social Security Act);
(g) Foster Care Allowance (Article 76A Social Security Act);
(h) Disabled Child Allowance (Article 77 Social Security
Act); any other non-contributory allowances and benefits,
payable under the Social Security Act.
Special Considerations relating to the Tax Treatment of Pensioners

Over the past few years, Government and Parliament passed a
number of measures seeking to relieve pensioners from unnecessary
tax burdens. These include:
(a) L.N. 320 of 2012 INCOME TAX ACT (CAP. 123) the
Part-Time Work (Amendment) Rules, 2012 removing
restrictions to pensioners’ eligibility to avail themselves of
the part-time rules;
(b) L.N. 144 of 2014 INCOME TAX ACT (CAP. 123)
Deduction (Income from Employment) (Amendment)
Rules, 2014 granting low-earning pensioners a notional
deduction;
(c) L.N. 42 of 2017 INCOME TAX ACT (CAP. 123)
Tax Rebate (Pensioners) Rules, 2017 L.N. 43 of 2017
INCOME TAX ACT (CAP. 123) Deduction (Income
from Employment or Pension) (Amendment) Rules,
2017 and L.N. 11 of 2019 INCOME TAX ACT (CAP.
may be exempt from taxation in accordance with the provisions of article 12( 1 )(h) of the Act,
constitute pension income for the purposes of article 4(l)(d) of the ITA.
123) Tax Rebate (Pensioners) (Amendment) Rules, 2019

providing for a special small tax rebate.
Annuity and Annual Payments

Annuities are regulated in Articles 1689 to 1712 of the Civil
Code and the tax definition of annuity should be the civil code
definition of annuity. In the 1950 s and 1960’s the tax courts
delivered a number of judgements on annuities. Funnily enough,
we have a significant judgement on annuities and we lack major
pronouncements on key concepts.
Our Courts differentiated between annuities of a capital nature

and annuities of an income nature. Article 4 (1) (d) ITA charges to
tax only annuities and annual payments of an income nature.
The first Case of the Board dealing with annuities was Case
17 of 195064. Case 17 dealt with an annual payment imposed on
a legatee as a condition to his inheritance of the family business.
Appellant claimed that receipts in terms of the will did not
constitute an annuity but non-taxable capital payments made by
instalments. The Board disagreed sustaining that the nature of the
payment was not of a capital nature and was consequently taxable.
The Board decision was reversed in Case 2 of the Court of Appeal
when the Court held that,
“It appears from the acts of this case that the Court is satisfied that the
payment of the pound a day for four years (ordered in terms of the will)...
represent the consideration payable by each of the sons of E.F (the decujus)...
This leads us to the conclusion that the purpose of such disposition is a one
time payment, the payment of a capital, partly by instalments and partly at
one go, as appellant sustains. In fact, contrary to what has been sustained by
the Board in the sentence appealed from the purpose of the said dispositions
is exceptional...”
64 Decided January 8,1951.

An analysis of what amounts to an annuity for income tax

purposes was made in Case 13 of 195265, Case 9 of 1954 and Case
30 of 1954 of the Board of Special Commissioners. In Case 1366the
Board observed that the Income Tax Act charged both annuities
of a gratuitous nature and annuities by onerous title67. The Board
added that no distinction is made between the income element
and the capital element in the annuity in terms of the Civil Code68.
Case 9 dealt with an annual payment over a five-year period made
in consideration of the transfer of a real right69. The Commissioner
of Inland Revenue sustained that such a payment was taxable by
way of annuity. The appellant argued that the annual payment
lacked most of the essential elements of an annuity. Appellant
argued that the payment in question was of a capital nature because
the payment lacked the constitutive elements of an annuity. It was
neither made for an indefinite term nor was it otherwise linked
to the lifetime of the recipient. The Board agreed with appellant,
ruling that the payment in question was not an annuity because it
65 Decided March 31,1953.

66 Case 15 of 1952 which dealt with an annuity payable following the cession of a share in a
partnership repeated the principles enunciated in Case 13.
67 The following extract from the Revenue’s Official Synopsis is being reproduced in view of the
complexity of the issues,
"The Board noted that our law taxed annuities both when constituted by onerous title (as in this
case) and when constituted gratuitously (where there is no doubt as to its taxability). The Board
noted that in Malta annuities are a much older concept than income tax itself, therefore ifthe
law really wanted to distinguish between that part ofthe annuity which refers to capital and that
part which refers to interest, it could have easily done so. But since such a distinction had not been
made by the Act (contrary to what had been done in the case ofAustralia), it could not be made
by the Board. The Board considered that under British legislation annuities were always taxable
unless these consisted ofpayments by installment ofan ascertained capital sum. The Board quoted
from authoritative British texts and tax cases .It was held that appellant had actually bought an
annuity that assured him ofan amount ofincome until his death. The situation was analogous to
that ofthe owner ofa temporary emphyteusis: part ofthe emphyteusis represents capital, yet the
recipient is taxable on the whole amount because the law did not distinguish between the income
and the capital element ofthe payment.”
68 Annuities are regulated by Articles 1689-1693 of Cap. 12 of the Laws of Malta. A contract
creating an annuity is null if it is not made in writing, or, where an immovable thing is assigned,
if it is not made by a public deed. An annuity may be perpetual or for life.
69 The cited case dealt with a real right over an immovable property prior to the introduction
of tax on capital gains. Although most parts of the judgement are obsolete the gist of the
decision remains relevant.
was made for a definite term70. In Case 30 of 195471 the Board held
that income in the form of annuity is always taxable for the reasons
previously enunciated in Case 13.
Alimony Payments
The Court of Appeal expressed itself on the matter of annual
payments in 1964 in case 5572 when it held that alimony payments
made by a husband to his estranged spouse constituted income in
his estranged wife’s hands and had to be taxed as an annuity,
“For fiscal law purposes under the law of Income Tax, the fulfilment of the
legal obligation in the present circumstances falls under sub-article (e) of
Article 573 which contemplates income derived from “any pension, charge or
annuity or annual payment”.
Even if one has to consider the present payment as not being a pension ...
there is no doubt that the payment constitutes in the wife’s hands a gain from
a charge’ and ‘an annuity’ and an annual payment’. With the contract of
separation appellant’s husband bound himself to pay the alimony payment
in question....it is clear that the stipulation of such obligation (presumably
guaranteed by hypothec) he created an encumbrance or a debt on his
property...such an encumbrance is a liability to pay ‘a charge’ in every sense
of the word....This payment has the nature of recurrence even though it is
calculated at so much per week. The words annuity’ and ‘annual payment’
do not only refer to an annuity contemplated under the Civil Code74. That
wording is modelled on English law where it was held that an alimony
payment paid in terms of a contract, at so much per month or week constitutes
an ‘annuity’ or ‘annual payment’ for the purposes of tax on income.”
70 The following extract from the Revenue’s Official Synopsis is being reproduced in view of the
complexity of the case,
“The Board held that there was no risk involvedfor the debtors (the children) as the maximum
payment was only Lm3,000 while thefactory was worth about Lm70,000. The contract was not
truly "aleatory"for both parties. Besides, Maltese law contemplates annuities only where these are
constitutedfor the lifetime of the creditor or ofa third party. Where an annuity is set up for a
definite period it becomes a simple sale by installments. And if the said payments were not an
annuity, then they would not be taxable under article 5(1)(e) as they would be capital in nature.
The Board held that annual payment ofLm600 was not chargeable to tax.”
71 Decided on November 17,1954.
72 Decided on June 4,1964.
73 Now article 4.
74 This conclusion could amount to a significant departure from the dicta of Case 9 of 1952.
Box 13 of the personal Tax Return tells us that an alimony

payment must be reported separately but what is an alimony
payment? The Income Tax Acts use the term but do not define it
creating a problem with interpretation. The issue has some practical
significance because Article 4 ITA tells us that alimony payments
are chargeable in the hands of the party receiving them and Article
14B ITA tells us that alimony payments are tax deductable.
The Civil Code, the law which regulates the matter does not use
the term ‘alimony’ because the Civil Code uses another term which
is ‘maintenance’. Article 5 of the Civil Code speaks of the right to
maintenance and Article 9 defines the term as meaning:
“19. (1) Maintenance shall include food, clothing, health and habitation.
(2) In regard to children and other descendants, it shall also include the
expenses necessary for health and education.”
Do ‘maintenance’ and ‘alimony’ mean one and the same

thing? The answer to this question gives rise to a number of tax
consequences because:
(a) In the Civil Code, ‘Maintenance’ includes both payments

made to an estranged spouse and payments made to
children.
(b) Alimony payments are taxable but Article 12 (1) (t) ITA
exempts from tax financial assistance received in respect
of the maintenance of a child.
(c) In page 16 of the Booklet entitled Help to Complete Your
Tax Return, the Revenue takes the view that ‘maintenance
payments made in respect of dependent children are not
deductible’.
Taxpayers deserve to have a tax definition of the term alimony

because the tax legislator’s decision not to follow terms used in the
Civil Code creates grey areas. In 2012,1 had suggested the adoption
of the following definition of the term alimony:
“‘alimony’ means an allowance for maintenance paid to a spouse, an estranged

spouse or a minor child consequent to a judicial or consensual separation or
a divorce.”
3.5 Income from Immovable Property
Article 4 (1) (e) ITA charges to tax ‘...rents, royalties, premiums and
any other profits arisingfrom property; ’.
Rents
In 2018 Act VII of 2018 added a definition of the term rent’ to the
ITA. The term has been defined as including ground rents, whether
from an urban or rural tenement.75. Rents may be of two forms:
rents of a trading nature which fall to be taxed under Article 4(1)
(a) ITA and rents, which are not in the nature of trade and fall to
be taxed under Article 4(1) (e) ITA. Badges of trade make all the
difference and this is why this subject is so important. A rent is
typically considered to be of a trading nature if it is received by a
person who habitually grants immovable properties on lease. Rents
for long periods are rarely considered to be of a trading nature. On
the other hands rents granted for short periods such as the case with
leases of fully furnished flats to tourists are typically considered to
be of a trading nature.
Special Rate of Witholding Tax on Rental Income

In the 2012 Budget Speech the Minister announced:
““For individuals or companies who invest in the restoration of these

properties to sell or rent a concession will be given as follows:
Final witholding tax of 10 per cent on income from rent for residential
purposes, and 15 per cent on income from rent for commercial purposes;
and Final witholding tax of 10 per cent [INSTEAD of 12%] in the case of
a sale or the payment of 30 per cent tax instead of 35 per cent on the gain;
and””
75 Article 3ID (8) (b) ITA.

Act V of 2012 introduced special withholding tax rates for two

special forms of rental income namely (i) Rental income paid with
respect to property falling under the Housing Scheme and (ii)
Rental income paid with respect to restored property.
Article 31B ITA - Housing Scheme

Article 3IB ITA applies when any person who is an owner of
immovable property rents such property to a person receiving rent
subsidy under any scheme administered by the Housing Authority
and the said owner is registered with the Housing Authority for
this purpose.
The tax chargeable on Article 3IB ITA income is at the rate of

10% of the gross rental income received. Such tax shall be final and
not be available as a credit against the tax liability of the said person
or refundable to him in any way.
The Housing Authority acts as collecting agent, deducts the tax

from the rent subsidy, renders an account to the Commissioner
of all such amounts deducted specifying amounts together with
the details of the person receiving the rent and remits the tax
collected.
Article 31 C ITA - Restored Property

Article 31C ITA applies when any person who is the owner of
immovable 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. Compliance obligations apply.
The tax chargeable on Article 31C ITA income is at the rate

of 10% of the gross rental income received where the rent is for
a residential purpose, and at the rate of 15% of the gross rental
income received where the rent is for a commercial purpose. Such
tax is final and is not available as a credit against the tax liability of
the said person or refundable to him in any way.
The measures introduced in 2012 and 2013 must have been
successful because in Act XII of 2014, the Budget Act introduced
a new rental regime based on the experimental regimes introduced
in 2012 and 2013.
Article 31 D ITA - Taxation of Rental Income

from the Letting of a Tenement
Act XII added Article 31D to the Income Tax Act. Article 31D was
amended by Act No. XXXVII of 2014 (relating to the treatment
of undeclared rental income), Act No. XXI of 2015 (extending the
remit of the regime to cover both properties leased as garages and
residences) and Act No. XV of 2016 (extending the remit of the
regime to certain commercial tenements).
The current version ofArticle 31D ITA incorporates special rules

relating to the taxation of rental income. It must be emphasized that
the Article 3ID ITA regime applies only in specific circumstances
namely, when any person 76 rents out a tenement.
In paragraph 8, the term ‘tenement’ is defined as meaning:
(i) a tenement, not being a commercial tenement as defined

in article 1525 of the Civil Code, which consists of either
a dwelling house or part thereof which is to be occupied
or is occupied as a home or residence by the occupier or a
garage; or
(ii) a "commercial tenement" or a "club", both terms having the
meaning assigned to them respectively in article 1525 of
the Civil Code when the property is not rented to or from
a related body of persons, and for the purpose of this sub
paragraph -
(A) a body or persons is related to an individual if it is owned or
76 Companies included.
controlled, directly or indirectly, as to more than twenty-

five percent by that individual; and
(B) two bodies of persons are related if they are owned or
controlled, directly or indirectly, as to more than twenty-
five percent by the same persons.
When Article 31 D ITA applies, the tax chargeable in the

circumstances is, at the option of the person deriving rental income,
at the rate of fifteen cents (0.15) on every euro of the gross rental
income received. Such tax is final and notwithstanding any other
provision of the Income Tax Acts, no set-off or refund is granted to
any person in respect of the tax so charged.
When the option to pay tax at 15% has been exercised, such
income shall be deemed to constitute separate chargeable income
for the purpose of the Income Tax Acts and shall not form part of
the chargeable income of the person exercising the said option.
Paragraph 3 prescribes that when the person receiving rental

income is an individual he shall not be required to declare such
income, in his tax return but Subsidiary Legislation 372.27 Letting
of Tenement (Forms) Rules lays down a special form for the
reporting of rental income taxed under 3 ID ITA.
Irrespective ofwhether the 15% option is exercised or not, where

an enquiry has been conducted and the Commissioner determines
that any rental income which should have been declared was not so
declared, such income shall be charged to tax at the rate of 35 cents
(0.35) on every euro of the gross rental income received and such
tax is in addition to any interest and additional tax payable under
the Income Tax Acts. Such tax is final and notwithstanding any
other provision of the Income Tax Acts, no set-off or refund shall
be granted to any person in respect of the tax so charged.
Companies resident in Malta availing themselves of 3ID must
allocate the distributable profits resulting from income to which

3ID appi ies, and taxed accordingly, to the final tax account.
Paragraph 6A provided for non-compliance.
Article 31E ITA - Rental Income Housing

Authority Scheme
Article 3IE contemplates a reduced rate of 5% on certain rental
income. The 5% applies to the gross rental income received and is
treated as a final tax which is not available as a tax credit.
The 5% rate applies in restricted case namely to rents of at least

seven years duration under a scheme administered by the Housing
Authority when the owner is registered with the Housing Authority
for the purpose and complies with any conditions imposed by the
Housing Authority.
Maintenance Allowance
The Deduction of Expenses in Respect of Immovable Property
Rules (‘DERIP’) prescribe for a special tax deduction against
rental income known the Maintenance Allowance.
Rule 3 of DERIP prescribes that the Maintenance Allowance

applies only to Article 4(1) (f) ITA income. Article 4(1) (f) ITA
was repealed in 1996 but it would appear that the deduction is now
taken to refer to Article 4(1) (e) ITA income, rental income which
is not in the nature of trade and in respect of which final tax has not
been applied.
Long term lets are presumed not to be a rent of a trading nature.

Therefore, generally, income from long term rents is considered to
be rental income and consequently a rent which is subject to the
Maintenance Allowance. On the other hand, short term lets of
fully furnished premises are considered to be in the nature of trade
and are consequently deemed not to be subject to the Maintenance
Allowance. Rents of a trading nature would be subject to the

deductions which apply in a trading context.
Rule 3 of the DERIP includes an exhaustive list of deductions
in respect of immovable property. The expenditure which is
deductible in terms of DERIP consists exclusively in the total of:
(i) the amount of interest allowable under article 14(1 )(a)

ITA;
(ii) any rent, ground rent or similar burden payable;
(iii) where applicable, the licence fee payable for the purpose of
the Guest Houses and Holiday Furnished Premises Act;
and
(iv) a further amount equivalent to twenty per cent of the
income remaining after deducting from the total of
the income in question the expenditure referred to in
paragraphs (ii) and (iii) of this rule, so however that no
such deduction is allowed in respect of income arising
from any emphyteutical concession.
3.6 Royalties
The ITA defines the term passive interest and royalties’ but we
need to know what, for tax purposes, should be treated as a royalty.
We desperately need a tax definition of royalty.
Garner defines a royalty as ‘a payment to an author or inventor

for each copy ofa work sold under a copyright or patent177. Typically,
royalties take two main7778 forms: (i) recurring royalties such as
those which are paid in return for permission to use a trademark
or a patent and (ii) royalties which are paid upon an outright
transfer of an intellectual property right. The former type of
royalties are taxable under Article 4 (1) (e) for the reason that
they are of an income nature but the latter type of royalties are
77 Garner, B, A: op.cit p. 1330.
78 Royalties could be classified as business profits too.
taxable under Article 5 in view of the fact that they constitute

capital gains.
The leading local case on royalty income is Case 24 of
1970 involving a contract wherein appellant had entered into
a contract of assignment wherein it assigned its tradename,
trademarks, industrial know how and trade secrets to another
commercial enterprise for a substantial sum, which was to be paid
by instalments. Appellant argued that any gains derived from
the contract of assignment were not of an income nature. The
Board disagreed. The Board held that in this case the appellant
had not sterilised the asset and that gains derived in terms of the
contract constituted a compensation for services rendered and
was consequently of an income nature. A copy of the Revenues
synopsis of the case is reproduced below:
“The Board noted that this case was unique and no provision of the Income
Tax Act specifically dealt with a typical transfer. As was the case with English
case-law, it was considered proper, in the circumstances, that it be dealt with
on the basis of the general principles governing the distinction between
trading and capital income. One had to consider whether appellant company
had parted with an asset that was the source, or one of the sources of its own
profits. It has to be established whether, while continuing to retain the right
to its know-how and expertise it used it to advantage to have its products
manufactured by another company against payment. It was evident that
the foreign company did not sell its rights to its asset but merely their use.
There was no sterilisation of asset, no loss of rights whatsoever so the income
earned was of a trading nature chargeable to tax.”
3.7 Any other profits arising from property79
This provision catches all income from property which is of

a revenue nature. In Case 21 of 195280 the Board of Special
Commissioners held that although a payment made by tenants to
a landlord in respect of fixtures could not be classified as rents or
premiums, the payments fell to be taxed as income from immovable
79 Immovable.
80 Decided on May 19,1953.
property.81 The conclusion in Case 21 was confirmed in Case 79 of

the Court of Appeal82.
In Cases 3 of 1952 and 9 of 195783 the Board held that a
laudemium, a payment made by the emphyteuta of a piece of land
to the owner of the nuda proprietas on the transfer of emphyteusis
was taxable as income derived from property. In Case 3 the Board
clarified that the non-recurrence of the payment did not mean that
such a payment could not constitute taxable income.
3.8 Any other Income
Article 4 (1) (g) ITA is a blanket all catching provision which

charges to tax any other income not specifically listed in Articles
4 (1) (a) to (4) (1) (g) ITA. Without prejudice to the distinction
between income and capital, Article 4 ( 1 ) (g) gives rise to a situation
where all income is taxable.
81 The Board based its decision on the grounds that under the law of lease lessees do not generally
have any right for compensation in respect of beneficati to a property.
82 When the Court held that ‘the money’ that "was received merely as considerationfor thefacility
given to the lessees to make alterationsfor the better enjoyment by them, while the tenancy lasted...
This means, as the Board argued in its decision, that the owners ‘will not suffer any loss orprejudice
to their property’. This Court agrees with this reasoning. It holds that the amount of money
received by the landowners., for thefacility given to the lessees, was like the rent although received
once in a lump sum, in consideration ofthefuller enjoyment by the lessee ofthe right ofuse and
occupation acquired in virtue ofthe tenancy. The compensation merely added to the landowner’s
profits from letting out the premises without in any way creating any hole in theirfixed assets.
Such compensation therefore must be regarded as falling within section 5 (1) (f) of the Income
Tax Act’’.
Chapter 5
The Classification of Taxpayers
I. Classifying Taxpayers
The ITA categorises taxpayers under several categories and the

classification of taxpayers has a bearing on the tax compliance
obligations of taxpayers and their general treatment for tax
purposes. Although the tax is one, the manner such tax is computed
depends on the classification of the taxpayer. The rate of tax which
applies to a taxpayer depends on such a classification. Moreover,
the classification of an entity as a company’ implies important tax
consequences. A distinction is drawn between legal persons which
are transparent entities and legal persons which are opaque entities.
A further distinction is drawn between residents and non

residents with yet another distinction being drawn between
individuals who are married and individuals who are not married.
Article 4 of the Civil Unions Act had promised equivalence
enunciating that ‘...a civil union, once registered, shall mutatis
mutandis have the corresponding effects and consequences in law
of civil marriage contracted under the Act’. Consequently, our tax
laws had to change.1 Act XIII of 2015 changed definitions of the
terms ‘married couple’, ‘married individual’, ‘married’ and ‘spouse’
incorporating civil unions within their remit. Act XIII of 2015I
1 I must have been among the first to anticipate the impact of the Civil Unions Act on our tax
laws. See Do they pay as much as 'I do’? Tax in same-sex civil unions (The Sunday Times of Malta
Sunday, November 17,2013).
established that, for the purposes of tax law, parties to a civil union
are treated like parties to a marriage which, in view of the ECtHRs
judgment in P.M. v. The United Kingdom,2 was inevitable.
2 Application No 6638/03 when the ECtHR held that:

“26. For the purposes of Article 14 a difference in treatment between persons in analogous or
relevantly similar positions is discriminatory if it has no objective and reasonable justification
that is if it does not pursue a legitimate aim or if there is not a reasonable relationship of
proportionality between the means employed and the aim sought to be realised. Moreover,
the Contracting States enjoy a margin of appreciation in assessing whether and to what extent
differences in otherwise similar situations justify a different treatment (see Camp and Bourimi
v. the Netherlands, no. 28369/95, § 37, ECHR 2000-X).
27. The Court notes the Government’s arguments that this case is not about paternity/
maternity but the married status of the parents. It is true that any person, not married to
the mother of the child concerned, would not qualify for tax deductions for maintenance
payments made. That said however, it is nonetheless the case that the applicant may claim to
be treated differently as an unmarried father than a married father, though both are parents of
the child to be maintained and under obligations to pay maintenance. This is not a situation
where the applicant seeks to compare himself to a couple living in a subsisting marriage (see,
for example, Lindsay v. the United Kingdom, cited above, where married and unmarried
couples, taxed differently, were not found in be in a comparable position), but one where the
married father has separated or divorced and is also living apart from the child of the family.
Other persons, not parents, are not covered by the child support provisions and are generally
in a different situation. This applicant differs from a married father only as regards the issue of
marital status and may, for the purposes of this application, claim to be in an relevantly similar
position.
28. The justification for the difference in treatment relied on by the Government is the special
regime of marriage which confers specific rights and obligations on those who choose to join
it. The Court recalls that it has in some cases found that differences in treatment on the basis
of marital status has had objective and reasonable justification (see, for example, McMichael
v. the United Kingdom, judgment of 24 February 1995, Series A no. 307-B, § 98, concerning
legislation which did not grant automatic parental responsibility to unmarried fathers who
inevitably varied in their commitment and interest in, or even knowledge of, their children).
It may be noted however that as a general rule unmarried fathers, who have established family
life with their children, can claim equal rights of contact and custody with married fathers
(see Sahin v. Germany [GC], no. 30943/96, § 94, ECHR 2003-VIII). In the present case, the
applicant has been acknowledged as the father and has acted in that role. Given that he has
financial obligations towards his daughter, which he has duly fulfilled, the Court perceives no
reason for treating him differently from a married father, now divorced and separated from the
mother, as regards the tax deductibility of those payments. The purpose of the tax deductions
was purportedly to render it easier for married fathers to support a new family; it is not readily
apparent why unmarried fathers, who undertook similar new relationships, would not have
similar financial commitments equally requiring relief.
29. The Court concludes therefore that there has been a violation of Article 14 of the
Convention in conjunction with Article 1 of Protocol No. 1 in this case.”
The Classification of Taxpayers 147
The basic categorisation of taxpayers is being illustrated diagrammatically

below.
2. ‘Bodies of Persons’
Article 2 ITA defines the term ‘body of persons’ as any body corporate3,
including a company, and any fellowship, society or other association
of persons, whether corporate or unincorporate, and whether vested
with legal personality or not4’ The term ‘body of persons’ includes the
‘company’ but companies are special bodies of persons for the purposes
of the law.
3. Companies, ‘Opaque9 Entities
A body of person qualifies to be considered as a company for the

purposes of the Income Tax Act provided that it is any one of the
following:
(a)
(i) a limited liability company constituted under the
Companies Act or under the Commercial Partnerships
Ordinance; or
(ii) any other company constituted as such under any other
law in force in Malta;
3 Including a body corporate established by law;

4 Article 2 of Cap. 123 of the Laws of Malta;
(iii) (1) any partnership en nom collectif and any partnership

en commandite constituted under the Companies Act or
under the Commercial Partnerships Ordinance;
(2) any partnership regulated by the applicable provisions of
the Civil Code and registered in such manner as may from
time to time be provided in terms of the Second Schedule
to the Civil Code;
(3) any European Economic Interest Grouping (EEIG)
formed pursuant to the provisions of the Companies Act
(European Economic Interest Grouping) Regulations;
and which partnership or EEIG as the case may be, has
elected to be treated as a company in terms of sub-article
(6) of article 27 of the Income Tax Management Act and
for as long as such election remains in force:
Provided that in the case of a cell company as defined in the
Companies Act (Cell Companies Carrying on Business of
Insurance) Regulations, (in this proviso referred to as 'the
Regulations') as may be amended from time to time, or in
any other law or regulations replacing the Regulations, for
all intents and purposes of the Income Tax Acts, every cell
of a cell company and that part of a cell company in which
non-cellular assets are held, shall each be deemed to be a
separate company and any words and expressions in the
Income Tax Acts which are relevant to a company shall be
construed accordingly. The interpretation of such words
and expressions insofar as applicable to a cell company
shall be made on the basis of the relevant provisions of the
Regulations:
Provided further that a partnership en commandite with
its capital divided into shares constituted prior to the 1st
of January, 2015 shall be deemed to have elected to be
treated as a company in terms of sub-article (6) of article
27 of the Income Tax Management Act and for as long as
such election remains in force;
(b) (i) any body of persons constituted, incorporated or

registered outside Malta, and of a nature similar to a
company referred to in sub-paragraphs (i) or (ii) of
paragraph (a) above;
(ii) any body ofpersons constituted, incorporated or registered
outside Malta and of a nature similar to any partnership
referred to in sub-paragraph (iii) of paragraph (a) above,
where such body of persons has elected to be treated as
a company in terms of sub-article (6) of article T7 of the
Income Tax Management Act and for as long as such
election remains in force;
(c) any co-operative society duly registered as such under the
appropriate law for the time being in force in Malta;
The definition of company reproduced above was introduced

by Act XIII of 2015. The most recent definition of the term’
Company’ is significantly wider than previous definitions allowing
for election partnerships. Act XIII changed the definition of the
term ‘dividend’ too; amounts credited to partners will be treated
as dividends.
Companies are taxpayers in the full sense of the word.

Companies are opaque entities, single non-transparent entities for
the Income Tax Acts. The ITA treats companies as separate and
distinct taxpayers from their shareholders. A clear distinction
is maintained between the profits, deductions and losses of a
company and the profits, deductions and losses of the shareholders
of such company.
The attribution of the status of company’ to a body of persons

carries with it the application of ad hoc rules under the ITA. The
latter include the following:
(i) The Income Tax Acts incorporate a special residence rule that
applies exclusively to Companies5.
(ii) Only Companies6 may apply the ACIT tax accounting system7.
(iii) The Income Tax Acts contemplate a special tax treatment which
applies exclusively to groups of Companies8.
(iv) The full imputation system applies only to distributions of
dividends made by Companies.
(v) Companies are subject to specific compliance obligations9.
(vi) The special 35% rate of tax applies only to companies, bodies
corporate established by law and ecclesiastical undertakings
exercising trading activities to be dealt with as a separate body
of persons10.
Group Relief
Case 43 of the Court of Appeal confirmed that a company and
its shareholders are separate and distinct bodies of persons for the
purposes of tax law and that consequently the losses of a company
cannot be utilised by its shareholders. Generally, a shareholder
of a cannot set off his chargeable income against losses suffered
by his company but the Income Tax Act was amended in 1994 to
allow for a special mechanism that allows the surrendering of losses
between companies that are deemed to be part of the same group.
The said rules are contained in Articles 16-22ITA.
5 The definition of‘resident’ contained in Article 2 ITA incorporates the following rule: ‘a
company incorporated in Malta on or after 1st July 1994 shall be resident in Malta and any
other company incorporated in Malta shall be resident in Malta from 1st January 1995 where
the management and control of the business of the company is exercised outside Malta’ which
is not applicable to partnerships.
6 And, more recently, their branches.
7 The definition of‘distributable profits’ contained in Article 2 ITA and Article 42B ITMA of
the Laws of Malta.
8 Namely surrendering of losses (Articles 16-22 ITA) and exemption from income tax on
Capital Gains in terms of Article 5 (9) Cap. 123 of the Laws of Malta which contemplates the
transfer of an asset from ‘one company to another company’.
9 Attard, Robert, An Introduction to Income Tax Theory (Malta 2004) p. 251.
10 Article 56 (6) ITA.
In certain instances, the ITA envisages scenarios whereby members of

a group ofcompanies may surrender trade losses11 to one another.
Two companies are considered to form part of the same group

only if:
(i) They are both resident in Malta and not resident for tax
purposes in any other country ; and
(ii) One is the fifty-one percent subsidiary of the other or
both are fifty-one per cent subsidiary of a third company
resident in Malta.
For the purposes of the group relief provisions, a company is

deemed to be a fifty-one per cent subsidiary of another company:
(i) if and so long as more than fifty per cent of its ordinary
share capital and more than fifty per cent of its voting
rights are owned directly or indirectly by the parent
company; and
(ii) the parent company is beneficially entitled either directly
or indirectly to more that fifty per cent of any profits
available for distribution to the ordinary shareholders of
the subsidiary company; and
(iii) the parent company would be beneficially entitled either
directly or indirectly to more than fifty per cent of any
assets of the subsidiary company available for distribution
to its ordinary shareholders on a winding up.
The ITA thus recognises direct and indirect groups as well as

horizontal and vertical groups. Forming part of the same group
of companies does not automatically imply that losses may
be surrendered between members of the same group, further
conditions apply.11
11 Capital losses may not be surrendered. Article 18 ITA.

Allowable losses may be surrendered to a member of the same

group provided the following conditions are met:
(i) When the surrendering company and the claimant

company are both members of the same group throughout
the year preceding the year of assessment for which the
relief is claimed;
(ii) Both companies have accounting periods, which begin,
and end on the same dates.
However, a company which is either:
(i) newly incorporated and at all times after its incorporation

satisfies the conditions to be deemed a member of the
same group of companies as another company in the
year preceding a year of assessment and has the same
accounting period end date as that other company in that
year preceding the year of assessment, or
(ii) wound up part way through its accounting period and
until it is so wound up satisfied the conditions to be
deemed a member of the same group as another company
in the year preceding a year of assessment and has the same
accounting period start date as that other company in that
year preceding the year of assessment;
is deemed to have an accounting period which begins and ends on

the same date as that of the other company and group relief shall be
available in full for that year.
The losses that may be surrendered are losses under the definition
of losses in Article 14(1) (g) ITA, excluding the allowances under
Section 14 (l)(f) ITA (wear and tear plant and machinery) and
14( 1 )(j) ITA (initial capital allowance).
Relief may not be given more than once, whether by giving

group relief and by giving some other relief (in respect of any year
of assessment) to the surrendering company, or by giving group
relief more than once, in respect of the same amount. Two or more
claimant companies cannot, in respect of any one loss, obtain
in total more relief than could be obtained by a single claimant
company.
Losses are surrendered from the tax account of one company to

the equivalent tax account of the other company.
A payment for group relief -
(i) is not taken into account in computing profits or losses of

either company for Income Tax purposes; and
(ii) is not, for any of the purposes of the Income Tax, be
regarded as a distribution.
A surrendering company may surrender allowable losses by

way of group relief in excess of the total income of the claimant
company in the year preceding a year of assessment, in which case
the claimant company may carry forward and set off those losses in
accordance with the provisions of article 14(l)(g) ITA as if they
were losses of its own trade.
A claim for group relief:
(a) need not be for the full amount available,

(b) should include the consent of the surrendering company
set out in such form as the Commissioner may require,
and
(c) (c) must be made by the later of -
(i) the tax return date for the relative year of assessment in
respect of which the claim is made, or
(ii) twelve months following the end of the company’s

accounting period, which date falls within the year immediately
preceding the year of assessment for which the claim is made.12
A rule introduced in 2012 provides that when the allowable

loss, had it been a profit, would have been allocated to the
immovable property account or the Maltese taxed account of
the surrendering company, the claimant company may deduct
such loss from its income which stands to be allocated to either
its immovable property account or its Maltese taxed account,
and such loss may only be carried forward against the claimant
company’s total income arising in subsequent years as would stand
to be allocated to any of these taxed accounts. Similarly, where the
allowable loss, had it been a profit, would have been allocated to the
foreign income account of the surrendering company, the claimant
company may only deduct such loss from its total income as would
stand to be allocated to its foreign income account and such loss
may only be carried forward against the claimant company’s total
income arising in subsequent years as would stand to be allocated
to its foreign income account.
The European Court ofjustice delivered an important pronouncement

on issues pertinent to surrendering of losses in the case of Marks &
Spencer Group Pic v. U.K. Inspector of Taxes13 (the M&S Case) in 2005.
It pronounced itself as follows:
“As Community law now stands, Articles 43 EC and 48 EC do not preclude

provisions of a Member State which generally prevent a resident parent
company from deducting from its taxable profits losses incurred in another
Member State by a subsidiary established in that Member State although
they allow it to deduct losses incurred by a resident subsidiary. However,
it is contrary to Articles 43 EC and 48 EC to prevent the resident parent
company from doing so where the non-resident subsidiary has exhausted
the possibilities available in its State of residence of having the losses taken
into account for the accounting period concerned by the claim for relief and
12 Paragraph (ii) was added by Act III of 2013.

13 C-446/03.
also for previous accounting periods and where there are no possibilities
for those losses to be taken into account in its State of residence for future
periods either by the subsidiary itself or by a third party, in particular where
the subsidiary has been sold to that third party.”
In essence, therefore the Court ruled that although the restriction to

freedom ofestablishment posed by Englands rules relating to surrendering
of losses was justifiable such a restriction was not proportional (and
consequently contrary to EU law) where14:
(i) the non-resident subsidiary has exhausted the possibilities

available in its State of residence of having the losses taken
into account in its State of residence for the accounting
period concerned by the claim for relief and also for
previous accounting periods, and
(ii) there is no possibility for the foreign subsidiary’s losses to
be taken into account in its State of residence for future
periods either by the subsidiary itself or by a third party, in
particular where the subsidiary has been sold to that third
party.
The M&S case has a direct impact on the Maltese tax system,
considering that the provisions of the Maltese legislation on surrendering
of losses currently in force closely mirror the UK group relief provisions
existing at the time. Neither the Maltese Government nor the
Commissioner of Inland Revenue has formally expressed itself on this
matter, as yet, but it would appear that the rules relating to surrendering
of losses contained in Article 16 ITA on group relief do not seem to
be compatible with the ECJ decision in M&S. It seems that Malta
should take action to remedy the situation soonest. The ECJ s decision
in M&S has recently been followed up with a reasoned opinion. The
Commissions release15 relating to the matter is being reproduced below:
14 Press Release No 107/05 (13 December 2005) Judgment of the Court of Justice in Case
C-446/03.
15 IP/08/1365 Brussels, 18 September 2008. The Commission's case reference number is
2007/4026..
“The European Commission has sent the United Kingdom a formal request
to properly implement the European Court of Justice (ECJ) judgment in
Marks & Spencer on cross border loss compensation. In the legislation meant
to implement the Marks & Spencer ruling, the United Kingdom imposes
conditions on cross border group relief which make it virtually impossible
for tax payers to benefit from the relief. The Commission considers that this
is contrary to the EC Treaty. The request is in the form of a ‘reasoned opinion’
under Article 226 of the EC Treaty. If the United Kingdom does not reply
satisfactorily to the reasoned opinion within two months the Commission
may refer the matter to the European Court ofJustice.
In the Marks & Spencer ruling (Case C-446/03 of 13 December 2005) the
Court ruled that the UK ban on cross border loss reliefwas disproportionate,
in so far as it denied loss reliefwhere a non-resident subsidiary had exhausted
all possibilities for relief in its state of establishment. Following this ruling,
the UK should in principle grant relief for definitive losses of a subsidiary
established in another Member State.
However, although the legislation has been amended, the UK still imposes
conditions on cross border group relief which in practice make it impossible
or virtually impossible for the tax payer to benefit from tax relief pursuant to
the judgment in Marks & Spencer. This in particular concerns the following
points:
An unnecessarily restrictive interpretation of the condition that there should

be no possibility of use of the loss in the state of the subsidiary (paragraph 7
of Schedule 18A of the Income and Corporation Taxes Act (ICTA) 1988);
the date for determining whether the condition that there should be
no possibility of use of the loss in the state of the subsidiary is met is set
immediately after the end of the accounting period in which the loss arises
(Part 1, paragraph 7(4), of Schedule 18A ICTA 1988);
the time limit to claim for group relief for losses made by subsidiaries
established in other Member States is set at twelve months (extended in case
of enquiries by the Revenue) after the filing date for the company tax return
of the claimant company(Schedule 18, paragraph 74, of the Finance Act
1998);
the legislation states that it applies only to losses incurred after 1 April 2006
(Part 3 of Schedule 1 of the Finance Act 2006).
According the Commission these conditions make the new legislation
incompatible with the freedom of establishment, guaranteed by Articles 43
and 48 of the EC Treaty and Articles 31 and 34 of the EE A Agreement.”
Special laws prohibit the surrendering of losses with respect to

companies which are subject to a special tax status. Companies which
cannot surrender losses are companies falling under the definition of
petroleum contractors and securitisation vehicles.16
Company Registered in Malta

The 200717 amendments to the ITA created a special type of company
and a new term in the Income Tax Acts, the ‘company registered in Malta’.
The concept of ‘company registered in Malta’ is directly linked to the
application of the ACIT regime. ‘Company registered in Malta’ is defined
in Article 2(1) ITA as meaning,
“...a company which is resident in Malta or a company which, although

not resident in Malta, carries on any activity in Malta and in the case of a
company which is neither incorporated nor resident in Malta shall mean a
company that is registered for this purpose with the Commissioner in such
manner as may be prescribed.”
The definition of a company registered in Malta is wide enough

to include within its purview non-resident companies which are
neither incorporated nor resident in Malta but which carry on an
activity in Malta (i.e. including branches of oversea companies).
Further amendments to the ITA, passed later on in the course 200718

introduced a proviso within the definition of a company’ contained
in Article 2 ITA. The proviso provides for the Cell Company19. The
amendment provides ‘that in the case ofa cell company as defined in the
Companies Act (Cell Companies Carrying on Business of Insurance)
Regulations20...every cell ofa cell company and that part ofa cell company
16 See Chapter 14 on special cases.
17 Article 3 of Act II of2007.
18 Article 7 Act No. IV of2007.
19 Defined in Article 84A CA as,
‘...a company formed or constituted as such or converted into a cell company and creating within
itself one or more cells for the purpose of segregating and protecting the cellular assets of the
company in such manner as may be prescribed.’
20 Article 2 of S.L. 386.10 defines a Cell Company as,
‘...a company formed or constituted as such or converted into a cell company and creating within
itself one or more cells for the purposes of segregating and protecting the cellular assets of
the company in accordance with the provisions of these regulations, and in relation to the
in which non-cellular assets are held, shall each be deemed to be a separate

company...’. It would appear that cell companies may, subject to certain
conditions, be considered to be a group of companies and losses may be
surrendered from one Cell Company to another cell company.
Act XV of 2016 introduced a similar rule for securitisation cell

companies. In the case of a securitisation cell company as defined in the
the Securitisation Regulations, every cell of a securitisation cell company
and that part of a securitisation cell company in which non-cellular assets
are held, is deemed to be a separate company.21
Single Taxable Person Basis (Consolidation)

Act III of 2013 added Article 22A ITA envisaging an enabling
provision allowing a form of tax consolidation. Article 22A
enables the Minister for finance to make rules providing for bodies
of persons under common ownership to be entitled to elect to
compute and bring to charge their chargeable income or losses
as the case may be, on a collective basis, and for the consequent
carrying out of the relevant provisions and obligations under the
Income Tax Acts as if they are a single body of persons, subject
to such terms and conditions as may be laid down in such rules.
Article 22A was implemented by L.N 110 of 2019 discussed in the
appendix
4. Transparent Entities
Partnerships En Commandite with capital not divided into shares

constituted prior to 2015 and Partnerships En Collectifand Partnerships
En Commandite that do not elect to be treated as companies
(‘Partnerships’) are transparent entities for the purposes of the law.
Therefore, such transparent entities are not really taxable persons.
business of insurance manager, as well as the business of insurance broking, reference to
"company" shall include reference to a partnership en commandite or similar or equivalent
body corporate, which has its capital divided into shares;’
21 Article 12 of the Budget Act.
Partnerships which do not possess the status of companies, are

not full taxpayers for the purposes of the ITA. The partnership is
looked-through ’ for tax purposes and the income of a partnership
is treated as the income of the partners and taxed in the partners’
hands accordingly.
Article 27ITM A as amended in 201522 and 201623 provide that when

income from any source accrues to or is received by a partnership that is
carried on by any two or more persons jointly and the partnership is not a
"company" the income of any partner from the partnership, is deemed to
be the share to which he was entitled and must be included in the return
of income to be made by such partner.
Whereas, in the ordinary course of events24, the losses of a company are

separate and distinct from the losses of the shareholders of such company
losses ‘incurred by any person, solely or in partnership, in any trade, business,
profession or vocation are automatically attributed to the individual
partners25. Capital allowances are not allocated to individual partners
like losses but ‘remain in the partnership’ because capital allowances are
tied to the trading activity to which such allowances refer to26.
Partnerships, unlike companies, do not pay tax in their own

name but are still required to file a return.
5. Residents
A definition of the term resident is contained in Article 2ITA. The

definition provides that ‘“resident in Malta’ when applied to an
individual means an individual who resides in Malta except for such
22 Act XIII of 2015.

23 Act XV of 2016.
24 Save for the possibility of surrendering losses;
25 Article 14(1) ITA;
26 Especially Article 14 (1) (f) of Cap. 123 of the Laws of Malta;
temporary absences as to the Commissioner may seem reasonable

and not inconsistent...”.
The definition contained in Article 2ITA is not very helpful
because it basically leaves the matter up to the Commissioners
discretion and creates one of typical ‘orror vacui charateristic of
the ITA. However, it seems that the gap has been closed by the
Board of Special Commissioners. The Board expressed itself on the
matter in a thorough and clear judgement in BSC 13/63 when it
applied a hard and fast physical presence test for the purposes of
determining residence.
In BSC13/6327 established that28 a person is considered to be a

resident of Malta if such a person spends more than six months in Malta.
The rule was established by a analogy29 by reference to Article 13ITA30
which deals with temporary residence.
The tax rates which apply to resident individuals are contained

in 56 (1) (a) and (b) ITA.
5.1 Joint and Separate Computations
Article 56 (1) (a) ITA establishes that the following tax rates apply
27 Decided on December 14,1963.
28 Significant excerpts from the official synopsis of the judgement are being reproduced from the
Revenue’s site in view of the importance of this judgement,
“...the relative period to be too short for them to be considered as residents for tax purposes...the Act
did not give a comprehensive definition of "resident" nor did it specify a minimum period of
permanency in Malta necessary for a person to qualify as resident. In the circumstances the
Board agreed with the Commissioner in drawing an analogy with the provisions of article 9
of the Act to help reach a decision. This article, entitled ‘Temporary residents’ provides that a
person is not liable to tax on income earned outside Malta if he has not "actually resided in the
Island at one or more times for a period equal in the whole to six months. It is an established
principle that a law is to be viewed in its entirety. In the absence of a specific provision, it is
logical to draw on the definitive period set by article 9 as a yardstick when deciding on the
admissibility of personal deductions that are limited only to ‘residents'”.
29 Such a rule of interpretation is unusual in tax law. In Case 40 of the Court of Appeal the
Court held ,”And in fiscal law there is no place for analogy. In the same manner that you
cannot by analogy extend the provisions which impose tax you cannot extend the provisions
which create a deduction or an exemption”
30 Article 13 ITA previously Art. 9.
to a married couple resident in Malta when opting for a joint

computation:
(i) Where the chargeable income does not exceed €12,700
the tax is to be determined by multiplying the chargeable
income by 0%;
(ii) Where the chargeable income exceeds €12,700 but is less
than €21,201 the tax is to be determined by multiplying
the chargeable income by 15% and then subtracting
€1,905 from the result;
(iii) Where the chargeable income exceeds €21,200 but is less
(iv) Where the chargeable income exceeds €28,700 but is less
(v) Where the chargeable income exceeds €60,000 the tax is to
be determined by multiplying the chargeable income by
35% and then subtracting €9,905 from the result.
The rates above are colloquially referred to as the ‘married rates’.

The following rates apply in the case of any other individual resident
in Malta including each spouse where the responsible spouse has
opted for a separate computation for the purposes:
Article 56 (1) (b) ITA establishes that the following tax rates
apply in the case of any other individual resident in Malta including
each spouse where the responsible spouse has opted for a separate
computation:
(i) Where the chargeable income does not exceed €9,100 the
tax is to be determined by multiplying the chargeable
income by 0%;

35% and then subtracting €8,725 from the result.
The rates above are colloquially referred to as the single rates’
Article 49 (1) ITA prescribes that the income of a married

couple, where both spouses are living together, is to be charged to
tax in the name of the responsible spouse. The spouses select the
responsible spouse jointly but when the spouses fail to make such
selection the Commissioner decides who the responsible spouse
will be. Both spouses should sign any tax return or declaration but
any tax return or declaration which is signed only by the responsible
spouse or the other spouse on behalf of the responsible spouse is
presumed to have been made with the consent of both spouses.
Article 49(2) ITA provides that where a joint return is required

to be filed by a married couple, both spouses are jointly and severally
responsible for the performance of all obligations under the ITMA
and ITMA. In case of default, the Commissioner may take such
action to enforce performance of such obligations against either or
both of the spouses. The proviso to Article 49 (2) ITMA confirms
that in no case may any criminal action be taken against a spouse
for any act or omission for which he or she may not be directly
responsible.
Contrary to popular belief, the joint computation does not apply only
to married persons. Unmarried individuals^ may apply the married rates
in limited cases. An unmarried individual may apply the rates if:
(i) "he/she wholly maintained under his or her sole custody a

child who:
(A) was not over 18 years of age (or not over 23 years if receiving
full-time instruction at any university, college or other
educational establishment or serving an apprenticeship
with a view to qualifying in a trade or profession), or
(B) was incapacitated by infirmity from maintaining himself or
herself, and who, in any case, was not in receipt of income, in
his or her own right, in excess of €3,400;31
32;
(ii) where a childrens allowance is payable in respect of that
child under the Social Security Act, was recognised by
the Director (Social Security) as the beneficiary of the
childrens allowance payable in respect of the said child;
(iii) such individual was not in receipt of any financial
assistance in respect of the maintenance of the said child
from the other parent of the said child;
(iv) such individual was not living or residing at the same house
with the other parent of the said child33.
Article 50 ITA gives married residents a choice and an

opportunity to mitigate their tax liability. Married persons have a
choice either (i) to aggregate all their income in one computation
and pay tax at married rates; or to (ii) be taxed separately by applying
single rates on income from certain sources. It is important to
emphasize that, it is not all the income of the spouses which can
be taxed separately but only certain types of income. Article 50
31 L.N. 218 of 2012 defines these as “an individual was unmarried or a widow or a widower, or
was a spouse separated de jure or de facto, or was divorced,”
32 Amended by Act VII of 2018.
33 Proviso to Article 56 (1) of Cap. 123 of the Laws of Malta;
(1) ITA prescribes that when the spouse not being the responsible
spouse derives income from the following ‘earned’sources:
(i) Article 4 ( 1 ) (a) ITA Income, Income from Trade, business,
profession or vocation in so far as it does not refer to any
fees derived from the holding of an office of a director; or
(ii) Article 4(1) (b) ITA Income, Income from Employment or
Office in so far as it does not refer to any fees derived from the
holding of an office of a director; or
(iii) Article 4 (1) (d) ITA Income, Pension income provided
that such pension income is received in view of the past
employment34.
he/she may elect in writing that the tax on the chargeable income
derived from the said earned sources be computed separately. In
such a case each spouse applies the single rates instead of the joint
rates in that year of assessment.
Any income of the spouses that is not derived from the earned’
sources listed in Articles 4(1) (a) ITA, 4(l)(b) ITA and 4(l)(d)
ITA as previously defined is aggregated to the total income of
the spouse with the higher income. Where such total income of
the spouses is equal, it is aggregated with the total income of the
responsible spouse.
The tax computed separately is charged in the name of the

responsible spouse. A married couple is barred from applying the
separate computation if the other spouse s income consists solely of
income that is deemed to constitute a fringe benefit.
5.2 Parental Computation
Act V of 2012 introduced new tax rates applicable to parents. The

new rules on parental computation provide that:
34 The three categories listed are referred to as ‘earned’ income;

(a) When a parent maintained under his or her custody a

child, or paid maintenance in respect of his or her child as
provided in article 12( 1 ) (t); and
(b) Such child was not over 18 years of age (or not over
21 years if receiving full-time instruction at a tertiary
education establishment); and
(c) Such child was not gainfully occupied, or if gainfully did
not earn income in excess of €3,400, said parent shall be
entitled to be charged to tax at the following rates:
(i) Where the chargeable income does not exceed €10,500

the tax is to be determined by multiplying the chargeable
income by 0%;
35% and then subtracting €9,050 from the result;
The 90% Rule

In Case C-391/97 Frans Gschwind Finanzamt Aachen-AuEenstadt,
the ECJ had concluded that Article 39(2) EC is to be interpreted
as not precluding the application of a Member State's legislation
under which resident married couples are granted favourable tax
treatment subject to the condition that at least 90% of their total
income must be subject to tax in that Member State.
Judgments on the same lines of Gschwind Finanzamt Aachen-

Auféenstadt were delivered in Schumacker case (C-279/93)
Gschwind C-391/97 , Zurstrassen C-87/99 Wallentin C-169/03
and Meindl C-329/05. The 90% rule evolved into a non
discrimination rule.
In 2014, Act XII incorporated a ‘Gschwind type-rule’ in our law. A

proviso was added to Article 56 (1) (a) and (c) ITA35. The 2014 additions
prescribe that resident rates apply even to individuals who are nationals of
a European Union or European Economic Area member state even when
their spouses are not resident in Malta if the other conditions are satisfied
and the Commissioner is satisfied that at least 90% of the couple s world
wide income is derived from Malta.
6. Non-Residents
The rates which apply to non-residents are the following:
For every euro of the first €700 0c

For every euro of the next €2,400 20c
For every euro of the next €4,700 30c
For every euro of the remainder 35c;
Unlike, married residents, married non-residents do not have an

option to prepare a separate computation.
35 Article 25 Act XII of 2014.

Chapter 6
Jurisdiction to Income Tax
I. General Jurisdictional Rules
The rules relating the jurisdiction of the Income Tax Act are
contained in Article 4 of the Income Tax Act, Article 4(1) and
Article 4 (1) (g) ITA, in particular. Malta asserts jurisdiction to
tax on the basis of territoriality, ordinary residence, domicile and
remittance. In essence Malta has the right to tax:
(i) Income and taxable capital gains1 arising in Malta;

(ii) Income and taxable capital gains arising abroad to persons
who are ordinarily resident and domiciled in Malta;
(iii) Foreign source income derived by persons who are
ordinarily resident in Malta but not domiciled in Malta
which is received in Malta; and
(iv) Foreign source income derived by persons who are
domiciled in Malta but not ordinarily resident in Malta
which is received in Malta.1
1 Not all capital gains are taxable but only capital gains which are in the list of taxable transfers
contained in Article 5 ITA.
On 28 March 2019, the Commissioner for Revenue published

an important guidance note entitled The Remittance Basis of
Taxation for Individuals under the Income Tax Act. The Guidance
Note explains the meanings of‘residence and ordinary esidence’2
2 “2. Residence and ordinary residence

2.1. Residence does not depend on nationality or any other civil status, but is a question offact. A
person may be resident in Malta even ifhe is also residentfor tax purposes in another country.
1 “Spouse” includes a partner in a registered civil union.
2.2. Presence in Malta for more than 183 days in any particular year amounts to residence in
Maltafor thatyear, regardless ofthe purpose and the nature ofthe individual’s stay in Malta. An
individual who comes to Malta to establish his residence here becomes residentfrom the date ofhis
arrival, regardless ofthe duration ofhis stay in Malta in any particular year.
2.3. A person who lives in Malta on a permanent or indefinite basis is ordinarily resident in
Malta. A person who is in Malta for a temporary purpose may become ordinarily resident in
certain circumstances. This would apply, for example, to individuals who are in Malta for more
than 183 days in each year over a longperiod - say, for three consecutive years. It can also apply to
individuals who do not stay in Maltafor more than 183 days in any year but who come to Malta
regularly over a longperiod - say, over a period ofthreeyears - and establish personal and economic
ties with Malta.
2.4. An ordinary resident loses his residence status ifhe leaves Malta permanently or indefinitely.
Ifhe is temporarily absentfrom Malta, he continues to be considered as resident here unless his
absence is or becomes inconsistent with a residence status. This depends on the circumstances of
each case and, in particular, on the personal and economic ties that the individual may have
retained with Malta.”
Jurisdiction ofIncome Tax 169
‘domicile’3, arising in Malta’4 and ‘received in Malta’5. Extracts

3 “3. Domicile
3.1. Individuals who are in Malta and consider Malta as their permanent home are domiciled
in Malta. "Home” here refers to the place where a person belongs and implies stronger ties with a
country than residence.
3.2. Domicile does not depend on nationality.
3.3. Every individual acquires domicile at birth (domicile oforigin). This is normally the domicile
ofthe parents, regardless ofthe place where the individual is bom.
3.4. An individual may change his domicile oforigin and acquire a domicile ofchoice. A domicile
ofchoice in a particular country is acquired when the individual takes up residence in that country
with the intention ofmaking that country his permanent home. A person who takes up residence
in a country, even iffor a long or indefinite period, does not acquire domicile in that country
ifhe has the intention of returning some day to his country ofdomicile or ofsettling some day
somewhere else.
3.5. No individual can be without a domicile and no individual can have more than one domicile
at the same time. An individual does not lose his domicile oforigin unless and until he acquires
a domicile ofchoice. Ifan individual acquires a domicile ofchoice, he can change domicile again
by taking up a new domicile ofchoice or returning to the country ofhis domicile oforigin. Ifan
individual abandons a domicile ofchoice without establishing his permanent home in any other
country, his domicile oforigin will revive automatically.”
4 “4. Arising in Malta
4.1. Income derived from employment or from a profession, business or other self-employment
arises in Malta ifthe activities are performed in Malta.
4.2. For double taxation treaty purposes, liability to Maltese tax on incomefrom an employment
may depend on the duration of the employee’s stay in Malta, and liability to Maltese tax on
incomefrom a profession or business may depend on whether those activities are carried on through
afixedplace ofbusiness in Malta or not. Unless the provisions ofa double taxation agreement are
applicable, however, the duration of the stay in Malta and the existence or otherwise ofa fixed
place ofbusiness in Malta are not determiningfactors.
4.3. It is to be noted, nonetheless, that incidental or ancillary links to Malta are not sufficient
in order to establish where the activities are performed. For example, a person whose business
or employment is based outside Malta is not considered as deriving income from Malta simply
because he makes occasional visits to Malta. The delivery ofgoods or services to customers in Malta,
or the storage, display orpromotion ofgoods or services in Malta, is not enough to conclude that the
incomefrom the sale ofthose goods or services arises in Malta.
4.4. Passive income arises in the country where the source is situated. Rent and other incomefrom
immovable property arises where the property is located. Rent or other compensation for the use
oftangible or intangible movable property is usually treated as arising in the country where the
lessee is resident or carries on his business. Dividends are normally treated as arising in the country
where the paying company is incorporated while interest is treated as arising in the country where
the debtor is resident.
4.5. Capitalgains arise in Malta ifthe asset that is transferred is situated in Malta.”
5 “5. Received in Malta
5.1. Income is received in Malta ifit is paid to the recipient in Malta. Income paid into an account
held abroad is also treated as received in Malta ifit is subsequently remitted to Malta.
5.2. Proceeds ofa capital nature, such as an inheritance or the proceedsfrom the sale ofa capital
asset, are not income and the receipt in Malta is not captured under the remittance basis.
5.3. Remittances to Malta for ordinary expenses, such as living expenses, are presumed to be
remittances of income, regardless of the foreign account out of which the remittance is made.
from this important Guidance Note are being reproduced in the

footnotes verbatim.
Worldwide Basis v. Remittance Basis of taxation

Thus, persons who are both ordinarily resident and domiciled in
Malta are subject to unlimited or full taxation; they are subject
to tax on their worldwide income but persons who are either not
ordinarily resident or not domiciled in Malta are subject to limited
taxation; they are subject to the remittance basis of taxation. The
difference in tax treatment is based on the axiom that a ‘full’ tax
resident who is both ordinarily resident and domiciled in Malta
uses the amenities of a state more than a person who is either
notresident or not domiciled in Malta and that a ‘full’ resident
should pay more tax than a resident.
Exclusions from the Remittance Basis of Taxation

An important rule governing the remittance basis of taxation was
introduced in 2015. The proviso to Article 4 ( 1 ) (g) (iii) ITA added
by Act XIII of 2015 prescribes that the remittance basis of taxation
shall not apply to an individual whose spouse is ordinarily resident
and domiciled in Malta.
Subsidiary Legislation 123.160 the Residence Programme

Rules (‘RPR’) contains further restrictions to the remittance
basis of taxation. Rule 5 (4) prescribes that notwithstanding any
provision in the Income Tax Act, an individual who falls under the
definition of‘permanent resident of Malta’ in rule 2, will be taxable
on any income accruing in or derived from Malta or elsewhere, and
whether received in Malta or not. Rule 2 RPR defines ‘permanent
resident of Malta’ as either:
When remittances are made for a capital purpose, such as the purchase ofproperty in Malta,
and the individual can show that they originatefrom moneys held abroad as capital, such as an
inheritance or the proceedsfrom the sale ofcapital assets, they will be regarded as remittances of
capital."
(a) a person who has right of permanent residence in terms of

article 6 and is in possession of a permanent residence certificate
issued in terms of article 7 of the Free Movement of European
Union Nationals and their Family Members Order; or
(b) a person who applies for right of permanent residence in terms
of article 6 of the Free Movement of European Union Nationals
and their Family Members Order.
A mirror image of Rule 5 (4) RPR is contained in Subsidiary

Legislation 123.148 Global Residence Programme Rules (‘GRPR’).
Rule 5 (4) GRPR prescribes that notwithstanding any provision in
the Act, an individual who falls under the definition of "long-term
resident" in rule 2 GRPR shall be taxable on any income accruing
in or derived from Malta or elsewhere, and whether received in
Malta or not. Rule 2 GRPR defines the term "long-term resident"
as meaning:
(a) a person who has long-term resident status in terms of the

Status of Long-term Residents (Third Country Nationals)
Regulations;
(b) a person who applies for long-term resident status under
the Status of Long-term Residents (Third Country
Nationals) Regulations.
Act VII of 2018 amended Article 4 ITA so as to reflect the rules

previously introduced in the aforementioned Legal Notices. Act
VII added the following proviso to Article 4:
“Sohowever that items (i) and (ii)6 of this proviso shall not apply to an
individual who is a long-term resident, or who holds a permanent residence
certificate or a permanent residence card, in respect of any income derived
by such individual in the year of being granted long-term resident status or
the right of permanent residence and in subsequent years. The terms "long
term resident", "permanent residence certificate" and "permanent residence
6 The remittance basis of taxation.

card" shall have the meaning assigned to them respectively in the Status of
Long-Term Residents (Third Country Nationals) Regulations and the Free
Movement of European Union Nationals and their
Family Members Order."
Introduction of Remittance Base Charge

Act No. VII of 2018 added 56 (27) ITA introducing a remittance
base charge (minimum tax) for individuals applying the remittance
basis of taxation. The recently added 56 (27) ITA prescribes that:
“"(27) Any individual who during any year preceding the year of assessment:
(i) is ordinarily resident in Malta but not domiciled in Malta (hereinafter
"the non-domiciled individual") and to whom provisos (i) and (ii) of article
4(1) apply, and who is not taxable in accordance with any scheme under the
Act effectively establishing a minimum tax payable; and
(ii) derives income (including, in the case of a married couple whose income
is chargeable to tax in terms of article 49 of the Act, the income derived
by both spouses) amounting to not less than thirty five thousand euro
(€35,000) or its equivalent in another currency, or such other amount as
may be prescribed, arising outside Malta and referred to in proviso (i) to sub
article (1) of article 4 of the Act, but which is not received in Malta, shall, for
any year of assessment, be subject to a tax
liability on his income amounting to not less than five thousand euro
(€5,000) per annum (hereinafter "the minimum tax"), and should the
income (excluding capital gains chargeable in terms of article 5 A of this Act)
chargeable to tax in the hands of such individual for any year of assessment
result in a tax liability (before taking into account any relief granted in terms
of articles 76 to 89 of the Act) amounting to less than the minimum tax, he
shall be deemed to have received in Malta additional income arising outside
Malta as shall result in a total tax liability on his total income, wherever
arising, amounting to the minimum tax:
Provided that in computing the minimum tax, account shall be taken of tax
paid under this Act, whether by withholding or otherwise, in respect of all
income (excluding tax imposed in terms of article 5 A of this Act), whether
arising in Malta or outside Malta:
Provided further that if the non-domiciled individual can prove to the
satisfaction of the Commissioner that if he had been subject to tax without
taking into account the provisions of provisos (i) and (ii) to sub-article (1)
of article (4) of the Act, the total tax payable by him would have amounted
to less than the minimum tax, his tax liability shall be capped accordingly at
the said lower amount."
Temporary Residents
Another important jurisdictional rule is contained in Article 13
ITA which deals with temporary residents. Article 13 ITA was
copied from Section 336 of the British 1988 Finance Act. Article
13 ITA creates a special regime which applies to persons referred to
as temporary residents. Temporary residents are basically persons
who are neither ordinarily resident nor domiciled in Malta who
spend only a very short time in Malta. Temporary residents are not
taxable on foreign source income at all, even if their foreign source
income is received in Malta.
Article 13 ITA provides that,
“Tax shall not be payable in respect of any income arising outside Malta to
any person who is in Malta for some temporary purpose only and not with
any intent to establish his residence therein and who has not actually resided
in Malta at one or more times for a period equal in the whole to six months
in the year preceding the year of assessment.”
Thus, a person who satisfies, in a cumulative manner, all three

conditions by staying in Malta for a temporary purpose, staying in
Malta without the intention to establish a residence in Malta and
residing in Malta for less than six months is not taxed on foreign
source income at all. The meanings of the terms ‘temporary purpose’
and ‘without the intention to establish a residence’ have recently
been thoroughly analysed in the British judicial pronouncements
in the Gaines-Cooper cases discussed below.
1.1 Agricultural, Manufacturing and other

Productive Undertakings
Article 4 (3) ITA includes special jurisdictional rules relating to the

income of certain undertakings. The general rule is that income
derived by the said undertakings from the sale in a wholesale
market of products grown or produced in Malta is taxable in Malta
even when the wholesale market is situated outside Malta. Maltese
jurisdiction to tax prevails even when the contract of sale of such

produce is executed outside Malta7. The proviso to the article
creates an exception to the rule in those cases the Commissioner is
satisfied that the profits have been increased through treatment of
the product outside Malta other than handling, grading, blending,
sorting, packing or disposal. When treatment carried out abroad
significantly improves the saleability of the product grown or
produced in Malta income derived from the profit attributable
to that foreign activity is excluded from liability to Maltese tax8.
Income derived from the sale of petroleum produced in Malta or
rights on the said petroleum is governed by analogous rules and
when such petroleum profits derive to non-residents and the gains
accrue partly in Malta and partly overseas specific computational
rules apply9.
1.2 Shipping and Air Transport
Special rules relating to profits arising from the carriage of

passengers, mails, livestock or goods to non-resident shipowners are
contained in Article 28 ITA. Profits derived by non-resident ship
owners from the said activities are taxable in Malta whenever Malta
is a port of call. Exceptions to this source rule are envisaged in the
case of transhipment10. The jurisdictional rules that apply to non-
7 “4 (3) Where a person carries on in Malta an agricultural, manufacturing or other productive
undertaking, the following provisions shall have effect, that is to say:
(a) if such person sells any product of the undertaking, in a wholesale market, outside Malta
or for delivery outside Malta, whether the contract is made within Malta or outside Malta, the
full profits arising from the sale shall be deemed to be income of such person accruing in or
derived from Malta:”
8 Subject to the deemed profit rule contained in 4 (3) (b) ITA of the Laws of Malta, “(b) if
such person otherwise disposes of, uses or deals with any product of the undertaking, outside
Malta, the profit which might have been obtained if such person had sold the product to the
best advantage in a wholesale market outside Malta shall be deemed to be the profit arising
from such disposal, dealing or use, and to be the income of such person accruing in or derived
from Malta.”
9 Article 23 ITA and Article 56 (15) ITA. The taxation of petroleum profits derived arising
from the extraction ofpetroleum in Malta would generally be governed by ad hoc Exploration
and Profit Sharing Agreements.
10 Article. 28 (1) ITA.
Jurisdiction ofIncome Tux 175
resident shipowners were also extended to apply to non-resident

persons who carry on the business of air transport or the business
of the transmission of messages by cable or wireless telegraphy, and
to the agent of such persons11.
Act I of 2010 introduced Article 29 (2) ITA incorporating

an important new jurisdictional rule. Income derived by an
owner, lessor or operator of one or more aircraft/aircraft engine
(irrespective of their country of registration) engaged in the
international transport of passengers or goods, is deemed to arise
outside Malta, notwithstanding the fact that the aircraft may have
called at or operated from any airport in Malta.
1.3 The Concept of an Alter-Ego
Another important rule relating to jurisdiction to tax is contained

in Article 5 ITMA which ‘looks through’ profits derived by
non-residents via resident agents. Article 5 ITMA prescribes that
when a non-resident person derives profits in Malta through a per
son who acts as his lunga, manus then the profits of such non-res
ident person are taxable in Malta and the non-resident would be
charged and assessed in the name of his Maltese resident agent.
Non-resident persons who derive profits11 12 from Malta through an
agent13 are taxable in Malta on those profits14,
“in like manner and to the like amount as such non-resident person would
be assessed and charged to tax in Malta as if he were in the actual receipt of
such income.”
11 Article 29 ITA.
12 Directly or indirectly.
13 Defined for illustrative purposes as including an attorney, factor, agent, receiver, branch or
manager.
14 Assessable and chargeable in the name of his trustee, guardian, tutor, curator or committee,
or of any attorney, factor, agent, receiver, branch or manager, whether such attorney, factor,
agent, receiver, branch or manager
2. The Concept of Income Derived from Malta
Income and capital gains derived from Malta are taxable in Malta
irrespective of the characteristics of the person who receives such
income or gain. Income arising in Malta is taxable in Malta even if
the recipient of such income is a non-resident, a non-domiciliary or
a temporary resident.
2.1 ‘Income Arising in
As a jurisdiction with an old British law heritage Malta tends to

follow the ‘trading in’/’trading with’ doctrine to determine the
source country of a receipt. The leading British case on the matter
is Wilcock v Pinto & Cols. Only income with a substantial link
with a jurisdiction falls to be considered as a trade in’, income
which is taxable in the relevant jurisdiction. Income, which only
has a tenuous connection with a particular jurisdiction, is a ‘trade
with’ and not deemed to arise in that jurisdiction.
In the case of certain cross-border transactions, establishing

whether income arises in Malta may be difficult but there seems
to be an element of general international consensus in respect of
certain issues. The said general principles bring to mind, subject
to a number of notable exceptions15 16, the rules relating to place of
supply incorporated in the Third Schedule to the VAT Act. The
Commissioner of Inland Revenue would be expected to take the
following basic guidelines into consideration in the process of
determining whether income is deemed to arise in Malta:
• Income derived from immovable property situated in the

territorial confines of a state is considered as arising in
such state.
• Income from services is deemed to arise in the country
15 9TC111.
16 Referring mainly to the proposed origin principle.
where such services are physically exercised.

• Generally passive income such as dividends, royalties and
interests are deemed to arise in the country where the
payer resides.
• Income from Intangible property rights is generally
deemed to be sourced from the country wheresuch
intangible property is exploited;
• Revenue derived from the disposal of tangible property is
generally deemed to arise in the country where the asset
is situated when the sale takes place at law (where there is
passage of title).
• Employment income and income derived from services
rendered by artistes and sportsmen are generally taxed in
the place of performance of such work17.
Maltese tax courts and tribunals have delivered a number

judgements dealing with the concept of income arising in Malta.
A great deal of importance has been attributed to what is known
as ‘the activities test’; earned income arises in the country where
the activities, which yield the income, are physically exercised.
Income is taxable in the country in which it is produced18.
Maltese judgements on ‘income arising’ have been discussed in An
Introduction to Income Tax Theory, and any further comment would
be repetitive. The main principles which have been enunciated in
the judgements are being summarised below:
• Income arises in Malta when the activities which give rise

to such income are exercised in Malta (BSC 33/55);
• Income derived from a contract is taxable in Malta if the
relevant contract is executed in Malta and the recipient of
such income establishes some form of presence in Malta
(BSC 2/68);
17 Rohatgi, Roy, Basic International Taxation (New York 2002) pp.154-159.

18 Fiott, Dr. A, Trading in and Trading With Malta - in The Accountant April 1992 (Malta
1992) p.ll.
• Income derived from services which are connected with

immovable property situated in Malta is taxable in Malta.
The Court of Appeal held that a non-resident estate agent
was taxable in Malta in respect of a fee he charged to a
non-resident in respect of a property situated in Malta
(Case 120, Court of Appeal).
2.2 «Malta’
The ITA envisages a ‘tax meaning’ of the term ‘Malta’. Unlike

other laws, the ITA does not merely refer to Article 124 of the
Constitution of Malta.19 Article 2 ITA defines ‘Malta as meaning:
“...the Island of Gozo and the other islands of the Maltese Archipelago,
including the territorial waters thereof and the continental shelf.”
Chapter 194 of the Laws of Malta, the Continental Shelf Act

defines ‘continental shelf’ in Article 2,
“’the continental shelf’ means the sea bed and subsoil of the submarine areas
adjacent to the coast of Malta but outside territorial waters, to a depth of two
hundred metres or, beyond that limit, to where the depth of the superjacent
waters admits of the exploitation of the natural resources of the said areas;
so however that where in relation to states of which the coast is opposite
that of Malta it is necessary to determine the boundaries of the respective
continental shelves, the boundary of the continental shelf shall be that
determined by agreement between Malta and such other state or states or,
in the absence of agreement, the median line, namely a line every point of
which is equidistant from the nearest points of the baselines from which the
breadth of the territorial waters of Malta and of such other state or states is
measured;”
Subsidiary Legislation 194.01, Designation of the Continental

ShelfArea Order incorporates bearings which delineate the Maltese
Continental Shelf.
19 Which defines‘Malta’as meaning:
“"Malta" means the Island of Malta, the Island of Gozo and the other islands of the Maltese
Archipelago, including the territorial waters thereof;”
3, The Concepts of Domicile and Ordinary

Residence When Applied to Individuals
3.1 Ordinary Residence
The concept of ordinary residence is a very topical subject in civil

procedure because the Code of Organisation and Civil procedure
uses the tool of ordinary abode’ to determine the jurisdiction of
the Gozitan Courts. One can speak of an indigenous concept of
ordinary residence but the tax concept of ordinary residence seems
to have evolved independently from the civil law concept. The
Maltese tax concept of ordinary residence has been drawn directly
from the pronouncements of British courts.
The ITA does not incorporate a definition of the term ordinary

resident’. It does incorporate a definition of the term resident but
the terms residence’ and ordinary residence’ were held not to be
synonymous terms2021 . A person can be a resident of Malta without
being ordinarily resident in Malta. Ordinary residence requires
more than mere residence; it connotes residence in a place with
some degree of continuity. Ordinary residence means residence
which is normally part of a person’s everyday life. Whereas case
law has interpreted the test to establish residence as being a test
which is driven by a physical presence test, a legalistic facts and
circumstances test is applied for the purposes of determining
ordinary residence.
Ordinary residence is contrasted with occasional or temporary

residence. It is necessary to take into account the duration of an
individual’s presence in a country, the regularity and frequency
of his visits to a country, his family and business ties and nature
of a person’s visits to a country to determine whether a person is
an ordinary resident of that country27. In brief, the constitutive
20 For a discussion of the two terms see Ibid Attard, R p.232.
21 For more detail vide Attard, R (pp.223-228).
elements of ordinary residence’ have been held to consist in the

following:
(i) A regular physical presence in a country, residence which

is part of the regular order of a person’s life22;
(ii) Residence with a degree of continuity, notwithstanding
occasional temporary absences;
(iii) Residence taken up voluntarily;
The concept of ordinary residence has been recently thoroughly

examined in the recent Gaines-Coopers case discussed below.
3.2 Domicile of Individuals
The Maltese legal system has not developed its own indigenous
notion of domicile and borrowed the notion of domicile from
British common law, lock stock and barrel. Maltese Courts
have consistently held that the Maltese notion of domicile is the
common law notion. Maltese Courts tend to refer to old British
judgements as authoritative sources of reference2324
. The reader is
referred to Professor Ian Refalo’s Gabra ta Decizjonijiet dwar id-
Dritt Internazzjonali Privai in respect of Maltese case law relating
to the law of domicile.
Domicile has been defined, in Inland Revenue Commissioners

v Duchess of Portland25 as physical presence in a country as an
inhabitant of it’. Domicile of choice is acquired by the combination
of residence and the intention of permanent or indefinite
residence. The British Court held, in the Duchess of Portland case
that residence in a country for the purposes of domicile is physical
presence of a certain quality. Domicile is not about a physical stay
22 Inland Revenue Commissioners v Lysath (1928) 13 TC511.

23 G. Spiteri v. E. Soler et 22.10.1937 Court of Appeal.
24 (The Royal University of Malta, 1987)
25 (1982) CH314,318-9; (1982) STC 149 at 155c.
but is also about intention, the intention to live permanently in a

country. Intention must be viewed in the context of the propositus’s
life as a whole26. If the necessary intention is also there, an existing
domicile of choice can sometimes be abandoned and another
domicile acquired or revived by a residence off short duration in a
second country. The relevant rules have been summarised in Dicey
and Morris27 as follows:
• ‘Residence means very little more than physical presence. But it does mean
something more: thus a person is not resident in a country in which he is
present casually as a traveller. Residence in a country for the purposes of the
law of domicile is physical presence in that country as an inhabitant of it’.
• ‘Every independent person can acquire domicile of choice by the
combination of residence and intention ofpermanent or indefinite residence,
but not otherwise’;
• ‘Any circumstance which is evidence of a person’s residence, or of his
intention to reside permanently or indefinitely in a country, must be
considered in determining whether he has acquired a domicile of choice in
that country’
It has been held, in Inland Revenue Commissioners v Bullock28

that a person may have homes in more than one country at one
time. In such a case, for the purposes of determining his domicile, a
further enquiry may have to be made to decide which, if any, should
be regarded as his principal home.
British case law has established that a person must always have
a domicile and that, conversely, he may have one domicile at the
same point in time. Every person acquires the domicile of his
father at birth. When either the child’s father is dead or the child
is illegitimate, the child acquires the domicile of the mother29.
Children of unknown parents are domiciled in the country where
they are found.
26 Agulian v Cyganik (2006) EWCA Civ 129.

27 Dicey & Morris on the Conflict of Laws Thirteenth Edition (2000) Volume 1 Rule 10 at page
117.
28 (1976) STC409at414d.
29 North & Fawcett op.cit p. 139.
3.3 The Decision in Gaines-Cooper
Two scholarly decisions on matters relating to residence and

domicile have recently been delivered in England in two cases
which involved the same taxpayer, Mr. Robert Gaines-Cooper.
The first decision, the decision of the Special Commissioners30 was
delivered on 26 June 2006. The second decision, the decision of
the appellate court, the High Court of Justice, Chancery Division
was delivered on 13 November 200731. The decision of the High
Court dismissed the appeal.
The two decisions in Gaines Cooper are extremely interesting

from a Maltese perspective because the analysis carried out by
the UK tax courts may be applied as an authoritative source
of interpretation of the provisions of the ITA which deal with
ordinary residence, temporary residence and domicile.
The decision of the Special Commissioners thoroughly analyses

the meaning of the term ‘temporary purpose’ used in the original
source of Article 13 ITA and examines the most recent British
judicial trends relating to the legal notion of ordinary residence.
The decision of the High Court is very pertinent to the study of the
British law of domicile.
The Facts of The Case

Mr. Gaines-Cooper is a gentleman who has connections with a
number of jurisdictions. He was born in Reading in England In
1937 to British parents. He grew up and studied in England. In
1954 Mr. Gaines-Cooper undertook national service and was
posted to Cyprus from 1954-55. Upon completing national
service Mr. Gaines Cooper returned to the UK where he started
a successful business. He bought a large residence in Reading in
1964 in which he kept his paintings and collections of guns and
vintage cars.
30 SPC568,
31 (2007) EWHC 2617 (ch).
In 1971 Mr. Gaines Cooper sold his shares in his company to a

company resident in the Isle of Man but remained an employee of
the company. In the course of the proceedings it transpired that the
Isle of Man company was beneficially owned by Mr. Gaines-Cooper.
In 1971 the Isle of Man Company acquired a large property in the
UK, the property was converted into a dairy. Mr. Gaines-Cooper
did not have any living accommodation at the Dairy but he used to
like to visit the property.
In 1973 Mr. Gaines-Cooper travelled to the Seychelles and

decided to establish his permanent home there. In 1974 he resigned
from the company and established a property development
company in Canada. In 1975 he applied for a residence permit
to live in the Seychelles and established a plastic factory there.
The Seychelles residence scheme appears to have been similar to
the Maltese permanent residence scheme. The Seychelles business
was not profitable. When he visited the Seychelles from 1973-
1975 he stayed at a Hotel. However, Mr. Gaines-Coopers visits
to the Seychelles were so regular and of such duration that the
management of the Hotel knocked two suites together for his living
accommodation. A year later he acquired a house situated within
the hotel grounds but was unable to meet his loan commitments
and decided to sell the property to the British foreign office.
In 1977 Mr. Gaines Cooper met a certain Miss Laye-Sion in the

United Kingdom. Miss Laye-Sion would become very important
in Mr. Gaines-Cooper s life but in but in 1979 Mr. Gains Cooper
got married to another woman, a Dutch citizen named Dilona
Lantang. Mr and Mrs Gaines Cooper lived in a house in California.
In 1981 Mr. Gaines Cooper expressed his willingness to live in his
property in Reading on a permanent basis. He entertained his
guests at Reading and received all his correspondence there. In
1984 Miss Laye-Sion started to work for one of the companies of
Mr. Gaines-Cooper and Mr. Gains-Cooper was reported to have
entered into a good and stable relationship with Miss-Laye Sion.

Mr. Gaines Coopers marriage to Dilona Lantang was dissolved
1986. Mr. Gaines Cooper sold his house in Reading in 1989 and
went to live in another property situated in the UK. In 1993 Mr.
Gaines Cooper married Miss Laye-Sion in 1993, a Seychelles
citizen in England but Miss Laye-SIon applied for naturalisation
as a British subject. The point at issue was whether Mr. Gaines
Cooper was resident, ordinarily resident and domiciled in the UK.
The Concept of Temporary Residence

The Special Commissioners held that a temporary purpose is a
purpose lasting for a limited time; a purpose existing or valid for
a time; a purpose which is not permanent but transient; a purpose
which is to supply a passing need. Temporary purpose has been
defined as a casual purpose as distinguished from the case of a
person who is in a country in pursuance of is regular habits of life.
A decision to visit a country for a few months each year to exercise
a hobby was not held to amount to a temporary purpose.
The Special Commissioners held that when Mr. Gaines Cooper

visited the UK he did so for a limited time but he visited the UK
to be with his family and friends. The Special Commissioner took
the view that travelling to a country to visit family and friends is a
permanent and not a transient purpose but is rather, in pursuance
of the regular habits of a persons life. A decision to visit a country
on a large number of days each year to be with the family is not
a temporary purpose. The Special Commissioners rejected the
general proposition that because a visit is short it must necessarily
be for a temporary purpose. Therefore it concluded that Mr.
Gains Cooper s presence in the UK could not be said to be for a
temporary purpose.
Ordinary Residence
The case of Gaines-Cooper revolved around a question which had
previously been brushed aside as a purely academic issue - the
question whether a person can be ordinarily resident in a country

without being a resident of that country, an issue which has been
tackled by our Courts32. The Court held that Gaines-Cooper was
ordinarily resident in the UK because his residence in the UK was
continuous in the sense that it continued from year to year. It was
ordinary and part of his everyday life bearing in mind that Mr.
Gaines Cooper’s everyday life was far from ordinary. The Special
Commissioners held that a person would still be ordinarily resident
in a country which he visits from year to year even if there were an
occasional year when he was not resident in that country.
Domicile
The appeal to the High Court was limited to a point of law in
respect of the domicile decision. The decision of the High Court
confirmed the decision of the Special Commissioners relating to
residence and ordinary residence but the High Court felt that it
should perfect the pronouncement of the Special Commissioners
in connection with the notion of domicile. The High Court
referred to Lord Chelmsford’s decision in Udny and Udny33 and
the importance of its reliance on the test of chief residence’,
“Domicil of choice is a conclusion or inference which the law derives from

the fact of a man fixing voluntarily his sole or chief residence in a particular
place, with an intention of continuing to reside there for an unlimited time”
The Court also referred to the case in Plummer34 which held

that the loss of a domicile of origin is not insistent with retention
of a place of residence in that country if the chief residence has
been established elsewhere. The High Court described domicil
of origin as particularly adhesive’ but confirmed that there is, at
least in theory, a particular moment in time at which domicile of
origin is shed in favour of domicile of choice. The High Court
conceded that locating the exact moment of the transition from
32 Ibid Attard, Rp. 232.
33 (1869) LR1HL 441,458.
34 Ibid.
domicile of origin to domicile of choice is a difficult question of

fact. However, it held that a residence does not cease to be a chief
residence simply because it is let out. Thus it held that, although
Mr. Gaines Cooper let out his residence in England at one time,
his chief residence remained England just the same. The High
Court concluded, after examining Mr. Gaines Cooper’s continuing
connection with England that it was impossible to say that the
only true and reasonable conclusion was that Mr. Gaines Cooper
acquired a domicile of choice in Seychelles in 1976. Therefore it
dismissed the appeal and confirmed the decision of the Special
Commissioners which held that Mr. Gaines Coopers have never
abandoned his domicile of origin in England.
3.4 The Concept of Ordinary Residence When

Applied to Bodies of Persons
Residence and ordinary residence have marginally different

meanings, at least as far as individuals are concerned. The decision
in Gaines Cooper confirms that an individual can be an ordinary
resident of a country and a resident of another country. However,
the distinction between the two notions does not seem to hold in
the world of bodies of persons. Unlike individuals, bodies of persons
do not have families and personal ties; they do not commute and do
not keep wives and lovers. Therefore, as far as bodies of persons are
concerned, ordinary residence and residence have one and the same
meaning. Thus, the definition of ‘residence’ contained in Article 2
ITA must be taken to be a definition of the term ordinary residence’
for the purposes of Article 4ITA, as far as companies are concerned.
The definition contained in Article 2 ITA applies both an

‘Incorporation Test’ and a ‘Management and Control Test’. The
definition draws a distinction between companies incorporated
pre-1994 and companies which were incorporated after 1994.
Relevant extracts from the cryptic definition are being reproduced
below:
“resident in Malta ... when applied to a body of persons, means any body
of persons the control and management of whose business are exercised in
Malta, provided that a company incorporated in Malta on or after 1st July
1994 shall be resident in Malta and any other company incorporated in Malta
shall be resident in Malta from 1st January 1995 where the management and
control of the business of the company is exercised outside Malta.”
The selective application of the incorporation and managements

tests is somewhat egocentric. Whereas the incorporation test is
conveniently applied in respect of companies which have been
incorporated in Malta, the management and control test is applied
in respect of companies incorporated outside Malta. A company
which has been incorporated abroad is considered to be a resident
of Malta if it is managed and controlled in Malta.
The legislative definition of corporate residence contained in

Article 2 ITA has been drawn from common law precedents. The
notion of‘management and control’ is not a notion of Maltese law
and consequently the interpretative rule contained in Article 2
(2) ITA must be applied. The expression must be attributed the
meaning assigned to it in English law35.
3.5 Management and control under Common

Law
The notion of management and control and its evolution under

English common law has recently been the subject ofan authoritative
study which has just been conducted by Professor John Avery
Jones of the Special Commissioners. Avery Jones’s erudite study36
35 Article 2 (2) ITA reads as follows:

‘Words and expressions used in this Act which are not known to the law of Malta but are
known to the English Law, shall, so far as may be necessary to give effect to this Act and
consistently with the provisions thereof, have the meaning assigned’.
to them in the English Law and be construed accordingly.
36 Avery Jones, John, Jurisdiction to tax companies: the influence of the jurisdiction of the courts
and of European thinking. An advance copy of the study has been made available to the author
at the Fourth Tax History Conference held at the University of Cambridge The study is due
for publication (with rest of the conference papers) in 2010.
incorporates a comprehensive analysis of the development and

meaning of the concept of management and control under common
law. It promises to become Britain’s definitive work on the subject
and is therefore, indirectly, a valuable source of interpretation of
Article 2 ITA. The parts of the study which are relevant to Maltese
law are being discussed below.
The common law rule relating to management and control

was developed outside of the world of tax cases. It stemmed
from the need to determine county court jurisdiction over
railway companies in the nineteenth century. The British
courts had to establish an element of ‘threshold presence’ to
justify a claim of jurisdiction over a foreign company. Thus, the
concept of ‘dwelling’ which was generally applied in asserting
county jurisdiction in respect of individuals had to be applied
to companies. It was clear from the outset, that the dwelling
of the shareholders was considered to be irrelevant. Victorian
precedents37 took the view that a ‘company dwelt or carried on
business was where the actual business was carried on, namely
the branch rather than the head office, if that were in a different
place38’.
The first proper company tax residence case was Attorney

General v Alexander39 decided at a time when ‘the understanding
of the nature of the company was that the shareholders in general
37 ‘Keynsham Blue Lias Co. v. Baker 33 LJ Ex 41 in which the company had its registered office in
London, where the directors met and managed the business. The quarrying and manufacture
and sale of cement were ail done at Keynsham. It was held that the company dwelt and carried
on its business (within the County Courts (England) Act 1846 s. 128) at Keynsham, and not
in London. The decisions upon railway companies were reviewed in that case and held to be
inapplicable. A different result was reached in Aberystwith Promenade Pier Co. v. Cooper 35
LJ (Q.B.) 44 in which the place of business was held to be in London, although the pier was
built in Wales and the tolls were taken there, but the subject matter of the action was a call on
the shares, which is more obviously a head office matter than something relating to the pier’.
Ibid John Avery Jones p.2.
38 Ibid Avery Jones p.2.
39 (1874) LR 10 Exch 20.
meeting were the company40’ and the directors were merely

considered to be agents of the company. The Alexander case
involved the tax residence status of the company which ran the
central bank of the Ottoman Empire. The company’s capital was
raised in London and Paris but the company had an equally divided
place of management. The company was managed by a committee
composed of Englishmen and Frenchmen who met in London
and in Paris. The annual general meetings of the company were all
held in London. The court held that the company was resident
in Constantinople, the place of incorporation and seat of business.
The decision in Alexander was reversed in subsequent case law.
The leading tax case on management and control is The Calcutta

Jute Mills Co Ltd v Nicholson heard with The Cesena Sulphur Co
Ltd v Nicholson41, a case which was argued by a certain R.T.Reid,
who would, as the future Lord Loreburn decide most of the
leading precedents on ‘management and control’. The decision in
Cesena forms the basis of the common law notion of management
and control. R.T.Reid contended that guidance on the issue of
corporate residence should be sought in the railway cases. The
Court seemed to agree with him. The Court held that a company
is resident where the company’s real business is carried out, where
the company’s central management and control is found,
“The use of the word ‘residence’ is founded upon the habits of a natural
man, and is therefore inapplicable to the artificial and legal person whom
we call a corporation. But for the purpose of giving effect to the words of the
legislature an artificial residence must be assigned to this artificial person,
and one formed on the analogy of natural persons. There is not much
difficulty in defining the residence of an individual; it is where he sleeps
and lives. I adopt Mr. Matthews’ [counsel for the appellant in Calcutta Jute]
suggestion, that [the Income Tax Act 1853], when it speaks of‘residing’ does
not mean an artificial residence. It means an actual residence. Mr. Matthews
argues, therefore, that when you deal with a trading corporation it means
the place not where the form or shadow of business, but where the real trade
40 Ibid Avery Jones p. 6.
41 (1876) lExD 428.
I
and business is carried on, and that definition seems to be almost conceded
by all the counsel. There is a German expression applicable to it which is well
known to foreign jurists - der Mittelpunkt der Geschafte; and the French
term is ‘le centre de lentreprise,’ the central point of the business”.42
The Court combined the dicta of rulings on county courts

jurisdiction with mainland European thinking and the concept of
management and control came into being,
“All the cases cited support that view [where the real trade or business
is carried on]. In Keynsham Blue Lias Co. v Baker, the Court held that
Keynsham was the place of business, because the substantial business was
carried on there, though the registered office was in London. In Taylor v
Crowland Gas Co., the learned judges thought that a company dwells where
it carries on its business. In Adams v Great Western Ry. Co. it was held that
the place where that company carried on its business was Paddington. So
in Brown v London and North Western Ry. Co., it was held that the place
where that company carried on its business was at Euston, and not at Chester
as had been contended. The same rule had been applied in Shiels v Great
Northern Ry. Co. Then there is a very strong case, Aberystwith Promenade
Pier Co. v Cooper, where it was held that the place of business was in
London, although the pier was built in Wales and the tolls were taken there.
The decision in Sulley v Attorney General was to the same effect. The case
of Kilkenny and Great Southern and Western Ry. Co. v Feilden,46 which
was cited for the appellants, is, I am satisfied, distinguishable. In the last
case in this Court, Attorney General v Alexander, there was no charter of
incorporation in England, and two at least of the learned judges - the Lord
Chief Baron and my Brother Amphlett - held that Constantinople, where
the corporation was incorporated, was the seat of business, the place where
the business was carried on”43
The Court rejected the Incorporation test which was, at the

time applied by American authorities, saying that it was merely a
factor to be taken into account,
“Registration, like the birth of an individual, is a fact which must be taken
into consideration in determining the question of residence. It may be a
strong circumstance, but it is only a circumstance. It would be idle to say
that in the case of an individual the birth was conclusive of the residence. So
drawing an analogy between a natural and an artificial person, you may say
42 At 103 of the judgement.
43 Ibid at 452.
that in the case of a corporation the place of its registration is the place of
its birth, and is a fact to be considered with all the others. If you find that a
company which is registered in a particular country, acts in that country, has
its office and receives dividends in that country, you may say that those facts,
coupled with the registration, lead you to the conclusion that its residence is
in that country.”44
The Court went on to establish the place where the company’s

real and substantial business was carried on, the place where the
company’s centre point was situated. The Court held that once it
was the directors who called the shots’ and the directors met in
London the company’s centre point was in London,
“At first it did seem that the centre of business was in Italy. [But after
considering the company’s constitution he continues45. It seems, indeed,
that almost every act of the company connected with the administrative part
of the business is to be done in London. No doubt the manufacturing part
was done in Italy, and the company might have found sulphur in another
country, and carried on the manufacturing part of the business in that other
country, but the administrative part would be carried on at the place from
which all the orders flowed, where officers and agents were appointed and
recalled, where their powers were granted and revoked, where whatever
money was sent was received, and where the dividends were declared and
were payable. All these acts were performed in London. I think, therefore,
that the main place of business of the company is in England, and that there
is at Cesena merely an agency, as it were, of the principal house, that agency
being confined to the manufacture and sale of the sulphur, but under the
direction of the principal house.”46
The dicta of Cesena were set in stone in de Beers Consolidated

Mines Ltd v Howe47 decided by R.T. Reid who by that time was
Lord Loreburn, the Lord Chancellor. In de Beers the Court held
that,
44 Ibid at 453.
45 Ibid Avery Jones p.l 1/
46 Ibid para455-6.
47 [1906] AC 455.
“The decision of Chief Baron Kelly and Baron Huddleston, in the Calcutta
Jute Mills v Nicholson and the Cesena Sulphur Company v Nicholson, now
thirty years ago, involved the principle that a Company resides, for purposes
of Income Tax, where its real business is carried on. Those decisions have
been acted upon ever since. I regard that as the true rule; and the real business
is carried on where the central management and control actually abides.”48
The plot thickened in Swedish Central Railway Company v

Thompson49, a company which had a divided management. In its
first years of the company’s life the company’s board met in UK but
the board subsequently moved to Sweden. However, the company’s
seal, bank account and transfer books were kept in London.
Furthermore the company’s accounts were maintained and audited
in London as was the place from where dividends were paid out.
The Special Commissioners held that the company was resident in
the UK. When the matter went up the House of Lords the House
of Lords decided that although there was some management and
control in Sweden the Special Commissioners were entitled to find
that there was sufficient management in the UK for also to reside in
the UK. More importantly, it held that a company can have more
than one residence for the purposes of the Income Tax Acts.
Central management and control is linked to the seat of the

director’s meeting but it was clear from the outset that a company
is managed and controlled in the country in which real business is
carried on. Thus it was held, in Unit Construction Ltd v. Bullock50,
that if a parent company effectively usurps the functions of the
Board of Directors of the subsidiary, then one cannot say that the
company is managed and controlled where the board of directors
of the subsidiary meets.
The judgement in Bullock was discussed in Wood and Another

v Holden51,
48 Ibid at para 213.
49 9 TC 342 (case stated and High Court); [1924] 2 KB 255 (CA), [1925] 1 AC 495 (HL).
50 (1960) AC 351
51 Ibid.
“ [22] ... the representative of the parent company in East Africa effectively
usurped the functions of the local boards, which still existed but stood aside,
and controlled the subsidiaries in accordance with the requirements of the
parent. Much of that may have been irregular, or even unconstitutional, but
it was what happened. It was held that the African subsidiaries had become
resident in the United Kingdom.
[23] ... It was not a case where the local boards still exercised central
management and control, but did so under guidance and influence from the
parent company in the United Kingdom. It was a case in which the local
boards stood aside altogether, and the parent company effectively usurped
what in theory were the functions of the local boards.”
If the board of a directors is a sham and, to use Avery Jones’s

phrase, the shots are called somewhere else, the company resides
in the country were real authority is exercised. The latter principle
was applied in 2004 in the cases Regina v. Allen52 and Regina v
Dimsey53.
Mr. Allen was an English resident who hived off his business
interests in an offshore company. Mr. Allen, was not, at least on
the records, a director of his offshore company. The board was
composed by non-resident directors54. The said directors always
acted on the instructions of Mr. Allen and were, in substance,
directors only in name. Decisions relating to the operation of the
company were effectively taken in England by Mr. Allen. When
the Revenue, in the course of a tax audit, raided Allens house
they found evidence which demonstrated that Allen controlled
the company from the UK and acted as a shadow director of the
company55. When the matter went to Court, the Court found
that as the company was centrally managed and controlled from
the UK and the offshore company was thus effectively UK resident
company for all intents and purposes. Consequently the Court
found that Allen was guilty of tax fraud and sentenced Allen to a
52 [2001] UKHL45.
53 [2001] UKHL46.
54 In Jersey.
55 Boswell Marghareth; Getting it Wrong (UK 2001) p.l.
seven year prison sentence with a further seven years if he failed to

pay STG3,000,000 in taxes56.
Another important decision on the issue of ‘real control’ was

delivered in 2006 by Supreme Court ofJudicature Court of Appeal
(Civil Division) On Appeal from The High Court ofJustice in the
case Wood and another v. Holden (HMIT).57
The merits of the case in Wood and another seemed to have

some common elements with the merits of the case in Dimpsey
and Allen but the case of Wood and another had a somewhat
unexpected outcome. The Case of Wood and another involved a
complex international structure as well as a number of tax issues58
Mr. and Mrs. Woods possess an indirect beneficial interest in a

company named Eulalia, incorporated in the Netherlands. Eulalia
had a sole director who took his decisions in the Netherlands. The
British Revenue contended that Eulalia was a resident of the UK
and not a resident of the Netherlands because the Revenue argued
that functions which were vested in the director had been usurped
by third parties. According to the Revenue was Eulalias sole
director was a director only in name. The Revenue maintained that
the director of Eulalia was receiving instructions from Mr. Wood
and his accountant in the UK and that consequently Eulalia was,
effectively managed and controlled from the UK and was a UK
resident for the purposes of the law. The Special Commissioners
decided in favour of the Revenue but the High Court reversed
the decision of the Special Commissioners. The Revenue appealed
but the Court of Appeal dismissed the appeal and confirmed the
decision of the High Court.
56 Tichehurst, Rupert; How to Use an Offshore Company Portfolio International June 2003
p.34.
57 [2006] EWCA Civ 26.
58 Aparna Nathan, Determining Company Residence after Wood v. Holden, Step Magazine
Autumn Issue 2005).
The Court of Appeal found that the decisions which were taken
by the sole directors were effective decisions' because they were
reached with proper information or consideration,
“43. A further flaw in the special commissioners’ approach was to treat the decisions which were
made by ABN AMRO as not ‘effective decisions’ because they were reached without proper
information or consideration. But a management decision does not cease to be a management
decision because it might have been taken on fuller information; or even, as it seems to me,
because it was taken in circumstances which might put the director at risk of an allegation of
breach of duty. Ill-informed or ill-advised decisions taken in the management of a company
remain management decisions. I should add (in fairness to ABN AMRO) that it is not said
that, with fuller information, further consideration or independent professional advice, the
decisions in the present case as to the purchase and sale of the Holdings shares would have
differed from the decisions actually taken; but nothing turns on that. The decisions which were
taken would have been no less “effective decisions” if (on the facts) different decisions would
have been reached if ABN AMRO had approached the decision making process with greater
circumspection.
44. For those reasons I would uphold the judge’s decision to reverse the special commissioners’
finding as to the residence of Eulalia on the basis of the central management and control test.
That makes it unnecessary for me to consider what the position would have been if the effective
place of management test posed by the double tax convention had become relevant. I have
already indicated that I find it very difficult to see how, in the circumstances of this case, the two
tests could lead to different answers.”
The Appellate Court thus upheld the distinction which the

High Court's presided by Park J. maintained between the concept
of'influence' and the concept of'control'. The High Court held that
the Revenue had failed to prove that Eulalia was merely endorsing
decisions which had already been taken by Mr. Woods' accountant
in England. It described the I960 judgement in Bullock as a very
important case, but ... a highly exceptional case in terms of the
result’.
Park J. found that, contrary to what the Revenue alleged, the

company's accountant was not giving orders from the UK. Park
J. rejected the proposition advanced by the Revenue that the
decisions and deliberations taken by Eulalia's sole director were
mere formalities. Park J. conceded that the sole director had been
influenced but he maintained that influence is not tantamount to
management and control.
“25] There is a difference between, on the one hand, exercising management

and control and, on the other hand, being able to influence those who
exercise management and control. There is another difference, highlighted
by Unit Construction v Bullock, between, on the one hand, usurping the
power of a local board to take decisions concerning the company and, on the
other hand, ensuring that the local board knows what the parent company
desires the decisions to be.”
Thus, Eulalia was considered to be a Dutch resident because the

activities performed by its director in the Netherlands included a
judgemental process and not merely the execution of documents,
“The only acts of management and control of Eulalia were the making of the board resolutions
and the signing or execution of documents in accordance with those resolutions.
We do not consider that the mere physical acts of signing resolutions or documents suffice for
actual management. Nor does the mental process which precedes the physical act.
What is needed is an effective decision as to whether or not the resolution should be passed
and the documents signed or executed and such decisions require some minimum level of
information. The decisions must at least to some extent be informed decisions.
Merely going through the motions of passing or making resolutions and signing documents
does not suffice. Where the geographical location of the physical acts of signing and executing
documents is different from the place where the actual effective decision that the documents be
signed and executed is taken ... the latter place is where ‘the central management and control
actually abides.
[64]... The making of the board resolutions and the signing and execution of documents which
the Commissioners say were the only acts of management and control of Eulalia all took place in
the Netherlands. A company is resident where its central management and control are situated.
How, therefore, can Eulalia have been resident in the United Kingdom? How can it have been
resident anywhere other than the Netherlands ?
[64] ... What [the Commissioners] seem really to be saying is that, although the only acts of
control and management took place outside the United Kingdom, there was not much involved
in them. But the test of a company's residence is still the central control and management test:
it is not the law that that test is superseded by some different test if the business of a company
is such that not a great deal is required for central control and management of its business to
be carried out.
[66]... If directors of an overseas company sign documents mindlessly, without even thinking
what the documents are, I accept that it would be difficult to say that the national jurisdiction
in which the directors do that is the jurisdiction of residence of the company. But if they apply
their minds to whether or not to sign the documents, the authorities... indicate that it is a very
different matter....”
3.6 Domicile of Bodies of Persons

The ordinary residence of a body of persons is established by
reference to judge made rules which refer to the complex principle
of central management and control but the domicile of a body of

persons is determined, conclusively, by reference to the body’s place
of incorporation. A body of persons is domiciled in its place in its
place of incorporation59.
“According to common law a body of persons cannot change its

domicile and retains its domicile of origin for good”60 but Maltese
law makes an exception to the general rule of common law. The
exception refers to bodies of persons which have the characteristics
of limited liability companies. Maltese law provides for inbound
and outbound ‘flighting’ of companies. Companies established in
Malta are allowed to relocate their base to another jurisdiction, an
operation that is often referred to as ‘redomicilation’. Legal Notice
344 of 2002, the Companies Act - Continuation of Companies
Regulations prescribes that a body of persons of a similar
nature to a company as known under the Laws of Malta may, if
certain conditions occur cease to be registered under the foreign
jurisdiction and be continued under the Laws of Malta61. The said
legal notice also provides for an inverse scenario where a company
registered under the Laws of Malta may continue under a foreign
jurisdiction62.
59 Pennington, R, P, Penningtons Company Law Eight Edition (England 2001) p. 12.

60 Halsbury’s Laws of England, 4th ed., para. 83, at 55 from Rumasa S.A. and Williams &
Humbert Limited V. W. & H. Trademarks (Jersey) Limited and Six Others (Viscount
intervening). .
61 Article 3 of the Laws of Malta.
62 Article 11 LN 344.
Chapter 7
Tax Deductions
I. Rules on Deductions
The principal rules which govern deductions which are allowable

for income tax purposes (‘tax deductions’) are contained in Articles
14ITA-14H ITA and Article 26ITA.
Important rules relating to tax deductions are contained in

subsidiary legislation including the Deduction for Wear And Tear
of Plant and Machinery Rules1 (DWTPM Rules), the Deduction
(School Fees) Regulations1 2, the Pre-trading Expenditure
Regulations3, the Donations (National Heritage) Rules4 and the
Donations (Sports and Culture) Rules5 and the Deduction of
Expenses in respect of Immovable Property6. Strangely enough,
an important tax deduction rule has been hived off in the Value
Added Tax Act. Important rules on tax deductions are found in
the Income Tax Deductions Rules Subsidiary Legislation 123.07
containing rules relating to tax deductions in respect of vehicles7
and deductions in respect of emoluments.8
1 Subsidiary Legislation 123.01.

6 Legal Notice 100 of 1993.
7 See 6.4 infra.
8 Namely the rule in 4 prescribing that emoluments are deducted if accounted for and are
not deemed to have been duly accounted for except to the extent that their value has been
Tax deductions may be classified under the following categories:
1. Expenses incurred in the production of Article 4 (1) (a)

ITA income;
2. Expenses incurred in the production of any income;
3. Traditional Capital Allowances;
4. Expenses Incurred by Employers;
5. Expenses in respect of Immovable Property;
6. Expenses of a Private Nature which are expressly
deductible;
7. Other Deductions.
There is obviously an element of overlap between the categories

discussed above.
2. Tax Profit <£ Accounting Profit
Tax profit is not equivalent to accounting profit and therefore

certain expenditure which is deducted for accounting purposes
must be added back for tax purposes. The latter point was made
particularly clear in Case 5 of 2003 of the Court of Appeal which
involved a major bank. Thus, whereas, generally, an expense is
allowed for tax purposes provided it is ‘wholly and exclusively
incurred in the production of the income’ accounting standards do
not impose the ‘wholly and exclusively incurred test’ to recognise
an expense. Similarly, the accounting concept of depreciation
is similar but not identical to the tax concept of wear and tear
allowance. Depreciation is calculated by reference to accounting
standards but capital allowances are calculated by reference to ad
hoc tax rules.
correctly reported in the Payee Statement of Earnings and the Payer s Annual Reconciliation
Statement prepared in terms of the FSS Rules with respect to the relevant year and furnished
to the Commissioner by not later than twelve months after the relevant time limit prescribed
under the said Rules.
Tax Deductions 201
Provisions constitute another issue in respect of which the tax

concept departs from the accounting concept. Provisions are added
back for tax purposes but are generally accounted for accounting
purposes. Similarly, unrealised losses are deducted for accounting
purposes but are added back for tax purposes. Certain items which
are accounted for as a profit for accounting purposes are removed
from the computation and consequently not subjected to tax for tax
purposes. Thus, unrealised gains, which are deducted for accounting
purposes, are added back for tax purposes. Furthermore, the two
regimes have their own approaches to bad debts and donations. The
tax concept of a bad debt is not quite the same as the accounting
concept of a bad debt. Donations are accounted for by accounting
standards but are, saving recent exceptions, not deducted for tax
purposes. The treatment of expenditure paid in respect non
commercial vehicles are another point of difference, tax rules on
deductions relating to commercial vehicles are tax specific.9
3. Outgoings and expenses incurred wholly and

exclusively incurred in the production of the Income*
Article 14 contains a preamble which prescribes that all outgoings

and expenses incurred are deducted to the ‘extent to which such
outgoings and expenses were wholly and exclusively incurred in the
production ofthe income’.
3.1 ^Outgoings and expenses incurred9
The leading judgement on the interpretation ofthe words outgoings

and expenses incurred’ is F.C of T v. James Flood Pty. Ltd10 when
the British Courts explained that the word outgoing or expense
might suggest ‘that there must be an actual disbursement’ but the
Court acknowledged that such interpretation would ‘produce
9 Ibid BPPp. 3.1.
10 TC 1953 88 CLR 492.
very strange and anomalous results’ In Alliance Assurance Co.

Ltd v. F.C. of T11 the word ‘incurred’ was attributed its dictionary
meaning ‘to become through one’s own action or subject to...’ In
Elder Smith & Co. Ltd v. C. of T.11
12 the word ‘incurred’ was defined
as ‘the contracting of a debt’.
3.2 Wholly and Exclusively Incurred
In brief, the term ‘wholly and exclusively incurred in the production

of the income’ mean that an expense is allowed provided that such
expense is incurred for the purposes of earning income. There must
be ‘a distinct and link between the expenditure incurred and the
actual earning of the income’.13
3.3 ‘To the extent to which such outgoings and

expenses’
In principle, expenditure which has a dual nature, partly in the

production of the income and partly not in the production of the
income is not deductible. The leading judgement on the issue is
Mallalieu v. Drummond14 which involved a barrister who sought
to claim expenditure on the black attire for court use. The expense
was disallowed on account of the fact that the expenditure on black
suits had a dual purpose, i.e. that of clothing the taxpayer and that
of serving as a court attire.
In principle, expenditure which has a dual nature is disallowed

but when apportionment of expenditure is possible15 and such
expenditure does not run counter to the spirit of the law it is
allowed. The words ‘the extent to which such outgoings’ suggest that
11 TC 1921 29CLR424.
12 TC NSW 1932 47 CLR p.478.
13 Silke on South African Income Tax 5th Edition, 1967, pp.171-172.
14 Mallalieu v. Drummond 1983 57 TC 330.
15 The expense itself allows for apportionment. The private and domestic component of the
expense can be extrapolated from the total expense.
Tax Deductions 203
apportionment is allowed. If an expense is partly incurred for a

business purpose and partly incurred for a private (disallowable)
purpose that part of the expense, which represents the business
purpose.
Maltese case allowed for the apportionment of expenditure.

The Court of Appeal’s 1962 judgement in Case 4516 must be the
first Maltese judgement when apportionment was allowed. The
Court admitted the apportionment of expenses in respect of
expenditure on motor vehicles which had partly been used both
for business purposes and partly for private purposes.17 In 1971,
the Board allowed apportionment in BSC 16/1971.18 The Board
revoked the Revenues decision to disallow a rental expense which
was only partly of an income nature. The Board cited British texts
sustaining,
"The 'wholly and exclusively' rule does not prevent certain types of
expenditure from being apportioned, and part only of them allowed, so long
as it can be shown that the part allowed was wholly and exclusively incurred
for business purposes... it cannot in theory be apportioned on the ground
that it was partly, as opposed to wholly, incurred for business purposes. The
distinction is between payments which because of the taxpayer's business
are higher than they otherwise would have been, and payments, the amount
of which are not increased because of the taxpayer's business, but which are
incurred partly for business and partly for non-business reasons. In the case
of the former type of payment an apportionment is made and the excess
attributable to the business is allowed. No part of the latter type of payment
is allowable...Expenditure which is incurred wholly and partly for other than
business purposes must necessarily be within the prohibition (clauses) unless
it can be divided into allowable and non-allowable parts, since otherwise, it
is not expended wholly and exclusively for the purposes of the trade".
16 Delivered on March, 1,1962.

17 “It appears from the records of the case... that the cars in question were not used exclusively in
the performance ofhis profession, but were also usedfor private purposes, therefore as is current
practice, apportionment may be made.”
18 Decided June 9,1972.
3.4 ‘In the production of the Income9
An expense is allowed if it is incurred 7» the production of the

income’19. Unlike the the British Income and Corporation Taxes
Act 1998 which uses the terms for the purposes of... the trade’20,
Article 14ITA emphasises the direct relationship that must exist
between the expense and the revenue derived from such an expense.
In Case 69,21 the Court of Appeal noted that,
“to rank as a deduction the expenditure must not only have been incurred
for the purposes of earning income as defined but there must be a sufficiently
distinct and direct link between the expenditure incurred and the actual
earning of the income”2223
.
With respect to deductions, the Court of Appeal has followed

Hannan and Farnsworth observing that an expense “must have been
incurredfor the purpose ofearningprofit”.20 The said “acceptedgeneral
principle” does not signify that in order to be allowable, an expense
must be directly attributable to an income earning activity. There
must be a link of cause and effect between expenditure incurred
and production of income.24 A medical expense claimed by a
taxpayer was disallowed because it was one ofthe clearest examples
of an expense which is not incurred wholly and exclusively in the
production ofthe income25’. Expenditure, which is extraneous to the
profit earning activity, is not allowable since there must be a strong
link between the expenses incurred and the income produced26 but
in Case 36 the Court of Appeal suggested that judicial expenses
incurred in defending a trademark, which yielded income, could
be, in certain cases, allowed even though such a case did not ‘per
19 The said wording is more rigid than the test contained in its British counterpart but identical
to that contained in South African revenue law;
20 Article 74ICTA 1988;
21 Case 69 ofthe Court ofAppeal.
22 Silke on South African Income Tax 5th Edition, 1967, pp.171-172.
23 Hannan op.cit p.486.
25 Case 17 ofl 954 ofthe Board ofSpecial Commissioners.
Tax Deductions 205
se’ directly give rise to income. In Case 154,27 the Court of Appeal
allowed the deduction of damages paid by a tax consultant to his
client because of an error in managing clients affairs. The Court
held that it is human to err and it followed that expenses incurred
in making good for such damages were deductible in the same
manner that gains from the exercise of profession are taxable. Such
expenditure was concomitant to trade.28
Fines incurred in the production of income are not allowed

because fines are of a deterrent nature. The payment of a fine for
an infringement of law committed in the production of income
is not deducted even if the act which gives rise to the fine29 yields
income.3031
3.5 Point of law or fact?
The words wholly and exclusively incurred’ were the subject of much
debate and traditional case law held that a decision regarding whether
an expense was wholly and exclusively incurred in the production ofthe
income ‘is a question offact, in respect ofwhich no appeal lies}1 ’ In Case
191, the Court of Appeal reversed a long line ofjudgements relating to
the procedural assessment of issues relating to deductions. The Court
of Appeal held that a first-tier decision relating to the deductibility of
an expense was not merely a point of fact in respect of which there was
no appeal but it was a point of law which was subject to appeal.32 The
legal assessment of a deduction for tax purposes obviously involves an
interpretative function and leaving the matter entirely up to a board
composed of laymen is undesirable.
27 Decided June 24,1987.
28 The Court ofAppeal delivered an identical decision on very similar merits in Case 129 decided on
June 24,1987.
29 Such as the fine imposed as a punishment for trading without the requisite licence.
30 Alexander von Glehn & Co v. C.I.R.
31 Case 25. The Court referred to Case 15 of the Court of Appeal which added that the decision
on the point of fact ‘it is not necessary that the point of law be expressly decided in the
judgement a quo but that it is sufficient that it be involved or implied in the decision’.
32 Decisions of the Court of Appeal (Vol. 5) p.386.
3.6 Judge Made Rules
Judges have delivered a series of judgements which tend to restrict

the Article 14 test even more.
3.6.1 The Case 31 Rules
Case 31 of the Court of Appeal established that the deduction

of an expense can be made only against income to which such an
expense refers to.
In Case 31 the Court of Appeal ruled33 that rent (emphyteusis)

paid when the taxpayer was not trading, could not be allowed as a
deduction against trading income for subsequent years,
“...In the first place the law groups together all different heads of income... it
is clear that when one reads the law the deduction of expenses can be made
only from income to which such expense refers...
Although the tax is one, the way income is computed depends on the source
of such income. The law requires that for an expense to be allowable such
an expense (besides not being of a capital nature) must be also ‘wholly and
exclusively incurred in the production of the income’. These words can only
mean that there must be a relationship between the expense and the income,
the expense produced. In fact, the rents were extraneous to the production
of the income which taxpayer received by virtue of his ...”
In BSC 23/64 the Board disallowed an interest expense incurred

for the purposes of acquiring shares against income other than
dividends from such shares. The Board held that the only income
which could be set off by the interest, was the income yielded from
the shares acquired through the loan. The shares did not give
rise to a dividend so there was no income to be set off by interest.
Interests could not be used to set-off income other than interest.
For the purposes of calculating profit, profits from different sources
33 On the basis of the British judgement in Reef Estates Ltd. V. The Commissioner of Inland
Revenue (1954) S.A. 593 (TC) 19S.A.T.C 153.
Tax Deductions 207
are aggregated but for the purposes of determining the tax charge
on income from different sources must be computed separately.
If monies are borrowed but the capital to which the loan and the
interest refer to do not yield any income interest expenditure is
not allowable. BSC 28/196134, 8/196335, 21/196336, 14/196837,
36/196938,45/196939 and Case 6040 of the Court of Appeal.
In Case 18 of 1990,41 the Court of Appeal disallowed the

deduction of interest paid on a loan by a company that utilised such
a loan in order to provide an interest free loan to a related company.
As the loan to the related party did not give rise to income there
was no income against which the interests could be set off.
3.6.2 Strict Literal Interpretation

The Court of Appeal and the Board had the opportunity to
explain that the Articles dealing with deductions must be strictly
interpreted42, “the only safe rule is to look at the words of the
34 When the Board disallowed ground rent paid on a tenement which in the relevant year
yielded no income.
35 When the Court held that interest paid on a loan obtained for the development of property
for speculation was not allowable because no income was in existence at that point in time.
The Board quoted Case31 and confirmed that an expense can only be deducted against the
expense which it helps to produce.
36 When the Board disallowed interest paid in respect of a loan obtained to acquire shares as the
relative shares did not yield a dividend.
37 This case dealt with interest paid by a Taxpayer on a loan taken to fund the subscription
of share capital in a company. The expense was disallowed because the company did not
distribute a dividend and there was no income to set off or absorb a part of the expense.
38 In this case the Commissioner of Inland Revenue s decision to allow the deduction of interests
incurred in one year of assessment from the profits registered in the following years on the
grounds that 'there was no corresponding income against which the interest claimed could he set
off. Different rules apply to losses.
39 This case involved an employee who was bound to lend money to the company as a condition
of his terms of service. Interest paid on the loan was not allowed because the company did not
distribute a dividend. There was no income against which part of or the whole expense could
be set off.
40 Interest paid on a loan to acquire a factory which did not yield income was not allowed
against income from a retail business.
42 Case 32 of1967.
enactments and see what is the intention expressed by those words”43.

Consequently an expense is allowed only if it gives rise to income44.
In a series ofjudgements, the Board refused to allow expenses, which
amount to an application of the income45, rather than an expense in
its production. In BSC7/1967, the Board denied the taxpayer the
utilisation of insurance premiums46 because such expenses did not
give rise to income. BSC32/1967 confirmed the above rules and
referred to Konstam,
"It is often said that a taxing Act must be construed strictly in favour of
the subject; it may perhaps be more correct to say that a taxing Act must
be construed against either the Crown or the person sought to be charged,
with perfect strictness, so far as the language of the Act enables the Judges
to discover the intention of the Legislature. No tax can be imposed on the
subject without words in an Act of Parliament clearly showing an intention
to lay a burden upon him. The only safe rule is to look at the words of the
enactment and see what is the intention expressed by those words"
On the issue of the deductions, the Court of Appeal draws

heavily from British precedents,
“The doubt expressed by the Commissioner of Inland Revenue relating to

the application of British jurisprudence is unfounded...In fact Lord Davey
in Strong v. Woodfield (5T.C. 215, 200) when he was commenting on the
above provision said: ‘These words appear to me to mean for the purpose of
enabling a person to carry on and earn profits’ and Konstam, in the Law of
Income Tax, pag. 100 says ‘it must be borne in mind that expenses in order to
be deductible in ascertaining profits must have been incurred for the purpose
of earning the gross profits.”
In Case 36, the Court of Appeal held that judicial expenses

incurred in opposing a trademark in order to protect a brand name
owned by taxpayer were not allowable in view of the fact that there
43 Coltness Iron Co. v. Black I.T.C287p.371 quoted in Case 113 ofthe Court ofAppeal.
44 An exception is obviously made in the case of losses.
45 Case 1 of 1961 appears to be an exception. In that case the Board allowed a partner in a
partnership en commandite a deduction in respect of compensation to employees made by
way of a share of the profits of the partnership.
46 To the Teachers Superannuation Fund.
Tax Deductions 209
was no income tied to that expenditure, because the trademark was

not being commercially exploited by the taxpayer.
3.6.3 Proportionality
BSC 1/54 was the first, in a long line ofjudgements, which held that
an expense is allowed provided that such an expense ‘was reasonable
to allow’. The Board tends to accept expenditure provided that such
expenditure is reasonable and proportional. Thus, in BSC32/54
a sales commission paid by a trader to his son was not allowed
because it ‘was considered to exceed what was reasonable.^1 The
Board ruled that for such a salary to be allowable such salary must
be proportionate to the services rendered but the Board did not
refute the whole deduction outright but merely abated the amount
claimed.*48 BSC32/54 enforced ‘transfer pricing type’ rules allowing
an expense to an extent that it was claimed on an arm’s length basis.
In BSC32/198349 the Board allowed the deduction of a

reasonable amount of expenditure of ‘travelling expenses’ which
consisted in “promotional travelling required by the nature of the
business and to develop relations ofa commercial nature50.
The Board refused an interest expense in BSC 13/02 on the

grounds that there was no direct link between the expense and
the income produced; the outgoing had not been wholly and
exclusively incurred in the production of the income. On the
other hand, the Board allowed an expense which represented the
payment of damages as a tax deductible expense in BSC25/02
on the grounds that, despite its extraordinary nature, the expense
had been incurred in the normal course of a business. The Board
delivered a sentence in the same vein in BSC33/02, when it
allowed the payment of a terminal benefit as a deduction because
From the official C.I.R. synopsis. The Board appears to have solicited the parties to come to
an out of court settlement regarding “an appropriate amount for the commission”.
48 Lm450 instead of Lm567.
50 Vide note on pre-trading expenses below.
it was akin to payments made in respect of wages, salaries, bonuses

and fringe benefits, which were normal outgoings in a company's
trading activity.
BSC3/197151 involved travelling expenses, incurred by a medical

practitioner who was both an employee of the government and a
sole practitioner. The Medical practitioner claimed an allowable
expense both on travelling expenses incurred on trips from home
to work as well as travelling expenses from one private patient
to another. The Board held that, "where a man lives is at his own
discretion and travellingfrom where he lives to where he discharges
his duties is not in the performance of his duties". Consequently
travelling expenses incurred in the trip from home to work were
not allowable but travelling expenses incurred on trips from one
patient another were allowable52.
Entertainment expenses are another ‘mixed’ expense which raises

questions. The decisions of the Board suggest that entertainment
expenses should be allowed rarely. In BSC38/1959 the Board
refused the allowance of expenditure incurred in entertaining clients.
In BSC9/1959 the Board did not allow pharmaceutical company
a deduction for expenditure incurred in entertaining doctors
because such expenses could not be considered to be incurred in the
production of the income. In BSC32/1983, the Board held that
expenses for subscriptions, entertainment and commissions should
be in principle allowed if the amount claimed is reasonable.
Case law has established that court expenses incurred in an

unsuccessful debt collection suit are not allowable but expenditure
51 Decided April 17,1971.

52 Case 3 which dealt with an employee who was required to carry out on site-inspections
was decided much on the same lines. The Board quoted from Hannan & Farnsworths The
Principles of Income Taxation p. 541, "Zf may therefore be taken as an established general rule
that travelling expenses incurred in travellingfrom one's residence to a place of employment or
from one place where income is earned to another such place, are expenses ofa private or personal
nature and are not admissible deductions under the Income Tax Acts"
Tax Deductions 211
incurred in a successful suit which yielded income are53 deductible54.

Litigation expenses incurred over taxation matters are seldom
allowed.55 Even litigation expenses bent towards the creation of
an asset, such as litigation expenses incurred to acquire a tenancy
right or legal fees incurred in a specific performance suit against a
defaulting seller in a promise of sale were not allowed.56
In Case 53, the Court of Appeal disallowed an administrative

expense, which was incurred because of the particular nature of the
taxpayer because it did not give rise to income. The Court ofAppeal’s
judgement in Case 69 dealt with substantially different merits
and the Court allowed an expense incurred in the administration
of an estate as the expense was held to have a ‘sufficiently distinct
and direct relationship or link between the expenditure incurred
and the actual earning ofthe income’. The Court referred to South
African texts57 and judgements58 and added that in certain cases
administrative expenditure fell to be considered as a cost incurred
in the production of the income.
Insurance premiums are allowable if incurred in respect of assets

employed in the trade. Thus insurance premiums paid on policies
insuring fixed assets, stock in trade, plant and machinery and capital
used for the production of the income appear to have been allowed
by way of allowable deduction.
53 If effectively earned from that particular source.

54 Case 10 of1956 ofthe Court ofAppeal.
55 Vella, E; op.cit p.70.
56 Case 27 of1953 ofthe Board ofSpecial Commissioners. Legal expenses of the aforesaid type
were held to be of a capital nature.
57 Silke on South African Income Tax, 5th Edition, 1967 pp.172-175).
58 Elizabeth Electric Tramway Company Ltd. V. CIR 91936) 8 SATC 13, CIR v. Genn & co.
(PTY) Ltd (1955) 20 SATC 113.
4. Expenses incurred in the production of Income

from a Trade Business Profession or Vocation
The following expenditure is allowed against income which is

derived from Article 4 (1) (a) ITA activities, income which is
colloquially referred to as ‘trading income’:
4.1 Bad debts [14 (I) (d) ITA]
Bad debts incurred in any trade, business, profession or vocation,

proved to the satisfaction of the Commissioner are deductible for
tax purposes. The Commissioner has been granted discretion in
relation to what should constitute a bad debt for the purposes of
lax law. The Commissioner of Inland Revenue issued guidelines in
relation to bad debts in 2003. The Commissioner considers a debt
to be a bad debt for tax purposes if:
(i) The debtor has died without assets in the case of an

individual or the debtor has been wound up in the case of
a company; or
(ii) The debtor has become insolvent; or
(iii) The debt is time barred (preskritt); or
(iv) The creditor took all necessary steps to secure his debt
(issued judicial letter, warrants, instituted a law suit,
execution proceedings etc).
The following are some illustrative cases in which a debt is

considered to be ‘bad’ by the Commissioner:
(i) debtor died without leaving sufficient assets to settle the

debt;
(ii) debtor cannot be traced and the creditor exercised his best
efforts to trace the debtor;
(iii) when the debt is time-barred;
(iv) there is little or no likelihood that the debt can be recovered.
Tax Deductions 213
If a debt which had been previously written off as a bad debt in a

return is subsequently recovered, the bad debt must be reported as
an Article 4(1) (a) ITA receipt in a subsequent return.
The Court of Appeal has interpreted the tax concept of a bad

debt in a particularly rigid way in Case 5 of 2003. It held that the
list of deductions contained in Article 14ITA is exhaustive and that
a bad debt is allowed provided that the Commissioner is satisfied
that the debt has become bad in terms of law.
4.2 Losses [14 (I) (g) ITA]
Losses incurred by any person, solely or in partnership in the

exercise of Article 4(1) (a) ITA activities (trade losses) are allowed
as a tax deduction. A loss is considered as such provided that, had
such loss been a profit such a profit would have been taxable. In
other words, a negative figure is treated as a loss for tax purposes
provided that, had it been a positive figure it would have been
treated as taxable income. Thus, a loss incurred in the course of an
activity which could have yielded exempt income is not taken as a
loss. A similar rule is applied in relation to foreign losses.
Trade losses incurred outside Malta are allowed, provided that if,
such losses had been a profit and had been retained outside Malta,
would have been chargeable to tax. Thus, this provision seems to
incorporate an ingrained limitation of benefits clause which applies
to losses incurred against tax exempt profits and profits which fall
outside the scope of the income tax, due to the remittance basis of
taxation or any other reason.
Trade losses can be carried forward to subsequent years and may

be used to set off any income. Trade losses may also be used to set off
any capital gain. An important rule relating to the tax treatment of
losses was introduced by Act II of2007. A loss cannot be deducted
against income which stands to be allocated to the final tax account
and any loss resulting from activities or sources the profit derived
from which would have been allocated to the final tax account are
not considered to be a loss to which 14 (1) (g) ITA applies.
Two provisos added to Article 14 (1) (g) by Act XV of 2016

added new restrictions relating to the deduction of losses. The
restrictions refer to merger and division scenarios.
The first proviso confirms the general rule that, subject to the
group relief provisions", no person shall be entitled to a deduction
in respect of any loss incurred by another person.
The second proviso provides for merger and division scenarios

providing that:
(i) where any merger or division referred to in the Rulings

(Income Tax and Duty Treatment of
Mergers and Divisions) Rules is being effected for bona
fide purposes to the satisfaction of the Commissioner;
and
(ii) as a result of such merger or division, a trade or business
previously carried on by a company or other person
involved in the particular merger or division (hereinafter
referred to as "the First Company") or any part thereof,
shall thereafter be carried on by another company or
companies or other person involved in such merger or
division (hereinafter collectively referred to as "the Second
Company"); and
(iii) the First Company is entitled to any loss or to the balance
of any loss incurred by the First Company in any year
preceding the year of assessment or to any wear and tear or
initial allowances, or to the balance of any such allowances
due in respect of any year as aforesaid;
Tax Deductions 215
the Commissioner shall be entitled to grant his permission for

the losses and, or wear and tear and, or initial allowances or such
part thereof as he may deem fit, in the light of the trade or business
or any part thereof which shall thereafter be carried on by the
Second Company, to be claimed by the Second Company and to be
set-off against its gains or profits as the case may be in determining
its chargeable income, in lieu of the First Company. In granting his
permission the Commissioner may impose such conditions as he
deems fit and reasonable, and where the person who has requested
permission accepts the conditions laid down by the Commissioner,
such conditions shall be operative notwithstanding any other
provisions of this Act.
4.3 Expenditure on Scientific Research [14 (I) (h)

ITA]
Capital expenditure incurred on scientific research59 is, by way of
exception deductible. Expenditure on scientific research is allowed
provided that such expenditure is incurred and is for the bene
fit of an Article 4 (1) (a) ITA activity. Expenditure on scientific
research is deducted provided it is proved to the satisfaction of the
Commissioner. Scientific expenditure which is not subject to the
wear and tear allowance and the initial allowance is spread equally
over the year in which it has been incurred and the five succeeding
years. One of the provisos to the sub-article adds that no deduc
tion is allowed in respect of scientific research in the case of any
such expenditure on plant or machinery or premises, in respect of
which any deduction in respect of wear and tear and the initial al
lowance is granted. Expenditure on scientific research may, at the
59 An illustrative definition of scientific research is contained in 14 ( 1) (h) ITA itself:
"scientific research" shall include:
(i) basic research comprising activities undertaken for the advancement of scientific or
technological knowledge;
(ii) applied research where a specific application is in view;
(iii) development work involving the use of the results of basic and applied research as
aforesaid for the purpose of creating new or improving existing materials, devices, products or
processes.
option of the taxpayer, be allowed at 150% of the actual amount

of the expenditure incurred60.
4.4 Promotional and Marketing Expenditure [14

(1)0) ITA]
A tax deduction is provided in respect of any expenditure in

curred by a person engaged in Article 4 (1) (a) ITA activities for
the purpose of promoting such activities including any expendi
ture on market research and obtaining market information, adver
tising or other means of soliciting business, providing samples, and
participating in fairs and exhibitions.
5. Expenses incurred in the production of any income
The following expenditure incurred in the production of any

income is deductible for tax purposes:
(i) Article 14 ( 1 ) (a) ITA Expenditure - sums payable by such

person by way of interest upon any money borrowed by
him, where the Commissioner is satisfied that the interest
was payable on capital employed in acquiring the income.
(ii) Article 14 ( 1 ) (b) ITA Expenditure - rent paid by any tenant
of land or buildings occupied by him for the purpose of
acquiring the income.
(iii) Article 14 (1) (k) ITA Expenditure - any sum or expenses
proved to the satisfaction of the Commissioner to have
60 When a person exercises his option as aforesaid, the total increased deduction must not, for
any year of assessment, exceed 5% of the turnover of the person for that year; and if this total
increased deduction is such that the fall amount thereof cannot be allowed as a deduction in
the year in which it would, but for the stated 5%, have been deductible, that part which cannot
be so allowed shall be added to any deduction due under the provisions of this paragraph for
the following year and be deemed to
be part of that deduction or, if there is no such deduction for that year, be deemed to be the deduction
for that year, and so on for subsequent years.
Tax Deductions 217
been paid or incurred by or on behalf of a candidate for

election as member of the House of Representatives on
account of or in respect of the conduct or management of
such election.61
(iv) Article 14 (1) (m) - Expenditure on Intellectual Property
Rights. A tax deduction is granted in respect of any
expenditure of a capital nature on intellectual property
rights incurred by a person engaged in an Article 4(1) (a)
ITA activity and proved to proved to the satisfaction of
the Commissioner to have been incurred for the use and
benefit of such activity. Following the entry into force of
amendments contemplated by Act XV of 2016, expenditure
of a capital on intellectual property rights is spread equally
over the life of the asset but, in any case, over 3 years.
(v) Article 14 (1) (o) ITA Expenditure - such sums in respect
of risk capital as are aimed at approximating neutrality
between debt and equity financing, as the Minister may
prescribe.62
(vi) Article 14 (1) (p) ITA Expenditure - a percentage amount
of qualifying income as may be prescribed derived from
qualifying intellectual property subject to the satisfaction
of such terms and conditions and to obtaining such
determinations as may be prescribed.63
6. Traditional Capital Allowances
Traditional capital allowances may be sub-divided into 3 categories:
(i) Deductions allowed in terms ofarticle 14 ( 1 ) (c) ITA - Repairs

(ii) Deductions allowed in terms of 14 (1) (f ) ITA - The Wear
61 The deduction is only allowed if the Candidate in respect of whom the expense is incurred is
elected. Moreover the allowable expense is capped to the maximum imposed by the General
Elections Act (presently EURI,380).
62 Added by Act XVI of 2017.
63 Added by Act XVI of 2017.
and Tear Allowance;

(iii) Deductions allowed in terms of 14 (1) (j) ITA - The Initial
Allowance
Traditional capital allowances apply by reference to Plant and

Machinery and Industrial Buildings and Structures.
6.1 Plant and Machinery

The DWTPM Rules contain a list64 which may serve as an
illustrative definition of assets which are classified as Plant and
Machinery but in the absence of a proper statutory definition of
the term, reference must be made to common law precedents. In
Yarmouth v France65 Plant and Machinery was defined as:
‘In its ordinary sense it (Plant) includes whatever apparatus is used by a

businessman for carrying on his business - not his stock-in-trade which he
buys or makes for sale; but all goods and chattels, fixed or movable, live or
dead, which he keeps for permanent employment in the business.’
In the leading case Hinton v Madden & Ireland Ltd66, knives

used by a shoemaker where held to be plant. Similarly, cinema
seats, bottles of mineral water and partitions dividing office space
were held to constitute plant.
It would appear that a fixed asset would be considered to be

plant provided that that it meets all of the following 3 conditions:
(i) The asset is kept for the permanent employment of the

business67;
(ii) The asset must not be held by way of stock in trade;
(iii) The asset must be part of the apparatus employed in
carrying on the activities of the business.
One of the very few Maltese cases which discussed the technical
64 Ibid.
65 (1887), 19 QBD 647.
66 38TC391.
67 The British Inland Revenue holds that an expect lifespan of two years or more is sufficient.
Tax Deductions 219
meaning of the terms Plant and Machinery is BSC5/62 when the

Board held that wine concrete vats used by a Maltese vintner in
his business constituted plant and machinery for the purposes of
the law. Furthermore, our Courts held in Case 45 of the Court
of Appeal that a vehicle constituted plant and machinery for the
purposes of the law68.
6.2 Industrial Buildings or Structures
The term industrial building, typically, means a factory, a building

which is used for industrial purposes, a building which is used for
purposes such as manufacturing, assembly, repairing, processing,
and activities which are connected with industry. More recently,
the term has been extended to include office space. The definition
of ‘Industrial Building or Structure’ contained in Article 2 ITA
as amended in 2013 and 2016 defines any ‘industrial building or
structure’ as,
"industrial building or structure" includes a building used as a hotel or a car

park or offices, as may be prescribed. For the purpose of this definition:
(a) the word "hotel" includes any number of constructions suitably furnished
and equipped, with accommodation in single or double bedrooms, provided
that such constructions are grouped together and have in common ancillary
hotel services and amenities within a single and defined parcel of land and
are operated by a common management for the accommodation and for the
use of guests against payment;
(b) the word "car park" refers to a structure of a commercial nature available
to the general public, which is the main income generating activity of any
person claiming any deductions in its respect under article 14( 1 )(f) or (j),
and which is first used for this purpose after the 1st January 2012;
Subsidiary Legislation 123.173, the Industrial Buildings and

Structures (Capital Allowances) Rules incorporate the conditions
that offices must meet to fall within the definition of industrial
building or structure subject to capital allowances.
68 Attard, R and Rapa, M Ibid (2004) p. 66.

An office is treated as an industrial building or structure

provided it meets the following conditions:
it is first used and occupied on or after the 1st January 2016; and
it is an office business centre’: a number of units suitably
furnished and equipped, with a total office space area of more than
two thousand five hundred square meters, to be used exclusively
for offices, provided that such units are grouped together and have
in common ancillary services and amenities within a single and
defined parcel of land and are operated by a common management
for the use by the owner or tenants, in the course of their trade or
business against payment:
Wear and tear allowance and initial allowance are available only
to the owner of the office business centre.
Rule 4 prescribes that for the purposes of computing capital

expenditure on an industrial building and structure, the cost of the
land on which it is constructed is not included.
Claiming wear and tear allowance and initial allowances on

offices creates further restrictions in terms of deductions allowed
and tax regime applicable to rental income. Rule 8 prescribes that
when a person claims, for a year of assessment, a deduction in
terms of article 14(l)(f ) or (j) of the Act in respect of property
consisting of offices as defined in these rules, the Deduction of
Expenses in respect of Immovable Property Rules shall not apply
to the deductions that may be claimed by that person in respect of
that property for that year or for any subsequent year.
Furthermore, when a person claims, for a year of assessment,
a deduction in terms of the Deduction of Expenses in respect of
Immovable Property Rules in respect of property consisting of
offices as defined in the rules, that person may not claim deductions
under article 14(l)(f) or (j) of the Act in respect of that property
for that year or for any subsequent year.
Tax Deductions 221
When, for any year of assessment, the tax on rental income

derived by a person from property consisting of offices as defined
in these rules is determined in accordance with the provisions of
article 3ID of the Act, that person shall not be entitled to claim
deductions under article 14( 1 ) (f ) or (j) of the Act in respect of that
property for that year or for any subsequent year.
6.3 Repairs of Premises Plant and Machinery
The first ‘traditional’ capital allowance refers to any sum expended

for repairs of premises, plant or machinery employed in acquiring
the income, or for the renewal, repair or alteration ofany implement,
utensil or article so employed.
6.4 Wear and Tear of any Plant and Machinery
The second, ‘traditional’ capital allowance is an allowance granted

in respect of wear and tear of plant and machinery and any premises
being an industrial building or structure.
The principal rules which govern the wear and tear allowance
are contained in Article 14 (1) (f) ITA and the DWTPM Rules.
Article 14 (1) (f) ITA prescribes that wear and tear deduction is
allowed provided that the relevant plant and machinery is used in
the production of the income.
When the burden of wear and tear of the asset falls upon the
person making use of the property in the production of the income,
but such property does not belong to him, he is entitled to any
deduction to which he would have been entitled had the property
belonged to him.
Rule 10 DWTPM prescribes that where a person makes use of

an asset which does not belong to him on such terms that the burden
of wear and tear falls on the user and not on the owner of the asset,
wear and tear shall be computed in accordance with the DWTPM
rules and shall be allowed as a deduction to the user to the same
extent as if the owner of the asset had retained its use and were using
it in the production of the owner s income. Furthermore, Rule 11
prescribes that where an asset is used both in the production of the
income and for other purposes, the deduction to be allowed in each
year in respect of such deductions so computed, shall be reduced
in the proportion of the use of the asset in the production of the
income to its total use.
Prior to year of assessment 2002 the method which was used in

order to calculate the annual deduction for wear and tear in respect
of plant and machinery was the reducing balancing method.
However, as from year of assessment 2002 Rule 3 of the DWTPM
Rules prescribes that the straight line method must be applied. The
cost of acquisition of items of plant and machinery acquired before
year of assessment 2002 is deemed to be the written down value
of that asset as at the end of year of assessment 2001 to which the
following prescribed rates will be applied.
Rule 5 DWTPM Rules prescribes that annual deduction for

wear and tear shall constitute permissible deductions only in cases
where proper records and documentation have been kept of the
cost of the assets in respect of which a deduction is claimed. Rule 6
DWTPM rules adds that the cost of an asset shall be determined in
accordance with generally accepted accounting principles.
The Schedule to the DWTPM Rules prescribes the following

minimum number ofyears over which items ofplant and machinery
are to be depreciated for tax purposes:
Tax Deductions 223
Category Years
1. Computers and Electronic Equipment 4

2. Computer Software 4
3. Motor Vehicles 5
4. Furniture, Fittings, Fixtures, and Soft Furnishings 10
5. Equipment used for construction of buildings and excavation 6
6. Catering Equipment 6
7. Aircraft airframe, aircraft engines, Aircraft engine or
airframe overhaul and Aircraft interiors and other parts . 469
8. Ships and vessels 10
9. Electrical and Plumbing Installations andSanitary Fittings 15
10. Cable and Infrastructure 20
11. Pipeline Infrastructure 20
12. Communication and Broadcasting Equipment 6
13. Medical Equipment 6
14. Lifts and Escalators 10
15. Air-Conditioners 6
16. Equipment mainly designed or used forthe protection of water
and Electricity 6
7. Other machinery 5
18. Other plant 10
An important rule relating to the manner wear and tear allowance

must be taken with regards to motor vehicles is contained in Rule
3 of the Income Tax Deductions Rules70. It prescribes a special rule
relating to the written down value which must be taken in respect of
‘Non-Commercial’ Motor Vehicles71. Rule 3 prescribes that when
69 The Aviation sub-category was amended by L.N. 322 of 2018 coming into force as from year
of assessment 2018 and applicable to aircraft acquired on or after the 1 January 2018.
71 Sub-rule 4 of Rule 3 prescribes that the limitation applies to the following vehicles (colloquially
referred to as non-Commercial Motor Vehicles):
to any mechanically propelled vehicle constructed or adapted as a means of transport for
individuals, but shall not apply to a vehicle of a type not commonly used as a private vehicle
and unsuitable to be so used, or to a vehicle used by the person claiming a deduction referred
to in this rule wholly or mainly for the purpose of hire to or the carriage of members of the
public in the ordinary course of his trade or business:
Provided that for any year of assessment commencing on or after the 1 st January, 2002 this
rule shall, moreover, not apply to a vehicle used by the person claiming a deduction referred
to in this rule wholly or mainly for driving instruction in the ordinary course of his trade or
business.’
a ‘Non-Commercial Motor Vehicle’ is acquired at a cost exceeding

€14,000, any deduction in respect of wear and tear and any initial
deduction with respect to the vehicle any allowance due or charge
made with respect to the vehicle shall be computed as if the cost of
acquisition were €14,000.72
6.5 Initial Allowance

The third ‘traditional’ capital allowance is an allowance which
is allowed upon the acquisition of premises being industrial
buildings or structures. The deduction is taken in respect of
industrial building or structures first used and employed in the year
immediately preceeding the year of assessment. The deduction is
equivalent to one-tenth of the capital expenditure thereon.
6.6 Article 24 ITA - Balancing Statement

The rules discussed above in relation to capital allowances must
be read in conjunction with the rule contained in Article 24 ITA
relating to the obligation to draw up a balancing statement. Article
24 ITA prescribes that when an initial allowance or a wear and tear
allowance has been allowed on an asset and such asset -
(i) is sold or otherwise transferred under an onerous title,

whether still in use or not; or
(ii) is destroyed; or
(iii) is put out of use as being worn out or obsolete or otherwise
rendered useless or is no longer required, and the event in
question occurs before the source of income in respect of
which the deduction has been allowed has ceased to exist
or to belong to the said person the person benefiting from
the allowance is bound to render to the Commissioner a
balancing statement with his return.
The balancing statement must contain the following

information:
72 Legal notice 369 of 2009 increased this cap from 7,000 to 14,000.
Tax Deductions 225
(i) the amount of the capital expenditure on the provision

thereof (capital expenditure’); and
(ii) the total depreciation which has occurred by reason of
wear and tear since the date of the acquisition of such
property, taking into account the aggregate amount of
all deductions previously allowed by way of wear and tear
allowance and initial allowance and of any deductions or
charges previously allowed or made by way of balancing
statement or balancing allowance (‘total depreciation’);
(iii) the amount of all sale, insurance, salvage or compensation
monies in respect thereof and, where the property has
been transferred by exchange, the value thereof, or, if put
out of use, the disposal value thereof (’disposal value’).
The balancing statement would either yield a ‘loss on disposal’,

a balancing allowance (a tax deductible) or a ‘profit on disposal’, a
balancing charge (treated as income).
6.7 Roll-Over Relief, Capital Allowances

Article 24 (3) ITA prescribes that, when an asset in respect of
which capital allowances have been taken is replaced by the owner
and the asset transferred gives rise to balancing charge in the
balancing statement, the owner may elect to deduct the balancing
charge from the cost of the new asset. The latter operation entails
an advantage from a cash-flow point of view. The election to roll
over the balancing charge against the written down value of the
replacement asset would result in lower capital allowances because
initial allowance and wear and tear deduction would be calculated
by reference to a reduced original cost.
7. Deductions Available to Employers
Article ITA envisages two deductions which apply exclusively to

‘employers’, these are:
(i) any sum contributed by an employer to a pension, saving,

provident or any other society or fund which may be
approved by the Commissioner as may be prescribed
[Article 14(1) (e) ITA ];
(ii) any sum proven to the satisfaction of the Commissioner to
have been paid by an employer to a licensed or registered
childcare centre as fees in respect of childcare services for
the children of his employees, up to a maximum of nine
hundred and thirty-five euro (935) per child [Article 14
(l)(n)ITAj.
8. Expenses in respect of Immovable Property
The Deduction of Expenses in Respect of Immovable Property

Rules73 (‘DERIP’) prescribe a special tax deduction which is
colloquially referred to as the Maintenance Allowance.
Rule 3 of DERIP prescribes that the Maintenance Allowance

applies only to Article 4(1) (f) ITA income. Article 4(1) (f) ITA
was repealed in 1996 but it would appear that the deduction is now
taken to refer to Article 4 (1) (e) ITA income, rental income which
is not in the nature of trade.
Long term lets are presumed not to be a rent of a trading nature.

Therefore, generally, income from long term rents is considered to
be rental income and consequently a rent which is subject to the
Maintenance Allowance. On the other hand, short term lets of
fully furnished premises are considered to be in the nature of trade
and are consequently deemed not to be subject to the Maintenance
Allowance. Rents of a trading nature would be subject to the
deductions which apply in a trading context.

Tax Deductions 227
Rule 3 of the DERIP includes an exhaustive list of deductions

in respect of immovable property. The expenditure which is
deductible in terms of DERIP consists exclusively in the total of:
(i) the amount of interest allowable under article 14(1)(a)

ITA;
(ii) any rent, ground rent or similar burden payable;
(iii) where applicable, the licence fee payable for the purpose of
the Guest Houses and Holiday Furnished Premises Act;
and
(iv) a further amount equivalent to twenty per cent of the
income remaining after deducting from the total of
the income in question the expenditure referred to in
paragraphs (ii) and (iii) of this rule, so however that no
such deduction is allowed in respect of income arising
from any emphyteutical concession (the ‘Maintenance
Allowance’).
A rule restricting the deduction of expenses on immovable

property was introduced in Article 14 (4) ITA as part of the anti
abuse measures announced in Budget 2010 and implemented
by Act I of 2010. The deduction limitation rule applies when a
person derives income from work carried out on or in relation
to immovable property, consisting of brokerage and professional
services, construction work, project and such property is owned
by a related person. When the deduction limitation rule applies
the deductions against income from immovable property should
be taken by income stream, total deductions cannot exceed income
and any unabsorbed interest expenditure cannot create a tax loss.74
74 14 (4) ITA incorporates the following anti-abuse measures:

‘(b) in determining the chargeable income derived from the said work, loans, or credit, the
total deductions allowable under this article against such income shall not exceed the amount
of the said income;
And
(c) in determining the chargeable income derived from the transfer of the ownership or any
rights on such immovable property, no loss is to be allowed under the provisions of article
14(l)(g), in so far that such loss arises as a result of deducting any amounts paid or payable in
The anti-abuse measure is directed against the artificial creation of

tax losses.
9. The Rule in 14 (5) ITA
Act XV of 2016 introduced a new rule relating to the tax

deductibility of expenditure incurred in the purchase of goods and
services. Act XV added paragraph 5 prescribing that:
“(5) Notwithstanding the other provisions of this article, when a person

incurs expenditure for a supply of goods or services in respect of which the
supplier is required to issue a tax invoice or other document in terms of article
50 or 51 of the Value Added Tax Act, no deduction shall be allowed under
this article in respect of that expenditure unless that person is in possession
of a tax invoice or other document issued in accordance with the said article
50 or 51 and produces such tax invoice or other document if required to do
so by the Commissioner."
/ 0. Expenses of a Private Nature which are expressly

deductible
Expenses of a private nature are, generally, not deductible but the

law contains some exceptions. Article 14A-14H ITA provides that
individuals may avail themselves of a number of special deductions.
10.1 Alimony Payments
Article 14A ITA grants a deduction in respect of alimony payments.

In 2008, in Principles ofMaltese Tax Law751 had pointed out that:
“Article 14A restricts the deduction to cases when the alimony was ether
ordered or authorised by the Courts of Malta. An alimony payment ordered
by the Courts of a member state not being Malta is consequently not
respect of the work, loans, or credit referred to in this sub-article:’
75 Ibid p. 90.
Tax Deductions 229
deductible. It is highly debatable whether the latter approach is in line with

Community law.”
My appeal did not fall on deaf ears. In the 2010 Budget Speech
the Minister of Finance said that:
“Through this budget the Government also wishes to remedy the somewhat
anomalous situation in the income tax law, when it comes to exempting
a person who receives child alimony from the other spouse. Up to now a
person paying alimony to the other spouse, not related to children, is given
income tax deductions when the payment has been established by the
Maltese Courts. As from next year, the exemption and deduction will also be
given when the alimony has been established by foreign courts, on condition
that the Commissioner of Inland Revenue approves.’”
In 2010 Article 14 A was amended to provide for the

deductibility of alimony payments granted by foreign courts (on
condition that the Commissioner of Inland Revenue approves
such alimony).
The introduction of divorce resulted in another amendment to

Article 14A ITA. L.N. 218 of 2012 introduced a deduction paid in
the context of a divorce too. Article 14A ITA was amended again
in 2014 with the amendment providing for the tax deductibility of:
“...an alimony payment as determined by the courts of a European Union or

a European Economic Area (hereinafter "EU/EEA") Member State or by the
courts of another country as the Commissioner may approve or as agreed
by a public deed of personal separation under the authority of the courts of
a EU/EEA Member State or by the courts or other authorities of another
country as the Commissioner may approve, or as ordered by the courts of a
EU/EEA Member State in a divorce judgment or decree or by the courts of
another country as the Commissioner may approve..,”
A parallel amendment to article 12 ( 1 ) (t) ITA dealing with the

exemption with respect to financial assistance paid to an individual
from an estranged spouse in respect of the maintenance of a child
was passed.
Given the risk that alimony payment may erode into capital,
Article 14A ITA caps the maximum deduction available for a year
in respect of alimony to the amount of such alimony payment.
Thus, the most beneficial tax treatment a taxpayer may obtain
through the utilisation of this deductible expense is a tax neutral
situation76.
10.2 School Fees
Article 14B ITA provides for a deduction paid in respect of School

fees. The deduction applies to school fees to any of the schools
named by the Minister of Finance77 and, as from 31 December
200778, fees paid in respect of a registered private kindergarten.
The Schools which have been named by the Minister for the
purposes of Article 14B ITA are invariably Maltese ‘independent
schools’79 and it would appear that such a practice is in breach of
EU law on the grounds of selectivity.
In the Schwarz Case80 the European Court of Justice recently

held that limiting a tax deduction for school fees paid to schools
situated in the state of nationality violates the EU Treaty,
“Where taxpayers of a Member State send their children to a school situated

in another Member State the financing of which is essentially from private
funds, Article 49 EC must be interpreted as precluding legislation of a
Member State which allows taxpayers to claim as special expenses conferring
76 ‘...he shall he allowed as a deduction against his income the lesser ofthese amounts -
(a) the amount actually paid in accordance with the Court order or public deed;
(b) the individual's chargeable incomefor the year.’
77 LN 77 of 2002.
78 Act II of2007.
79 Accelerated Christian Academy, Anthony Lawrence Bartolo School, Chiswick House,
Garendon, Little Angels, Mariam Al Batool School, Newark Junior School, San Andrea
School, San Anton School, St. Edwards College, St. Joseph School, St. Catherine's High
School St. Martin's College, St. Michael's Foundation, Thi Lakin and Verdala International.
80 C-76/05 delivered on 11 September 2007.

Tax Deductions 231
a right to a reduction in income tax the payment of school fees to certain

private schools established in national territory, but generally excludes that
possibility in relation to school fees paid to a private school established in
another Member State.
Where taxpayers of a Member State send their children to a school established

in another Member State, the services of which are not covered by Article 49
EC, Article 18 EC precludes legislation which allows taxpayers to claim as
special expenses conferring a right to a reduction in income tax the payment
of school fees to certain private schools established in national territory, but
generally excludes that possibility in relation to school fees paid to a private
school established in another Member State.”
The allowable deduction is capped to a maximum threshold

which has recently been revised by Act V of 2012. Article 14B, as
amended by Act VII of 2019, provides that the deduction shall be
of the lesser of the following amounts:
(i) the amount actually paid as certified by the head of the

relative school or kindergarten;
(ii) two thousand six hundred euro (€2,600) in respect of
each child who attended such secondary school, or one
thousand nine hundred euro (€1,900) in respect of each
child who attended such primary school, or one thousand
six hundred euro (€1,600) in respect of each child who
attended such kindergarten:
As from year of assessment 2006,81 any individual who pays fees

to one of the schools named by the Minister in respect of a facilitator
for a child with special needs is allowed as a deduction against his
income the fees so paid up to a maximum of nine thousand and
three hundred and twenty euro (9,320).
The deduction is allowed provided that advice shall have been

given by a special board established by the Minister responsible for
81 Act II of2006.
education to the effect that the said facilitator is necessary for that
child.
When the parents of a child who attends a named school as

live separately and they jointly contribute towards the payment of
the school fees, the allowable deduction in respect of that child is
apportioned between them in proportion to the amount of their
contribution.
10.3 Childcare fees
Article 14C ITA prescribes that an individual who proves to the

satisfaction of the Commissioner that he has paid fees in respect
of childcare services for his children to a bona fide childcare centre
he is, for each child, allowed as a deduction against his income the
lesser of these amounts -
(i) the amount actually paid as confirmed by official receipts;

(ii) two thousand euro (€2,000).82
SUBSIDIARY LEGISLATION 123.121 DEDUCTION

(CHILDCARE FEES) RULES provides for a number of
conditions governing eligibility to the tax deduction. Rule 2
prescribes that deduction that may be claimed by an individual in
terms of article 14C ITA when:
(a) a fee is payable after deducting any subsidies or rebates that may
be received for the childcare service; and
(b) the childcare centre is registered or otherwise approved by the
Department for Social Welfare Standards or the Directorate for
Quality and Standards in Education or is a service provided by the
Foundation for Educational Services; and
(c) the payment and the details of the individual making the claim
are confirmed by information provided, in such format and content
82 Increased by Act V of 2012 and Act XII Of 2014..

Tax Deductions 233
as determined by the Commissioner, by the person running the

childcare centre.
10.4 Fees in respect of homes for the elderly and

the disabled
Act XXXII of2007 had introduced a tax deduction for fees paid to
homes for the elderly. Act III of 2013 had extended the purview of
the deduction to fees paid in respect of residence in a private home
for the disabled.83 If an individual proves to the satisfaction of the
Commissioner that in the year preceding a year of assessment he
has paid fees on his own behalf or on behalf of a family member,
in respect of residence a private homefor the elderly or the disabled,
or at a respite centre for the disabled, he is allowed a deduction in
terms of Article 14D ITA. The deduction is capped to lesser of the
following amounts -
( i) the amount actually paid ;

(ii) two thousand five hundred euro (€2,500).84
One of the provisos to the article prescribes that the total

deductions claimed in respect of any resident must not exceed the
amount as stipulated above. The deduction is allowed provided
that the payment and the details of the individual claiming the
deduction are confirmed by information provided by the person
running the private home for the elderly, in such format and
content as determined by the Commissioner.
83 The extension had been announced in Budget Speech 2013 when the Minister announced:
“The Government reduced the taxes on fees paid by persons who are resident in private old
people’s homes. Now we are extending this reduction to persons with a disability who pay fees
for residence in homes or respite centres or for support services within the community. The
reduction is being given to parents or relatives that pay these fees. The maximum reduction is
of2,500 euro.”
84 Increased by Act V of 2012.
10.5 Sports Fees
Article 14E ITA provides for a deduction in respect of the payment

of sports fees. Article 14E ITA prescribes that if an individual
proves to the satisfaction of the Commissioner that he has paid
fees, confirmed by official receipts, in respect of his children who
have not attained the age of sixteen years, attending sports activities
organised either by a person registered under the Sports Persons
(Registration) Regulations85 or by the Kunsill Malti Ghall-Isport,
he is allowed, for each child, a deduction against his income the
lesser of the following amounts:
(i) the amount actually paid;

(ii) one hundred euros.
10.6 Studies at a Recognised Tertiary Education

Institution
Act I of 2010 introduced a new tax deduction which was
incorporated in article 14F ITA. If an individual proves to the
satisfaction of the Commissioner that he has paid fees in respect of
his studies at a recognised tertiary education institution, whether
locally or abroad, he is allowed a deduction against his income in
respect of such fees in such manner and subject to such conditions
as may be prescribed.
Subsidiary Legislation 123.115 Deduction (Tertiary Education)

Rules contemplates the conditions to which 14F ITA refers to,
restricting the deduction considerably.
When the 14F ITA deduction is claimed by an individual, such

deduction is allowed against his income for the year in which he
has successfully completed his studies. The deduction to be allowed
is limited to the amount of fees actually paid or ten thousand euro
(€10,000), whichever is the lesser.
85 References to the Regulations were added by Act XII of 2014.
Tax Deductions 235
To the extent that the deduction cannot be wholly set off against
the income of the individual or of his spouse, where applicable, for
the aforesaid year, it shall be carried forward and set off against the
income for subsequent years in succession.
The deduction is allowed where the individual has not received

or will not receive any form of compensation regarding the fees
paid for the said studies from the Government or from any other
Government or private entity.
No deduction with respect to tertiary studies may be claimed if

the individual claims or has claimed any deduction or tax credit for
any year in respect of the said tertiary studies.
10.7 School Fees Paid to Cultural and Creative

Teaching Institutions
The 2012 Budget Speech announced the introduction of a new tax

deduction for parents whose children attend courses in cultural and
creative teaching institutions will benefit from a €100 reduction
on taxable income for costs related to courses given by licensed
or accredited schools or teachers. Ihe relevant tax deduction is
contemplated in Article 14G ITA prescribing that:
“14G. Notwithstanding anything to the contrary contained in this Act, if

an individual proves to the satisfaction of the Commissioner that in the year
preceding a year of assessment he has paid fees in respect of his children
who have not attained the age of sixteen years, attending creative or cultural
courses organised by institutions or persons licensed or accredited by the
Malta Council for Culture and the Arts, he shall, for each child, be allowed
as a deduction against his income the lesser of these amounts -
(a) the amount actually paid; (b) one hundred euro (€100):
Provided that the deduction shall only be allowed if the payment and the
details of the individual making the claim are confirmed by information
provided by the licensed or accredited person or institution through the
Malta Council for Culture and the Arts , in such format and content as
determined by the Commissioner:
Provided further that in the case of attendance at creative or cultural courses

organised by entities outside Malta, accreditation as aforesaid shall not be
necessary and the claim for deduction shall be made directly by the individual
concerned in such format and content as determined by the Commissioner.””
10.8 School Transport Fees
Act XIII of 2015 added Article 14H ITA providing for a tax
deduction with respect to school transport fees.
Article 14H prescribes that where an individual proves to the

satisfaction of the Commissioner he has paid fees for the use of
school transport in respect of his children, who have not attained
the age of sixteen years and who attend a church school or private
school, he shall be allowed as a deduction against his income the
fees paid, up to a maximum of €150 per child.
The deduction is only allowed if the payment and the details

of the individual making the claim are confirmed by information
provided to the Commissioner by Transport Malta in such format
and content as determined by the Commissioner.
//. Other Deductions
11.1 Article 74 VAT Act

An important income tax rules is hidden in the VAT Act. Article
74 VAT Act prescribes the following tax deduction rules:
(i) interest paid or payable under the VAT Act by the
Commissioner of VAT to any person is treated as income
of that person;
(ii) interest paid or payable under the VAT Act by any person
to the Commissioner of VAT is treated as an expense
incurred in the production of the income of that person
Tax Deductions 237
(and consequently tax deductible);

(c) administrative penalties paid or payable under the VAT
Act by any person to the Commissioner of VAT, are,
predictably, not treated as expenses incurred in the
production of the income of that person and are not tax
deductible.
11.2 The Donations (National Heritage) Rules

(‘DNHR’)86
The DNHR contemplate a deduction in respect of donations to
Heritage Organisations. The source for the DNHR appears to
have been, exceptionally, Italian law, article Vòbis of Testo Unico
delle imposte sui redditi, in particular87.
The DNHR rules prescribe that a donation of not less than

EUR2,320 which is made in cash or in the form of any other asset,
excluding immovable property, to any of the following:
(i) the Superintendent of Cultural Heritage;

(ii) Heritage Malta;
(iii) Fondazzjoni Patrimonju Malti;
(iv) non-Government cultural heritage organizations,
may be claimed as a deduction against income for the year

of assessment in which it is made. The donation can be claimed
provided that:
(i) a relevant signed certificate in respect of such a donation

has been issued by any of the above and is attached to and
submitted together with the income tax return for the
relevant year; and
(ii) the donation is made for the purpose of research,
conservation or restoration, education and exhibition of
87 Mifsud Bonnici, Ugo, An Introduction to Cultural Heritage Law (Malta 2008) p. 164.
the cultural heritage, which purpose shall also be indicated

in the said certificate; and
(iii)
in the case of a donation made to a non-Governmental
cultural heritage organisation registered with the
Superintendence of Cultural Heritage in terms of the
Cultural Heritage Act, that is not in any way related to
the donor company.
Where capital allowances have been allowed in respect if an

asset donated in accordance with the DNHR, the value of the
donation is considered to be the written down value of the asset as
on the date of donation. Where an asset donated is purchased by
the donor for forwarding to any of the said donees or is issued out
of the donors own stock, whether purchased or manufactured by
the said donor, the value of the donation shall be equivalent to its
cost to the donor.
DNHR provide for a deduction in respect of restoration works.

The DNHR prescribe that where, in any year of assessment, a
donation of not less than EUR 11,600 is made in cash to any of the
entities for the purpose of carrying out restoration works and such
restoration works are approved and undertaken by, or on behalf
of, any of these same entities, such donation may be claimed as a
deduction against income for the year of assessment in which it is
made, provided that a relevant certificate in respect of such donation
has been issued by the Superintendence of Cultural Heritage and is
attached to and submitted together with the income tax return for
the relevant year.
Such deduction is not allowed where it is made to a non-
Governmental cultural heritage organisation that is not registered
with the Superintendence of Cultural Heritage in terms of the
Cultural Heritage Act or is in anyway related to the donor company.
Tax Deductions 239
11.3 Tax Credit for Women Returning to Work88

A tax credit, a deduction from tax due as opposed to a proper tax
deduction against income, is granted to persons89, single or married,
who return to work. The tax credit applies in 3 distinct scenarios.
The three scenarios are contemplates in Rules 2 (a), (b) and (c):
Scenario A
(i) a person;
(ii) who has not attained the statutory retirement age;
(iii) returns to employment on or after the 1st January, 2008;
(iv) after having been absent from any gainful occupation for
at least five years immediately preceding the date of the
said return to employment; and
(v) who has never been, prior to the date of the said return
to employment, in receipt of a pension in view of past
employment and who, moreover, had previously been in
employment for at least twenty-four consecutive months.
Scenario B
Where:
(i) a woman has a child or children who is or are under sixteen
years of age; and
(ii) returns to employment on or after the 1st January, 2008;
(iii) after having been absent from any gainful occupation for
at least five years immediately preceding the date of the
said return.
Scenario C
Where:
(i) a woman has a child or children born on or after the 1st
January, 2007;
88 L.N. 110 of 2005.

89 Prior co the amendments introduced by L.N. 316 of 2016, the deduction was only available to
women.
(ii) and continues in employment?0., or returns to employment

on or after the 1st January, 2007.
The tax credit applies especially but not exclusively to

married women who, or whose spouses have, opted for a separate
computation. The tax credit consists in a tax credit of EUR2,000
which shall be set-off against the tax in respect of gains or profits
from the said employment.
The tax credit may only be set-offover a period oftwo consecutive

years of assessment commencing from the year of assessment during
which the return to employment occurs. In the case of women in
employment the tax credit is not available as a setoff against the
womans other sources of income, if any, or against her spouses
income. The income in respect of which a tax credit is granted is
deemed to constitute the first part of that womans total income for
the relative year of assessment.
In the case of a woman who qualifies under rule 2(b) or 2(c), the
tax credit may be availed of over a number of consecutive years not
exceeding the number of children plus one but shall in any case not
exceed €5000 in any one year.
In the case of a woman who qualifies under rule 2(c) in the year
2007, the tax credit shall commence from the year of assessment
2009.
The credit is subject to an anti-avoidance rule. A person shall

not qualify for the credit where the return to employment is
with an employer who is the persons spouse, her or her spouses
ascendant or descendant in the direct line, her adoptive child,
the spouse of any such ascendant, descendant or adoptive child,
her or her spouse s brother or sister or their spouses, or where the
90 Which means that the title of the law is a misnomer.

Tax Deductions 241
said employer is a company in which the woman or any of the

aforementioned persons is directly or indirectly a shareholder.
Any woman to whom rule 2(b) or 2(c) applies may opt for a tax
credit instead of the one mentioned in rule 3, in respect of each
child, equivalent to the tax chargeable on the gains or profits from
the employment referred to in rule 2 earned in the year of return
to employment, and this tax credit shall be set-off against the said
gains or profits for the year. Where the said return to employment
is as a self-employed person, the tax credit as aforesaid may not
exceed €5000.
11.4 The Pre-Trading Expenditure Regulations

of 2002 CPTER’)”
Generally, pre-trading expenditure is not allowed as a deductible

expense for tax purposes but, the enactment of the PTER and an
amendment made to Article 14 (3) ITA resulted in a derogation
from the general rules.
Article 14 (3) ITA prescribes that when any person incurs

expenditure before he begins to carry on his trade or business, and
the expenditure -
(i) is incurred not more than eighteen months before that

time; and
(ii) is not deductible in ascertaining the trading or business
income of that person, but would have been so deductible
had it been incurred after that time,
such expenditure is treated as incurred on the day on which the
trade or business is first carried on by that person if it falls under
one of the following categories prescribed in the PTER:

(i) staff training;

(ii) salaries and, or wages
(iii) advertising.
12. Art. 26 ITA -Expenses which are not allowed for

Tax Purposes
Article 14 ITA and Article 26 ITA have a Yin and Yan relationship.
Article 14ITA has been described as ‘the positive test’ because it
prescribes expenditure which is allowed for tax purposes. Article
26ITA has been described as ‘the negative test’ because it lists
expenses which are not allowed for tax purposes. Article 26
prescribes that the following expenditure is not allowed for tax
purposes:
(i) Article 26 (a) ITA refers to ‘domestic or private expenses

other than those specifically allowed by this Act’.92
(ii) Any outgoings and expenses to the extent to which they
are not wholly and exclusively incurred in the production
of the income and, in the case of gains or profits chargeable
under article 4(l)(b) ITA (employment income), not
being furthermore necessarily incurred in the performance
of the duties of the relative employment or office;
(iii) Any loss, diminution, exhaustion or withdrawal of capital,
any sum employed or intended to be employed as capital or
any expenditure for a capital purpose or of a capital nature
save as provided in article 14ITA (Capital allowances and
other capital expenditure which is expressly allowed).
92 Article 26 (a) ITA used to erroneously refer to ‘domestic or private expenses other than
alimony payments as provided for in article 14A ITA and school fees as provided for in
article 14B ITA’. The omission of an express reference to other allowable domestic and private
expenses such as the deductions envisaged in Articles 14C ITA to 14E ITA (and now E, F
and G) was an oversight from the legislator s part which has been rectified after the flaw was
identified in Principles ofMaltese Law.
Tax Deductions 243
Expenditure incurred as part of the outlay necessary to put

the business in a position to earn profits is not deductible.93 In
BSC35/1974,94 the Board held that expenses incurred in the
formation of a business such as investments in feasibility studies
could not be deducted. Such expenses were held to be of a capital
nature as they were not incurred in the production of the income
but in the preparatory acts undertaken to create a source of in
come. Similarly, in BSC2/1976 the Board disallowed a deduction
for formation expenses, and contractual expenses incurred upon
the acquisition of immovable property for re-sale95.
Case law has established that expenditure is considered to be

expenditure for a capital purpose or of a capital nature for the pur
poses of the law if such expenditure is incurred ‘once-and-for-all’.
The Court of Appeal’s judgement in Case 8 of2003 is a perfect
illustration of the legal principle. The Court disallowed a premi
um, because unlike rent, a premium was a once and for all expense,
“Hi 1-fehma konsiderata tal-Qorti illi d-deduzzjoni rikjesta f’dan il-kaz ma

tissodisfax il-kondizzjonijiet partikolari rikjesti taht il-ligi specjali dwar it-
taxxa fuq 1-income. Biex spiza titnaqqas jehtieg skond din il-ligi illi oltre
li ma tkunx ta’ natura kapitali, hlief kif prowdut fl-artikolu 14, tkun saret
“ghal kollox u biss ghall-produzzjoni ta’ 1-income” (Art 26(b)). Dan ifisser
li jrid ikollok relazzjoni bejn 1-ispiza pretiza bhala deduzzjoni u 1-income
li tkun saret biex tipproduci. Kif taraha din il-Qorti ma jistax ikun hemm
kollegament bejn 1-ispiza ta’ darba wahda tal-premium, li tkun saret fl-istadju
inizjali u preparatorju biex tibda topera 1-impriza ghall-generar tal-profitt, u
1-istadju meta din 1-impriza effettivament tibda tahdem. Dik 1-ispiza kienet
biss preparatorja ghat-tehid tal-uzu tal-fond biex minnu eventwalment jigi
generat il-business. Huwa inkoncepibbli ghalhekk illi jista’ jinghad li 1-hlas
tal-premium sar b’mod “ghall-produzzjoni ta’ 1-income”. Infatti 1-kliem tal
ligi ma jistax hlief ifisser illi jrid ikun hemm relazzjoni bejn 1-ispiza li taghha
jintalab it-tnaqqis u 1-income li hi saret biex tipproduci. Sewwa ghalhekk
93 Case 19ofl9S9ofthe Board ofSpecial Commissioners.

94 Decided Aprii 18,1975.
95 In view of the fact the purchase price would be taken into consideration in determining the
gain in respect of the sale price.
inghad mill-Kummissarju appellant fin-Nota ta’ Sottomissjonijiet tieghu

quddiem il-Bord illi skond it-test tal-ligi 1-kliem “wholly and exclusively
incurred in the production of the income” jimplika illi 1-ispiza trid tkun saret
bil-ghan li tipproduci d-dhul u ghaldaqstant spejjes ohra li jsiru ghal skopijiet
sekondarji ohra ghal dak li joholqu d-dhul ma jistghax jigi ammissibbli”.
Una volta allura li din il-Qorti ma tikkonsidrax il-hlas tal-premium bhala parti
ntegrattiva tal-hlas tal-kera, u gjaladarba qed tqis tali spiza ta’ natura kapitali
u mhux ta natura ta’ “revenue”, kompriz f’dan il-konsiderazzjoni tan-nuqqas
ta’ ness bejn tali spiza u 1-produzzjoni ta’ 1-income, hu 1-kaz li tiddissenti mill-
konkluzjoni raggunta mill-Bord in kwantu din ma tikkorrispondiex mal-
principji legali applikabbli ghall-kaz konkret.”
An expense which brings something new into being or which

augments an asset by increasing the value of such an asset is an
expense of a capital nature. On the other hand, an expense related
to an asset is not of a capital nature if it is an expense of a recurring
nature which is incurred to maintain an asset in its general working
order96. Expenditure incurred to restore an asset is not of a capital
nature but, conversely, an expense which is incurred for the purposes
of creating something ex novo is of a capital nature.
(iv) The cost of any improvements;
(v) Any loss or expense which is recoverable under any
insurance or contract of indemnity;
(vi) Rent of any premises or part of premises not paid for the
purpose of producing the income;
(vii) Any payments of a voluntary nature;
(viii)Certain interest payments: In 2011 the legislator felt
the need to introduce a restriction on the deductibility
of interest expenditure. Presumably, the change was
motivated by a suspicion that the interest exemption in 12
( 1 ) (c) (i) ITA was being abused through the use of foreign
Special Purpose Vehicles which were being used to reduce
tax liability in Malta on the commercial exploitation of
real estate. Presumably, foreign Special Purpose Vehicles
which were tax exempt on interest income were being used
96 Ibid Atrard, R, pp. 197202.
Tax Deductions 245
to create tax deductible interest expenditure at the level

Maltese property companies in the real estate business.
Such irregular schemes could result in situations where
Maltese property company were claiming a tax deduction
for interest paid, decreasing their chargeable income
considerably and foreign special purpose vehicles were
being used to extract income from the property companies
tax free. Tax inspectors had every right to be furious but
the measures they adopted to curb abuse went too far. The
interest restriction rule which was incorporated in Article
26 (h) ITA reads:
“For the purpose of ascertaining the total income of any

person no deduction shall be allowed in respect of:
(h) any interest, discount or premium paid or payable to a

person not resident in Malta where:
(i) the person not resident in Malta derives or benefits from the
said interest, discount or premium, directly or indirectly,
from the granting of loans or from any form of credit
to finance the acquisition, development, construction,
refurbishment, renovation of immovable property situated
in Malta or any right thereon including professional fees
related thereto (including fees related to the acquisition
of finance) and any other matter which increases or
enhances the value of such immovable property or any
right thereon; and
(ii) the said interest, discount or premium is exempt from tax
under the provisions of article 12( 1 ) (c) (i) ; and
(iii) the payor of the interest, discount or premium is a person
related to the person not resident in Malta...”
Thus, article 26 (h) ITA denies the tax deduction when:
(i) Creditor and debtor are related parties;97

97 The relationship is established by reference to a 10% shareholding quota. Article 26 (h) ITA
(ii) The loan to which the interest refers is to be used for

improvement of property situated in Malta; and
(iii) Lender is a non-resident benefitting from the tax
exemption under 12 (1) (c) (i) ITA.
I had questioned whether Article 26 (h) reconciles with Malta’s

international commitments. I suspect there in certain instance
Article 26 (h) ITA does not reconcile with Council Directive
2003/49/EC of 3 June 2003 on a common system of taxation
applicable to interest and royalty payments made between
associated companies of different Member States (‘the I & R
Directive’) and the manner the directive has been interpreted by
the European Court of Justice. The I & R Directive provides for
a tax exemption in respect of interest payments made by related
parties:
“interest or royalty payments arising in a Member State shall be exempt from

any taxes imposed on those payments in that State, whether by deduction at
source or by assessment, provided that the beneficial owner of the interest or
royalties is a company of another Member State or a permanent establishment
situated in another Member State of a company of a Member State.”
Article 26 (h) ITA tends to arbitrarily restrict the seamless

application of 12 (1) (c) (ii) ITA and such arbitrary restriction
might be perceived as an irregular restriction to a vested community
98
law right.*
contains an interpretative proviso which explains that a person is deemed to be related to a

person not resident in Malta if:
(i) that person and the person not resident in Malta are, directly or indirectly, controlled or
beneficially owned to the extent of more than 10% by the same persons; or
(ii) that person owns, directly or indirectly, more than 10% of the ordinary share capital or
voting rights of the person not resident in Malta.
98 On this point see Lankhorst-Hohorst Gmbh v Finanzamt Steinfurt of 12 December 2002
(Case C-324/00), Test Claimants in the thin Cap Group Litigation v Commissioners of
Inland Revenue of 13 March 2007 (Case C-524/04) and F.Gielen v Staatssecretaris van
Financien of 18 March 2010 (Case C-440/08). In Thin Cap Group Litigation Case the ECJ
pointed out that:
“Article 43 EC precludes legislation of a Member State which restricts the ability of a resident
company to deduct, for tax purposes, interest on loan finance granted by a direct or indirect
Tax Deductions 247
13. The Deduction (Pharmacy Of Your Choice)

Rules, 2010 (*The PYOC’ Rules)
The PYOC Rules grant qualifying persons incurring qualifying

expenditure a special tax credit equivalent to one hundred per
cent (100%) of the cost incurred with respect to each pharmacy
outlet against the said persons tax charge for the relative year of
assessment.
The total tax credit in respect of each pharmacy outlet shall not
exceed fourteen thousand euro (€14,000). No tax credit under this
rule may be claimed in respect of any expenditure incurred after the
31st December, 2019..
Qualifying persons are persons who:
(a) Carry on a business through a pharmacy outlet; and

(b) Incur expenditure in purchasing or installing any
equipment or software in a pharmacy outlet for the
implementation of the Pharmacy OfYour Choice scheme;
(c) After the enactment of L.N. 283 of 2016 any person
carrying on a business through a pharmacy outlet who
incurs capital expenditure or labour expenditure, as
parent company which is resident in another Member State or by a company which is resident
in another Member State and is controlled by such a parent company, without imposing
that restriction on a resident company which has been granted loan finance by a company
which is also resident, unless, first, that legislation provides for a consideration of objective
and verifiable elements which make it possible to identify the existence of a purely artificial
arrangement, entered into for tax reasons alone, to be established and allows taxpayers to
produce, if appropriate and without being subject to undue administrative constraints,
evidence as to the commercial justification for the transaction in question and, secondly,
where it is established that such an arrangement exists, such legislation treats that interest as a
distribution only in so far as it exceeds what would have been agreed upon at arm’s length.”
In Gielen, the ECJ added:
“However, the Court has made it clear that, in the case of a tax advantage which is not
available to a non-resident, a difference in treatment as between the two categories of taxpayer
may constitute discrimination for the purposes of the FEU Treaty where there is no objective
difference between those categories such as to justify different treatment in that regard
(Talotta, paragraph 19 and the case-law cited, and Renneberg, paragraph 60)”
defined in sub-rule (2), for the purpose of implementing

the Pharmacy of Your Choice scheme.
Qualifying expenditure is capital expenditure or labour

expenditure. ‘Capital expenditure’ is defined as meaning
expenditure for the acquisition of equipment (including a motor
vehicle), as approved by the Standing Advisory Committee, which
equipment shall be used for the home delivery scheme as part of the
Pharmacy of Your Choice scheme. ‘Labour expenditure’ is defined
as meaning additional labour costs, as approved by the Standing
Advisory Committee, for the purposes of the home delivery
scheme as part of the Pharmacy of Your Choice scheme.
14. Donations (University Research, Innovation and

Development Trust) Rules, 2010
The Legal Notice prescribes that where, in any year of assessment,

a donation of not less than €150 up to a maximum of €50,000,
is made in a monetary amount or in the form of any other asset
(equivalent to cost/WDV), to the University Research, Innova
tion and Development Trust, such a donation may be claimed as
a deduction against income for the year of assessment in which
it is made. The deduction is subject to a number of compliance
obligations.
15. Deduction (Electric Vehicles) Rules

This legal notice was enacted in terms of the enabling provision
contained in 14 (2) ITA on deductions. It provides for a tax de
duction in respect of qualifying expenditure" incurred by a quali-
99 "qualifying expenditure" means expenditure of a capital nature incurred on the acquisition of

electrical vehicles;
Tax Deductions 249
fyingperson100 on either an electrical vehicle101 or a hybrid vehicle.
Rule 3 establishes thatwhere a qualifying person incurs

qualifying expenditure in the year preceding the year of assessment,
a deduction shall be allowed against the said persons income
charged to tax for such year of assessment. The said deduction shall
be equivalent to 150% of the cost incurred in the case of an electric
vehicle and 125% of the cost incurred in the case of a hybrid vehicle.
The total deduction claimed under the rules may not exceed
forty thousand euro (€40,000) in the case of an electric vehicle
and thirty thousand euro (€30,000) in the case of a hybrid vehicle.
When a deduction is claimed under the rules, no deduction in
respect of wear and tear may be claimed in respect of the same
electrical vehicle. Any grant or other benefit received from the
Government in respect of a vehicle to which the rules apply shall
be deducted from the cost incurred for the purpose of calculating
the deduction allowable under this rule..
/6. Subsidiary Legislation 123.137 Donations

(Creativity Trust) Rules
The Subsidiary Legislation above was introduced in 2013 and

provides for a deduction with respect to donations of not less than
one hundred fifty euro (€150) up to a maximum of one hundred
thousand euro (€100,000), is made in a monetary amount or in the
form ofany other asset, or in kind, to the Creativity Trust, established
by the Creativity Trust Order.102 Compliance obligations apply.
100 "qualifying person" means a company that carries on a trade or business.

101 "electrical vehicle" means a vehicle propelled exclusively by an electric motor which gets its
source of energy from a battery or a set of batteries;
102 L.N. 21 of 2013 Malta Council for Culture and the Arts Act (Cap. 444) Creativity Trust
Order, 2013.
17. Subsidiary Legislation 123.113 Donations

(University Research, Innovation and Development
Trust) Rules
This subsidiary legislation provides for a tax deduction in respect

of a donation of not less than one hundred fifty euro (€150) up to a
maximum of fifty thousand euro (€50,000), is made in a monetary
amount or in the form of any other asset, to the University Research,
Innovation and
Development Trust, such a donation may be claimed as a
made, provided that:
(a) a relevant signed certificate in respect of such a donation has

been issued to the donor by the trustees of the University
Research, Innovation and Development Trust; and
(b) the donation is made for the purpose of research, innovation
and development which purpose shall also be indicated in
the said certificate; and
(c) the trustees of the University Research, Innovation and
Development Trust have submitted information required
by the rules.
18. Subsidiary Legislation 123.102 Donations (Sports

and Culture) Rules
This Legal Notice103 contemplates tax deductions with respect to

donations made to sportsmen, cultural organisations and artistes.
Taxpayers which are companies are eligible to this tax deduction.
The deduction does not apply with respect to donations made to
related parties but I could not find a definition of‘related party’.
103 Amended in 2015 and 2016.

Tax Deductions 251
Sports
Rule 3 of the Rules prescribes that where, in any year of assessment, a
company proves to the satisfaction of the Commissioner that it has
made a cash donation to a sports person participating in a national
sports event or an international sports event, such donation may be
claimed as a deduction against income for the year of assessment
in which it is made, provided that a certificate is issued in this
respect by SportMalta thereby certifying recognition of the event
and registration of the sports person. Such deduction may only be
claimed if the said sports person is not in any way related to the said
donor company.
The total deduction claimed by a company in any year of

assessment is the lesser of the expense actually incurred or sixty
thousand (60,000) euro.
"international sports event" is defined as meaning any form

of event having a competitive element, being organized by an
international governing body recognized by SportMalta, in which
local sports persons can participate.
"national sports event" is defined as meaning any league, knock

out competition or other form of local competition taking place in
the territory of Malta intended for local sports persons, recognized
a such by SportMalta.
"sports person" is defined as meaning an athlete, club, association,

federation, foundation or any other sports organisation registered
under any other category as established by SportMalta which is
deemed to be a "not-for-profit" sports entity and is registered in the
Register of Persons kept by SportMalta as required by the Sports
Act.
Cultural Organisations
Rule 4 provides for a similar tax deduction with respect to donations
to cultural organisations.
Where a company proves to the satisfaction of the Commission
er that it has made a cash donation to the Arts Council Malta
or a cash donation to a non-profit making cultural organisation
approved by the Arts Council Malta, an amount equivalent to
150% of such donation may be claimed as a deduction against
income for the year of assessment in which it is made, provided
that a certificate is issued in this respect by the Arts Council Malta
and that, in the case of a donation to a cultural organisation as
aforesaid, such cultural organisation is not in any way related to
the donor company.

assessment in accordance with sub-rule (1) shall be the lesser of the
amount calculated as aforesaid or fifty thousand (50,000) euro.
Scholarships and Artistes

Rule 5 prescribes that where, in any year of assessment, a company
proves to the satisfaction of the Commissioner that it has made a
cash donation or provided a scholarship to a bona fide artiste who
is ordinarily resident in Malta, such expense may be claimed as a
made provided that the said artiste is not in any way related to the
donor company.

assessment shall be the lesser of the
expense actually incurred or eighteen thousand and six hundred
(18,600) euro.
A company claiming a deduction under this rule shall provide

the Commissioner with particulars of the artiste, the nature of the
Tax Deductions 253
artistic activity and such other information regarding the donation

or scholarship as may be required on such form and in such manner
as the Commissioner may determine.
The Notional Interest Deduction Rules 2018

Act XVI of 2017 paved the way for Malta’s Notional Interest
Deduction Rules by adding Article 14 (1) (o) to the ITA and
tweaking Article 43 (6) ITA. Article 14(1) (o) ITA provides for a
deduction with respect to:
“(o) such sums in respect of risk capital as are aimed at approximating

neutrality between debt and equity financing, as the Minister may prescribe.”
The Minister implemented Article 14 (1) (o) ITA by Legal

Notice 262 of 2017 but Legal Notice 262 was short-lived and
was substituted within a few months after its publication. The
latest version of Malta’s Notional Interest Deduction system is
contemplated in L.N. 37 of 2018, the Income Tax Act (CAP. 123)
Notional Interest Deduction Rules, 2018 (the ‘NIDR’).
The NIDR incorporate definitions that delineate the purview

of the deduction regime putting forward computational rules. The
NIDR must be read in conjunction with L.N. 38 of 2018 - the Tax
Accounts (Income Tax) (Amendment) Rules, 2018 which adapted
the Tax Accounting Rules so as to provide for NID.
Rule 3 NIDR is probably the most important rule in L.N. 37

providing that for the purpose of ascertaining the total income
of an undertaking for a year of assessment, the undertaking shall
be entitled to a deduction for sums that are deemed to be payable
by way of interest on risk capital or such part thereof as may be
determined by the undertaking for the particular year. Definitions
of the important terms ‘interest on risk capital’ and ‘undertaking’
are contained in Rule 2.
The definition of ‘interest on risk capital’ in Rule 2 directs the

reader to Rule 4 providing that Interest on risk capital for a year of
assessment shall be calculated on the basis of the following formula:
Y = AxB
Where -"Y" represents the interest on risk capital that an

undertaking is entitled to claim in the relevant year of assessment;
"A" represents the reference rate-,

"B" represents the risk capital of the undertaking for the
accounting period ending in the year preceding the year of
assessment less any risk capital directly employed in the form of
securities, interest in a partnership, contributions and any other
loans or debts that do not bear interest that the undertaking holds
in or provides to any other person whether resident in Malta or
otherwise (referred to as “the invested risk capital”), to the extent
that such invested risk capital is:
(a) not employed by the undertaking in producing any income

in the year preceding the year of assessment in a situation
where had any such income been produced it couldhave
been exempt from tax in terms of the Act, or
(b) employed in producing income in the year preceding the
year of assessment which is exempt from tax in terms of
the ITA.
Rule 2 defines ‘undertaking’ as means a company or a partnership

resident in Malta or any other company or partnership that is not
resident in Malta that derives income that is effectively connected
with a permanent establishment of the company or partnership
situated in Malta.
The term "the reference rate" is defined as meaning the risk free
rate set by reference to the yield to maturity on Malta Government
Tax Deductions 255
Stocks with a remaining term of approximately 20 years plus a

premium of 5%.
"Risk capital" has a dual meaning:

(a) where the undertaking is a company or partnership
resident in Malta, the share or partnership capital of
the undertaking, any share premium, positive retained
earnings, loans or other debt borrowed by the undertaking
which do not bear interest, and any other reserves resulting
from a contribution to the undertaking, and any other
positive balance which is shown as equity in the financial
statements of the undertaking; and
(b) where the undertaking is a company or partnership that
is not resident in Malta, that part of the risk capital, as
defined in paragraph (a), of that undertaking that is
attributable to the permanent establishment situated in
Malta.
Limitation rules are found in in the proviso to Rule 3(1), Rule

3 (2) NIDR and Rule 4 (2) NIDR. The proviso to Rule 3 (1)
NIDR prescribes that the entitlement to a deduction shall apply
only in respect of profits which stand to be allocated to a company's
Foreign Income Account or Maltese Taxed Account or in respect
of profits of any other undertaking which, had it been a company,
would have stood to be allocated to its Foreign Income Account or
Maltese Taxed Account.
Rule 4 (2) NIDR prescribes that where in respect of any year

preceding a year of assessment, interest resulting from the above
computation exceeds ninety per cent (90%) of the undertakings
chargeable income for the said year prior to taking into account the
deduction allowable the amount of such excess shall not be available
for deduction against the profits for the said year, but may, at the
option of the undertaking, be carried forward for deduction and
be added to the deduction due for the following year and deemed
to be part of that deduction, or if there is no such deduction for

that year, be deemed to be the deduction for that year and so on for
subsequent years and any amounts carried forward as set out in this
proviso shall be increased by such rate as may be prescribed by the
Commissioner.
Where a shareholder or partner of an undertaking that is a

company is deemed to have received interest income pursuant
to a deduction claimed by such undertaking, the shareholder or
partner will be entitled to deduct any interest on risk capital which
it is deemed to have incurred in terms of the NIDR against such
deemed interest income without the limitation set out above.
Rule 3 (2) prescribes the limitation rule in 4 (2) shall be calculated

on the basis of the undertaking's income which stands to be allocated
to Foreign Income Account or Maltese Taxed Account or which
would stand to be so allocated if the undertaking were a company.
NID is claimed at the option of the undertaking in the return

made pursuant to article 10 of the Income Tax Management
Act, so however that such deduction may only be claimed if it is
demonstrated that all shareholders or partners of the undertaking
approve the claiming of such deduction in respect of the particular
year of assessment. The undertaking shall be entitled to a deduction
against such income for sums that are deemed to be payable by way
of interest on risk capital.
Where an undertaking claims NID the shareholder or partner,

as the case may be, of the undertaking at the end of the year
preceding the particular year of assessment shall be deemed to have
received in that year an amount of income equal to the interest
on risk capital claimed as a deduction by the undertaking for the
said year of assessment. Income that is deemed to be received is
characterised as interest.
Tax Deductions 257
On 15 November 2018, the Code of Conduct Group published

a draft assessment relating to Malta’s Notional Interest Deduction
Rules. The conclusion was that ‘The regime is considered as overall
not harmful’104
104 See http://data.consilium.europa.eu/doc/document/ST-14364-2018-ADD-6/en/pdf.

Given the assessment’s relevance as an interpretative tool, sections from the assessment are
being reproduced hereunder:
‘Where an undertaking has claimed the NID, the shareholder or partner in the NID is
deemed to have received interest income equal to the NID claimed by the undertaking (if
there is more than one shareholder/partner in the undertaking, the interest income is deemed
to have accrued to the shareholder/partner in proportion to the capital that they hold in the
undertaking).
The second paragraph of Rule 5(3) provides that a shareholder, partner or undertaking
may make a request so that the deemed interest income is allocated on a basis other than
the nominal value of the risk capital held by the shareholder or partner, as the case may be.
This provision is in place to address situations where it is clearly more reasonable to split the
allocation of the deemed interest income on a different basis, for example on the basis of the
actual profit sharing ratio, where this is different from the proportion of the nominal value
of shares held by each shareholder. The Guidelines to be issued with the legislation provide
that when the Commissioner for Revenue exercises his discretion under this provision, the
criteria that have led to the Commissioner’s decision will be published so that the adoption
of such criteria can be applied equitably and horizontally in respect of all undertakings. Any
decision taken by the Commissioner in terms of the second paragraph of Rule 5(3) will,
where applicable, be automatically exchanged by the competent authority in Malta with
the competent authorities of all other EU Member States, as well as with the European
Commission, pursuant to Regulation 13(3) of the Cooperation With Other Jurisdictions On
Tax Matters Regulations [S.L.123.127]. This will also be stipulated in the Guidelines. Such
deemed interest income is brought to charge in the hands of the shareholder/partner in the
same way that actual interest would be charged to tax (e.g. a shareholder that is a company
resident in Malta of the undertaking claiming the NID would be subject to income tax at the
standard corporate rate of 35% on such income). At the same time, distributions of profits
that have been relieved from tax at the level the undertaking that claimed the NID are not
subject to further tax at the level of the shareholder/partner.
When any profits relieved from tax through a NID claim are distributed to a shareholder, no
further tax is levied at the level of the shareholder.
Example:
Chargeable Income of an Undertaking pre-NID = €10,000
NID = €7,000
Chargeable Income of an Undertaking post-NID = €3,000
Tax thereon @ 35% = €1,050
Chargeable income after tax = €1,950
Allocation to Reserves (€7,000 + €1,950) = €8,950
The distribution to the shareholder of €7,000 representing the profits relieved from tax
through a NID claim is not subject to tax in the hands of the shareholder given that under
general Maltese tax law no additional tax is imposed on distributions to shareholders.
Generally, interest income derived by a person not resident in Malta is not subject to tax
subject to the satisfaction of certain conditions (e.g. the interest is not effectively connected
with a permanent establishment of the non-resident situated in Malta). The exact same
treatment also applies to interest income deemed to be received in terms of Rule 5(1) of the
Rules and hence this treatment creates symmetry between actual interest on interest bearing
debt and the notional interest arising from risk capital....
To compute the NID the reference rate is applied to the risk capital of the company or
partnership less the “invested risk capital” to the extent that such invested risk capital either
produces income exempt from tax, or produces no income, but if any income was produced,
such income could have been exempt from tax.
The invested risk capital is the risk capital that is directly employed in the form of securities,
interest in a partnership, contributions and any other loans or debts that do not bear interest
that the company or partnership holds in or provides to any other person whether resident in
Malta or otherwise.
Furthermore, the NID cannot be claimed against profits derived directly or indirectly from
immovable property situated in Malta.
The regime applies to foreign PEs of resident entities. However, if the income derived from a
foreign PE of a resident undertaking is exempt from tax under the provisions of the Income
Tax Act (Cap. 123 Laws of Malta), no notional interest deduction would be available against
such exempt income. Such deduction would be disallowed because it would not satisfy the
general deduction principle that deductions are only allowable to the extent that they are
wholly and exclusively incurred in the production of income that is chargeable to tax...’
Chapter 8
The Taxation of Employment Income
1. The Taxation of Employment Income
Employment income is reported before Trading Income on page

2 of the Income Tax Return but it is charged to tax under Article
4 (1) (b) ITA which charges to tax gains or profits from any
employment or office, including the value of any benefit provided
by reason of any employment or office’. Employment income
typically assumes the form of a salary but the BSC had confirmed,
in BSC 28/51 (a case which involved a cash allowance), that all
income from employment or office including bonuses and fringe
benefits are taxed in terms of the charging provision 4 (1) (b). Thus,
cash and non-cash benefits paid to employees are brought to charge
under 4(1) (b) ITA because Article 4(1) (b) now expressly refers
to ‘the value of any benefit provided by reason of employment or
office’ (i.e a fringe benefit). Benefits are thus attributed an annual
value, the annual value of the benefit is added to the cash salary and
the employer is charged to the tax on the ‘inflated salary’.
2. The Taxation of Fringe Benefits
A fringe benefit is a benefit which is provided by reason of

employment or office. However the devil is in the detail and details
are spelt out in the Fringe Benefit Rules, Subsidiary Legislation
123.55 (the ‘FBR’) which incorporates several important
definitions and rules.
2.1 Deemed Fringe Benefits
Rule 3 FBR creates certain presumptions relating to the provision of a

Fringe Benefit. It is important to point out that, in terms of Rule 3 FBR,
a fringe benefit can exist in certain cases even outside a strict employer1-
employee1 2 relationship. A Fringe Benefit is deemed to be provided in the
following cases:
(i) it is provided by an employer to his employee*; or

( ii) it is provided by a company or a partnership to an individual
who holds an office in that company or partnership*; or
(iii) it is provided by a company to an individual who was an
employee or officer3 of that company as a reward for, or in
recognition of, services rendered to that company; or
(iv) it is provided by a company on a continuing or regular
basis to an individual who, at the time it was first provided
or at the time that the company decided to provide it, was
an employee or an officer of that company*; or
(v) it is provided to the holder of an office by a person who
is responsible for the payment of remuneration for duties
performed under the terms of appointment to that office*;
or
(vi) it is provided as a reward for services rendered by a person
in the course of the performance of his duties as employee
or officer of another person where that benefit is provided
by a third party.
The Rule 3 presumption relating to the existence of a fringe

benefit is a rebuttable one in the cases of fringe benefits (i),(ii),(iv)
1 Defined in Rule 2 FBR as ‘a person who engages or has engaged another person to perform
services under a contract of employment’
2 Defined in Rule 2 FBR as ‘an individual who performs services under a contract of employment
whether written or not with another person’.
3 Defined in Rule 2 FBR as ‘the holder of an office and includes also an individual who -
(a) is a director of a company; or
(b) holds directly or indirectly more than 5% of the ordinary share capital or of the voting rights in
a company; or
(c) is a partner in a partnership.’
The Taxation ofEmployment Income 261
and (v) above (marked with an asterisk). In the said cases one can
rebut the presumption relating to the existence of the benefit in the
following cases:
(i) the benefit is a donation made by an individual on purely

personal considerations; or
(ii) the benefit is provided in settlement or on account of a
debt that is not related to any services rendered in the
course of an employment or office; or
(iii) the benefit is a distribution of profits by a company or a
partnership to a person in his capacity as shareholder
or partner of that company or partnership or represents
drawings made by a partner on account of his share of
profits of the partnership, and is accounted for as such in
the records of that company or partnership.
It will be noted that some of the benefits listed above are provided
outside a strict employer-employee relationship4. The same principle is
contained in Rule 4 which recognises the ‘indirect’ grant of benefits, the
grant of a benefit via third parties. Rule 4 creates the following important
rules:
(i) a benefit provided by a company to an individual who is not an

employee or an officer of that company but who is an employee
or an officer of an associated company5 shall be deemed to be a
benefit provided by the associated company;
(ii) a benefit provided by a company to an individual who is
not an employee or an officer of that company but who is
a member of the family of an employee or an officer of that
company or of an associated company shall be deemed to
4 The case of (b) (c) and (d) above.

5 Defined in Rule 2 as:
“’associated company’ means that is related to another company to which reference is made in the
context in which this term is used in a way that -
(a) the two companies form part of the same group; or
(b) the two companies are owned or controlled directly or indirectly as to more than 50% by the
same persons;”.
be a benefit provided to the said officer or employee;

(iii) a benefit provided by an employer, other than a company, to an
individual who is not an employee of that employer but who is
a member of the family6 of an employee of that employer shall
be deemed to be a benefit provided to the said employee;
(iv) a benefit provided to an employee by a third party shall
be deemed to be provided by the employer if the benefit
is provided on the employer s instructions, whether direct
or explicit or otherwise, or through his intervention.
L.N. 205 of 2017 INCOME TAX ACT (CAP. 123) the Fringe
Benefits (Amendment) Rules, 2017 added Rule 3A prescribing that
Fringe benefits are deemed to arise in the country where services
are wholly or principally performed. In the case of directors, Fringe
Benefits arise in the country where there is management and
control.
2.2 The Benefits
The FBR classifies fringe benefits under ten headings with a catch
all-clause in Rule 45.
The ten benefits are the following:
1. Rule 9 Benefits (Private Use of a Vehicle);

2. Rule 17 Benefits (the Vehicle Allowance);
3. Rule 20 Benefits (Private Use of Property);
4. Rule 26 Benefits (Beneficial Loan Arrangements);
5. Rule 28 Benefits (Free or discounted meals);
6. Rule 30 Benefits (Free or discounted airline or sea
transport tickets);
6 Defined in Rule 2 of the FBR as:
“’member of the family’ of a person means the spouse, ascendant, direct descendant or an adoptive
child of that person, or the spouse of such ascendant, descendant or adoptive child or an
individual
who ordinarily resides in the same residence as that person, whether related to him or not;”.
7. Rule 32 Benefits (Free or discounted transfer of property

and provision of
Services);
8. Rule 36 Benefits (Share option scheme benefits);
9. Rule 39 Benefits (Payment or reimbursement of expenses
incurred for private purposes);
10. Rule 45 Benefits (Other Benefits).
The ten benefits above are classified in the following three

categories for valuation purposes:
Category 1 Benefits - Benefits Relating To Motor Vehicles

Category 2 Benefits - Use Of Property
Category 3 Benefits - Other Benefits
2.2.1 Category I Benefits - Benefits Relating To

Motor Vehicles
In reality Category 1 contemplates two distinct types of fringe
benefits relating to motor vehicles: (i) use by an employee of a car
belonging to a third party and (ii) the grant of a fuel allowance.
Use of a Motor Vehicle

Rule 9 FBR provides that the private use by an individual of a
vehicle that is owned or held under a title of lease by another person
shall be deemed to be a benefit provided by the said person to the
said individual.
Rule 9 follows the same logic of Rule 3 by laying down a number

of cases when the grant of a fringe benefit is presumed. The grant of
a benefit is presumed in the following cases:
(i) if the vehicle is placed at the exclusive disposal of that

individual;
(ii) if the vehicle is regularly available for use by that individual
outside the hours during which he normally performs his

duties as an employee or an officer of the provider of the
benefit;
(iii) ifthe vehicle is regularly kept overnight or during weekends
under the charge of that individual in any place which is
not the business premises of the provider of the benefit or
within 100 meters thereof*;
(iv) if the vehicle is regularly used by that individual for
purposes not directly linked with his employment or
office.
The presumption created in (c) above does not apply to the

use of a vehicle by an employee who is required to use that vehicle
wholly in the performance of his duties as a messenger or driver.
Therefore the presumption relating to the parking of the vehicle

during night time does not apply to messengers and deliverymen,
in broad terms. Furthermore, sub-rule 4 of Rule 9 provides that
‘the use of a vehicle shall not be deemed to be a private use if the
Commissioner determines that it constitutes an official use’.
The word ‘vehicle’ is attributed a technical meaning in the FBR.

It is defined as any mechanically propelled vehicle constructed
or adapted as a means of transport for individuals, and any other
vehicle which is constructed or adapted for the conveyance ofgoods
but which is also suitable as a means of transport for individuals,
EXCLUDING -
(i) a vehicle with a design weight of more than 3500

kilograms;
(ii) a motor cycle;
(iii) a vehicle specially built or adapted for use by a severely disabled
person and used by such person for travelling between his home
and his workplace;
(iv) a van;7
(v) such other vehicle as the Commissioner may specify by
order in writing
Thus, in practice, only non-commercial, passenger vehicles fall within

the scope of Category 1.
The annual value (‘AV’)of a Rule 9 benefit (use of a motor-vehicle) is

calculated by reference to the following formula:
AV= (Vehicle use value + Maintenance value 4- Fuel value) X Private

use percentage.8
The formula uses artificial values which are deemed to represent costs
but are not calculated by reference to actual costs but to fixed values.
The vehicle use value is 17% of the vehicle value if the Vehicle use
value is not more than 6 years old and 10% of the vehicle value in any
other case. A vehicle shall be deemed to be more than 6 years old on and
after the sixth anniversary of the date when it was first registered for road
use, whether in Malta or outside Malta9.
The maintenance value of a vehicle is 3% of the vehicle value if the

vehicle value does not exceed €28,000 and 5% of the vehicle value in any
other case. The maintenance value of a vehicle is deemed to represent all
costs incurred by the provider of the benefit relating to the use of the
vehicle, including the road licence, the driving licence, insurance cover,
repairs and servicing, but excluding fuel and garaging of the vehicle10.
The fuel value of a vehicle is 3% of the vehicle value if the vehicle value
does not exceed €28,000, and 5% of the vehicle value in any other case.
The fuel value of a vehicle is deemed to represent the costs incurred by
the provider of the benefit relating to the fuel consumed in the use of the
7 Amended by L.N. 205 of 2017 INCOME TAX ACT (CAP. 123) Fringe Benefits
(Amendment) Rules, 2017.
8 Rule 10 FBR.
9 Rule 11 FBR.
10 Rule 12 FBR.
vehicle whether such costs are incurred by way of reimbursement in full

or in part to the beneficiary against the production of receipts or by way
of payments to third parties supplying the fuel. The rules on fuel value
contain a rule which does not find a counterpart in the rules dealing with
maintenance value. When the fuel costs are fully borne by the beneficiary
and are not reimbursed, in full or in part, by the provider of the benefit
the fuel value of a vehicle is taken at €0H.
When the provider of the benefit makes payments to

the beneficiary relating to fuel costs other than by way of a
reimbursement against the production of receipts, the fuel value
of a vehicle shall be taken at €0 but those payments shall constitute
a separate benefit and are taxed by way of car cash allowance as
discussed below.
The private use percentage of a vehicle is determined by reference

to the vehicle value as follows:
Car value Private use percentage

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%
The private use percentage of vehicle is 0I2% where, in any particular

case -
(i) the vehicle value does not exceed €16,310; and

(ii) the said vehicle is used wholly or mainly for point to point
services by an employee who is a salesman or a support
person in the performance of his duties or for such other
similar services as may be approved by the Commissioner;*
11 Rulel3FBR.
12 The 0% rate was provided for by L.N. 205 of 2017 INCOME TAX ACT (CAP. 123) Fringe
Benefits (Amendment) Rules, 2017. The rate was previously 20%.
and
(iii) the Commissioner approves in writing the applicability of this
rule to that case13.
The vehicle value is the aggregate of:
(i) the price of the vehicle;

(ii) the cost of any accessories that may be fitted in the vehicle and
not included in the price of the vehicle14.
As from the entry into force of L.N. 205 of 2017 INCOME

TAX ACT (CAP. 123) Fringe Benefits (Amendment) Rules,
2017 the private use of a mechanically propelled vehicle that is
constructed or adapted as a means of land transport, and that is
excluded from the definition of vehicle’ is deemed to have no value.
Vehicle Allowances
It has been previously pointed out that car cash allowances are
included within the purview of Category 1 Fringe Benefits. Vehicle
allowances are brought to charge under Rule 17 FBR which
contemplates 3 distinct types of payment:
(i) any payment to an individual relating to the use of his

vehicle whether by way of reimbursement of costs or
otherwise;
(ii) any payment to third parties to cover fuel or other costs
incurred by that individual in the use of his vehicle;
(iii) any payment to an individual relating to fuel costs incurred
in the use of a vehicle owned or held under a title of lease
by the provider of the benefit where the payment is not
made by way of reimbursement against the production of
receipts.
13 Rule 14 FBR.
14 In certain cases vehicle value is determined by reference to a price list made available by the
Commissioner.
The annual value of a vehicle allowance is generally the total amount

paid15 but exceptions are envisaged. Where -
(i) the allowance is paid to an employee in terms of the

provisions of a collective agreement or of his contract
of service with respect to the use of his vehicle for the
purpose of the employer s business; and
(ii) the beneficiary is not a person in a controlling position16; and
(iii) the employee is not entitled to the private use of another vehicle
owned or held under a title of lease by the employer,
the value of the benefit is reduced by 50% provided that

the maximum total reduction that may be so allowed in
any calendar year with respect to any one beneficiary is
€1,170.
2.2.2 Category 2 Benefits - Use Of Property

Category 2 benefits are further classified in two categories: (i) Use
of movable property (ii) Use of immovable property.
Use Of Movable Property

Category 2 does not charge to tax all benefits relating to the use
of movable property. The use of certain movable property may be
taxed in terms of Category 1 or Category 3. The matter is clarified
in Rule 20 FBR which provides that Category 2 does not apply to
use of vehicles and that the use of consumables is charged under
15 Rule 18 FBR.
16 Sub-rule 2 Rule 2 FBR which provides that:
‘a person shall be deemed to be in a controlling position in a company if -
(a) he is an individual who holds directly or indirectly 25% or more of the ordinary share
capital or the voting rights in that company or in an associated company; or
(b) he is an individual who holds, directly or indirectly, shares in that company and the shares
so held, together with any shares held directly or indirectly in that company by a member or
members of his family, amount to or represent an aggregate of more than 50% of the ordinary
share capital or the voting rights in that company; or
(c) he is an individual who is a director of that company or of an associated company but is not
registered with the competent authority set up under the Employment and Training Services
Act as a whole time employee with that company or with an associated company.’
Rule 21 FBR provides that there shall be deemed to be private

use of movable property when movable property is used wholly or
mainly in any manner other than in the normal course of his duties
as an employee or an officer.
The annual value of the use of movable property is determined

as follows:
(i) 12%, in the case of movable property, of the higher of the

market value and the cost of the property;
(ii) where the property is leased to the provider of the benefit and is
owned by a person who is not a related person17 the said value
is the rent payable for the year in question: provided that when
the property is sublet to the provider of the benefit by a related
person the said value shall be the amount of the rent payable for
the year in question to a non-related person.
(iii) When the provider of the benefit incurs or reimburses expenses
connected with the private use of property including, but not
limited to, expenses -
(i) for the maintenance, repair, upkeep, licences or
insurance of the property;
(ii) for the settlement of bills for services, facilities or
amenities provided in the property;
(iii) representing a share of common expenses or fees
charged in connection with a bloc of properties
of which that property forms part, the value of the
17 Defined in sub-rule 2 of Rule 24 FBR as:

For the purpose of subrule (1) a related person means:
(a) in relation to a company:
(i) an associated company; or
(ii) a person who holds, directly or indirectly, shares in that company;
(b) in relation to a partnership:
(i) a company or a partnership that is owned or controlled, directly or indirectly, as to more than 50%
by the partners of that partnership; or
(ii) a person who owns, directly or indirectly, an interest in that partnership;
(c) in relation to an individual:
(i) a member of his family; or
(ii) a company or a partnership in which he, directly or indirectly, holds a share or owns an interest.
benefit shall, for any month in which any such

expenses are incurred or reimbursed, be increased by
the amount of the said expenses.
2.2.3 Use of Immovable Property

Rule 21 FBR provides that there shall be deemed to be private use
of immovable property by an individual when he uses property for
his accommodation or private enjoyment or for any other purpose
other than solely as a place for the performance of his duties as an
employee or an officer.
Accommodation of an individual in immovable property,

including the use of any furniture situated therein, is not deemed
to constitute a private use and is consequently not taxable-
(a) where the immovable property is an officiai residence
allocated by a public authority or by an institution of a
public nature to the occupier in his capacity as the holder
of an office; or
(b) where the accommodation is provided temporarily on
account of special measures for the personal security of
the beneficiary; or
(c) where -
(i) the said immovable property is the employers business
premises or premises attached or adjacent to the
employer s business premises; and
(ii) the beneficiary is an employee who is not a person in a
controlling position; and
(iii) the accommodation of the employee in that particular
immovable property is necessary for the better
performance of his duties; and
(iv) the employment is one for which it is customary for
employers carrying on the same business as the provider of
the benefit in question to provide accommodation for their
employees18.
18 Rule 22 FBR.
Another exemption is contemplated in Rule 23 FBR which

provides that accommodation of an individual in immovable
property belonging to a company during any financial year of that
company, including the use of any furniture situated therein, is not
deemed to constitute a benefit provided by that company to that
individual or to a member of his family by reason of an employment
or office if all the following conditions are satisfied -
(a) during that year the company does not carry on a trade or
business and does not own any property whatsoever other
than -
(i) the immovable property in question;
(ii) any other immovable property which is occupied by
an individual as long as all the conditions of rule 23
are satisfied with respect to that accommodation;
(iii) cash and bank deposits;
(b) during that year the company does not have any liabilities
other than by way of long term loans from a bank or a
financial institution or from an individual who is directly
or indirectly a shareholder in that company;
(c) where the company has any liability referred to in
paragraph (b) that liability is not secured in any manner
by an associated company and the creditor is not a debtor
of an associated company or the creditor is a bank but the
bank’s debt in favour of that associated company is not for
a long term loan and is connected with the financing of
the loan to the property owning company.
(d) the company does not, for the year of assessment to which
that financial year refers, claim any group relief or any
deduction with respect to losses incurred in a
trade, business, profession or vocation brought forward
from any previous year;
(e) the accommodation is provided to a person who is
directly or indirectly a shareholder of that company or
to members of his family who is, or all of whom are, not

employees of the company and not in receipt of any form
of remuneration whatsoever from that company.
The annual value of the use of immovable property is determined

as follows:
(a) where the property is owned by the provider of the benefit

or by a related person, the said value shall be:
(i) in the case of immovable property, 5% of the higher of
the market value and the cost of the property:
Provided that where the property is held under a title
of emphyteusis, the said value shall be the higher of:
(A) 5% of the market value; and
(B) the total of:
- 5% of the cost of the property, and - an amount
equivalent to the relative annual ground rent;
(ii) in the case of movable property, 12% of the higher of
the market value and the cost of the property;
(b) where the property is leased to the provider of the benefit and is
owned by a person who is not a related person19 the said value
is the rent payable for the year in question: provided that when
the property is sublet to the provider of the benefit by a related
person the said value is the amount of the rent payable for the
year in question to a non-related person.(c) When the provider
of the benefit incurs or reimburses expenses connected with the
19 Defined in sub-rule 2 of Rule 24 FBR as:

For the purpose of subrule (1) a related person means:
(a) in relation to a company:
(i) an associated company; or
(ii) a person who holds, directly or indirecdy, shares in that company;
(b) in relation to a partnership:
(i) a company or a partnership that is owned or controlled, directly or indirectly, as to more than 50%
by the partners of that partnership; or
(ii) a person who owns, directly or indirectly, an interest in that partnership;
(c) in relation to an individual:
(i) a member of his family; or
(ii) a company or a partnership in which he, directly or indirectly, holds a share or owns an interest.
The Taxation ofEmployment Income m
private use of property including, but not limited to, expenses -

(i) for the maintenance, repair, upkeep, licences or
insurance of the property;
(ii) for the settlement of bills for services, facilities or
amenities provided in the property;
(iii) representing a share of common expenses or fees
charged in connection with a block of properties of
which that property forms part, the value of the benefit
shall, for any month in which any such expenses are
incurred or reimbursed, are increased by the amount
of the said expenses.
2.2.4 Category 3 Benefits - Other benefits

(a) Beneficial loan arrangements (Rule 26 FBR),
(b) Free or discounted meals (Rule 28 FBR),
(c) Free or discounted airline or sea transport tickets (Rule 30
FBR),
(d) Free or discounted transfer of property and provision of
services (Rule 32 FBR),
(e) Share option scheme benefit (Rule 36 FBR),
(f) Payment or reimbursement of expenses incurred for
private purposes (Rule 39 FBR),
(g) Other benefits (Rule 45 FBR).
Category 3 benefits tend to pursue the generic valuation rule,

the annual value of Category 3 benefits is generally the value of the
‘discount’ provided to the employee.
(a) Beneficial loan arrangements (Rule 26 FBR)

The grant by a person to another person of a loan20 at beneficial
terms is deemed to constitute a benefit provided by the former
to the latter. A loan is deemed to have been granted at beneficial
20 Defined sub-rule (2) Rule 26 FBR as including ‘any advance or credit and any amount shown
in the records of a person as owed by another person’.
terms if no interest is payable by the beneficiary or if the interest

so payable is less than the benchmark rate. Generally, the
benchmark rate of interest loans is 6.5%21 per annum but the
Commissioner of Revenue has the power to determine the rate.
Furthermore, the benchmark rate of interest on a loan granted
by a bank set up or licensed under Maltese law or by a financial
institution authorised to lend money to the general public
under Maltese law to an employee of such bank or financial
institution is the rate on the main refinancing operations as
applied by the Central Bank of Malta as prevailing at the end of
the previous calendar year.22
The annual value of a beneficial loan arrangement is the

interest that would be payable on the loan for the year
in question if it were chargeable at the benchmark rate
reduced by the interest paid on that loan by the beneficiary
during that year.
A 2017 amendment to Rule 27 provides that the value of a

loan by a company to a shareholder who holds more than
25% of the ordinary share capital and voting rights in that
company shall be zero.
(b) Free or discounted meals (Rule 28 FBR)

The provision by a person of a free meal or a meal at a
discounted price to another person shall be deemed to be
a benefit provided by the former to the latter. However
FBR 20 provides for an ad hoc exemption. Sub-rule 2
provides that the provision of a meal shall not be treated
as the provision of a benefit when it is provided -
(a) by an employer which is a hotel or a catering or similar

establishment in an area of a restaurant or a dining
room designated as being reserved solely for the use
21 Reduced from 8.5% to 6.5% by L.N. 205 of 2017.
22 Amended in 2017 by L.N. 205 of 2017.
of the staff or in any area at a time when meals are not

normally served to the public; or
(b) by any other employer in a canteen where meals are
served to the staff generally.
Rule 29 FBR prescribes that the value of the benefit

is the cost of the meal incurred by the provider
of the benefit reduced by the price, if any, paid
by the beneficiary. When the free or discounted
meal is provided by a hotel or a catering or similar
establishment to its employee, the said value shall be
reduced by the in-house benefit reduction.
(c) Free or discounted airline or sea transport tickets (Rule

30 FBR)
The provision of an airline or sea transport ticket or fare
by a person to another person at no consideration or at a
discounted consideration shall be deemed to be a benefit
provided by the former to the latter.
The value of the benefit is the excess, if any, of the price at

which the ticket or fare in question is normally sold to the
public over the price paid by the beneficiary for that ticket
or fare.
Special rules are contemplated in the case of employees

of companies such as Air Malta p.l.c. Sub-Rule 2 of Rule
31 provides that when the ticket or fare is provided by a
company that operates an airline or a shipping line or by
an associated company, the value of the benefit is:
(i) the actual cost incurred by that company in providing

that benefit; or
(ii) 20% of the price at which an economy fare ticket or
fare for the same destination is normally sold to the
whichever is the higher, reduced by the in-house

benefit reduction.
( j ) Free or discounted transfer of property and provision of

services (Rule 32 FBR)
The transfer of the ownership of any property, by a person
to another person at no consideration or at a consideration
which is less than the value of that property, is deemed to
be a benefit provided by the former to the latter.
The provision of a service, other than a service that falls

within the scope of any other benefit, by a person to
another person at no consideration or at a consideration
which is less than the value of that service shall be deemed
to be a benefit provided by the former to the latter. The
same rule applies to the provision of coupons entitling the
holder to special discounts and the use of consumables.
Generally, the value of the benefit is the excess, if any, of

the value of the property or service over the consideration
paid by the beneficiary but there are exceptions.
When the benefit consists in the transfer of a motor vehicle
and the beneficiary had, before the transfer, made private
use of that motor vehicle, the value is reduced by the total
value of the fringe benefit that was deemed to have been
provided to that beneficiary as a result of the private use
of that motor vehicle: provided that the value so reduced
shall not be less than zero.
When a benefit provided by the employer consists in the

transfer of in-house property or the provision of an in
house service, the value shall be reduced by the in-house
benefit reduction.
When in-house property or an in-house service is provided

to an employee on a working day and consumed or availed
of by the employee on the employer’s business premises
the benefit shall have no value.
When property is transferred by way of a benefit to which

rule 32 applies and the beneficiary subsequently transfers
that property, and where the cost of acquisition of that
property is relevant in terms of the Act for the purpose
of determining the tax chargeable in the hands of the
beneficiary upon the said subsequent transfer, the said
cost shall be deemed to be an amount equivalent to the
consideration actually paid by the beneficiary for the
acquisition of the property increased by the value of the
said benefit.
(e) Share option scheme benefit (Rule 36 FBR)

Rule 36 FBR provides that when a company grants
an option to its employees or to the employees of an
associated company to acquire shares, that option shall
not be deemed to constitute a benefit but the exercise
by an employee of the option is deemed to be a benefit
provided by the employer company to that employee. The
benefit is deemed to have been provided on the date when
the shares are issued or transferred to the beneficiary as a
result of the exercise of the share option. Thus, the grant
of the option is not taxable per se. The tax point arises
when the employee exercises the option.
The value of a benefit is the excess, if any, of the price which

the shares in question would fetch if sold in the open
market on the date when the benefit is provided over the
price paid or payable by the beneficiary for those shares.
Principles ofMaltese Income Tax Law 2019
The income represented by the value of the benefit shall

constitute chargeable income separate and distinct from
any other chargeable income of the beneficiary for the
relative year of assessment and shall be subject to tax at the
rate of fifteen cents for every euro
The assignment or renunciation of a right to a share option

scheme gives rise to a taxable gain in terms of article 5 ITA.
(f) Payment or reimbursement of expenses incurred for

private purposes (Rule 39 FBR)
A Rule 39 FBR benefit is deemed to be in existence
whenever a person pays or reimburses, in full or in part,
expenses incurred for the benefit or in the interest of
another person. A vehicle allowance is not taxed under
Rule 39 FBR but is taxed in terms of Rule 17 FBR. The
following reimbursements are exempt from tax in terms of
sub-rule 2 of Rule 39:
(i) expenses to which no other provision of these rules applies

necessarily incurred in the production of the beneficiary’s
income in his capacity as an employee or the holder of an
office;
(ii) expenses incurred by an employee on the instructions and
in the exclusive interest of his employer where such expenses
are reimbursed by the employer against the production of
receipts;
(iii) the costs of travel23 for a business purpose24 relocation
23 Defined in Rule 40 FBR as meaning the cost of a journey to a destination outside Malta and
back, including related insurance, the costs of transport, accommodation and meals, incurred
by a person outside Malta and a reasonable subsistence allowance’.
24 Defined in Rule 40 FBR as including marketing a business or concluding business transactions
or attending business seminars and business meetings or such other purposes as may be
approved by the Commissioner for the purpose of this paragraph. In the case of travel of a
mixed nature FBR 40 provides that when the purpose of travel outside Malta is not wholly
a business purpose no part of the travel costs shall be treated as costs of travel for a business
purpose. Provided that any private element which is negligible or which is purely incidental to
the business purpose of the travel shall be disregarded.
costs25 and costs of journeys between shifts26;

(iv) the costs of travelling between Malta and Gozo27 for a
business purpose;
(v) the cost of business related training28;
(vi) subscriptions in respect of an employee s membership in a
professional body recognised as such by the Commissioner
where that employee is employed in his capacity as a member
of the relative profession or where that membership is a
condition required by the employer in terms of the contract
of employment of the beneficiary;
(vii) the cost for providing insurance for business purposes29;
25 Defined as meaning ‘costs incurred by or reimbursed to an employee in order to settle in a
country, other than his country of residence, for the purpose of taking up a new employment
or posting that lasts or is expected to last for at least twelve months, or to resettle in his
country of residence upon the termination of that employment or posting, including the cost
of the journey of the employee and of his spouse and dependent children and the cost for the
transportation of furniture and personal effects but excluding accommodation costs;’.
26 Defined as meaning ‘the cost of the journey of an employee to his country of residence
immediately upon the end of a work period and the cost of the journey of that employee from
his country of residence to the country where he is required to report in order to resume his
duties for the next work period; and for this purpose "a work period" means a recurrent period
that normally lasts for not more than four weeks, during which the employee is required to
report daily for work, and that is followed by a period of rest that is normally at least one third
of the work period: provided that the Commissioner may, in any particular case, recognise any
other period as a work period for the purpose of this paragraph.’.
27 Defined in Rule 41 FBR as meaning the cost of a journey by sea or by air to one of the said
islands and back by an employee who normally resides in the other island, including the cost
of the transport of a vehicle on such journey and the cost of one meal for each such journey;
and where the visit to that island lasts more than one day the term includes also the cost of
transport within that island, accommodation and meals.
28 Rule 42 FBR provides that ‘business related training means a training course undertaken by
an employee that leads to the acquisition of knowledge or skills which are necessary for the
performance of the duties under the relative employment or to an increased effectiveness in
the performance of the employee’s present or prospective duties, but that does not necessarily
lead to any formal qualification . the costs of business related training are:
(i) the course and examination fees;
(ii) the cost of essential books and course material;
(iii) when the course is conducted in a place away from the employee’s usual place ofwork, the
additional expenses incurred in travelling to and from that place;
(iv) if the course is held outside Malta the costs of travel’.
29 Defined in Rule 43, "insurance for business purposes" means:
(a) indemnity cover against any liability for which an officer of a company may be
personally liable in terms of any law by reason of his office; or
(b) insurance over the life of an individual or over property belonging to him where such
insurance is required in connection with the provision of security for a loan or other
liability directly related to the business of the employer of that individual or of the
(viii) the cost incurred by an employer in providing organised

transport30 for his employees;
(ix) a present given to an employee to mark a festive season
or similar events provided it is not made in cash and
provided also that the total value of any such gifts
granted to any one employee during a calendar year
does not exceed €120 or such other higher amount as
may be approved by the Commissioner;
(x) the cost of providing insurance against expenses for
medical treatment or an insurance policy under which
a benefit is payable only in the event of the death or
injury of the insured while in service under a scheme
available generally to employees: provided that this
paragraph shall also apply where the beneficiary is an
officer of the company as long as the benefit is available
to such a beneficiary under the same conditions and
within the same or similar parameters as it is available
generally to employees. Rules introduced in 2017
have added 2 provisos. The first proviso prescribes that
the exemption shall also apply where the beneficiary
is an officer of a company as long as the said scheme
is available generally to the employees of that
company. The second proviso adds that the amount
of the cost that is not to be deemed to constitute a
benefit provided to any beneficiary by reason of an
employment or office shall not exceed three times the
cost of providing insurance as aforesaid to any other
beneficiary under that scheme;
(xi) costs incurred by and charged in the name of an
employee, as evidenced by receipts produced to the
employer, or by his employer for the provision of fixed
company or partnership of which he is an officer.

30 Defined in Rule 44 FBR. "organised transport" means transport in a vehicle with a seating
capacity of 10 or more persons from defined pick-up points to the place of work and back,
available generally to employees or to a category of employees
or mobile telephony services, including the cost of a

telephone set, mobile phone or a facsimile machine,
used by the employee for the purpose of the business
of the employer;
(xii) costs incurred in the provision of the use of a computer
and related equipment and software belonging to or
held under a title of lease by the employer and used
by an employee for the purpose of the business of the
employer;
(xiii) costs incurred in the provision to an employee of
internet services, as evidenced by receipts produced to
the employer, used by the employee for the purpose of
the business of the employer;
(xiv) the cost of the provision for the benefit of employees
of recreational facilities in the employers premises or
in premises available for that purpose to the employer;
(xv) long service awards granted to an employee in
recognition of 15 years’ or more service to the extent
that the relative cost does not exceed €120 per year
of service and provided no similar award has been
granted to the same beneficiary within the previous
10 years;
(xvi) an award granted to an employee who is not a
director under a suggestion scheme or a scheme for
the promotion of safety at work organised for all
employees or all employees within a specified grade
or grades on equal terms, provided that the scheme is
outside the scope of the employees’ normal duties and
the award is of a reasonable amount;
(xvii) the cost of providing to employees uniforms and
safety clothing which they are under an obligation to
wear in terms of their contract of employment or of
any law;
(xviii) the cost of the provision of childcare facilities for the
benefit of the employees, provided that the employee

receiving such benefit does not claim the deduction
provided for by article 14C ITA;
(XIX) any such other payment in kind or cost or
reimbursement as may be approved by the
Commissioner.
(XX) L.N. 292 Fringe Benefits (Amendment) Rules, 2010
excludes from the scope of fringe benefits tax:
The private use of an aircraft by an individual who:
(a) is an employee or officer of an employer, company
or partnership whose business activities include
the ownership, leasing, or operation of any one or
more aircraft or aircraft engine which is used for or
employed in the international transport of passengers
or goods, and
(b) is not resident in Malta.
(XXI) the following health related costs:
(i) the cost of a medical examination, test or screening

which an employee is required to undergo in order to
take a new employment or to take up a new post with
the same employer or to gain entry to a superannuation
fund;
(ii) the cost of medical care, medicine and other medical
treatment provided as a prevention against injury
or illness related to an employment as part of a
programme available generally to employees exposed
to the same work-related health risks;
(iii) the cost of individual or group counselling relating to
safe work practices, health, fitness, stress management
or drug or alcohol abuse that is given as part of a
programme available generally to employees exposed
to the same work-related health risks;
(g) Other benefits (Rule 45 FBR)

Rule 45 FBR is a catch-all provision which taxes any
benefit provided by reason of employment or office which
is not expressly addressed in the FBR. Rule 45 FBR
provides that any payment in cash, whether by way of
reimbursement, bonus, gratuity, allowance or otherwise,
by a person to another person shall, unless accounted for
as wages or salaries, be deemed to be a benefit provided by
the former to the latter and its value shall be the amount
so paid. Furthermore, thing, right, privilege, perquisite
or perk, other than cash, given under any title and in any
manner whatsoever by a person to another person shall be
deemed to constitute a benefit provided by the former to
the latter and the value of such benefit shall be the market
value of that thing, right, privilege, perquisite or perk.
2.2.5 The In-House Benefit Reduction

The In-House Benefit deduction is a special deduction from annual value
which is contemplated in Category 3. It is a special deduction which
is available to those employees who receive property and services from
the employer which consist in an asset which the employer provides
in the course of his business. Thus, a bank which lends money to its
employees would be offering its employees an in house benefit. The in
house reduction consists in a deduction from annual value amounting to
the lower of €700 and the value of that benefit before the said reduction.
Persons in a controlling position do not benefit from the in-house benefit
reduction31.
3. The Final Settlement System
Tax on employment income (fringe benefits included) is collected

via the Final Settlement System, a withholding tax process which
is based on a pay as your earn mechanism in terms of which an
31 Rule 25 FBR.
employer withholds income tax on the salaries paid to employees,

monthly.
The Final Settlement System is governed by Final Settlement System

(FSS) Rules32, (‘the FSS Rules’)- The FSS rules apply to emoluments, a
term which is defined as meaning:
(i) any income, including any fringe benefits, chargeable to

tax under article 4(l)(b) of the Income Tax Act; and
(ii) any pension arising or received in Malta for past
employment; and
(iii) any other remuneration payable or fringe benefits that
are provided to an individual for services rendered
by him except where such individual receives such
payment in the course of his trade, business, profession
or vocation or is otherwise required to be registered for
the purposes of the Value Added Tax Act, in respect of
such services, or where he renders such services to any
individual for domestic and private purposes.
An important clarification relating to payments which fall

within the scope of the FSS Rules was published in the 2008 FSS
Update. The FSS Update clarified that “Remuneration paid to
Directors, whether defined as Director’s fee or Director’s salary, is
taxable under Article 4(l)(b) as gains or profits from employment
or office’ and as such is regulated by the Final Settlement System
(FSS) Rules, 1998 (L.N. 88 of 1998)”.
The FSS Rules create a number of compliance obligations. All

employers must register as private employers in terms of Rule 4
FSS Rules within fifteen days from the date the first emoluments
due by them start to accrue. Employers must deduct tax from
each payment of emoluments made to a payee, to the extent that
it consists of or includes a payment in cash by applying, as the case
may be, tax according to certain tax deduction methods33.
33 Rule 6 FSS rules.
Rule 11 of the FSS rules contains an important FSS tax deduction

principle - tax deductions shall not, without the consent of the payee,
exceed 50% of the cash portion. There may be cases when the employee
receives substantial benefits in kind and the annual value of his benefits
would be so large that tax deductions could warrant a deduction of more
than 50% of the cash portion.
Rule 3 FSS Rules prescribes that a payee in receipt of emoluments

must complete an FS4 in triplicate and send it to his employer within
seven days from being hired. Failure to file an FS4 would imply that
emoluments would be taxed at the rate of 35%, in lieu of progressive rates
of tax. The employer is bound to complete the FS4 sent to him by the
employee and to submit to the Commissioner the original copy of the
FS4 by the last working day of the month following that during which the
said form was forwarded to him. Failure to file the FS4 would expose the
employer to payment of any underdeduction of tax.
Rule 20 refers to the employers duty to submit the FS5 (Employer's

Monthly Payment Advice). Rule 15 of the FSS Rules prescribes that every
payer shall, by the last working day of the month following that during
which he has made payments of emoluments, remit to the Commissioner
the total amount of tax deducted or which should have been deducted
therefrom. If the remittance required by sub-rule is not received by the
Commissioner by the due date, or if the amount received is less than that
which should have been remitted, the Commissioner shall determine
to the best of his judgement the total amount of the deduction of tax
which should have been remitted by the payer and serve a default notice
upon him requiring him to pay, in addition to any additional tax imposed
thereby, the amount or the difference, as the case may be, within the time
to be limited by such notice. Knowledgeable failure by an employer
to remit FSS tax withheld from salaries paid to employees is a criminal
offence, the crime of misappropriation34.
34 Il-Pulizija v. John O’Dea (Qorti tal-Appell Kriminali 11/1/94).

4. A Note on Deductions against Employment Income
Deductions are, in principle, allowable against employment

income. However, the deductions which are, in practice, availed
of by employed individuals are more often than not the special
personal’ deductions listed in Articles 14A - 14G ITA because the
ITA creates an ad hoc high threshold which refers to deductions
against employment income. Article 26 (b) ITA prescribes that a
deductions is allowable against employment income provided that
such expenditure is ‘necessarily incurred in the performance of the
duties of the relative employment or office’.
Another important rule relating to deductions against

employment income is contained in sub-rule 4 of Rule 18 FBR
which prescribes that an employee who receives a vehicle allowance
may claim certain deductions which would otherwise not have been
allowable. Rule 18 FBR provides that an employee who receives
a vehicle allowance benefits from a deduction with respect to the
expenses relating to the use of his vehicle and a deduction for the
wear and tear of that vehicle to the extent that such expenses and
wear and tear relate to the use of the vehicle for the purpose of his
employer’s business. The deduction is allowed provided that the
expense meets certain additional conditions35
5. The Part-Time Rules
The Income Tax Acts and subsidiary legislation contemplate

a potentially favourable tax rate which applies to part-time
35 (a) the conditions listed in subrule (2)(a), (b) and (c) of Rule 18 are all satisfied; and
(b) the employee is in possession of documents proving the said expenses and the purpose for
which they were incurred; and
(c) the income declared by the employee in his income tax return includes the value of the
benefit computed in accordance with the foregoing subrules of this rule; and
(d) the claim for the deductions is supported by a computation showing the details relevant
to the determination of the amount due as a deduction in accordance with this rule.
work. Given that the rules are being discussed in this chapter it is
important to emphasize that the part-time rules apply both to part-
time employment and part-time trade. Even part-time traders can
benefit from the part-time rules.
The rules relating to the taxation of part-time work are contained

in Article 90A ITA and the Part-Time Work Rules36 (‘PTR’). There
is an element of duplication in the two legal instruments. Article 90A
contemplates a potentially beneficial tax rate which applies to part-time
work. The application of the 15% tax rate is optional. A taxpayer may
elect to pay tax on his part-time work by declaring income from part-time
work in his return and pay tax thereon at progressive rates37.
The 15% rate applies to specific individuals who perform activities

which qualify as ‘part-time work’ for the purposes. Consequently, an
analysis of all relevant legal terms is necessary.
The general rule contained in Article 90A is that only the following
resident38 persons may apply for the special rate on part-time work:
(i) Individuals who receive full-time instruction at

a university, college or other similar educational
institution;
(ii) Individuals serving an apprenticeship with a view to
qualifying in a trade or calling;
(iii) Full-time employees, who must, in terms of Rule 2 be
registered with the ETC;
(iv) Recipients of a pension from past employment.39
However, the scope of the Part-Rules has been extended in 2005 with
the enactment of Act II of 200540 which added sub-article 9 to Article
90A ITA. In certain cases, even persons who do not satisfy the criteria
listed from (a-d) may be eligible to benefit from the part-time rules. A
37 Art 90A (2) ITA.
38 Rule 2 PTR.
39 Art. 90A (1) ITA.
40 Art. 13 Act II of2005.
person married to an individual who receives full-time instruction or

is serving an apprenticeship or has income in his or her own right as
described above is eligible to benefit from the PTR.
Part-time employment income and part-time trade must satisfy

certain criteria to fall within the definition of‘part-time work’ for
the purposes of the 15% regime. Work is considered to be part-time
work if the individual is not engaged thereon for more than thirty
hours in any one week.41 Furthermore, part-time employment
income is considered as such only if the recipient of such income:
(i) has registered the part-time work with Jobsplus; and

(ii) performs such work against remuneration with a company,
organisation or enterprise other than that with which he is
employed on full-time basis.42
Certain activities do not qualify as part-time employment.

Restrictions to Government posts apply but L.N. 320 of 2012
INCOME TAX ACT (CAP. 123) Part-Time Work (Amendment)
Rules, 2012 has relaxed conditions for pensioners.43 Remuneration
paid by Government to holders of an office, including members on
boards or tribunals, and Members of Parliament and Local Councils
is not considered to be income derived from part-time work for the
purposes of these rules. Fees and other payments made to members
of the Board of Directors of companies or to members on boards of
public corporations established by law are similarly excluded from
41 Article 5 (2) S.L. 123.39.

42 Rule 5 PTR as amended by XXVII. 2016.6.
43 Rule 6 defines ‘same employer’ as follows:
(a) companies controlled and beneficially owned, directly or indirectly, to the extent of more than
50% by the same shareholders shall be considered as the same employer;
(b) a Government entity which is controlled directly or indirectly by another Government entity
shall be considered as the same employer as that controlling entity. For the purposes of this
paragraph, a Government entity shall mean the University of Malta and MCAST, Local
Councils, any Government ministry, department or authority, parastatal bodies, corporations,
foundations and other similar organisations or companies in which the Government or any of
the aforementioned entities has a controlling interest.
the remit of the 15% regime.44
Part-time trade qualifies to be considered as such provided that

the following conditions are satisfied:
(i) where the individual has registered the part-time work

with Jobsplus;
(ii) where the individual does not engage more than two
employees (and such employees shall be on a part-time
basis) in the part-time activity he carries out;
(iii) where the individual keeps proper books of accounts as
provided for in article 19 of the Income Tax Management
Act;
(iv) where the individual performs such work for a company,
organisation, enterprise or entity other than that with
which he is employed on full-time basis; and
(v) where the individual is registered for value added tax
purposes, unless the economic activity engaged in is one
in respect of which such registration is not required or
the individual is exempt from registration under the Value
Added Tax Act.45
With effect from 2016 remuneration paid to police officers for

performing extra duty work is considered as income from part-
time work qualifying under these rules. The term "extra duty" refers
to work that is not part of the police officer’s normal duties and is
not overtime.
Not all income from part-time employment qualifies to be

taxed at 15%. The beneficial system is subject to a threshold. With
effect from 2014, with respect to income from part-time work
from employment income only the first €10,000 are to be taxed at
the 15% rate envisaged by Article 90A of the ITA. With respect
44 Article 5 5 (l)S.L. 123.39.
45 Rule 4 PTR as amended by XXVII. 2016.6.
to income from trade, the cap is of €12,000.46 Any surplus income

from part time work is added to the taxpayer s other income and
taxed at the employees applicable rates.
BSC 18/03 is a rare case on the PTR. The Revenues Official

Synopsis of the judgement is being reproduced hereunder:
“The point at issue was whether appellant qualified for the fixed 15% rate
on his part-time employment. The Commissioner claimed that appellant
could not benefit from such favourable rate because his employer had failed
to deduct tax at 15% and it had been appellant’s duty to make the payment
directly to the Commissioner by the 31 December of the relative year.
According to article 90A(8), due to the fact that appellant had failed to pay
tax on all his income from part-time work, all his part-time work income
was to be added with the rest of his income and assessed at the normal rates.
The Board held that the provisions for part-time self-employment [article
90A(8)J - where the payment of the 15% tax can be made by the 15th
February of the following year - were to be applied to this case, even though
it concerned part-time employment.”
6. Income from Employment Exercised Abroad - Art.

56 (17) ITA
Article 56 (17) ITA provides for a favourable tax treatment of

employment exercised outside Malta. The said regime consists in
the right to pay tax on income arising from employment exercised
abroad at 15%. The scheme is available to "any individual'. Specific
conditions must be satisfied for the system to apply.
The system applies exclusively to Article 4 (b) income,

employment income, being income that represents "emoluments
payable under a contract ofemployment requiring the performance of
work or ofduties mainly outside Malta' and where the emoluments
are "received:
46 Rule 3 PTR as amended byL.N. 185 of 2014.
(i) ‘in respect of work or duties carried out outside Malta or

(ii) ‘in respect of any period spent in Malta (a) in connection with
such work or duties or (b) on leave during the carrying out of
such work or duties’.4748
The term ‘mainly in the extract above has been deemed to

imply that in order to benefit from this article the taxpayer must
work outside Malta, for most, the majority of his time. The said
beneficial tax treatment is rendered inapplicable to certain target
activities namely services rendered on ships and aircraft owned by
Maltese companies and Government service, ‘excluding however
any service on board a ship, aircraft or road vehicle owned, chartered
or leased by a Maltese company and any servicefor the Government
ofMalta’.
Income taxed under 56 (17) ITA is deemed to constitute ‘the firsts

part of that individual’s total income for that year’ for computational
purposes.
Problems of interpretation have arisen in connection with

Article 56 (17). Terms such as ‘mainly outside Malta’49 tend to leave
room for interpretation resulting in ambiguity but it seems that
even unequivocal terms such as any individual’ are giving rise to
much anxiety. In reality the terms ‘any individual’ should not leave
any room for interpretation. ‘Any individual’ should mean ‘any
individual’ without any strings attached; residents, non-residents
and non-domiciliaries included within the remit of the term. In
fact, when Article 56 (17) ITA was discussed in BSC 5/01 the BSC
held that Article 56(17) ITA applied to residence permit holders,
without any unnecessary restrictions.
47 Although Article 56 (17) is principally used in connection with item (a) activities above,
categories (b) and (c) create significant opportunities.
48 Act I of 2010 introduced the reference to ‘first’ part, before 2010 the law used to speak of‘the
last part’.
49 Employment income should be considered as arising mainly outside Malta if it involves more
than 183 working days in a calendar month but there are those who maintain that mainly
outside Malta should mean 10 months in a calendar year.
The ART’s judgment in Case 151/2011 did shed some light

on the correct interpretation of Article 56 (17) ITA but did not
deal with the most topical issues relating to Article 56 (17) ITA.
Case 151/2011 involved a secondee working for an audit firm.
Whilst acknowledging problems of interpretation caused by the
absence of a definition of ‘wholly or mainly outside Malta’, the
Tribunal concluded that taxpayer was not eligible to avail himself
of Article 56 (17) ITA because his contract of employment did
not incorporate wording binding him to work wholly or mainly
outside Malta. The wording in taxpayer’s contract of employment
left the matter up to taxpayer’s employer’s discretion falling short
of the unequivocal conditions required by law. An extract from the
judgment is being reproduced hereunder:
“Sfortunatament il-kuncett ta’ xoghol principiamene barra minn Malta ma

huwiex wiehed definit fil-Kap.123 tai- Ligijiet ta’ Malta u ghalhekk jaghti
lok ghal diversi problem fl-interpretazzjoni ta’ 1-istess. Nonostante dan il-
fatt però t-Tribunal huwa konvint li dan il-kuncett ta’ xoghol principalment
barra minn Malta huwa intrinsikament marbut maz-zmien li ghalih il-
principal ikun ingagga lillimpjegat sabiex jaghmel jahdem barra minn Malta
u tali zmien ghadu mhux biss jirrizulta b’mod definit millkondizzjonijiet
ta’ 1-impjeg - bil-miktub jew bil-fomm che siano - izda jkun effettivament
kondizzjoni centrali ghal tali impjieg. Ghalkemm mill-provi prodotti mir-
Rikorrent jirrizulta li limpjieg tieghu mad-ditta.... kien jinvolvi xoghol barra
minn Malta u li bhala fatt tul 1-impjieg tieghu ma’ din id-ditta effettivament
intbaghat jahdem barra minn Malta, senjatament il-Libja, fil-fehma tat-
Tribunal ma jirrizultax b’mod sodisfacenti li 1-impjieg tieghu mad-ditta ....
kien jinvolvi bhala kondizzjoni centrali ta’ tali impjeg li huwa jesegwixxi
xoghol principalment barra minn Malta kif intiz fl-Artikolu 31(15) tal-
Kap.123 tal-Ligijiet ta’ Malta.
Fid-dikjarazzjoni tieghu Michael Scerri, wiehed millpartners tad-ditta ....
fiz-zmien meta r-Rikorrent kien impjegat taghha, jikkonferma illi I hereby
certify and confirm that... was employed by the company as an accountant
and his duties were both in Malta and abroad 10 as had been included in
his engagement terms, izda ma jikkwalifikax zzmien li matulu r-Rikorrent
kien mistenni li jahdem barra minn Malta tul il-kors ta’ dan 1-impjieg.
Mill-kontro-ezami tieghull jirrizulta li d-determinazzjoni taz-zmien
li matulu r-Rikorrent kien mistenni li jahdem barra minn Malta kienet
wahda diskrezzjonali ghad-ditta ... li kienet tibghatu, kif del resto jidher li
kienet tibghat lillimpjegati 1-ohra kollha taghha, skond 1-esigenzi taghha

li kienu jinqalghu minn zmien ghal zmien, li kultant kienu jirrikjedu safar
ghal frit xhur u xi minn daqqiet ohra ghal zmien itwal. Ir-Rikorrent stess
ghalkemm jishaq fuq il-fatt li matul issena 1997 b’kollox huwa ghamel
madwar seba’ xhur u nofs jahdem il-Libja, in kontro-ezamil2 kkonferma li
filkondizzjonijiet ta’ 1-impjieg tieghu ma kienx marbut b’xi zmien partikolari
li kien mistenni li jahdem barra minn Malta peress illi dan iz-zmien kien
dettat mill-esigenzi talprincipal tieghu. In effetti ghall-mistoqsijiet meta inti
dhalt ma’.... kellek xi zmien specifiku ta’ zmien li kellek tahdem barra ghax
kien miftiehem jew dan kien skond il-htiega ta’.... skond irrequirements ta’
... jigifieri ma kienx hem agreement minn qabel li inti kellek taghmel disa’
xhur tahdem il-Libja u tlett xhur tahdem Malta? U lanqas li minn sena
taghmel disa’ xhur barra u 1-kumplament Malta? U tista’ ma taghmel xejn
ukoll ghax tista’ ma tinqalax ilhtiega jew jibghatu lil haddiehor? ir-Rikorrent
irrisponda le 1-agreement kien li mmur nahdem barra imma ma kienx hemm
zmien fiss kemm indum. Nista’ naghmel diet xhur, nista’ naghmel disa’ xhur
ma kienx hemm time limit u ghall-ahhar mistoqsija: Hekk hu.Ghalhekk
indipendentement mit-tul ta’ zmien li r-Rikorrent ghamel jahdem il-Libja
matul is-sena 1997, jirrizulta b’mod car li t-tul ta’ zmien per se li huwa kien
mistenni jahdem barra minn Malta tul 1-impjieg tieghu mad-ditta .... ma
kienx kondizzjoni centrali ta’ limpjieg tieghu ma 1-imsemmija ditta peress
illi dan kien purament diskrezzjonali ghad-ditta u kien ivarja minn zmien
ghall-iehor, u konsegwetment ma jistax jinghad u jigi konkluz li 1-kuntratt
jew ftehim ta’ impjieg tieghu ma’ lisemmija ditta kien jehtieg li jsir xoghol
principalment barra minn Malta kif intiz ghall-finijiet ta’ 1-Artikolu 31(15)
tal-Kap.123 tal-Ligijiet ta’ Malta.
Ghaldaqstant 1-appell intavolat mir-Rikorrent mill- Likwidazzjoni tat-Taxx
ghas-sena ta’ stima 1998 ma jirrizultax fondat u b’hekk ma jisthoqqx li jigi
milqugh.”
7. Football Income
Act XII of 2014 created a special tax rate applicable to income

denominated ‘football income’ Act XII added paragraph 26 to
Article 56 inserting a new set of rules aimed at ensuring compliance
in the soccer industry. The rules in 56 (26) ITA prescribe that an
individual who derives football income may elect to be charged to
tax on all such income at the rate of seven point five cents (0.075) on
every euro. "Football income" is defined as meaning income from
an employment contract in Malta for playing football, such income

being chargeable under article 4(l)(b) and earned by a full-time or
part-time professional football player who is duly registered as a
professional football player with the Malta Football Association,
and such a professional football player has in effect an employment
contract with a Maltese football club duly registered as a Member
Club with the Malta Football Association.
8, Terminal Benefits
Rule 34 FSS recognises an important principle relating to the taxation of

employment income prescribing that where any payment of emoluments
to a payee represents and includes amounts payable on the termination
of a contract giving rise to the payment of emoluments, the amount
so payable is subject to tax deductions. Thus, terminal benefits may
be taxable qua payment made by virtue of past employment or office.
However, not all terminal benefits are taxable and a distinction has been
drawn in case law between taxable and non-taxable terminal benefits.
Justice Paten of the High Court of Justice Chancery Division held, in
Ian Wilson (HM Inspector of Taxes) v. Stephen Clayton that, the mere
fact that a payment is made between an employer and its employee/ex
employee is not sufficient to make the payment taxable.
The general principle which is followed in cases dealing with terminal

benefits is that a terminal benefit is taxable when it is paid ex contractu/
ex lege and is not paid ex gratia. Thus a benefit which is paid in terms of
a draconian termination clause contained in a contract of employment
and a payment which must be paid in terms of law should be taxable.
A detailed discussion of Maltese and British case law on the taxation of
terminal benefits is found below
8.1 British Precedents on Fringe Benefits
In one of the earliest cases on fringe benefits, Seymour v. Reid of

the British Courts established that,
19275051
”[I]t must now (I think) be taken as settled that [the words - salaries, fees,
wages, perquisites or profits whatsoever — ] include all payments made
to the holder of an office or employment as such, that is to say by way of
remuneration for his services, even though such payments may be voluntary,
but that they do not include a mere gift or present (such as a testimonial)
that is made to him on personal grounds and not by way of payment for
services."
Differentiating between a payment made to an employee on

personal grounds’ and a payment made by ‘way of payment of
services’ is difficult and in the I960 case Hochstrasser v. Mayes™
Lord Radcliffe observed,
it is not easy in any of these cases in which the holder of an office or

employment receives a benefit which he would not have received but for his
holding of that office or employment to say precisely why one considers that
the money paid in one instance is, in another instance is not, a ‘perquisite or
profit... therefrom.
The test to be applied is the same for all. It is contained in the statutory
requirement that the payment, if it is to be the subject of assessment, must
arise ‘from’ the office or employment. In the past several explanations have
been offered by judges of eminence as to the significance of the word ‘from’
in this context. It has been said that the payment must have been made to the
employee ‘as such’. It has been said that it must have been made to him ‘in
his capacity of employee’. It has been said that it is assessable if paid ‘by way
of remuneration for his services’, and said further that this is what is meant
by payment to him ‘as such’. These are all glosses, and they are all of value as
illustrating the idea which is expressed by the words of the statute. But it is
perhaps worth observing that they do not displace those words. For my part,
I think that their meaning is adequately conveyed by saying that, while it is
not sufficient to render a payment assessable that an employee would not
have received it unless he had been an employee, it is assessable if it has been
50 11 TC 625.
51 AC 376.
paid to him in return for acting as or being an employee. It is just because

I do not think that the £350 which are in question here were paid to the
respondent for acting as or being an employee that I regard them as not being
profits from his employment."
In Laidler v. Perry51 the British Courts observed that a terminal

benefit is treated, as employment income if the causa causans of
the payment of the benefit is employment. This judgement was
further refined in the 1991 case of the famous goalkeeper Peter
Shilton52 when Lord Templeman ruled that not only rewards for
5354
past services are taxable as employment income but even rewards
as an inducement to continue to perform services and payments as
an inducement to enter into a new contract of service are taxable.
Similarly, in Hamblett v.Godfrey* a payment made to an employee
as an inducement to enter into a revised contract of engagement
which prohibited union membership was taxable as employment
income. The receipt was taxable because it was made to the
employee in return for the employee’s being and continuing to be
an employee.
"So, in my judgment, the approach that the court should take, and, indeed,
that Knox J did in fact take, is to consider the status of the payment and the
context in which it was made. The payment was made to recognise the loss
of rights. I am now going to paraphrase, I hope accurately, from the findings
of the Special Commissioners and the employers’ letter and other records.
The rights, the loss of which was being recognised, were rights under the
employment protection legislation, and the right to join a union or other
trade protection association. Both those rights, in my judgment, are directly
connected with the fact of the taxpayer s employment. If the employment did
not exist, there would be no need for the rights in the particular context in
which the taxpayer found herself. So, I start from the position that those are
rights directly connected with employment...There is no doubt in this case
that the employment protection legislation goes directly to the employment
of the taxpayer with the employer. The right to join a union, in my judgment,
also falls directly to be considered as in connection with that employment,
52 AC 16.
53 Shilton v. Wilmshurst [1991J1 AC 684.
54 (1987) 1 WLR 357.
because without the employment there is no purpose in joining the union

except for esoteric or personal reasons involved in particularly sensitive areas
of government service might be required to abandon their right of freedom
of speech. In such a case, it would clearly have to be considered on the facts
involved in the individual case to see whether the abandonment of that
fundamental right was in fact connected and arose on the employment or
not, and it would clearly differ from case to case...It is plain that the taxpayer
received her payment as a recognition of the fact that she had lost certain
rights as an employee, and by reason of the further fact that she had elected
to remain in her employment at GCHQ. Accordingly, if I may adopt the
language of Lord Radcliffe in the passage I have referred to, the payment
to the taxpayer was made in return for her being and continuing to be an
employee at GCHQ, or to use the words of Viscount Simonds, the payment
accrued to the taxpayer by virtue of her employment. But in the end I think
it is right to base my decision on the wording of the statute. It is clearly not
enough that the payment was received from the employer. The question is:
was the payment an emolument from the employment ? In other words, was
the employment the source of the emolument ? It was argued by counsel for
the taxpayer in the course of his cogent submissions that the rights lost by
the taxpayer were mere personal rights, and that, indeed, this was a stronger
case from the taxpayer s point of view than Hochstrasser v Mayes since the
rights given to the employee in that case were part of a composite contract.
With respect, I find it impossible to accept this argument. As the Special
Commissioners held, the rights had been enjoyed within the employer
employee relationship. The removal of the rights involved changes in the
conditions of service. The payment was in recognition of the changes in the
conditions of service...I have been driven to the conclusion that the source
of the payment was the employment. It was paid because of the employment
and because of the changes in the conditions of employment and for no other
reason. It was referrable to the employment and to nothing else. Accordingly,
in my judgment, the £1,000 was a taxable emolument."
Payments similar to those made in Hamblett must be

distinguished from payments made in view of the redundancy
or dismissal of an employee. Payments made as inducements to
remain in employment must be distinguished from payments made
in connection with the termination of an employment. Thus, in
Mairs v. Haughey* the Irish Courts held that a payment made to
an employee by way of compensation for the loss of additional
55 66 TC 273.
rights under a non-statutory enhanced redundancy scheme were

not taxable.
Terminal payments paid in consideration of the abrogation of

a contract of employment were held not to constitute income in
Henley v. Murray* when Sir Raymond Evershed noted,
“There is another class of case where the bargain is of an essentially different

character, viz, where the contract itselfgoes altogether and some sum becomes
payable for the consideration of the total abandonment of all the contractual
rights which the other party had under the contract. In the course of the
argument an extreme case was put to counsel for the Crown of an employer
who wrongfully breaks a contract of service and discharges a servant wholly
therefrom and the servant then sues for damages for wrongful dismissal.
Although, of course, it is true to say that the sum awarded as damages arises
from the contract in the sense that if there had never been a contract the
sum of damages could never have been awarded, counsel admitted that, in a
case of that sort, it would be impossible to suggest that the sum awarded to
the servant for damages was taxable under schedule E...In the circumstances
of the present case also it is not open to the Crown to say that this sum of
£2,000 odd constituted profits from the office or employment, since, on
its true analysis, it constituted the consideration payable to the taxpayer
for the total abrogation imposed on him of his contract of employment, so
that from 6 July 1943, no contract existed under which that figure or any
other sum could be paid. I, therefore, come to the conclusion on the facts
that this case is of the second class, namely, one in which the agreement
itself ceased altogether to exist for all purposes on 6 July 1943...the essential
question is not the form in which the salary is paid, but the fact that it is
remuneration—that it is reward for services under a subsisting agreement.
None of that language seems to me to have any application once the essential
fact is accepted that in the present case there ceased to be any contract of
service, and, therefore, from that date onwards there was no remuneration.
This was not a sum paid in advance because there was no future claim which
the taxpayer could ever assert, nor was it reward for his past service. It was
a cash consideration paid for his agreeing to submit to the terms which the
assurance society sought fit to impose."
56 1AER908.
An interesting decision relating to terminal benefits was

delivered by Justice Paten of the High Court of Justice Chancery
Division in Az/2 Wilson (HMInspector ofTaxes) v. Stephen Clayton5758 .
The Clayton case referred a payment received by an employee from
his employer following the compromise of remedy proceedings in
the Birmingham Industrial Tribunal. Wilson confirmed that the
mere fact that the payment was made between an employer and its
employee is not sufficient to make the payment taxable. Moreover,
such a receipt is not taxable if it takes place years after a contract of
employment is terminated. Thus, the Court held that,
“In the present case the contract of employment relevant to the payment had
been terminated in 1997. There was therefore no subsisting agreement for
services to which the payment could relate, nor were there any arrears due
under that contract for which it was intended to provide. Therefore unless
the payment can be linked to and treated as a payment for services under the
new contract subsisting since 1997, it is not taxable as a profit under s. 19. For
the reasons already given, there is no basis for treating it as such a payment.”
8.2 Maltese judgements on Terminal Benefits
The Court of Appeal delivered a lucid judgement on terminal

benefits in Case 32 of 1971™. In Case 32 the Court ofAppeal was
asked to assess the taxability of a payment made from an Indemnity
Fund to a retiring employee. The Court analysed terminal
payments from a different perspective. The Court observed that
such a payment fell within the ambit of an exemption from tax,
which was previously contained in Article 8(1) (i)59 of the Income
Tax Act that exempted from tax “any capital sum received by way
of commutation ofpension, retiring or death gratuity or received as
consolidated compensation for death or injuries...” The Court held
that the exemption applies only to sums of a capital nature paid
by way of gratuity and proceeded to interpret the meaning of the
57 To which this paper is heavily indebted.

58 Decided on June 27,1973.
59 Now Article 12 (1) (h).
term gratuity’ A gratuity is a payment, which is not made by way

of consideration or compensation. However a gratuity remains a
gratuity for the purposes of the exemption even if the payment of
such a gratuity is due at law,
payment must not be made by way ofconsideration60 in the sense that

payment is made gratuitously. However this does not mean that the
law requires, that (such as the case when such a payment is promised)
that there must not be a legal right to the saidpayment. In the present
case the Court sees no reason why it should not classify the sum received
as a ‘retirement gratuity which is exempt from tax in terms of the
aforesaid article. ”
A payment made at a reception by an employer to an ex

employee in recognition of twenty five years of service was held
to be chargeable to tax in Case 5 of 199961. The Board held
that although the retiring employee was a personal friend of the
employer such a payment could not be classified as a gratuity as
it was clear that in spite of the declarations of the appellants it
was made in recognition of past services, especially in view of the
manner the payment had been posted in the company’s books.
8.3 Damages for Sexual Harassment
The Equality for Men and Women Act62 and the recently amended
Employment and Industrial Relations Act63 created a new form of
payment, which may be made in connection with an employment
or an office. The Industrial Tribunal may order an employer who
sexually harasses64 an employee to pay reasonable sums of money as
60 ‘L-pagament isir bla korrespettiv.
62 Cap 456 of the Laws of Malta.
63 Cap. 452 of the Laws of Malta.
64 To subject an employee to any unwelcome act, request or conduct, including spoken words,
gestures or the production, display or circulation of written words, pictures or other material,
compensation to the aggrieved party65. Would damages awarded

to an employee in connection with a sexual harassment claim be
taxable as employment income ? Unfortunately we have no reply
to the latter question but the US Tax Court, not surprisingly,
appears to have a history with similar cases and decisions delivered
in the US on the matter may arguably shed some light on a possible
answer to the question.
The United States Tax Court recently6667 delivered a decision on

the taxability of compensation for sexual discrimination in Michael
T. Prasil, et ux. v. Commissioned. Mrs. Prasil, plaintiffs wife,
was subjected to sexual discrimination and harassment from her
employer at her place of work. She suffered material damages as a
consequence of her bad experience68 and filed a sexual harassment
suit in the Olmstead County District Court of Minnesota. During
the course of the proceedings Mrs. Prasil reached an out of court
settlement with her employer. The settlement agreement provided
that Mrs. Prasil was to receive a consideration of USD7,650 in
exchange for the release set forth in the agreement. Mrs. Prasil
argued that the receipt of the said sum was not taxable because
it consisted in the payment of damages received on account of
personal injury or physical sickness. The Commissioner disagreed
and the case went to the Tax Court. The Tax Court confirmed the
general rule that damages are excludable from gross income when
such damages are based upon tort or tort rights and, in addition,
when such damages are received on account of personal injury or
sickness69. The Court held that in the present case the damages
paid could not be excluded from gross income because they were
not paid by way of compensation for physical injury. In the Court s
which in respect of that person is based on sexual discrimination and which could reasonably
be regarded as offensive, humiliating or intimidating to such person.
65 Articles 29 and 30 Cap 452 of the Laws of Malta.
66 Delivered on April 9,2003.
67 T.C. Memo. 2003-100; No. 3945-02.
68 She suffered from a condition known as Sweet s syndrome and needed to be hospitalised.
69 Commissioner v. Schleier, 515 U.S.323,336 (195).
opinion Mrs. Prasil had not proved that her disease had been caused
by harassment. Consequently the payment she had received was to
be included in her gross income.
Chapter 9
Compliance Obligations
The Income Tax Acts and subsidiary legislation contemplate

numerous compliance obligations. The slightest omission to abide by
compliance obligations exposes the taxpayer to draconian sanctions
which are not always proportional to the relevant wrongdoing. Even
innocent errors expose the wrongdoers to penalties. Thus, Rule 7 of
the TAR prescribes that in the most likely event that the allocation
of profits is not made in accordance with the rules contemplated in
TAR the Commissioner may regard the relative tax return as being
incomplete, exposing the taxpayer to penalties.
1. Year of Assessment and Basis Year
Article 10 ITA prescribes that tax is charged, levied and collected

by reference to year of assessment. It envisages what is known as
'a preceding year system of taxation'. Tax is charged, levied and
collected for each year of assessment upon the chargeable income of
any person for the year immediately proceeding year of assessment
(‘the basis year).
2. Statutory Deadlines
The statutory deadlines which are applicable to taxpayers depend

on the classification of such taxpayers for tax purposes. The
deadlines which apply to companies are reckoned by reference to

the year end of companies.
Article 166 C A prescribes that accounting periods of companies

are determined by reference to the accounting reference date of such
companies. A company’s first accounting reference period begins
on the company’s date of its registration and must be a period of not
less than six months and not more than eighteen months; and each
successive period of twelve months beginning after the end of the
first accounting reference period and ending with the accounting
reference date shall also be an accounting reference period of the
company. A company may change its accounting reference period
both for company law and for tax purposes. Article 164 CA
prescribes that a company may give notice in the prescribed form
to the Registrar of Companies specifying a date in the calendar year
as being its accounting reference date. No such notice shall have
effect unless it is given before the end of nine months beginning
with the date of the company’s registration. Failing such notice, the
company’s accounting reference date is 31 December. The rules
contained in the CA run parallel to rules contained in Article
11 ITA which prescribe that the Commissioner may permit a
companies to change their accounting reference dates.
Individuals who are not exempted from filing a return are bound
to file their tax return by the 30th June of the year of assessment. All
tax due for the year of must be settled upon the filing of the return.
Companies which have a January to June accounting year end

must file their tax return by the 31st March of the year of assessment.
Companies that have an accounting year end other than a January
to June year end must file their income tax returns within 9 months
after their accounting reference date.
Compliance Obligations 305
3. Provisional Tax Payments
The Payment of Provisional Tax (P.T.) Rules1 (‘PT Rules) binds

taxpayers who fall under the definition of ‘provisional tax payers’
to pay provisional tax. Provisional tax is paid by reference to P.T.
benchmark and benchmark which is computed by reference to
Rules 6,7, 8 or 9 of the PT Rules. The P.T. benchmark is, broadly,
the tax payable for the taxpayers first year of assessment.
Rule 2 PT Rules defines the term ‘provisional tax payer’ as

meaning and including:
(i) all companies; and

(ii) persons who must file a ‘full tax’ return; and
(iii) Persons who are neither companies nor individuals.
Rule 4 of the PT Rules that provisional tax payments fall due on

the 30th April, 31st August and 21st December of each basis period.
Rule 5 of the PT Rules prescribes that provisional tax payments
must be paid as follows:
1st instalment - at least 20% of the PT benchmark

2nd instalment - at least a further 30% of the PT benchmark
3rd instalment - at least a further 50% of the PT benchmark
(unless a PT reduction form is filed before PT date)
Given that the compliance obligations of companies, unlike

those of individuals, are determined by reference to year ends and
financial statements special rules apply to companies.

4, The Obligation to File a Tax Return
The taxpayer s obligation to file a tax return is contemplated in

Article 10 ITMA. Not all taxpayers are bound to file a return.
Article 12 ITMA prescribes that some taxpayers have a right to
elect not to file a tax return. Persons who fall within any one of the
following categories are not required to file a tax return:
(i) Individuals resident in Malta whose total income for

the year of assessment neither includes trading income
nor exceeds the tax free threshold;
(ii) Individuals resident in Malta whose total income for
the year of assessment consists solely of income that
was subject to deduction at source, including income
subject to a nil rate of deduction, and fully reported
in a statement or statements of earnings prepared in
accordance with law;
(iii) a person designated by the Commissioner of Inland
Revenue.
Article 12A ITMA, added by Act IV of 2007, prescribes that

persons who receive a special notice from the Commissioner are
neither required to furnish a tax return nor to make an election
in terms of Article 12 ITA. Returns are filed on a self-assessment
basis.
5. The Self-Assessment System
The Self-Assessment system was introduced in our law by Act IX

of 1999 which added some sub-articles to Article 10 ITMA. The
Commissioner has the power, and has actually availed himself of
the power, to request taxpayers to file a self-assessment with their
tax return. Article 10 (2) ITMA explains that a self-assessment is a
computation which shows:
(i) the chargeable income of that person for the year of

assessment on the basis of the information contained
in the return of income;
(ii) the tax chargeable thereon; and
(iii) the tax payable by or repayable to that person for
the year of assessment, being the difference between
the tax computed under paragraph (ii) and the
aggregate of the amounts referred to in the following
subparagraphs, disregarding any credit, relief or tax
paid, withheld, payable or repayable for any other year
of assessment:
( iv) any provisional tax paid and any tax deducted at source
that falls to be set off or that is available as a credit
in accordance with the provisions of the Income Tax
Acts against the tax computed under paragraph (ii);
(v) any tax credit or relief claimed and provisional tax
claimed.
6. Powers of the Revenue upon the Receipt of a

Return
Article 31ITMA prescribes that when a person delivers a return

of income that includes a self-assessment the Commissioner has
the power to determine the chargeable income, the tax chargeable
thereon and the tax payable by or repayable to that person for
that year of assessment in the amounts indicated by that person in
the self-assessment, making such arithmetical adjustments as may
result to be necessary on the basis of the information contained in
that return. Similar powers may be exercised by the Commissioner
when a taxpayer fails to file a return.2
2 Article 31 (3) ITMA.

Different rules apply to years of assessments in respect of which

returns have been filed prior to year of assessment 19993 and years
in respect of which a return is delivered for the year of assessment
1999 or any subsequent year.4 Article 30ITM A governs assessments
pre-1999 and Article 31ITMA governs assessments post-1999.
6.1 Pre-Year of Assessment 1999
Assessments in terms ofArticle 30 ( 1 ) ITM A may be raised only after

the submission of a return and after a form of hearing is provided to
the taxpayer. The Commissioner can issue an assessment only after
considering such further returns, books or evidence, ifany, as may be
produced before or obtained by him accordingly'.
In the event that a person who in the Commissioner s opinion

is liable to pay tax files no tax return, the Commissioner has
the power to raise an assessment. Such an assessment is issued
to the Commissioner’s best judgement and is known as a best
of judgement assessment.5 In addition, the Commissioner is
granted the right to issue a third type of assessment. Where
it appears to the Commissioner that a person has not been
assessed or has been assessed at a lesser amount than that which
ought to have been charged for any year of assessment preceding
the year of assessment 1999, the Commissioner may assess such
person at such amount or additional amount as, according to
his judgement, ought to have been charged. Prior to issuing
such an assessment the Commissioner is bound to give taxpayer
a hearing as discussed above.6
Generally, the Commissioners right to raise assessments is

subject to time-bars. The general rule is that an assessment made

5 The raising of such assessments is without prejudice to any additional tax that may be imposed.
6 Article 30 (3) of Cap. 123 of the Laws of Malta;
in terms of Article 30ITMA may be raised within eight years after

the relative year of assessment7. However, the said general rule is
subject to exceptions that purport to significantly stretch the said
time-bar. The law states that, in cases of fraud of evasion8 no time
bar exists. The Commissioner,
“may at any time assess such person at such amount or additional amount as
according to his judgement ought to have been charged and take action for
the payment of tax, additional tax and any penalty”9.
6.2 Post-Year of Assessment 1999

A different set of rules apply to year of assessment 1999 and
subsequent years of assessment. The Commissioner has the power
to determine chargeable income and tax due on the basis of the
information contained in that return.1011The Commissioner has the
right to make an assessment and determine the amount oftax payable
‘by such method...as he deems fit’ whenever a person fails to file a
return or submit any other applicable requirements11. If, following
the preparation of an estimate, the taxpayer still fails to deliver his
return the Commissioner may raise an assessment on such person
without the need to previously notify the said person that an enquiry
is being conducted into his tax declarations and liabilities12. Even
the post-1999 rules incorporate a best of judgement assessment
system. Where it appears to the Commissioner that the tax payable
7 The eight-year prescriptive period has an odd history. It was originally introduced in blatant
violation of law. When it was originally introduced it was not passed through the regular
enacting process but just printed in the act without the assent ofparliament “When the Existing
Laws (reprint) act no.21 of1963 was extended to the Income Tax Act, the reprinted version ofthe
Act substituted the legislated sixyearprescription period (sectyion S3) with the transient eightyear
period contemplated in Act no. 20 of1950. Theflagrant by-passing oflegislative enactment is the
matter ofconcern amongst many taxpayers and tax advisersi Borg, G ; op.cit p. 13.
8 '...where a person has not made to the Commissioner the returns required by the Income Tax Acts
for any year ofassessment preceding the year ofassessment 1999 or afull and true disclosure ofall
materialfacts necessaryfor his assessmentfor any such year and there has been an avoidance oftax,
the Commissioner, where he is ofthe opinion that the avoidance oftax is due tofraud or evasion...’
9 Article 30 (5) (6) of Cap. 372 of the Laws of Malta;
10 Article 31 ( 1 ) of Cap. 372 of the Laws of Malta ;
12 Article 31 (3 A) of Cap. 372 of the Laws of Malta;
by a person for the year of assessment 1999 or any subsequent year

of assessment has been determined at a lesser amount than that
which ought to have been charged, the Commissioner may after
considering such further returns, books or evidence, if any, as may
be produced before or obtained by him, to the best ofhis judgement
make an assessment of the chargeable income of that person, the
tax chargeable thereon and the tax payable by or repayable to that
person for that year of assessment. Where the Commissioner after
having made an assessment is of the opinion that any tax so assessed
has been assessed at a lesser amount than that which ought to have
been charged he may, in the same manner, make an additional
assessment or assessments13.
Predictably, the Commissioner has the discretion to cancel
any assessment raised irrespective of whether such assessments are
raised before or after year of assessment 1999.14
Article 31 (6) ITMA prescribes that, in most cases, an

assessment must be issued not later than 5 years from the end of
the year in which a return of income was furnished. Exceptions
are contemplated and, in certain cases, the law purports to grant
the Commissioner the power to raise an assessment even after the
lapse of the 5 year term. Article 31 (7) ITMA provides that in the
following cases an assessment may be issued at any time\
(a) when a person has furnished the Commissioner with a

return or returns and has not made therein a full disclosure
of all material facts relevant to the determination of his
income and allowable deductions; or
(b) when a person, for the purpose of avoiding tax or through
gross or wilful neglect has furnished the Commissioner
with a return which is incorrect or misleading in any
material respect.

14 Article 32ofCap.372ofthe Laws of Malta ;
There has been quite a lot of litigation relating to Article 31

(7) ITMA and its equivalent for pre-year of assessment 1999,
Article 30 (5) ITMA because the Revenue is known to use Articles
allowing it to issue assessments even after the lapse of the ordinary’
prescriptive terms. Case Nru. 152/11VG, a case involving an
allegation of non-disclosure of directors’ fees was a case in point.
The ART conceded that in such cases the onus of proof reverts
on the Revenue but the evidence which must be brought by the
Revenue justifying its tardiness in issuing the assessment must only
be on a prima facie basis:
“Kif gustament sottomess mill-Kummissarju tat-Taxxi, il-principju

regolatur fil-kuntest ta’ 1-applikazzjoni ta’ 1-Artikolu 30(5) tal-Kap.372
tal-Ligijiet ta’ Malta huwa li jekk il-Kummissarju tat-Taxxi Interni jinvoka
d-dritt tieghu li allavolja jkunu ghaddew aktar minn tmien snin huwa xorta
johrog Likwidazzjoni addizzjonali fit-termini ta’ 1-Artikolu 7 tal-Kap.123
(1-artikolu tal-Ligi applikabbli fiz-zmien rilevanti ghas-sentenza citata), it-
taxpayer ghandu dritt jitlob li 1-istess Kummissarju almenu jipprova li kellu
prima facie raguni biex jifforma fehma li kien hemm qerq jew evazjoni
skond il-kaz23. Jidher mill-ligi li 1-oneru tal-prova f’kazijiet normali jaqa
fuq it-taxpayer, però f’kazijiet fejn isiru Likwidazzjonijiet oltre il-perijodu
preskrittiv il-Kummissarju tat-Taxxi Interni bhal ma gie deciz minn din
il-Qorti fil-kaz Nru.81 fil-31 ta Mejju 1971 jista jigi miltub jipprova li
verament ifforma 1-fehma li kien hemm qerq jew evazjoni u fuq liema bazi
wasal ghaliha. M’ghandux 1-oneru li jipprova li ghandu ragun izda li ma
wasalx ghall-Likwidazzjoni kapriccozament24.
B’hekk 1-oneru tal-prova impost fuq il-Kummissarju tat-Taxxi f’tali
rigward huwa wiehed prima facie intiz li jikkonvinci lit-Tribunali mhux illi
1-Kummissarju definittivament ghandu ragun izda li huwa pproceda bil-
mod kif ipproceda fil-konfront tar-Rikorrent mhux kapriccozament izda
ghaliex realment ifforma 1-fehma li kien hemm evazjoni tat-taxxa da parte
tar-Rikorrent.
Kuntrarjament ghal dak pretiz mir-Rikorrent, it-Tribunal huwa tal-fehma li
fil-kaz in ezami 1-Kummissarju tat-Taxxi rnexxielu jilhaq 1-oneru tal-prova
minnu rikjest f’din ic-cirkostanza u cioè li a bazi ta’ 1-informazzjoni li kellu
fil-pussess tieghu, ossia I-ittra ta’ Victor Bezzina datata 3 ta’ Lulju 2007 u
1-prospetti tat-taxxa emendati tas-socjetà Makaw Limited ghas-snin ta’ stima
in kwistjoni, u d-dikjarazzjoni u konsegwenti rikonoxximent tal-korrettezza
ta’ dawk il-figuri kif emendati da parte ta’ wiehed mid-Diretturi tas-socjetà
Makaw Limited, ossia Charles Camilleri, liema informazzjoni ma giet bl-

ebda mod kontradetta mir-Rikorrent ghad illi kien 1-iktar wiehed f ’posizzjoni
li juri xeffettivament ircieva bhala Directors’ fees tul is-snin in kwistjoni,
validament, intiza f’dan 1-istadju mhux bhala korrettezza fil-mertu izda bhala
korrettezza formali u procedurali, ipproceda biex johrog Likwidazzjonijiet
ta’ Taxxa fil-konfront tar-Rikorrent ghas-snin ta’ stima 1995,1996 u 1998.
Fid-dawl ta’ dan kollu osservat ghalhekk jirrizulta li b’applikazzjoni ta’
1-Artikolu 30(5) tal-Kap.372 tal-Ligijiet ta’ Malta, kuntrarjament ghal dak
pretiz mir-Rikorrent il-Likwidazzjonijiet ta’ Taxxa ghas-snin ta’ stima 1995,
1996 u 1998 mahruga kontra tieghu mill-Kummissarju tat-Taxxi ma humiex
preskritti.
Ghal dawn ir-ragunijiet it-Tribunal jaqta’ u jiddeciedi billi jichad 1-aggravju
preliminari tal-preskrizzjoni sollevat mir-Rikorrent u jordna 1-prosegwiment
tal-kawza fil-mertu.”
7. Case Law on Assessments
Most of our case-law on the powers of the Commissioner to issue tax

assessments is based on South African case law15 which established that,
“the Commissioner cannot make an assessment on a purely imaginative

estimate of the person’s income; he may have to justify his assessment before
the Special or other Superior Court...the officer charged with the best of
judgement assessment is not empowered to make a pure guess without any
evidence or any material at all.16”
In Case 190, the Court of Appeal17 held that when the

Commissioner issues an assessment he must show that such
assessment was raised in terms of law. The Commissioner must
adhere to principles of procedural justice, the Commissioner must
prove that his assessment is raised after considering such further
returns, books or evidence, if any as may be produced before or
obtained by him’. The Court took the view that whenever the
Commissioner has reasons to doubt the veracity of a return he is
15 CIRv. Taylor.
16 Borg, G ; op.cit p.9.
17 Decided on October 16, 1991 censored copy made available to the author by Dr. Antoine
Fiott.
duty bound to raise a best of judgement assessment but such a best

of judgement assessment cannot be raised arbitrarily but can be
validly raised only after examining trade books. The Commissioner
exercises a quasi-judicial function and he must grant taxpayer the
right to a fair hearing.1819
The Court of Appeal established that, in the issuance of tax
assessments, the Commissioner must act ‘properly’, ‘fairly and
reasonably^3. The term ‘properly’implies that the Commissioner must
18 “Issa,fir-rigward tad-doveri tal-Kummissarju meta, jkun jidhirlu li ghandu johrog stima bazata
fuq best ofjudgement din il-Qorti ghalkemm ma iddecidietx ut sic il-punt ilium devolut lilha,
kellha diga opportunità’ tesprimi ruhhafis-sentenza taghha tai-31 ta'Jannar 1990 (kaz numru
226/86) u cioè’:
‘Il-posizzjoni ghalhekk hija li billi mill-istess Kap 123 huwa ovvju li hemm diversi artikoli
li tabthorn jistghu jinhargu stimi jekk il-Kummissarju fappell quddiem il-Bord jinvoka
l-applikazzjoni tal-artiklu 68(d) irid qabel xejn jipprova li l-assessment ikun inharegjew that
is-subartiklu 2(b) jew is-subartiklu 3 tal-artikolu 62. Fi kliem iehor min ikun iridjiddeciedi
irid ikun sodisfatt illi inhareg assessment that wiehedjew iehor mid-disposizzjonijiet imsemmija
u li gew osservati ir-rekwiziti impost mill-ligi fuq il-Kummissarju fl-iter li jkun wasslu ghal
dik l-istima. Ijisser dan li ghalfini tal-applikazzjoni tal-artikolu 68 (b) mhux sujficjenti lil-
Kummissarjujiddikjara lijkun wasalghall-istima in kwistjoni that wiehed mid-disposizzjonijiet
imsemmija, iza li jekk si tratta ta’ stima skond l-artikolu 62 (2) (b) jipprova li jkun wasal
ghaliha after considering suchfurther returns books or evidence ifany as may be produced before
or obtained by him u wara li jkun irrifiuta il-prospett tat-taxpayer. Altrimenti kull decizjoni
differenti tista’ twassal ghall-posizzjoni infelici li l-Kummissarju semplicement ghak hekk
jidhirlu u mhux ghax ikollu evidenza soda u valida jaqbad u arbitrarjamentjijfissa hu kemm
ghandu jigi kalkulat c-chargeable income tat-taxpayer u dan zgur mhux dak li evidentement
ried il-legislatur. L-istessjekk si tratta ta’ kazfiejn skond il-Kummissarju l-istima tkun inharget
skond l-artikolu 62(3) irid ikun jigi ippruvat li dak kollu lijimponi dak l-artikolu gie osservat.
Altrimenti t-taxpayerjista’jigipenalizzat ingustament...Qabel taghlaq din il-Qorti trid tosserva
li certament il-Kummissarju tat-Taxxi Interni meta jhoss li prospett ma jurix il-verita’ghandu
mhux biss id-dritt izda anke id-dover that il-ligi lijaghmel best ofjudgement izda dan mjistax
u mghandux jasalghalih arbitrarjament izda wara li jezamina l-fatti sewwa inkluz jekk ikun
hemm bhal ma kien hemmf’dan il-kaz kotba ta’ negozju.. jista’jkun hemm cirkostanzo ihra li
jkun sarjafhom u lighalih ikunu sujficjenti biexjissodifawhjohrog tali assessment u anke dan hu
kontemplatfil-ligipero’majistaxjippretendi lijoqghodsieket u li l-awtoria’li hemmfuqu tassami
li kellu ragunijiet biexjiggustifikawhjohrog tali assessment. Altrimenti dak li ipprovda ghalih il-
legislatur majkollu ebda valur u l-Kummissarju tat-taxxi internijkun qedjarrogaghalih innifsu
drittijiet u poteri li m’ghandux. Qabel ma c-cittadin jitpoggafil-posizzjoni lijridjiddefendi dak
lijkun iddikjarafil-prospett tieghujewjikkontesta il-fehma tal-Kummissarju tat-taxxi Interni il-
igi evidentement riedet li l-istess Kummissarjujasalghal ex officio assessment wara lijkun ha in
kunsiderazzjonijiet certafatti konkreti ufic-cirkustanzi partikolari ta’ dan il-kazjidher li dak li
ghamel il-kumissarju hu lijippretendi li ma kellux dover lijezamina dak li l-istess ligi timponilu
lighandujezamina. Seta’kellu ir-ragunijiet tieghu anzi din il-Qorti trid tahseb li kellu izdajekk
he hekk kellu d-dover li almenujghaid dan.’’
19 Case 57 ofthe Court ofAppeal. Vide also Case 66c of the Court of Appeal decided on March
22,1976,
act regularly by scrupulously adhering to procedural law. The terms

‘reasonably andfairly imply that the Commissioner must adhere to
the principles of natural justice. In Case 57, the Court of Appeal held
that the Commissioner had acted illegally because he was following
an arbitrary policy to refuse to cancel additional tax even though
ex admissis20 such additional tax was not due. Quoting from S.A
De Smith21 the Court held that the exercise of the Commissioners
discretion ‘could not be bound by codes, or set patterns, at the expense
ofthe merits ofindividual cases’22. Although the drafting of criteria to
serve as general guidelines is allowed, such general guidelines cannot
be based on considerations that allow the Commissioner to classify
all cases in artificially pre-set categories.23. In case 160, the Court of
Appeal held that when the Commissioner takes decisions relating to
objections and determines tax payable he must submit reasons for
decisions.24
“...l-ezami tat-tribunal ghandu jillimita ruhu ghar-ricerka jekk id-diskrezzjoni tkunx giet
properly exercised jigifieri jekk gietx ezercitata legalmentfis-sustanza u fil-forma skond ir-regoli
tal-gustizzja naturali (loc. op.cit pag.319) jew fi kliem iehor jekk l-att tad-diskrezzjoni kienx
legali, cioefil-limiti tal-gurisdizzjonijekk gewx osservati l-proceduri mehtiega ujekk l-ezercizzju
tad-diskrezzjoni kienxfair and honest (ibid.pag.321). Jekk dawn il-kondizzjonijietjikkonkorru
allura l-Qrati ma jistghux imorru oltre u jirrevedu ‘the exercise ofdiscretion and substitute their
own discretion for that of the body ofperson to whom the discretion has been entrusted’ (ibid.
pag.319)”-,
20 'Ihasten to add, ofcourse, that this reduction is in no way meant to convey that... you were in any
way seeking to obtain an undue tax advantage!
21 De Smith S, A; A Judicial Control of Administrative Action pp.183-185. An authority
‘entrusted with a discretion must not, by the adoption of a general rule of policy, disable itself
from exercising its discretion in individual cases’.
22 From the official Revenue synopsis.
23 Vide also case 30 of 1966 of the Board.
24 The following is an extract from the Revenue’s Official Synopsis published recently,
“stated that in the process of refusing objections and determining the tax payable by notice in
writing, the Commissioner of Inland Revenue was exercising a quasi-judicialfunction. It was
today an accepted principle ofnaturaljustice that the citizen should be made aware ofthe reasons,
and on what basis, a decision had been taken against him by the administration, so that he could
be in a position tofile a proper appeal. This applied also where the administration was vested with
an element ofdiscretionary powers. The citizen could otherwise be deprived ofthe opportunity of
seeking a judicial review by the Courts. On the merits ofthe particular case, however, the Court
agreed with the Board that the notice ofrefusal issued by the Revenue was sufficiently motivated
for allpurposes oflaw. The taxpayer's appeal was therefore rejected.”
8. Investigative Powers
The power to raise assessment is strengthened by wide powers of

investigation. The Commissioner is granted the power to request
when and as often as he thinks necessary ‘fuller orfurther returns’25
and in the case of persons who elect not to furnish a return he is
vested with the power to require from such persons the provision
of a return and self-assessment.26 The Commissioner may require
persons to deliver books, accounts, documents and returns
including bank statements. He may likewise require taxpayers
or their representatives to attend personally before him.2728He is
vested with the power to require the production of information
‘when and as often as he deems necessary’23, in order to provide
information to foreign tax authorities where arrangements between
Malta and the respective State or its tax authorities exist for the
reciprocal exchange of information for tax purposes and where the
information is such that the Commissioner could collect for the
purposes of the Income Tax Acts29.
The Commissioner of Inland Revenues powers in the context of
investigations for suspected tax evasion3031 are very similar to those of
the executive police. The Commissioner and persons acting under
his written authority are granted full andfree access to all business
or professional premises51 ’ in order to observe and record the nature
and importance of any business or professional activity carried
on there, and to check the existence of merchandise and means
of production and transport. In addition, the Commissioner is

28 Within a reasonable time that may not be shorter than thirty days;
29 Article 10A of Cap. 372 of the Laws of Malta;
30 Article 20 (5) of Cap. 372 of the Laws of Malta,
‘The powers of investigation under this (Article 20) article shall not be exercised unless the
Commissioner or any officer authorised by him, has reasonable grounds to suspect that tax is being
evaded in respect ofoperations carried out by the taxpayer on the premises referred to in subarticle
w
31 '...such as offices, factories, workshops, warehouses, garages and land...’
I
allowed full and free access to any property32 or other asset whose
value is required to be determined for any of the purposes of the
Income Tax Acts to the extent that such access is likely to assist
him in determining the said value. If a person prevents, obstructs
or disobeys the Commissioner or an officer in the execution of his
powers of access such a person is liable to pay fines of a penal nature
as well as a prison sentence33.
Finally, the Commissioner is the authority at whose suit a

prosecution for a tax offence may be instituted, ‘no prosecution for
any offence against the Income Tax Acts may be commenced except at
the instance ofor with the sanction ofthe Commissioner34. ’
In 2011, a number of laws strengthened the Revenues’

powers of investigation. Act IV of 2011 must be singled out, the
Commissioner s right to information was stretched to the limits.
Evasion is presumed, notification can be done by publication
and requests for information can be made by publication too. It
would be interesting to see whether these provisions would survive
constitutional challenges.
2011 witnessed the enactment of L.N. 295 of 2011 INCOME
TAX ACT (CAP. 123) Cooperation with Other Jurisdictions
on Tax Matters Regulations, 2011 (‘CWOJ’) providing for
cross border assistance by tax authorities. This law has become
exceedingly important because it transposes FATCA Regulations
and analogous EU directives. Since 2011, the CWOJ has already
been amended several times.35
32 In the case of property to premises occupied in whole or in part for the purposes of habitation,
such access shall require the presence of an officer of the Police of a rank not below that of
inspector and shall not take place between nine in the evening and five in the morning. Article
20 (2) of Cap. 372 of the Laws of Malta;
33 Article 20 (4) of Cap. 372 of the Laws of Malta, ‘he shall, on conviction by the Court of
Magistrates, sitting as a court ofcriminaljudicature, be liable to a fine (multa) ofnot less than
twenty-five liri and not exceeding two hundred liri or to imprisonmentfor a term not exceeding
six months or to both suchfine and imprisonment.’
35 By Legal Notices 472 of 2012, 408 and 481 of 2014, 384 of 2015, 400 of 2016 and 344 of
2017.
Rule 5 of CWOJ prescribes that the provisions of article 10A

ITA shall be interpreted to give the widest possible powers in
order to obtain and provide information to competent authorities
of jurisdictions with which Malta has an arrangement. The
Commissioner has the power to obtain and provide information
that is held by or is in the possession or control of person in Malta,
including any -
(a) bank and other financial institution;
(b) insurance company;
(c) person acting in an agency or fiduciary capacity including
nominees and trustees;
(d) lawyer, notary and other independent legal professional,
real estate agent, accountant, auditor, tax advisor, company
service provider, person licensed to carry on investment
business, stockbroker;
(e) company, collective investment scheme, partnership,
foundation and any other body of persons;
(f ) stock exchange in Malta; and
(g) regulatory authority or body in Malta:
The CWOJ implements the EU Administrative Cooperation

Directive Council Directive 2011/16/EU of 15 February 2011
on administrative cooperation in the field of taxation and
repealing Directive 77/799/EEC as amended by EU Council
Directives 2014/107/EU, 2015/2376, 2016/881 and 2016/2258.
Consequently, it binds entities falling within the definition of
‘Malta Financial Institution’ to register with the CfR for the
purposes of the Directive. A Reporting Malta Financial Institution
must apply due diligence procedures specified in Section II to
Section VII of Annex I, and Annex II to the regulations so as to be
able to identify Reportable Accounts. Reporting Malta Financial
Institutions must maintain and retain all the documentation and
information collected in the course of meeting their reporting and
due diligence obligations for a minimum period of five years.
The CWOJ provides that the CfR is to automatically exchange

information relating to rulings and advance pricing arrangements
with competent authorities of all member states.
CWOJ excludes from its remit information containing any

trade, business, industrial or commercial secret, or information
which is the subject of attorney client privilege or information
the disclosure of which would be contrary to public policy.
‘Information which is the subject of attorney client privilege’ is
taken to mean confidential communications between a client and
a lawyer or other legal representative produced for the purposes
of seeking or providing legal advice or for the purposes of use in
existing or contemplated legal proceedings.
Rule 13 (4) CWOJ provides for Country-by-country reporting

prescribing that the Ultimate Parent Entity of an MNE Group
that is resident for tax purposes in Malta, or any other Reporting
Entity in accordance with Section II of Annex III, must file with
the CfR for Revenue a country-by-country report with respect to
its Reporting Fiscal Year.
In 2016, the Minister of Finance transposed into local law the

European EU Council Directive 2016/881 through L.N. 400
of 2016 Cooperation with Other Jurisdictions on Tax Matters
(Amendments) Regulations. The Regulations, inter alia, require:
• the Commissioner for Revenue (“CfR”) to automatically
exchange information relating to Advance Cross-Border
Rulings (ACBRs) and Advance Pricing Arrangements
(APAs); and
• ultimate parent entities (“UPE”) of Multi National Entity
Group (“MNE”) which are resident in Malta or certain
Constituent Entities (“CE”) resident in Malta to file with
the CfR a Country-by-Country Report (“CbCR”).
The Regulations introduce a requirement on the CfR to

automatically exchange information to other Competent
Authorities of all EU Member States in respect of ACBRs or APAs
that have been issued, amended or renewed after 31 December 2016.
In certain instances, the CfR shall also exchange such information
with the European Commission. In line with the Regulations,
the automatic exchange of information (“AEol”) pursuant to this
provision must take place “within three months following the end
of the half of the calendar year during which the ACBRs or APAs
have been issued, amended or renewed”
The CfR is also required to exchange information with all other

EU Member States in relation to ACBRs or APAs that have been
issued, amended or renewed within a period beginning five years
before 1 January 2017. Certain exceptions however, apply. Indeed,
if the ACBRs and APAs have been issued, amended or renewed
between 1 January 2012 and 31 December 2013, the relevant AEol
shall only take place if such ACBRs or APAs were still valid as at 1
January 2014. Furthermore any information relating to ACBRs or
APAs which have been issued, amended or renewed prior to 1 April
2016 to any person/group of persons deriving a group-wide annual
net turnover of less than Euro 40,000,000 in the relevant fiscal year
(excluding those carrying out financial or investment activities),
shall not be exchanged.
Additionally, the Regulations provide that if the arrangements

under which the APAs were negotiated exclude the disclosure of
information to third parties, bilateral or multilateral APAs with
third countries shall be excluded from the scope of AEol. The law
however adds that where the arrangements under which APAs
were negotiated permit disclosure, such bilateral or multilateral
APAs shall be exchanged under Regulation 14 of Cooperation
with Other Jurisdictions on Tax Matters Regulations.
The Regulations also require Maltese tax resident UPEs of

MNE Groups and CE which have been appointed as the Surrogate
Parent Entity (“SPE”) to file with the CfR a CbCR in respect of
Reporting Fiscal Years starting from 1 January 2016.
The Regulations also seem to cater for the so-called ‘secondary

mechanism’, whereby a CE which is tax resident in Malta and
which is not the UPE will be required to submit the CbCR itself if
(a) the entity is resident for tax purposes in Malta;
(b) one of the following conditions applies:
(i) the UPE of the MNE Group is not obligated to file a
CbCR in its jurisdiction of tax residence;
(ii) the jurisdiction in which the UPE is resident for tax
purposes has a current International Agreement to
which Malta is a party but does not have a Qualifying
Competent Authority Agreement in effect to which
Malta is a party by the time specified in regulation
13 (4) (a) for filing the CbCR for the Reporting Fiscal
Year;
(iii) there has been a Systematic Failure of the jurisdiction
of tax residence of the UPE that has been notified by
Malta to the CE resident for tax purposes in Malta.
This secondary mechanism will apply as from periods

commencing on or after 1 January 2017, unless the CE has been
appointed as the SPE.
In accordance with the Regulations, the CbCR would only be
deemed complete if the following information is disclosed with
respect to the MNE Group:
(i) aggregate information relating to the amount of revenue,
profit (loss) before income tax, income tax paid, income
tax accrued, stated capital, accumulated earnings, number
of employees, and tangible assets other than cash or cash
equivalents with regard to each jurisdiction in which the
MNE Group operates;

(ii) an identification of each CE of the MNE Group setting
out the jurisdiction of tax residence of such CE, and
where different from such jurisdiction of tax residence, the
jurisdiction under the laws of which such CE is organized,
and the nature of the main business activity or activities of
such CE.
The CbCR needs to be submitted by the Maltese UPE, SPE or

CE, where applicable, within nine months from the last day of the
fiscal year of the MNE Group.
The information collected by the CfR from the CbCRs must be

automatically exchanged to any other EU Member State in which
one or more CE of the MNE group is either tax resident or subject
to tax by virtue of a permanent establishment created therein at
prescribed intervals.
A notification requirement applies for all CEs which are

tax resident in Malta. CEs which are either UPEs or SPEs must
indicate their status to the CfR, whereas the other (i.e. non-UPE
and non-SPE) must indicate who is the UPE or SPE. In any case,
the notification must be submitted annually by not later than the
last day for filing of a tax return of that CE for the preceding fiscal
year. Furthermore, penalties for non-compliance apply.
Rule 5 CWOJ has been updated by LN. 344 of 2017

implementing Directive 2016/2258 EU providing the CfR with
access to mechanisms, procedures, documents and information
referred to in the Fourth Anti-Money Laundering Directive.
9. The Procedure to Contest an Assessment
The procedure to contest an assessment is prescribed in Article

33 ITMA. A person who disputes an assessment must file a
notice of objection in writing. The notice of objection must
state, precisely, the grounds of his objection to the assessment and
must be filed within thirty days from the date of the service of the
notice of assessment36. L.N. 112 of 2002, the Notice of Objection
Regulations, prescribes that,
‘the notice of objection referred to in Article 33 (2) of the Act shall be made
on the form prescribed in Schedule A...in the case of an individual and on
the form prescribed in Schedule B to these regulations in the case of a person
other than an individual’.
The Revenue has rejected objections which have not been made
on the pre-printed objection forms distributed with assessments.
The proviso to sub-Article 33 (2) ITMA provides that a notice

of objection is null if the -
(i) the return for the respective year of assessment is not

filed;
(ii) the tax not in dispute for the said year of assessment
has not been paid in full before the prescribed time
limit.
It would appear that the requirement relating to payment of tax

not in dispute is unconstitutional. A parallel requirement which
used to apply in the context of the filing of appeals to the Board
of Special Commissioners was held to be unconstitutional by the
Constitutional Court in Pig Breeding Company Limited v. Avukat
36 The Commissioner has the discretion ‘upon being satisfied that owing to absence from Malta,
sickness or other reasonable cause, the person disputing the assessment was prevented from
making the application’ to extend such period as may be reasonable in the circumstances.
Generali u 1-Kummissarju tat-Taxxi Interni37. The retention of

Article 33 (2) ITMA must have been due to some form of oversight.
On receipt of the notice of objection the Commissioner

may require the person objecting to furnish such particulars or
information as the Commissioner may deem necessary. The
objection may result in either a revocation/correction of the
assessment, an agreement or may eventually lead to the issue of a
formal notice of refusal.
In the past, the Revenue Authorities have dismissed the

juridical importance of the notice of refusal and have issued their
notices without appreciating that the notice of refusal is like an
‘indictment’, the document which articulates the reasons of the
Revenues conclusions.38
10. Appeals to the Administrative Review Tribunal

CART9)
Article 35 ITMA, as amended in 2010, prescribes that any person

who, being aggrieved by an assessment made upon him, has failed
to agree with the Commissioner may enter within a peremptory
thirty day term after the date of service upon him of notice of the
refusal of the Commissioner to amend the assessment as desired,
37 Ibid Appell Civili Numru. 19/2004/1.

38 Appell numru 2/07 Seduta ta’nhar it-Tnejn, 28 ta’Jannar, 2008 ,
“Dan premess, ma jidherx li jista jigi negar illi 1-Kummissarju appellat ghandu, skond il-Iigi,
poteri ta' "quasi judicial discretion". Fl-istadju tal-konsiderazzjoni ta' 1-Awiz ta oggezzjoni mit-
taxpayer hu jagixxi qisu qorti u dan jobbligah li f kaz ta' rifjut ta' 1-oggezzjoni sottomessa lilu
huwa ghandu jaghti r-raguni li tkun wasslitu ghal dik id-decizjoni tieghu. Huwa ghandu,
fi kliem iehor, jforni dik ir-raguni li tqieghed in riljev dak li hu necessarjament sufficjenti
biex jikjarixxi u jissorreggi r-ratio tad-decizjoni tar-riljut tieghu. Is-sens komuni u r-regola
ta' gustizzja naturali fuq accennata certament jesigu illi t-taxpayer ghandu jitqieghed in
grad li adegwatament jikkontesta dak 1-istess rifjut fit-tfassil tal-gravami tieghu fl-appell lil
Bord u, 1-aktar, ghall-fini li fil-fazi processwali quddiem dan 1-istess Bord, ikun f qaghda li
jiddizempenja ruhu kif jixraq mill-piz gravanti fuqu billi juri li 1-likwidazzjoni tat-taxxa mill-
Kummissarju ghandha titwarrab ghax hi eccessiva jew ghal xi motiv legali iehor;”
an appeal against such assessment to the Administrative Review

Tribunal (‘ART’).39 No valid appeal before the Tribunal may be
filed unless appellant files a return of his income for that year40.
Legal Notice 336 of 2010 extended the jurisdiction of the ART

to fiscal matters, references in the ITA and ITMA to the board
were removed. The ART began to hear tax cases and experience has
shown the decision to extend the jurisdiction of the ART was a step
in the right direction because the ART has significantly enhanced
the rights of tax payers in tax controversy. Tax controversy is now
both foreseeable and predictable.
I /. Procedure of the ART
Article 35 (3) ITMA prescribes that the onus of proving that the
assessment complained of is excessive shall be on the appellant
but the Constitutional court’s comments in the John Geranzi
case should result in the application of the principle nemo tenetur
seipsum accusare to tax cases involving tax surcharges.
The ART’s composition, functions and procedure are regulated

in the Administrative Justice Act, Chapter 490 of the Laws of Malta
the (AJA). Records of the ART are accessible to the litigants and
are kept at the Archives of Court Registry. Taxpayers may appear
in person and may be assisted or represented by an Advocate, Legal
Procurator or another person.
39 Finally, the administrative review reform has been implemented in tax controversy too and the
tax boards have been abolished. Magistrates preside over the tax courts safeguarding the right
to procedural justice.
40 Article 36 (a) ITMA.
‘the Board shall summarily reject any appeal before it for any year of assessment and confirm
the assessment complained of unless prima facie proof is brought before it that, by the date
on which the appeal was entered, appellant had filed under articles 10 and 11a return of his
income chargeable for the said year of assessment;’
The procedure to contest an assessment is no longer the standard

form contemplated in the days of the Board. Now, the procedure
is by application and the AJA establishes the contents of an
application. Application must contain:
(a) a clear and correct statement of the subject-matter and the

cause of the claim;
(b) the claim or claims;
(c) a clear and detailed statement of the facts of the case of
which the applicant may be aware;
(d) the name of witnesses the applicant intends to produce,
including the subpoena of the other party, stating in
respect of them the proof the applicant intends to establish
by their evidence; and
(e) the remedy being requested, with costs against the public
administration.
The law does not say whether the application must be a sworn
application. The AJA prescribes that the application must be
served on the public administration41 and that the administration
has twenty days to reply. The Revenues reply must contain:
(a) any such pleas as would be taken to be waived if not raised

before the contestation of the suit;
(b) a clear and correct statement of the pleas on the merits of
the claim or claims and referring to the provisions of the
law in terms of which the decision was taken;
(c) a clear and detailed statement of facts of the case of which
the public administration is aware, denying, admitting
or explaining the circumstances of fact set out in the
applicants application;
(d) the name of the witnesses which the applicant intends
to produce, including the subpoena of the other party,
41 The AJA does not prescribe that the application must be notified to the AG.
stating in respect of each of them the proof he/she intends

to establish by their evidence;
(e) a request that the public administration be non-suited with
costs against the applicant.
The administration has the discretion to admit the claim. Article

15 (7) AJA prescribes that where the claim is contested, the ART
shall appoint the case for hearing. What happens when the Revenue
does not contest a claim? Would the institute of contumacy apply?
Appeals from judgements of the Board established that in tax
litigation the institute of contumacy does not apply but the ART is
governed by its own rules.
Unlike the Board, the ART is bound by a set of rules which

ensure procedural justice. Article 3 AJA prescribes that the ART
shall respect and apply principles of good administrative behaviour
which include the following:
“(a) an administrative tribunal shall respect the parties’ right to a fair hearing,
including the principles of natural justice, namely:
(i) nemo judex in causa sua, and
(ii) audi et alteram partem;
(b) the time within which an administrative tribunal shall take its decision
shall be reasonable in the light of the circumstances of each case. The decision
shall be delivered as soon as possible and for this purpose the tribunal shall
deliver one decision about all matters involved in the cause whether they are
of a preliminary, procedural or of a substantive nature;
(c) an administrative tribunal shall ensure that there shall be procedural
equality between the parties to the proceedings. Each party shall be given an
opportunity to present its case, whether in writing or orally or both, without
being placed at a disadvantage;
(d) an administrative tribunal shall ensure that the public administration
makes available the documents and information relevant to the case and that
the other party or parties to the proceedings have access to these documents
and information;
(e) proceedings before an administrative tribunal shall be adversarial in
nature. All evidence admitted by such a tribunal shall, in principle, be made
available to the parties with a view to adversarial argument;
(f) an administrative tribunal shall be in a position to examine all of the

factual and legal issues relevant to the case presented by the parties in terms
of the applicable law;
(g) save as otherwise provided by law, the proceedings before an
administrative tribunal shall be conducted in public;
(h) reasons shall be given for the judgment. An administrative tribunal shall
indicate, with sufficient clarity, the grounds on which it bases its decisions.
Although it shall not be necessary for a tribunal to deal with every point
raised in argument, a submission that would, if accepted, be decisive for the
outcome of the case, shall require a specific and express response.”
Judgements and Interlocutory decrees show that the ART

is working extremely hard to ensure that principles of good
administrative behaviour are followed both by the ART and
the Revenue. The ART’s first Income Tax decision, the ART’s
interlocutory decree in Case 24/11VG set an important precedent
on equality of arms in tax controversy. The interlocutory decree
referred taxpayer’s right to information because taxpayer had
requested the ART for access to his tax file a request which was
contested by the Revenue. The ART explained that official secrecy
cannot be used to justify a refusal to submit documentation at appeal
stage and referred to a 2001 judgement of the Court of Appeal
establishing that a taxpayer has a right of access to information
concerning him, especially if this information had been collected in
the process of a tax investigation. The ART explained that access to
information was a tenet of the equality of arms principle and that a
high level of transparency commands the workings of the Revenue.
Reflecting on taxpayer’s duty in a tax appeal and the reversion of the
onus of proof, the ART held that taxpayer had to be given the right
to make his case with reference to all documents available. In its
lengthy judgement the ART explained that access to information
is key aspect of the right to a fair hearing. The ART referred
extensively to Parliamentary debates relating to the AJA and to
the duty of public administration to produce documentation. The
Revenue’s argument that official secrecy prohibited the Revenue
from submitting the documents requested was dismissed as absurd.
The Court concluded that:
“Ghaldaqstant, il-Kummissarju tat-Taxxi Interni bhala Kap tat-Tax

Compliance Unit huwa obbligat li jesebixxi 1-files pertinenti ghall-
investigazzjoni tat-Tax Compliance Unit fil-konfront tar-Rikorrent fl-atti ta’
dawn il-proceduri.
Ladarba fil-kaz in ezami 1-files in kwistjoni già jinsabu taht il-kustodja
preventiva tat-Tribunal, bis-sahha ta’ dan id-Digriet ghandhom issa jigu
inseriti fl-atti ta’ dawn il-proceduri
The Revenue did not file a valid appeal against this interlocutory decree
but it filed an appeal against an identical interlocutory decree. The case is
pending in front of the Court of Appeal.
12. Appeals to the Court of Appeal
Article 37 ITMA prescribes that any person who, having appealed

to the ART feels aggrieved by its decision may, by application filed
within twenty42 days from the date of service upon him of the
decision of the Board, appeal against the decision, on a question
of law only -
(i) where the total amount of tax, additional tax, fines

and interest in dispute at the time when the appeal was
lodged before the Board is less than EURI, 150,000),
to the Court of Appeal (Inferior Jurisdiction); and
(ii) where the total amount of tax, additional tax, fines
and interest in dispute at the time when the appeal was
lodged before the Board is of EURI, 150,000 or more,
to the Court of Appeal.
The creation of a system whereby certain appeals are heard by

the Court of Appeal (Inferior Jurisdiction) and other Appeals
are heard by the Court of Appeal composed of three judges was
introduced in 200743.
42 The term was previously of 30 days, the time-limit was shortened by Act XII of 2014.
43 Act IV of2007. The 2007 amendment tends to create more problems than it actually solves. It
13. Evidence on Appeal
Act I of 201044 purported to restrict the taxpayers right to bring

evidence at appeal stage. Article 31 (5) ITMA prescribes that a
person who refuses to submit a document to the Revenue is not
allowed to submit such document to the ART. The proviso to 31
(5) ITMA reads,
“Provided that if there is evidence that, after being requested by the

Commissioner by means of a notice in writing, such person failed to produce
without any reasonable excuse any records, documents, accounts and
electronic data within thirty days from the date of service of such notice and
an order in writing by the Commissioner referred to in article 33(5) has been
issued, such person shall not be allowed to produce such records, documents,
accounts and electronic data before the Administrative Review Tribunal or
in any Court of law.”
A similar provision was introduced in 36 (b) ITMA,
“(b) notwithstanding the provisions of article 34(7), where the assessment

complained of has been raised by the Commissioner in accordance with the
provisions of article 30(l)(b) or (2) or (3), or of article 31(5), no evidence
shall be considered by the Tribunal as sufficient to warrant any change in
the assessment concerning that income if the person appealing against the
Commissioner s decision has failed to provide without any reasonable excuse
the records, documents, accounts and electronic data in accordance with the
proviso to article 31(5);”
The Court of Appeal presided by Mr. Justice Sciberras expressed

serious reservations relating to the legality of provisions which
purport to restrict a persons right to bring evidence in an appeal.
In a case on Article 48 of the VAT Act, an article which is quasi-
creates unnecessary anxiety relating to the validity of appeal applications. A lawyer’s oversight
relating to competence of the appellate court will cost a client over EURI, 150,000 one of
these days. Ihe Court of Appeal (Inferior) Jurisdiction is, considering its limited resources,
doing a marvellous job in hearing tax appeals. It is extremely efficient and very detailed in
its work. Decisions are delivered extremely expeditiously and, judging by the enormous
workload which the Court of Appeal faces, are scholarly. Limiting the remit of the Court of
Appeal (Inferior Jurisdiction) was unnecessary.
44 Following the enactment of Act 1 of 2010.
identical to 31 (5) ITMA,45 the Court of Appeal suggested

that provisions like Article 48 are unconstitutional. Mr. Justice
Sciberras pointed out that he seriously doubted whether legal
provisions which restricted taxpayer s right to submit evidence on
appeal were compatible with the Constitution of Malta.46 In clear
terms, Sciberras expressed his dismay in relation to the manner
such norms restricted the taxpayer s right to submit evidence in the
trial stage.47
“Huwa car mill-interpretazzjoni ta’ dan il-proviso illi 1-legislatur ried

jirrestringi z-zmien ghall-produzzjoni mit-taxpayer tad-dokumenti, u
fl-istess waqt li scabilixxa 1-istadju li fih 1-istess taxpayer kien fid-dmir li
jipproducihom, ghadda biex jippreskrivi li ma kienx ser jammetti estensjoni
ta zmien ghall-producibilita' taghhom jekk mhux ghal skuzanti ragonevoli
u sufficjenti li, apparentement, lanqas ma kellha tannovera fiha motivi ta’
indoli privata jew singolari;
Fuq dan il-punt din il-Qorti ma tistax ma tissenjalax ghall-mument id-

dubbji serji taghha kemm dik 1-emenda ghandha legittimità' kostituzzjonali.
Dan qed tirrilevah ghaliex, meta aggancjata mal-garanzija kostituzzjonali
tat-tutela tad-drittijiet u dik tat-tutela procedimentali, naturalment fil-
kwadru tad-drittijiet tat-taxpayer, dik 1-istess emenda timponi limitazzjoni
pre-processwali fuq it-taxpayer ghall-produzzjoni tal-provi dokumentali
fil-procediment kwazi-gudizzjali quddiem il-Bord, jew gudizzjali quddiem
45 Case 22/07.
46 Presumably he was thinking of the right to a fair hearing and the equality of arms principle.
47 On this point see Case 15/05:
“Jibda biex jigi osservat illi ghalkemm hu dejjem desiderabbli li taxpayer jottempera ruhu
mar-rikjesta li ssirlu ghall-produzzjoni tad-dokumenti mitluba lilu mill-Kummissarju li jkun
qed jistharreg id-denunzji minnu sottomessi, kifhekk jesigi 1-Artikolu 41 ta 1-Att, dan 1-istess
disposi, imbaghad, ma kellux jigi intiz li jorbot idejn il-Bord b' mod li jrazzan id-diskrezzjoni
tieghu fl-apprezzament tal-provi. Ikollu jinghad li hekk kif il-Kummissarju ma kienx marbut li
joqghod fuq id-denunzji tat-taxpayer, multo magis, imbaghad, meta dan ma jkunx, meta hekk
mitlub, issodisfah bil-produzzjoni tad-dokumenti, daqstant iehor il-Bord, meta jsir appell lilu,
kellu s-setgha li jordna 1-esebizzjoni tad-dokumenti, jew li jakkorda 1-opportunita' lit-taxpayer
li jaghmel tali prova, jinvestiga kull prova dokumentali u addirittura, jiddertermina, fuq il-bazi
tad-dokumenti hekk esebiti, li ma ghandux joqghod fuq 1-istimi tal-Kummissarju. Kieku kellu
jigi ragonat mod iehor il-Bord jigi emaskulat ghal kollox mill-funzjonijiet u attribuzzjonijiet
proprji tieghu, u dan zgur li ma jirriflettix ir-raison d' ette tal-legislatur li kkrejah u affidalu
1-ezercizzju ta' dik id-diskrezzjoni gudizzjarja li jippreciza 1-Artikolu 3 tas-Sitt Skeda ta 1-Att
aktar 'il fuq riportar. Dan igib li 1-objezzjoni legali sollevata mill-appellanti fuq dan il-punt ma
tistax titqies sostenibbli;”
din il-Qorti, b’ mod li dan mhux biss jippezantixxi 1-piz tal-prova imposta
mil-ligi fuq it-taxpayer [Artikolu 4 (2) tad-Disa’ Skeda], izda wkoll, u
fundamentalment, jikkreja ostruzzjoni ta’ dik ir-regola processwali li tesigi
r-rispett tal-principju inderogabbli tal-kontradittorju;”
14. Additional Tax
14.1 Additional Tax for Default
The Schedule to the ITA prescribes the additional tax which

is chargeable under article 56 (12) (c) ITA. The Courts first
tier judgement in Clayton Communications and a number of
challenges to the VAT penalty system created awareness that the
penalty system was intrinsically unfair and did not respect the value
of proportionality. L.N. 98 of2009 purported to render the penalty
system fairer and mitigated additional tax by changing the rules
prospectively as from year of assessment 2009 or any subsequent
year.48 Further measures mitigating penalties were passed in 201449
and2015.50
Individuals
Number of months from the date on Maximum
which a return is required to be submitted
in accordance with the relevant provisions
of the Income Tax Management Act
Within 6 months EUR10
Later than 6 but within 12 months EUR50
Later than 12 but within 18 months EURI 00
Later than 18 but within 24 months EURI 50
Later than 60 months EUR500
48 Further amendments mitigatingpenalties were passed by Act XII of 2014 and Act XIII of 2015.
49 Act XII of 2014.
50 Act XIII of 2015.
Persons other than individuals

Number of months from the date Maximum
on which a return is required to be
submitted in accordance with the
relevant provisions of the Income Tax
Management Act
Within 6 months EUR50

Later than 36 but within 48 months EURI ,000
Later than 48 but within 60 months EURI,200
Later than 60 months EURI,500
Where the Commissioner is satisfied that a default in furnishing

a return was due to a reasonable excuse51 additional tax may be
remitted. However, an insufficiency of funds to pay any tax due,
or when reliance is placed on any other person to perform any task,
the fact of that reliance or any dilatoriness or inaccuracies on the
part of the person relied upon, does not constitute a reasonable
excuse.
14.2 Additional Tax for Omissions
According to Rule 5 of the Schedule, additional tax for an omission

from a return runs at 1.5% of endangered tax per month. LN 295
of 2015 provides that, as from 2016, interest on late payment of
income tax runs at 0.54%.
51 Reasonable Care’ is defined as :

(i) When a person has sought and relied on the written, advice of a tax professional; and
(ii) The complexity of the transaction which has resulted in an omission from the return or the
complexity of the legal provisions concerned and the difficulties in their interpretation;
(iii) The original written advice was submitted with the return.
15. Additional Tax as an Arbitrary and Mechanical

Charge
The Inland Revenue s computer system calculates additional tax in

a mechanical and arbitrary way. No thought process and human
intelligence go into the calculation of additional tax because
additional tax runs automatically.
Judgements of the ECJ, the ECtHR and the Court of Appeal

suggest that the penalty system should be revised soonest. In 2005,
the Court ofAppeal established that the Commissioner s discretion
to charge additional tax is not absolute.
“Dan premess, jibda biex jigi osservat b’ introduzzjoni preliminari illi skond
il-ligi [Artikolu 56 (12) (c), Kapitolu 123] il-Kummissarju hu akkordat
id-diskrezzjoni li johrog taxxa addizzjonali meta t-taxpayer jommetti mill-
prospett tieghu tat-taxxa xi ammont li messu gie inkluz bhala “income”. Din
id-diskrezzjoni pero' ma hijiex wahda assoluta tant li hi assoggettata ghas-
sindakar mill-Bord biex dan jezamina jekk, kif sottomess lilu mill-appellanti,
it-taxxa addizzjonali mposta kellhiex, jew le, tigi mahfura;”52
The ECJ and the ECtHR have gone a step further. In Malta, the
ECJ s judgement in Paraskevas Louloudakis and Elliniko Dimosio
v. the Greek Government53 is expected to leave a deep impact on
tax controversy. It establishes that tax penalty systems must factor
in for good faith. In determining tax penalties, good faith must
be taken into account. Ignorance of the law is not an excuse but
it could be an extenuating circumstance. The ECJ explained that,
““National legislation which provides, in the event of infringement of the

temporary importation arrangements laid down by Directive 83/182, for a
series of penalties including, in particular:
- fines set at a flat rate on the basis of the sole criterion of the vehicle's cubic
capacity, without taking its age into account,
- increased duty which can amount to up to ten times the taxes in question,
is compatible with the principle of proportionality only in so far as it is made
52 Appell numru 2/05 Seduta ta’ nhar it-Tnejn, 10 ta’ Ottubru, 2005 Numru 1
53 Case C-262/99.
necessary by overriding requirements of enforcement and prevention, when

gravity of the infringement is taken into account.
3. In proceedings concerning infringements relating to temporary
importation of certain means of transport, neither Directive 83/182 nor
other rules of Community law prevent its being excluded that ignorance of
the applicable rules should lead to automatic exoneration from all penalties.
None the less, where determination of the arrangements applicable has given
rise to difficulties, account must be taken of the good faith of the offender
when determining the penalty actually imposed on him. “
Commission of the European Communities v. Hellenic

Republic54 is another important case because it forms the basis of
a judgement of the Court of Appeal (Superior Jurisdiction). The
ECJ concluded that,
“In the absence of harmonization of Community legislation in the field

of offences committed in the context of the Community temporary
importation arrangements for travellers' personal effects, the Member States
are competent to adopt such penalties as appear to them to be appropriate.
When making use of that competence they are, however, required to comply
with Community law and its general principles, and consequently, the
principle of proportionality. In that respect, the administrative measures
or penalties must not go beyond what is strictly necessary for the objectives
pursued and the control procedures must not be accompanied by a penalty
which is so disproportionate to the gravity of the infringement that it
becomes an obstacle to the freedoms enshrined in the Treaty.
‘As the Court has repeatedly held, the administrative measures or penalties
must not go beyond what is strictly necessary for the objectives pursued
and the control procedures must not be accompanied by a penalty which
is so disproportionate to the gravity of the infringement that it becomes an
obstacle to the freedoms enshrined in the Treaty (see, inter alia, Case 203/80
Casati [1981] ECR 2595, paragraph 27; Joined Cases 286/82 and 26/83
Luisi and Carbone v Ministero del Tesoro [1984] ECR 377; and Case 68/88
Commission v Greece [1989] ECR 2965).”
Disproportionate penalties constitute an obstacle to freedom

enshrined in the Treaty. In the EU, disproportionate penalties are
not allowed.
54 Case C-210/91.
Even the ECtHR delivered an important judgement on tax

penalties. The case Affaire Mamidakis v. Greece referred to a legal
system which is quite similar to the current Maltese system. The
case originated from Greece a jurisdiction which is notorious for
its high tax fines. Appellant Kyriakos Mamidakis was the managing
director of Mamidoil-Jetoil SA, a company which was found
guilty of the commission of a customs offence in respect of which
Mamidakis was held personally liable. Mamidakis held that the
penalties imposed were arbitrary, excessive and disproportionate’
and alleged a violation of his right to property. The Court observed
that Mamidakis was personally liable to pay an administrative
penalty of EUR3,008,216 for an evasion of EUR4,946,145. In the
Court’s opinion the ratio of the tax evaded to the administrative
penalty was a disproportionate one.55 After taking into account the
state s margin of appreciation in imposing penalties, the ECtHR
found for taxpayer.
‘“Dans ces circonstances, meme en tenant compte de la marge d'appréciation

dont disposent les Etats contractants en cette matière (voir, Balàż c. Slovaquie
(dec.), no 60243/00, 16 septembre 2003 ; Valico S.r.l. c. Italie (dec.), no
70074/01, 21 mars 2006), la Cour estime que l'imposition de l'amende en
question a porté une telle atteinte à la situation financière du requérant quii
sagissait dune mesure disproportionnée par rapport au but legitime quelle
poursuivait.
Partant, il y a eu violation de Particle 1 du Protocole no 1
The Greek judgements discussed above formed taxpayer’s core

arguments in an appeal which was heard by Court of Appeal
(Superior Jurisdiction), the case of Avukat Lorraine Conti Nomine
v. Il-Kummissarju tat-Taxxa fuq il-Valur Mizjud56, a case involving
a foreign owned company’s contestation of draconian punitive
measures charged in terms of the VAT Act. The foreign company
held that the punitive measures should have been revoked because:
55 In the ECtHR’s words “Vagit de sommes extrémement élevées’”.

56 Unreported.
(a) Penalties had been raised in the absence of intentional

evasion by the company and its officers. The company
acted in good faith on the basis of guidance provided by
a public authority. The company claimed that punitive
measures were grossly unfair and had the effect of
impeding the freedoms of movement granted by the EC
Treaty because the penalties were neither appropriate
nor necessary to achieve the aims pursued. The company
referred to paragraph 48 Paraskevas Louloudakis v.
Hellenic Republic ECJ C-262/9.
(b) The penalty was incompatible with the principles of
the free movement of goods. The company referred to
paragraphs 57 and 58 Paraskevas Louloudakis v. Hellenic
Republic ECJ C-262/99.
(c) The penalty had been raised in a mechanical way without
taking into account good faith and absence of fraudulent
intent and was consequently contrary to the realisation of
the freedoms granted by Community Law. The company
referred to paragraphs 66-69 in Paraskevas Louloudakis v.
Hellenic Republic ECJ C-262/99.
(d) The penalty was the product of a mechanical scheme and
was consequently disproportionate to the gravity of any
alleged offence in a manner which violates the company’s
right to property and community freedoms. On this
point, the company referred to a British case, 2010
UKFTT 20 TC Enersys Holdings UK Limited and the
Commissioners for Her Majesty’s Revenue’s and Customs.
(e) The penalty went beyond what was strictly necessary for
the objectives pursued and was disproportionate to the
gravity of the infringement in a manner which created
an obstacle to the freedoms enshrined in the Treaty. The
company referred to paragraphs 19 and 20 of Commission
of the European Communities v Hellenic Republic (ECJ
C-210/91).
(f) The penalty was disproportionate in a manner which

violated its fundamental right to property in terms of
paragraphs 40-48 of Affaire Mamidakis v. Greece ECtHR,
Application No. 35533/04.
The VAT Appeals Board did not quite understand the company’s
arguments and decided in favour of the Commissioner of VAT
but the Court of Appeal took a completely different approach.
The Court of Appeal revoked the decision of the Board. On 24
February 2012, in its judgement Avukat Lorraine Conti Nomine
v. Il-Kummissarju tat-Taxxa fuq il-Valur Mizjud57, the Court of
Appeal delivered an important decision which is a turning point.
The Court of Appeal established that the value of reasonableness
required that penalties cannot be imposed in the absence of
clear evidence of bad faith. In a short but strong judgement, the
Court of Appeal declared that it was making the ECJ decision in
Commission v. Greece 'it's own' endorsing taxpayer's arguments
lock stock and barrel,
"din il-qorti taghmel taghha d-decizjoni tal-qorti ewropea tal-gustizzja v. The

Hellenic republic moghtija fis-16 ta dicembru 1992 fejn trattandosi ta' 'a
technical infringement of a customs rule, the Greek customs authorities did
not make a correct assessment of his intentions and consequently the fine
which they imposed on him was disproportionate. "
/6. Additional Tax as a Criminal Charge
Decisions of the European Court of Human Rights (ECtHR)58

and the recent decision of the Constitutional Court in John
Geranzi Limited suggest that additional tax imposed in terms of
the ITA amounts to a penalty of a criminal nature for the purposes
of the European Convention. Classification of additional tax as a
penalty of a criminal nature implies a radical departure from the
57 Appell Nru. 47/11.

relating to onus of proof50 and procedure

traditional tax rules5960
which must be followed in the course of tax appeals.61 The
presumption of innocence must apply to determinations in respect
of additional tax qua criminal penalty. Such a departure would
mean that determinations relating to the imposition of a criminal
charge must pursue a procedure which guarantees all the minimum
requirements which apply in the course of criminal prosecutions.
The classification of additional tax as a penalty of a criminal

nature should imply that, the principles enunciated in ECtHR
Affaire. E.L., R.L. et J.O. -L. c. Suisse Case of E.L., R.L. and J.O.
-L. v. Switzerland (75/1996/694/886), would apply to additional
tax imposed under the ITA, as well. Consequently, the heirs of
a taxpayer should not be liable to pay additional tax due by the
testator. The Revenue’s right to claim additional tax should die with
the taxpayer, any position contrary to the principle established in
the Suisse Case would amount to the violation of the taxpayers
right to a fair hearing. The aforesaid case established that,
“50. The Government, with whom the Commission concurred in substance,

considered that the guilt of the deceased had been lawfully established by the
judgment of the Obwalden Cantonal Tax Appeals Board of 19 December
1989 (see paragraph 15 above).
There was no question of punishing the applicants for criminal acts
committed by the deceased. Rather, the liability of the person who had
evaded taxes was imposed on his estate. This was clear from the fact that the
applicants would not have been liable to pay the fine if they had renounced
the inheritance, and that in any event they were not liable for more than their
share in the estate.
51. The Court observes that no issue could be, nor was, taken with the
recovery from the applicants of unpaid taxes. Indeed, the Court finds it
normal that tax debts, like other debts incurred by the deceased, should
be paid out of the estate.
59 Contained in Article 35 (3) ITMA. 35 (3) ITMA should apply, exclusively to tax disputes and
not to determinations over criminal charges.
60 Namely the taxpayer would be considered to be innocent until proven guilty.
61 Not to mention the right to silence and all the rights vested in the accused in cases of a criminal
nature.
Imposing criminal sanctions on the living for acts apparently committed

by a deceased person is, however, a different matter. Such a situation calls
for careful scrutiny by the Court.
52. In this case the Court does not find it necessary to decide whether the
guilt of the deceased was lawfully established.
Pursuant to Article 130 § 1 of the Ordinance on Direct Federal Tax, the
proceedings were brought against the applicants themselves and the fine was
imposed on them (see paragraphs 11 and 21 above).
It must therefore be accepted that, whether or not the late Mr L. was actually
guilty, the applicants were subjected to a penal sanction for tax evasion
allegedly committed by him.
53. It is a fundamental rule of criminal law that criminal liability does
not survive the person who has committed the criminal act. This is in fact
recognised by the general criminal law of Switzerland, particularly by Article
48 § 3 of the Swiss Criminal Code, under which a fine lapses if the convicted
person dies (see paragraph 36 above).
In the Court's opinion, such a rule is also required by the presumption of
innocence enshrined in Article 6 § 2 of the Convention. Inheritance of the
guilt of the dead is not compatible with the standards of criminal justice in
a society governed by the rule of law. There has accordingly been a violation
of Article 6 § 2.”
/ 7. Record Keeping
Article 11 ITA prescribes that every person shall each year make up
the accounts of his trade or business which he is required to keep.
Article 19 ITMA prescribes that every person carrying on a trade,

business, profession or vocation must keep proper and sufficient
records of his income and expenditure to enable his income and
allowable deductions to be readily ascertained.
Proper and sufficient records of his income and expenditure must

include proper accounts with respect to -
(i) all sums of money received or expended and the matters

in respect of which the receipt or expenditure takes place;
and
(ii) all sales, purchases or services rendered, as well as any
other transaction, act or operation pertaining to the trade,
business, profession or vocation;
(iii) a profit and loss account or equivalent annual statement;
(iv) a statement of the assets and liabilities as on the date
on which the annual accounts of the trade, business,
profession or vocation are made up or, in the case of a
company, a balance sheet.
The records required to be kept must be supported as follows
(i) in the case of a company registered in Malta, the balance

sheet and profit and loss account, which shall comply in
every respect with the applicable provisions of articles 167,
168 and 169 of the CA, such balance sheet and profit and
loss account must be accompanied by a report made out
bya certified public auditor as provided by the applicable
provisions of articles 179 and 181 of the CA. In the case
of a company which is not resident in Malta, such records
shall be those which refer to the company’s activities in
Malta.
(ii) in the case of a co-operative society, the audited financial
statements of the society, prepared in all respects as
required by the law for the time being in force regulating
co-operative societies and accompanied by any report
which is by any such law required to accompany the
audited financial statements of the society.
All records required to be kept must be retained for a period of

not less than nine years after the completion of the transactions,
acts or operations to which they relate.
The law tends to suggest that, in tax controversy, failure to

maintain proper books and records is fatal but, in exceptional

circumstances, our Courts have been prepared to accept alternative
forms of evidence.62 The John Geranzi Case has probably created
a major exception to the rule. The company did not submit any
books and records but won its case just the same.
In tax controversy, maintenance of proper books and records

is very important but proper books and records do not create an
irrefutable proofof their contents. In Case 49/11VG, the ART held
that the Tax Compliance Unit had concluded that company’s books
and records had been kept in accordance with law but this did not
imply that the books evidenced that their contents have a true and
fair view. The company had implemented a strong internal audit
system but this did not mean that the company had succeeded in
demonstrating that it had accounted for tax correctly. The Tribunal
was not convinced by the contents of the company’s books and
records because they were proper in form but not in substance. The
Tribunal remarked that actual source of the inflows had not been
62 On this point see Appell numru 2/10 (VAT) Seduta ta’ nhar il-Gimgha, 26 ta’ Marzu, 2010.
“Fuq 1-interpretazzjoni tad-disposizzjonijiet rilevanti, senjatament
1-Artikolu 19(1) abbinat ma’ 1-Artikolu 36 (b) tal-Kapitolu 372 din il-Qorti
kif presjeduta kienet diga' kkummentat funditus dwarhom. Ara “George
Aquilina -vs- Kummissarju tat-Taxxi Interni”, 7 ta’ Novembru, 2008. Gja
qabel din pero' din 1-istess Qorti kienet irrilevat illi “1-mezzi ta’ prova
jappartjenu fil-kaz ta’ dokumentazzjoni ghal dak il-katalogu prefissat mil-
legislatur ghax-xorta ta’ records “xierqa u sufficjenti” fl-Artikolu 19 ta’ 1-Att”.
Zied jigi aggunt illi “issa anke jekk il-Qorti lesta tikkoncedi illi x-xorta jew
tipicità' ta’ prova ma ghandhiex necessarjament tkun limitata ghal dawk biss
kompendjati fil-precitat artikolu, b’danakollu r-riljev 1-aktar fondamentali
jibqa’ dak li kwalsiasi tip ta’ prova xort’ohra jehtieg li twassal dejjem ghal
liberu konvinciment ta’ min irid jiggudika, intiz dan mhux biss bhala liberta
ta’ valutazzjoni tal-mezzi probatorji, ferm s’intendi 1-vinkolu tal-prova legali
fejn tokkorri, izda wkoll bhala liberta tal-fonti tal-konvinciment proprju.
Sitwazzjoni din li mill-qari u ezami tas-sentenza attakkata ma tokkorrix.”
Ara “Nazzareno Micallef -vs- Kummissarju tat-Taxxi Interni”, 10 ta’ Ottubru,
2005. Ara wkoll is-sentenza 1-ohra ta’ din il-Qorti fl-ismijiet “Alan Farrugia
-vs- Kummissarju tat-Taxxi Interni”, 4 ta’ Ottubru, 2006;”
corroborated by external documentation. The Tribunal emphasized

that the onus of proof was on the appellant and that, in its opinion,
appellant had failed to prove his case deciding in DGIT s favour.
The Tribunal reached an identical conclusion in Case 50/2011.
/8. Withholding Tax on Payments to Non-Residents
Article 73 ITA binds whoever pays to a non-resident a payment

which comprises income which is chargeable to tax in Malta to
withhold tax on account of the government on such a payment.
Article 73 ITA prescribes that,
“73. (1) Where any person pays to a person not resident in Malta, or to a
person resident in Malta on behalf of such non-resident person, any income
chargeable to tax under the provisions of this Act, he shall upon paying such
income, unless he is himself liable to pay tax thereon under the provisions of
article 5 of the Income Tax Management Act, deduct tax therefrom:
(a) at the rate of twenty-five cents (0.25) in the euro where payment is made
to or on behalf of any non-resident person other than a company or a person
to whom article 56(18 A) applies;
(b) at the rate chargeable under article 56(6) where payment is made to or on
behalf of a non-resident company; and
(c) at the rate chargeable under article 56(18A):
Provided that the Commissioner may, by notice in writing given to any person
required to effect a deduction of tax in accordance with paragraphs (a) and
(b), authorise such person to deduct tax at a rate lower than that hereinbefore
mentioned, or to pay such income without any deduction of tax:....”
Tax withheld must be paid within 30 days. Failure to withhold

tax and to remit tax withheld to the Revenue within the stipulated
time period exposes the payor to draconian tax consequences.
The payor would be bound to make good for the tax which he is
supposed to deduct. Furthermore, failure to abide by the obligations
envisaged in Article 73 ITA creates liability to pay additional tax:
“(2) Any amount of tax deducted from income in accordance with the
provisions of sub-article (1) shall be a debt due to the Government by the
person effecting the deduction as aforesaid, payable within thirty days from
the making of the deduction, and such amount shall be accounted for and
remitted to the Commissioner within the said period.
(3) Deductions of tax made under sub-article (l)(a) and (b) shall, when
paid to the Commissioner as provided in sub-article (2), be set off for the
purposes of collection against the tax charged on the non-resident person in
respect of the relative income. Any excess shall be refunded...
(4) Where any person fails to deduct tax in accordance with the provisions
of this article or, after deducting such tax fails to pay it to the Commissioner
within the period mentioned in subarticle (2) -
(a) such person shall be chargeable with the tax which should have been deducted
or paid as aforesaid and, in addition, with twice the amount of such tax;
(b) the tax and additional tax shall be recoverable from the said person in the
same manner as other tax charged upon him under this Act;
(c) a notice given by the Commissioner to any person and stating the tax
which was due to be deducted or paid by him as aforesaid and any additional
tax to which he became liable for having failed to deduct or pay the tax shall,
unless the contrary is proved, be sufficient evidence that the amount shown
in the said notice is the amount due to be paid to the Commissioner by the
said person;
(d) the Commissioner may in his discretion remit wholly or in part any
additional tax chargeable under the provisions of this sub-article;
(e) additional tax charged under this sub-article shall be borne by the person
required to deduct or pay the tax and shall not be recoverable by such person,
whether wholly or in part, from the person receiving the income;
(f ) additional tax charged under the provisions of this subarticle shall not be
deemed to be part of any tax paid or payable for the purposes of articles 59,
76 and 89 and articles 42, 51 and 52 of the Income Tax Management Act.”
Article 73 ITA’s compatibility with EU law as interpreted in FKP

Scorpio Konzertproduktionen GmbH v Finanzamt Hamburg-
Eimsbuttel has been questioned63. Any analysis of Article 73ITA and
63 C-290/04 which established that,
‘2) Articles 59 and 60 of the EEC Treaty must be interpreted as
— precluding national legislation which does not allow a recipient of services who is the
debtor of the payment made to a non-resident provider of services to deduct, when making
the retention of tax at source, the business expenses which that service provider has reported
to him and which are directly linked to his activity in the Member State in which the services
are provided, whereas a provider of services residing in that State is taxable only on his net
income, that is, the income received after deduction of business expense;
— not precluding national legislation under which only the business expenses directly linked
to the activity that generated the taxable income in the Member State in which the service is
provided, which the service provider established in another Member State has reported to
its compatibility withy EU law must take into consideration the fact
that the CfR has the discretion to lower the rate of withholding tax and
that any tax over-paid may be refunded64. However, there may be cases
when an element of a possible cash flow disadvantage will remain...
the payment debtor, are deducted in the procedure for retention at source, and expenses that
are not directly linked to that economic activity can be taken into account if appropriate in a
subsequent refund procedure;
— not precluding a rule that the tax exemption granted under the Convention of 16 June
1959 between the Federal Republic of Germany and the Kingdom of the Netherlands for the
avoidance of double taxation in the area of income, capital, and various other taxes and for
regulating other tax matters, to a non-resident provider of services who has carried on activity
in Germany can be taken into account by the payment debtor in the procedure for retention
of tax at source, or in a subsequent procedure for exemption or refund, or in proceedings for
liability brought against him, only if a certificate of exemption stating that the conditions laid
down to that end by that convention are satisfied is issued by the competent tax authority’.
64 Bezzina, J & Cilia, S, ECJ Case-Law Seminar on the Interpretation of EC Law with respect to
taxation, an Update (IFSP 2006) Slides 43-44.
Chapter IO
The Obligations of Officers of Bodies

of Persons that are subject to Tax in
Malta under the income Tax Act
Until relatively recently, directors’ personal liability for income

tax was not a very topical issue and criminal prosecutions were
uncommon. Clearly, there has been a change in trend and criminal
prosecutions of directors serving on boards of company that are
delinquent in their FSS filings have become the order of the day. I am
aware of hundreds of cases, most of which have not been published.
Most of the cases have been decided in favour of the Revenue.
Matters are turning out to be a nightmare for taxpayers because the
inflexibility of the law and the peculiarities of the criminal process
are resulting in a system which is imposing disproportionate levels
of diligence on directors.
I, The Interpretation Act
An important rule relating to the responsibilities of directors

and officers of a limited liability company is contained in Article
13 of the Interpretation Act (‘IA’). Article 13 IA prescribes
that when a limited liability company commits an offence
(including a tax offence), the company’s directors are presumed
to be guilty of that offence unless they prove that they were
unaware of such an offence and exercised all due diligence to
prevent the commission of the offence. Article 13 IA is being
reproduced below:
“13. Where any offence under or against any provision contained in any Act,
whether passed before or after this Act, is committed by a body or other
association of persons, be it corporate or unincorporate, every person who, at
the time of the commission of the offence, was a director, manager, secretary
or other similar officer of such body or association, or was purporting to act
in any such capacity, shall be guilty of that offence unless he proves that the
offence was committed without his knowledge and that he exercised all due
diligence to prevent the commission of the offence.”
In principle, Article 13 IA is an article of general application1

but matters have taken a somewhat unexpected twist. Articles
similar to Article 13 IA are contained in the Income Tax Acts but,
in a tax context, do these articles render Article 13IA inapplicable?
The issue is not exclusively an academic one because Article 13IA
contemplates a number of defences which are not contemplated in
the special Article 13-type’ provisions found in Income Tax Law.
2. The Income Tax Acts and Subsidiary Legislation
The Income Tax Acts burden the officers of a company with on
erous tax obligations. Officers of a limited liability company are
personally answerable for all matters required to be done under
the Income tax Acts by a company. Article 7 ITMA prescribes
that, in certain cases, a director of a limited liability company is
personally responsible to pay income tax due by a company. Rele
vant extracts from Article 7 ITMA are being reproduced below:
“7. (1) The manager or other principal officer of every body of persons
shall be answerable for doing all such acts, matters and things as are
required to be done ....
(2) Every such principal officer shall pay the tax out of the property of the
body of persons. He shall, however, be liable for payment personally, and
jointly and severally with any other person responsible therefor, if at any
time ... he had in his possession or control any property belonging to the
body of persons which could have been used to pay the tax then due.
1 See Chapter 1.
The Obligations ofOfficers ofBodies ofPersons 347
The liquidator of a company which is being wound up shall not distribute

any of the assets of the company to its shareholders unless he had made
provision, in so far as he is able to do so out of the assets of the company, for
the payment in full of any tax which he knows of or might reasonably expect
to be payable by the company under the Income Tax Acts and in default,
such liquidator shall be liable personally, and joindy and severally with any
other person responsible therefor, for payment of the tax due.”
Act V of 2012 added a proviso to Article 7 (3) ITMA excluding

the application of this draconian provision with respect to official
receivers. The recent proviso prescribes that:
“Provided that this sub-article shall not apply to an official receiver, or any
other person, appointed in accordance with the provisions of article 225 of
the Companies Act.’”
A parallel rule is contained in Article 9 ITMA which prescribes

that:
“Every person answerable under the Income Tax Acts for the payment of
tax on behalf of another person may retain out of any money coming to his
hands on behalf of such other person so much thereof as shall be sufficient
to pay such tax, and shall be and is hereby indemnified against any person
whatsoever for all payments made by him in pursuance and in virtue of the
Income Tax Acts.”
The personal obligations of directors of companies which

employ individuals are particularly onerous. The Income Tax Acts
tend to ‘look through’ companies and hold directors personally
responsible for the company’s obligations. Article 21 ITMA
prescribes that:
“21. (1) Every employer when required to do so by notice from the

Commissioner shall, within the time limited by the notice, prepare and
deliver for any year a return containing -
(a) the names and places of residence of all persons employed by him;
(b) the payments and allowances made to those persons in respect of that
employment, and the provisions of the Income Tax Acts with respect to the
failure to deliver returns or particulars in accordance with a notice from the

Commissioner shall apply to any such return.
(2) Where the employer is a body of persons, the manager or other
principal officer shall be deemed to be the employer for the purposes
of this article, and any director of a company, or person engaged in the
management of a company, shall be deemed to be a person employed.”
A similar rule is contained in article 59 (8) ITA and Article 30

of the FSS Rules which disregards corporate personality altogether
and identifies the officers of the company as the persons bound to
abide by certain statutory obligations. Article 59 (8) ITA:
“Any account required to be rendered or any certificate required to be

furnished under this article shall be rendered or furnished, as the case may
be, by the manager or other principal officer of the company.”
Article 30 of the FSS Rules prescribes that:
‘"The manager, other principal officer or liquidator of any body of persons

shall be personally answerable for all matters required to be done under these
rules by or on behalf of the body of persons.”
3. Case Law on the Matter
3.1 Criminal Cases
The O’ Dea Case

The classic case on a criminal prosecution for a tax offence committed
by a director is the case Il-Pulizija v. John O’Dea2, a criminal case.
Mr. O’Dea was a director of a company that employed a number of
individuals. Mr. O’Dea’s company faced financial straits but Mr.
O’ Dea tried to make ends meet and managed to pay all salaries
in time. However, the company failed to withhold tax due on
the salaries and to submit returns reporting salaries paid and tax
2 Qorti tal-Appell Kriminali (11/1 /94).

withheld thereon. Criminal proceedings were instituted against

O’Dea because the police argued that O’Dea had misappropriated
Lm7,534 in tax payments in respect of the employees in terms of the
PAYE system. The accused was found guilty and was condemned
to a pecuniary fine and to two months imprisonment.
3.2 The 2011 Cases
FSS Offences as ‘Reati Permanenti*

In 2011, the Court of Criminal Appeal delivered a series of
judgements which established an important principle - failure to
abide by FSS Regulations is a criminal offence known as a ‘reat
permanenti. The Court’s classification of failures to comply with
FSS Regulations as rent permanenti implies that, with respect to
FSS infringements, prescription starts to run only when the illegal
state of affairs ceases.
The Court of Criminal Appeal concluded that FSS Offences

are Reat Permanenti in the line of thought that resignation from a
board does not exculpate a director.
Resignation and Self-Inflicted Impossibility to

Abide by the Law
Many directors who served on boards which were delinquent
with their FSS filings have tried to limit their personal liability
by resigning from their posts. Persons in the business tend to
perceive a resignation from the board of a delinquent company as a
statement wherein a director disassociates himself from a company’s
wrongdoing. The Court of Criminal Appeal has taken a different
view. Judgements of the Court of Criminal Appeal suggest that the
Court of Criminal Appeal tends to perceive certain resignations as
being tantamount to an act of irresponsibility and laissezfaire.
In films I watched, when an aircraft is in flames because of engine
failure the pilot always bails out, he presses the ejector button
and parachutes to safety while the plane crashes either in a field
or at sea, never on housing. Probably, the Judges of the Court of

Criminal Appeal did not watch Top Gun. The Court of Criminal
Appeal expects the pilot to remain on his hot seat and to exercise
his best efforts to land the plane to safety, bail-out is perceived as an
act of cowardice even though, these days, it is becoming extremely
popular. I tremble at the thought of how our Court of Criminal
Appeal would judge Italian captains of cruise liners of recent
memory.
Back to the dangerous world of tax litigation, our Criminal

Court has delivered a series of cases wherein it has rejected the
defence ad impossibilia nemo tenetur3 raised by ex-directors on the
basis that a resignation is tantamount to a self-inflicted impossibility
to solve the problem.
The Court of Criminal Appeals judgement in the case Il-Pulizij a

(Spt. Anthony Agius) Vs Victor Galea4 is a judgement in a long line
of similar judgements wherein the Court discussed the principles
discussed above. The Victor Galea case involved an ex-director of
a company which had omitted to abide by its obligations under
the FSS Rules. Galea was prosecuted over two years after he had
tendered his resignation from the Board and thus he raised the
plea of prescription. The Court of Magistrates accepted the plea
of prescription but the Attorney General appealed on the basis
that the charge was a ‘reat permanenti’ and in a ‘reat permanenti’
prescription begins to run only after the illegal state of affairs is
terminated. In this particular case, the illegal state of affairs had
persisted after accused’s resignation because the company had
not filed the forms and paid tax. The Court of Criminal Appeal
held that the charge involved a ‘reat permanenti, prescription had
not even started to run and therefore the offence was not statute
barred. The illegal state of affairs had persisted even after accused
had tendered his resignation. The Court proceeded to comment
3 Nobody is obliged to do the impossible.
4 Appell Kriminali Numru. 206/2011 Il-Pulizija (Spt. Anthony Agius) Vs Victor Galea.
on accused’s resignation from the Board. The Court of Criminal

Appeal held that when accused resigned from his post he had chosen
to put himself in a position to be unable to rectify the company’s
default. Impossibility to abide by the law had been self-inflicted.
The Court remarked that it could not reward such behaviour and
reversed the decision of the Court of Magistrates and rejected the
plea of prescription.
In Il-Pulizija (Spt. Anthony Agius) Vs Gerald Zammit the

Court of Criminal Appeal emphasized that a resignation is not
an exculpating circumstance. The Court of Criminal Appeal
imposed very high levels of diligence. Zammit had sent requests
for information relating to the company’s compliance with the law
but his requests were not answered. When Zammit saw that his
attempts to obtain a clear picture of the situation were futile, he
resigned. The Court of Criminal Appeal found Zammit guilty,
what he had done was simply not enough. According to the Court,
a significant effort to avert the state illegality was necessary,
‘“Skond 1-istess appellant il-passi illi ha kienu rikjesti ta’ informazzjoni.

L-istess appellant fir-rikors ta’ 1-Appell tieghu, fil-paragrafu 4.5 jghid ‘Tant
kien attivament jiprova jistaqsi dwar 1-andament tal-kumpanija, illi meta
baqa ma kellux risposti ghal dak li kien qed jitlob, hu irrizenja.’ Bir-rispett
dan m’huwiex bizejjed u ma jissodisfax il-vot tal-Ligi. Meta issentenza fuq
imsemmija titkellem dwar Tkun ha attivament passi...’ tfisser aktar minn
sempliciment mistoqsijiet, izda tfisser li jrid ikollok esperjenza, “hands on”
ta’ dak kollu li jkun qed jigri fil-kumpanija. Direttur ma jistax jezimi mir-
responsabbilta billi jghid illi hu impjega nies sabiex imexxu 1-kumpanija u
jhalli f’idejhom. Jista’ jkunu nies professjonisti u kompetenti izda direttur
dejjem jibqa’ responsabbli ghal andament tal-kumpanija u 1-osservazzjoni
taghha, tal-Ligijiet fiskali tal-pajjiz. Mill-istess rikors ta’ 1-appellant jidher illi
dan ta’ 1-ahhar naqas illi jkollu din 1-esperjenza”
3.3 The 2012 Judgements
In 2012, the Court of Criminal Appeal delivered a series of

judgements wherein it reiterated its strict interpretation of the
law. Il-Pulizija (Spt. Anthony Agius) Vs Anthony Sciberras,5 the

Court confirmed that resigning from a directorship does not
exonerate a director for responsibility for unpaid FSS and that
prescription does not begin to run from date of resignation because
FSS infringements are a ‘reat permanenti’. The Court referred to a
concept of‘responsibility for an indefinite term’
“Ghalhekk la darba rrizulta illi Direttur ikun ikkommetta dan ir-reat u dan
id-Direttur ikun volontarjament irrezenja mil-karigia allura bhala 1-persuna
li jkun ghamel ir-reat jibqa responsabli u soggett ghal multa addizzjonali...
Ghalhekk 1-appellat jibqa’ responsabli ghal zmien indefinit stante illi r-reati
kontemplati taht il-kap 372 huma reati permanenti. Ma giex kontestat illi
1-appellat kien responsabli biex jibghat lill-Kummissarju tat-Taxxi Interni
d-denunzji tat-taxxa u I-hlas relattiv ghall-istess snin indikati fl-akkuza, xi
haga illi huwa naqas illi jaghmel u ta dan 1-ewwel Qorti sabitu hati u mponiet
multa. Ma dan kienet obligata illi timponi wkoll multa addizzjoniali ghaz-
zmien kollu illi 1-appellat jibqa inadempjenti.”
The Court of Criminal Appeal reiterated the same principle in

Il-Pulizija (Spt. Anthony Agius) Vs Caroline Borg6 and Il-Pulizija
(Spt. Anthony Agius) Vs Luciano Sciberras7.
In Il-Pulizija (Spt. Anthony Agius) Vs Guido Agius8 repeated its classification

of an FSS infringement as a ‘reat permanenti’ and developed another
interesting legal principle. Mr. Agius had enormous financial difficulties and
was trying to meet commitments entered into with a number of creditors.
He sold all his assets including his home and ended up being homeless. He
prioritised his employees over all other creditors and paid them before paying
his creditors, the Revenue included. Agius’s selfless decision did not work in
Agius’s favour because the Revenue wanted its pound of flesh. The Court
was strict with Agius and said that Mr. Agius had to pay the consequences
for ignoring his responsibilities with the Revenue. The law is clear. An extract
from the judgement follows:
“Jibda biex jinghad illi kienet decizjoni libera ta’ 1-appellant illi jipoteka
5 Appell Kriminali Numru. 174/2012.

propjeta personali mal-Bank. Fuq dan zgur il-Kummissarju tat-Taxxi Interni
ma jahtix. Ma hemmx dubju illi 1-appellant hawnhekk ghamel kalkolu hazin
u ta dan jahti hu u hu biss. U t-tieni, ma kellu 1-ebda dritt jaghzel li jhallas
lil haddiema u jhalli lura lill-Kummissarju tat-Taxxi Interni. La ha fuqu dan
1-oneru ta’ 1-ghazla allura jrid jerfa’ r-responsabilta taghha. L-ammonti dovuti
lill-erarju ghandhom jithallsu dejjem u hadd ma jista’ jaghmel ilprijoritajiet
tieghu u jaghzel hu lil min ghandu jhallas ghal skapitu ta min.
Ghalhekk il-Qorti issib illi b’dawn id-decizjonijiet kien listess appellant illi
pogga ruhu f ” self inflicted impossibility” sabiex jonora 1-obbligi tieghu mal-
Kummissarju tat-Taxxi Interni u ma jistax issa f’dan 1-istadju jqajjem id-difiza
ta’ limpossibilita.”
Agius’s appeal was dismissed and Agius was convicted. A few

months later the Court of Criminal Appeal delivered an even
stronger judgement in the VAT case Il-Pulizija (Spt. Ramon
Mercieca) Vs Joseph Scicluna.9
The Court made similar observations to those made in the Agius

judgement and the Scicluna judgement in Il-Pulizija (Spt. Anthony
Agius) Vs Charlotte Ciantar10 when the Court dismissed an appeal
on the basis that insufficiency of funds is not an excuse.
9 Appell Kriminali Numru. 371/2011 when the Court of Criminal Appeal confirmed that an
insufficiency of funds does not excuse failure to abide by his obligations under tax law. Mr.
Scicluna (who lives off a pension) was charged for multiple violations of the VAT Act because
he was unable to settle debts accumulated with the VAT Department and other creditors.
Scicluna produced evidence which amply demonstrated that financially he was ruined. On
this basis he raised the plea ofad impossiblia nemo tenetur (a person cannot be held responsible
for something he cannot control). Scicluna said that he was heavily indebted towards the bank
and was using the VAT he had collected to pay the banks. Scicluna’s argument was rejected
by the Court of Criminal Appeal but the Court agreed to lower the daily penalty imposed
for failure to abide by the law within the stipulated time. With reference to the defence of ad
impossiblia nemo tenetur, the Court observed that financial ruin was not an excuse,
“Il-Qorti frankament ma taqbilx ma’ din is-sottomissjoni. Il-flus kienu jinġabru bhala VAT u altura
dawn kellhom jintbaghtu lid-Dipartiment tal-VAT u mhux jispiċċaw ghand il-bank kreditur.
Il-fatt li wiehed ghandu dejn kbir u li ikreditur qed jiġri warajh bis-shih ma jeżentahx milli
jhallas dak li hu dovut lid-Dipartiment tal-VAT ghax il-flus miġbura bhala VAT la huma tieghu
(f’dan il-każ tal-appellant) u lanqas tal-kreditur. Ma jistax wiehed jinvoka 1-prinċipju msemmi
jekk ma jkunx ha hsieb li dak li ġabar ghall-VAT mar ghand id-Dipartiment sempliċiment
ghax il-preżenza tal-kreditur privat tkun qed tinhass aktar. Ghalhekk il-Qorti mhix tilqa’ dan
l-‘aggravju jew sottomissjoni.”
The Court of Criminal Appeal’s judgement in Il-Pulizija

(Spt. Anthony Agius) Vs Giuseppe Agius11 is a rare case when a
prosecution failed. Accused was qua company director charged
for a number of FSS infringements which had been committed
by a company in which accused had held a directorship position.
It transpired that infringements had occurred after accused had
resigned from his post. Predictably, accused was found not guilty
and the sentence was confirmed in appeal but the Court made a
number of observations which are indicative of the Court s line of
reasoning. In delivering judgement, en passant, the Court expressed
the opinion that a director is responsible for infringements of FSS
law even if he is not involved in the management and control of the
company. I found this conclusion to be quite worrying. An extract
from the judgement is being reproduced below:
“Jibda biex jinghad illi billi direttur ma jkunx involut flamminsitrazzjoni ma

jfissirx illi b’daqshekk huwa mehlus mill-obbligi illi jgorr kwalunkwe direttur
versu terzi u Kummissarju tat-Taxxi Interni. Kull direttur ghandu lobbligu
illi jassigura ruhu illi 1-obligazzjoijiet tal-kumpanija versu 1-Kummissarju tat-
Taxxi Interni u enti ohra governattivi jigu mwettqa u ma jistax igib 1-iskuza
illi mhuwiex involut fl-amministrazzjoni jew ghandu biss ishma minoritarji.
Indipendentiment kemm direttur ghandu ishma la darba huwa validament
appuntar bhala direttur, ghandu obbligu li jitlob 1-informazzjoni kollha
necessarji sabiex jassigura li 1-obligazzjonijiet ikunu mwettqa. Jekk dan ma
jsirx, allura d-direttur ikun responsabli daqs kwalunkwe direttur iehor versu
1-Kummissarju tat-Taxxi Interni. Dana inghad, irrizulta f’dan il-kaz pero’
illi lappellat formalment informa bir-rizenja tieghu lill-MFSA fis-sitta u
ghoxrin (26) ta April, 1999, (fol 44). Quindi minn dak inhar ma baqax aktar
responsabbli ghat-treggija jew 1-amministrazzjoni tal-kumpanija.”
3.4 The Judgement in Busuttil
The last FSS judgement delivered by the Court of Criminal Appeal

in 2012 was undoubtedly its most important one. In Il-Pulizija
(Spt. Anthony Agius) v. Antonio Busuttil1112 the Court confirmed

the strict line it took in earlier cases and went to steps further.
Busuttil was, qua director, charged for multiple violations of FSS
rules. Busuttil had resigned from his post before he had been
charged. The Court of Magistrates found accused guilty and fined
him EUR400 but both the AG and the accused appealed the Court
of Magistrate’s judgement.
Accused appealed on the basis that he should not have been

found guilty because prosecution had failed to produce evidence
required in terms of Article 13 Interpretation Act. Accused argued
that he was not privy to the company’s wrongdoing and that he had
exercised due diligence to prevent the commission of the offence.
The Attorney General pointed out that, in addition to the fine, the
lower Court should have inflicted a daily penalty for accused’s non
conformity with FSS law (i.e. that the accused should suffer a daily
penalty for every day the company delays in settling its due with the
Inland Revenue, failure to settle the issue within a prescribed time
would eventually lead to an effective prison term).
Accused produced evidence which proved that he was not

involved in the management of the company. Furthermore, he
proved that he was not aware of his company’s problems with the tax
authorities. The Court held that a director is responsible regardless
of his duties within the company. The fact that, internally, the
Board had not assigned fiscal responsibilities to Busuttil did not
mean that Busuttil was not responsible for FSS. The Board had
only assigned responsibility for sales to Busuttil but this did not
mean that he could raise this argument in his defence,
““Il-fatt illi huwa kien qed jiehu hsieb is sales u kien hemm haddiehor jiehu
hsieb 1-amministrazzjoni tal-kumpanija ma tbiddilx din is-sitwazzjoni.
L-arrangamenti interni filkumpanija hija xi haga personali tad-diretturi u
ma taffettwax id-drittijiet statutorji tal-Kummissarju tat-Taxxi Interni illi
ghandu dritt idur fuq kwalunkwe direttur jekk jirrizulta xi nuqqasijiet fil
kumpanija. Ghalhekk huwa inutli illi 1-imputat jargumenta illi huwa kien fuq
sales jigri barra u 1-gestjoni tal-kumpanija kienet f’idejn haddiehor u li qatt
ma ssemma xi problemi mal-Kummissarju tat-Taxxi Interni fil-laqghat li kien

ikollhom tal-kumpanija peress illi dawn huma affarijiet interni tal-kumpanija
li ma jaffettwawx iddritt tal-Kummissarju tat-Taxxi Inteni, li ghandu dritt
idur fuq kwalunkwe direttur jekk jirrizulta nuqqas ta’ hlasijiet dovuti lill-
Kummissarju.”
The Court took the view that the Interpretation Act does not
apply to FSS prosecutions. A lack of knowledge of the offence,
non-participation in management and control and the exercise
of due diligence could not be used as defences. The Court added
that a directorship carries with it personal responsibility for FSS
payments and Article 13-type defences were out of place.
“The Court took the view that the Interpretation Act does not apply to
FSS prosecutions. A lack of knowledge of the offence, non-participation
in management and control and the exercise of due diligence could not
be used as defences. The Court remarked that a directorship carries with
it personal responsibility for FSS payments and Article 13-type defences
were out of place. The fact that, internally, the Board had not assigned fiscal
responsibilities to Busuttil did not mean that Busuttil was not responsible
for FSS. The Board had only assigned responsibility for sales to Busuttil but
this did not mean that he could raise this argument in his defence,”13
13 The judgement in Busuttil tends to contradict the legal reasoning in the judgement in II-
Pulizija (Supt. Daniel Gatt) (Supt. M. Bayliss) (Spettur K. Ellul Bonici) v. Andrew Ellul
Sullivan Joseph Ellul Sullivan, Carmel sive Charles Ellul Sullivan and Philip Azzopardi when
the Court of Criminal Appeal was faced with the prosecution of a company which kept a large
board of directors. The Court of Criminal Appeal dug deep into the mind of the company and
sifted the guilt and absence of guilt of each director. The Court considered the role of each
director. The Court appreciated the fact that directors allocated responsibilities to each other.
There were directors who were responsible for certain departments and there were directors
who were responsible for other departments. The Court’s observation that not all directors
were to be placed in the same basket of liability had set an important precedent.
“Illi hawn ghalhekk trid tigi ezaminata il-pozizzjoni ta’ kull wiehed mill-erba imputati
separatament ghax jidher li jista’ jkun hemm lok ghal distinzjoni bejn kull wiehed miz-zewg
diretturi taz-zewg kumpaniji...”
“Hu minnu li 1-ligi testendi din il-prezunzjoni ta’ htija anki fejn wiehed li ma jkunx jaf
x’ kien ghaddej, ma jkunx ezercita d-diligenza kollha xierqa biex jevita 1-eghmil tar-reat,
pero’ kif gie ritenut fis-sentenza fuq citata tal-Qorti Ewropeja tad-Drittijiet tal-Bniedem
‘presumptions of fact’ simili jridu jkunu “confined within reasonable limits which take into
account the importance of what is at stake...”
The Court examined the duties of each and every director and assessed their role in the
commission of the offence. It distinguished between small companies were all the members
of the board were familiar with every nook and cranny of the company and companies with
The Court dismissed accused’s appeal confirming both the

guilty verdict and the one-time penalty. It accepted the Attorney
General’s appeal and ordered the accused to pay the daily penalty.
In 2012, Antonio Busuttil filed constitutional procedures14 to

impugn the Court of Criminal Appeal’s judgments against him.
Busuttil claimed that the judgments of the Criminal Courts and
the law they were based on breached his right to a fair hearing
and his right to property. In brief, Busuttil complained that the
Revenue’s significant delay in instituting proceedings against him,
the fact that he had been found guilty even though he had brought
evidence of his good faith and the exorbitant fines he had been
subjected to amounted to a violation of his human rights. The
Constitutional Court shot down all 3 allegations, highlighting the
strict nature of the law. The Constitutional Court concluded that
in criminal cases involving prosecutions for FSS, lack of knowledge
should not be a defence:
“22. Fir-rigward, din il-Qorti tqis li bhala direttur tal-kumpannija fiz-zmien

meta 1-kumpannija naqset milli tosserva 1-ligijiet fiskali, ir-rikorrent ma
jistax jakkampa fuq id-difiza li ma kienx jaf bin-nuqqasijiet talkumpannija.
large boards where tasks were assigned to individual board members. The Court recognised
a principle which has been ignored by tax courts, the responsibility for certain acts should fall
on the director who is vested with the responsibility for such acts,
“Issa hu risaput li f’kull organizzazzjoni kullhadd ghandu il-funzjonijiet, il-mansjonijiet u
r-responsabbiltajiet tieghu. F’azjendi zghar fejn ikun hemm certa fiducja reciproka jew fejn
ikun hemm relazzjonijiet familiari bejn il-persuni koncernati, mhux diffidi li wiehed jiltaqa’
ma kazijiet fejn dak li jkun jafda lil persuna 1-ohra li tkun qed tiggestixxi taqsima ohra
tal-attivita’ li tkun u jhalli f’idejha. Mhux ghalhekk eskluz a prioristikament li kemm
Joseph Ellul Sullivan fil-kaz ta’ Tessons Limited u Philip Azzopardi fil-kaz ta J.Cachia
Caruana Limited setghu ma kienux jafu x’kien ghaddej ezatt , tal-ewwel ghax ma kienx
id-dipartiment tieghu w tat-tieni ghax kif irrizulta kien biss “sleeping partner” li halla
1-gestjoni kollha tas-socjeta’ f’idejn Carmelo sive Charles Ellul Sullivan.”
The Court agreed with the accused’s version of the facts, two of the directors were not aware
of the wrongdoings which were occurring in a department of the company which did not fall
under their direct responsibility. Consequently, they could not be held liable for wrongdoings
which they were not responsible for and of which they were not aware. The Court sentence
confirmed principles which may appear to be obvious but are extremely important because
these principles of reasonableness might have been ignored in certain tax disputes.
14 Rikors numru 84/12 AF Antonio Busuttil v. Kummissarju tal-Pulizija.
Anke jekk dan kien il-kaz, id-diretturi qatt ma jistghu jinhelsu mir-
responsabbilitajiet li tghabbi 1-ligi fuqhom. Din il-Qorti tirribadixxi li:
“Id-diretturi ma jistghux jaharbu mir-responsabbilta' taghhom billi jghidu
li huma ma kienux jafu x’kienet il-vera sitwazzjoni tal-kumpannija li ma
jifhmux jew li huma joqghodu fuq dak li jghidulhom il-konsulenti imqabbda
minnhom...... Direttur anke jekk non executive jew minoritarju ghandu
1-istess responsabbilita' bhad-diretturi 1-ohra u ghandu 1-obbligu li jkun jaf u
jimpenja ruhu li jwettaq id-doveri impost fuqu mil-ligi.”
23. Ukoll:
“Ladarba huwa kien direttur huwa kellu jaderixxi ruhu mal-obbligi kollha ta
direttur u jinteressa ruhu anke fl-aspett finanzjarju tal-kumpannija li tieghu,
kemm siehbu kif ukoll hu, huma f’ghajnejn il-ligi responsabbli ghall-obbligi
tal-kumpannija”.
It is yet to be seen how major judgments of the ECtHR such

as the Grand Chamber’s recent judgment in Application no.
36480/07 Lekic v. Slovenia will impact on the Maltese system.
3.5 The 2013 Judgements
The Court of Criminal Appeal’s FSS judgements for 2013 includ

ed some rare acquittals. In Il-Pulizija (Spettur Frank Anthony
Tabone) v. Guda Taddeus Rapa15 the Court of Criminal Appeal
composed of our ChiefJustice reversed a decision of the Court of
Magistrates wherein accused had been qua director of a company
found guilty of a number of FSS infringements. In the course of
the appeal it transpired that charges had been issued against the
wrong company.
The Court of Criminal Appeal’s judgement in Il-Pulizija [Spet

tur Anthony Agius] vs Christopher Gauci16 ofJanuary 2013 will
come as a balm to defence lawyers because it tends to tweak the
strong line taken by the Court of Criminal Appeal in previous
15 Appell Numru 94/2012. As a matter of fact this judgement was delivered in December 2012
but it was published i 2013.
16 Appell Nru: 144/2012.
judgements. The case involved the company which ran the Price
Club supermarket, the same company which was in the midst of
the famous fraudulent trading case. Accused had been prosecut
ed for FSS infringements which referred to years when he was a
director as well as years when the company was in liquidation. The
company had been placed into liquidation by the Court. Predicta
bly, the accused was found not guilty for infringements occurring
post-liquidation but, surprisingly, the Court acquitted accused
for infringements occurring pre-liquidation too. The Court
acquitted accused on the basis of prescription. Accused had been
prosecuted over two years after he had resigned. The Court gave
a lot of importance to the fact that the company had been placed
into liquidation by court order. The Court said that in such a case,
‘resignation’ had not been self-inflicted so the plea of prescription
could be raised successfully.
“Filwaqt illi din il-Qorti tirrikonoxxi illi d-difiza ta’ mpossibilta hija
rikonoxxuta fis-sistema guridika taghna, bhala regola generali din id-difiza
tista tigi mqajma biss jekk dak li jkun ma jkunx pogga ruhu volontarjament
fl-impossibilta fizika illi jottempra ruhu mal-Ligi. Quindi jekk is-sitwazzjoni
tkun ta “self inflected impossibility” din id-difiza ma tistax treggi. F’din il-
kawza rrizulta illi 1-kumpanija marret fillikwidazzjoni fl-1 ta’ Novembru, 2001
fuq ordni tal-Qorti u 1-avukat Andrew Borg Cardona gie mahtur Strarcarju fit-
12 ta’ Lulju, 2002. Quindi zgur minn din 1-ahhar data lappellant kien imnehhi
kompletament mill-awtorita tieghu bhala direttur u ma setax aktar jaghmel
atti li jorbtu jew ihollu s-socjeta. Konsegwentement mit-12 ta’ Lulju, 2002
1-appellant kien fl-impossibilta illi jaqdi d-doveri tieghu versu 1-Kummissarju
tat-Taxxi Interni. Ghalhekk la lappellant irnexxielu jqajjem b’success id-difiza
ta’ mpossibilta 1-preskrizzjoni ghas-snin sussigwenti tibda tghaddi favur tieghu,
f’dan il-kaz zgur mit-12 ta’ Lulju, 2002. F’dawn ic-cirkostanzi d-Dipartiment
tat-Taxxi Interni kellu terminu ta’ sentejn sabiex ifittex lill-appellant ghal dawk
is-snin illu huwa naqas illi jottempra ruhu mal-Ligi (Artiklu 688 (e) tal-Kap. 9
tal-Ligijiet ta’ Malta), izda d-Dipartiment ma ghamel xejn u ddecieda ili johrog
iccitazzjoni odjerna fil-25 ta’ Marzu, 2011 f’liema zmien itterminu preskrittiv
sabiex tigi istitwita din 1-azzjoni altru illi kien skada.
Ghal dawn il-mottivi 1-Qorti taqta u tiddeciedi li tilqa lappell, tiddikjara
1-azzjoni preskritta u tillibera lill-appellantminn kull imputazzjoni u htija.”
The Court of Criminal Appeal s judgement of 11 February 2013,

Il-Pulizija (Spt. Anthony Agius) v. Carmelo Cutajar17 is interesting
too because the Court referred to Article 13 Interpretation Act.
A couple of months earlier, in the Busuttil judgement the Court
of Criminal Appeal composed of another judge had decided that
Article 13 Interpretation Act does not apply to FSS prosecutions
so we are left with an issue of inconsistency which creates a state of
legal uncertainty.18
In any case, even Cutajar was found guilty because he was

identified as being a ‘representative’ of the company named in the
Memorandum and Articles of Association:
“Issa fl-ewwel parti tal-aggravju, 1-appellant jissottometti li huwa ma kellux

kontroll effettiv tal-kumpanija u li fi kwalunkwe każ għandu japplika
1-artikolu 13 tal-Att dwar 1-Interpretazzjoni (Kap 249). Kien ghalhekk li
huwa xehed u tella diversi xhieda sabiex juri kif id-diretturi l-ohra kienu
prattikament imexxu kollox u li huwa ma kienx stmat filkumpanija.
Dwar dan 1-Ewwel Onorabbli Qorti nnotat li 1-appellant baghat it-riżenja
tieghu fis-sena 2000 (fejn ghalaq sittin sena kif wiehed jista’ jara mill-ID
Card). Sa dak iż-żmien ma kien għamel 1-ebda ċaqliqa (u dan ikopri diet snin
li hemm indikati fiċ-ċitazzjoni: 1998,1999 u 2000).
Jista’ jkun veru li r-relazzjonijiet mad-Diretturi l-ohra ma kinux mill-ahjar.
Jista’ jkun veru wkoll li 1-appellant sahansitra kien jghid lill-impjegati l-ohra
biex imorru jkellmu lil hutu dwar pagi jew leave. Iżda dawn 1-istess fatti juru li
1-impjegati l-ohra kienu xorta qegħdin iqisuh bħala persuna li ghandu status
17 Appell {Criminali Numru. 104/2012

18 Extract from the Busuttil Judgement (Page 12):
“F’dan il-kaz 1-imputat qieghed jargumenta illi huwa osserva d-dispost tal-artiklu 13 tal-Interpretation
Act illi ghamel minn kollox sabiex huwa jassigura illi ma jsirx dan ir-reat u fi kwalunkwe kaz
ma kienx jaf illi dan ir-reat qed isir. Din il-Qorti taghmilha cara illi 1-Interpretation Act ma
tistax tigi applikata ghal din il-ligi peress illi din hija ligi specjali illi tkopri mizuri fiskali tal-
Gvern u ghalhekk hija din il-ligi illi ghandha tigi applikata u mhux 1-Interpretation Act.”
Extract from the Cutajar Judgement (Page 11):
“Il-Kap 249
13. Meta xi rear taht jew kontra xi disposizzjoni li tinsab f xi Att, li jkun ghadda sew qabel jew wara
dan 1-Att, isir minn korp jew ghaqda ta’ persuni, sew jekk tkun persuna ġuridika jew le, kull
persuna li, fil-hin tal-eghmil tar-reat, kienet direttur, manager, segretarju jew uffiċjal iehor
simili tal-korp jew ghaqda, jew kienet tidher li qed taġixxi f’dik ilkariga, tkun hatja ta dak ir-
reat kemm il-darba ma tippruvax li r-reat ikun sar minghajr it-taghrif taghha u li tkun eżerċitat
id-diliġenza kollha xierqa biex tevita lghemil tar-reat:”
differenti minn taghhom.
Il-Qorti mhix taċċetta 1-argument li 1-appellant ghandu jkun liberat minn
kull dmir li timponi fuqu 1-liġi bhala direttur meta naqas li jikkonsulta sew
ma’ min jifhem f’din il-materja beix jara li jkun regolarizzat kollox. Ghalhekk
mhix qed taċċetta dik il-parti tal-aggravju mmarkata (a) ghaliex mhix
konvinta li 1-appellant, bhala direttur, kien ha dawk il-passi meħtieġa biex
jara 1-pożizzjoni korretta legali tieghu u, sakemm din tkun iċċarata, jara li
1-obbligi li jaqghu fuq is-soċjeta’ li taghha kien direttur ikunu segwiti.”
Then came the judgment in Spiteri...
3.6 The Judgment in Spiteri
The judgment in Il-Pulizija (Spettur Anthony Agius) -vs- Silvana

Spiteri Kaz Nru: 885767/10/02/01 is very worrying because it
sets an unfair precedent. A director who brought evidence that she
was not involved in the control of a company was held criminally
responsible for a string of offences under the Final Settlement
System Rules. An extract from the judgement follows:
“Illi mill-provi minnha prodotti u mis-sottomissjonijiet maghmula f ’isimha

1-immputata qed tishaq li hija ma kellha 1-ebda involvement fil-kumpanija
Foresight Holdings Limited u li ghalhekk tapplika fil-konfront taghha id-
difiza predisposta f’l-artikolu 13 ta’l-Interpretation Act ghaliex skond hi la
darba ma kenitx taf bin-nuqqasijiet ta’l-imsemmija kumpanija fil-konfront
tal-Kummissarju tat-Taxxi u ma ndunat b’xejn li seta’ jqanqal xi dubbju dwar
jekk din il-kumpanija kienet qed tonora 1-obbligi fiskali taghha, hija qatt ma
tista’ tinzamm responsabbli ghan-nuqqasijiet li jistghu jirrizultaw.
Illi pero 1-punt krucjali fil-proceduri odjerni mhux jekk 1-imputata kellhiex it-
tmexxija tal-kumpanija f’idejha jew le, jew kellhiex xi involviment kwalunkwe
fil-kumpanija, imma jekk kenitx direttur jew le, u dan irrispettivament mir-
rwol li kellha jew ma kellhiex fil-kumpanija, jew is-sehem li kienet taghti fil-
gestjoni tal-kumpanija u/jew in-negozju taghha; punt krucjali iehor huwa
x’passi hadet 1-imputata, in kwantu direttur, biex tinforma ruhha dwar, u
tassigura li 1-obbkigi fiskali kienu qed jigu onorati.”
4. Civil Cases
The Commissioner of the Inland Revenue is a privileged litigant

and resorts to the special fast track procedures contemplated
in Article 466 of the Code of Organisation and Civil Procedure
(‘COCP) to collect his dues from directors. The Article 466
procedure contemplates a procedure whereby the Commissioner
of Inland Revenue sends a judicial act to the directors and if the
directors do not oppose the judicial act within the prescribed
time limit by filing an application the amount vaunted becomes
final and conclusive. Most of the Maltese civil law cases dealing
with tax due in terms of the FSS Rules are opposition proceedings
instituted by directors in terms of Article 466 COCP. The case
of Julian Camilleri, personalment u bhala direttur ghan-nom u in
rapprezentanza tas-socjeta ATC Plastics Ltd vs Kummissarju tat-
Taxxi Interni was a case in point19.
Camilleri opposed a claim relating to unpaid income tax due in

terms the FSS Rules, social security and additional tax. Camilleri
claimed that the Revenue s claim was unjustified because in one of
the years subject to the FSS assessment, the company did not
have any employees and that he had informed, the Inland Revenue
Department of this, in good time. When the Revenue double
checked its records it found out that Camilleri was actually correct.
It withdrew the part of its claim which referred to the year when
the company did not employ and employees but it insisted on the
remainder of its claim. The Court decided in favour of Camilleri.
The Court rescinded the Revenue s Article 466 procedures and
dismissed the Revenue s claim ‘in toto’ because it held that it was
not empowered to dismiss a claim only in part.
The case of Sylvana Xuereb, Foresight Holdings Limited vs

Kummissarju tat- Taxxi20 had a completely different outcome and
19 First Hall, Civil Court, 30th March 2001.
20 First Hall, Civil Court, 28th June 2006.
albeit the Maltese system does not follow the principle of stare
decisis, the Xuereb judgement sets a worrying precedent. Mrs.
Xuereb was a non-executive director of a company that employed
a number of employees before it ceased to operate. She was not
vested with the company’s legal and judicial representation.
Furthermore, Mrs Xuereb did not have the power to administer
monies which belonged to the company and had not, as a matter of
fact, administered monies belonging to the company. In addition,
she had resigned from the Board of Directors.
The Commissioner of Inland Revenue raised an assessment on

the company in respect of tax, FSS, NI and issued a judicial letter
against Mrs. Xuereb on behalf of the Company in respect of the
tax due by the Company. The revenue argued that, on its records
Mrs. Xuereb was a director of the Company and was personally
responsible to pay the tax due by the company. Mrs. Xuereb
instituted proceedings to impugn the Revenues claim. She pointed
out that she was no longer a director and had always been a non
executive director. Therefore she called upon the Court to rescind
the judicial letter.
The Court held that being vested with legal and judicial
representation is irrelevant for the purpose of tax law. The Court
pointed out that, in certain cases, the law imposed personal
obligations on directors. The fact that Mrs. Xuereb had not handled
monies of the company was held to be irrelevant. Furthermore,
the Court held that the company had failed to communicate to the
Revenue that it had ceased to operate. The Court decided in favour
of the Revenue and held that Mrs. Xuereb was personally liable
to pay the tax due by the company. An extract from the Court s
decisions is being reproduced hereunder:
‘F’dina 1-kawza 1-atturi qed jitolbu li dina 1-Qorti tiddikjara li n-notifika ta

1-ittra ufficjali mibghuta mill-konvenut lil Foresight Holdings Limited hija
nulla ghall-effetti kollha tal-ligi u ghalhekk il-kumpanija attrici mghandhiex
taghti lill-kontrollur konvenut is-somma hemm mitluba.

Illi 1-attrici Sylvana Xuereb, mizzewga Spiteri, qed tikkontendi li m’ghandhiex
thallas il-flus mitluba fl-ittra ufficjali billi hija kienet irrizenjat mill-posizzjoni
taghha ta’ Direttrici tal-kumpanija Foresight Holdings Limited. Dwar dina
s-sottomissjoni xehdet Astrid Farrugia, (ara fol 191) u kkonfermat li 1-attrici
kienet irrizenjat minn Direttur fit- 8 ta’ Marzu 2004 kif jirrizulta mid-
dokument a fol 35 tal-process.
Mid-dokumenti ezibiti jirrizulta li t-talbiet tal-konvenut fl-ittra ufficjali
jirreferu ghall perjodu qabel iddata ta’ meta 1-attrici rrizenjat u ghalhekk
I- attrici hija responsabbili. Ma jirrizultax li 1-attrici nnotifikat lill-
Kummissarju bit-tibdil li sar fid-diretturi qabel dik id-data jew f’dik id-data.
L-attrici qed tirritjeni li hija qatt ma kellha r-rapprezentanza legali tas-
socjeta’ attrici. Il-Qorti pero’ tirrileva li 1-attrici bhala wahda mid-diretturi
kienet responsabbli, anke personalment jekk ikun il-kaz, u dan skond il-ligi,
ghall-hlas ta’ kull taxxa li setghet tigi dovuta mill-kumpanija.
Kwantu ghas-sottomissjoni ta’ 1-attrici li hija qatt ma zammet flus tal-
kumpanija attrici f’idejha, dan il-fatt, cjoe li ma kienetx fizikament izzomm
flus tal-kumpanija fil-pussess taghha, huwa rrilevanti billi, bhala direttur, hija
kienet responsabbili ghall-hlas tat-taxxa tal-kumpanija, ikunu fejn ikunu 1-flus.
II- kumpanija attrici u 1-attrici qed jissottomettu inoltre li 1 kumpanija
waqfet li topera fil-bidu ta’ 2002 u ma kienet timpjega lil hadd, u b’dan il-
Kummissarju tat-Taxxi Interni
kien gie debitament notifikat. Illi pero’ 1-Qorti tirrileva li minn imkien mill-
provi prodotti ma jirrizultax li fil-fatt 1-Kummissarju gie hekk notifikat b’dik
is-sitwazzjoni (ara xhieda ta’ Ludgardo Mercieca).
L-istess jista’ jinghad dwar is-sottomissjoni li 1-ammont dovut minn
Foresight Holdings ghas-sena 2003 jinsab kontestat fil-kawza (Citazzjoni
Numru 559/2004 JRM). Il-konvenut qed jikkontendi illi 1-kawza citata
mill-atturi u li allegatament saret kontra tieghu qatt ma giet notifikata lilu,
u hu m’ghandu ebda hjiel tal-kontenut taghha. Dwar dan 1-atturi ma gabu
ebda prova li tikkontradici dak li xehed il-konvenut. Anke kieku, il-fatt li
wahda mis-snin qed tigi kontestata ma jfissirx li 1-ittra ufficjali hija nulla jew
li 1-atturi m ghandhom jaghtu xejn ghas snin 1-ohra li mhux kontestati.’
However, it must be pointed that Article 7 ITMA holds

directors personally liable for the tax due by the company only
when directors hold in their possession or control any property
belonging to the body of persons which could have been used to
pay the tax then due. In the course of the case, Mrs. Xuereb had
submitted evidence which proved that she had not been vested
with the power to administer funds belonging to the company.

Thus, the Court’s conclusion leaves much room for debate.
The case Sundry Limited (C 9297) gia maghrufa bhala Muscat

Servicing Limited vs Kummissarju tat-Taxxi Interni21 involved a
suit for tax which was payable under the FSS Rules. The Revenue
issued a judicial letter in respect of Income Tax (FSS), additional tax
and NI payable by the Company. The Revenues judicial letter was
filed in terms of Article 40(1 )(b) ITMA which prescribes that the
Revenue’s claim automatically becomes an executive act within 2
days from notification. The taxpayer sought to rescind the letter on
procedural grounds. The taxpayer held that it had not been properly
notified with the judicial act. The Court disagreed with the taxpayer
and held that the Revenue had followed the correct procedure in
terms of the FSS Rules. Consequently, the Court decided in favour
of the Revenue. A request for a constitutional reference would have
possibly altered the outcome of this case because Article 40(1 )(b)
ITMA raises some constitutional concerns because it denies the
taxpayer with the right to a fair hearing.
Failure to raise, in a timely manner, issues relating to taxpayer

protection in disputes relating to tax collection may amount to
a lost opportunity. In Alfred Baldacchino personalment u bhala
direttur ghan-nom u in rapprezentanza tas-socjeta’ Haywharf
Caterers Limited vs Il-Kummissarju tat-Taxxi Interni22 a director’s
opposition to a claim relating to tax payable under the FSS was
dismissed because the company had failed to file its objection in
time. However, the acts of the case referred to tax which was clearly
statute barred. Baldacchino’s case may well have had the favourable
outcome of the decision in Alfred Caruana23, had Baldacchino
raised issues of retrospectivity in his opposition proceedings.
21 First Hall Civil Court, 25th April 2006.
22 Court of Appeal, 27th January 2006. For a case with similar merits see Il-Kummissarju tat-
Taxxi Interni vs. Joseph Mizzi personalment u bhala likwidatur in rapprezentanza tas-socjeta’
Ta’ Lambert Company Limited Court of Appeal, 5th July 2006.
23 CIR vs Alfred Caruana (App.Civ.Nru 266/2005/01 10/01/07).
Chapter 11
Important Tax Exemptions
/. Exemptions for Non-Residents
Article 12 (1) (c) ITA contemplates two important tax exemptions.

Both tax exemptions refer to non-residents. The two exemptions
are contained in distinct sub-paragraphs but are subject to an anti
avoidance provision which applies to both limbs of the sub-article.1
1.1 Interest, discount, premium or royalties

accruing to or derived by non-residents
Article 12 (1) (c) (i) ITA exempts from tax interest, discount,
premium or royalties accruing to or derived by non-residents. The
exemption is subject to two important provisos. The exemption
applies provided that the non-resident who derives the income:
(i) is not in the relevant year engaged in trade or business

in Malta through a permanent establishment situated
therein; and
(ii) where the royalties or the debt claim in respect of which
the interest, discount or premium, is paid are NOT
effectively connected with such permanent establishment
Furthermore, the exemption discussed above is subject to the anti

avoidance provision discussed in 1.3 below.
1 The indentation to the sub-article indicates that the proviso applies to both exemptions.
1.1.2 An Indigenous Concept of Permanent

Establishment?
The exemption does not apply if the non-resident is ‘not engaged

in trade or business through a permanent establishment’ and
relevant income ‘is not effectively connected with such permanent
establishment’. The words and concepts applied in Article 12
ITA bring to mind the ‘force of attraction of the permanent
establishment’ concept used in the articles on interest and royalties
in the OECD Model Convention.
The ITA does not contain a definition of the term permanent

establishment. Should we use the definition contained in the
current version of the OECD Model Convention?2 Trying to use
the definitions contained in our treaties would pose a challenge
because the definitions of permanent establishment contained
in our treaties are not aligned and treaties contemplate different
timelines for project permanent establishments3 with some treaties
2 Namely the definition contained in Article 5 :

1. For the purposes of this Convention, the term “permanent establishment” means a fixed
place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop, and
f ) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent establishment
only if it lasts more than twelve months.
3 The OECD contemplates a 12-month period but some of our treaties provide for shorter
terms/longer periods than 12 months. This is the case with our Treaties with Barbados,
Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Estonia, Egypt, Finland, Georgia,
Germany, Greece, Hungary, Iceland, India, Isle of Man, Jordan, Jersey, Korea, Kuwait, Latvia,
Lithuania, Luxembourg, Montenegro, Portugal, Qatar, Romania, San Marino, Serbia,
Singapore, Slovak Republic, Slovenia, South Africa, Syria, Tunisia and the United Kingdom,
Important Tax Exemptions 369
referring to supervisory,4 stock5 and consultancy6 permanent

establishments.
Like Article 12 ITA, articles 11.4 (on Interest)7 and Article 12.3
(on royalties)8 of the current version of the OECD Model speak of
engaged ‘in trade or business...through a permanent establishment’
and not effectively connected with such permanent establishment’.
Articles 11.4 and 12.3 speak of carries on business...through a
permanent establishment’. Therefore, to interpret these concepts
we can rely on the Commentaries to Articles 11 and 12 namely
4 Supervisory activities may create a PE in the treaties with Australia, Canada, China, Croatia,
Cyprus, Czech Republic, Estonia, Egypt, Greece, Hungary, Iceland, India, Ireland, Jordan,
Korea, Kuwait, Latvia, Lithuania, Luxembourg, Malaysia, Montenegro, Pakistan, Poland,
Portugal, Qatar, San Marino, Serbia, Singapore, Slovak Republic, Slovenia, South Africa,
Tunisia, UAE, UK
5 Stock PE is contemplated in the treaties with Albania, Malaysia, and other countries.
6 Consultancy/services PEs are contemplated in the treaties with Barbados, Bulgaria, China,
Croatia, Czech Republic, Estonia, Egypt, Finland, Greece, Iceland, Italy, Jordan, Kuwait,
Latvia, Lebanon, Lithuania, Montenegro, Morocco, Portugal, Romania, San Marino, Serbia,
Singapore, Slovak Republic, Slovenia, South Africa and UAE.
7 Which provides that:
“4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest,
being a resident of a Contracting State, carries on business in the other Contracting State in
which the interest arises through a permanent establishment situated therein and the debt
claim in respect of which the interest is paid is effectively connected with such permanent
establishment. In such case the provisions of Article 7 shall apply.”
8 Which provides that:
“3. The provisions of paragraph 1 shall not apply if the beneficial owner of the royalties,
being a resident of a Contracting State, carries on business in the other Contracting State
in which the royalties arise through a permanent establishment situated therein and the
right or property in respect of which the royalties are paid is effectively connected with such
permanent establishment. In such case the provisions of Article 7 shall apply.”
paragraph 24 in the Commentary to Article 11 OECD Model9

and paragraph 20 in the commentary to Article 12.10.
9 Reproduced hereunder:
“24. Certain States consider that dividends, interest and royalties arising from sources in
their territory and payable to individuals or legal persons who are residents of other States
fall outside the scope of the arrangement made to prevent them from being taxed both in
the State of source and in the State of the beneficiary’s residence when the beneficiary has a
permanent establishment in the former State. Paragraph 4 is not based on such a conception
which is sometimes referred to as “the force of attraction of the permanent establishment”.
It does not stipulate that interest arising to a resident of a Contracting State from a source
situated in the other State must, by a kind of legal presumption, or fiction even, be related to a
permanent establishment which that resident may have in the latter State, so that the said State
would not be obliged to limit its taxation in such a case. The paragraph merely provides that in
the State of source the interest is taxable as part of the profits of the permanent establishment
there owned by the beneficiary which is a resident in the other State, if it is paid in respect of
debt-claims forming part of the assets of the permanent establishment or otherwise effectively
connected with that establishment. In that case, paragraph 4 relieves the State of source of the
interest from any limitation under the Article. The foregoing explanations accord with those
in the Commentary on Article 7.
25. It has been suggested that the paragraph could give rise to abuses through the transfer
of loans to permanent establishments set up solely for that purpose in countries that offer
preferential treatment to interest income. Apart from the fact that such abusive transactions
might trigger the application of domestic anti-abuse rules, it must be recognised that a
particular location can only constitute a permanent establishment if a business is carried
on therein and, as explained below, that the requirement that a debt-claim be “effectively
connected” to such a location requires more than merely recording the debt-claim in the
books of the permanent establishment for accounting purposes.
25.1 A debt-claim in respect of which interest is paid will be effectively connected with a
permanent establishment, and will therefore form part of its business assets, if the “economic”
ownership of the debt-claim is allocated to that permanent establishment under the
principles developed in the Committee’s report entitled Attribution of Profits to Permanent
Establishments! (see in particular paragraphs 72-97 of Part I of the report) for the purposes
of the application of paragraph 2 of Article 7. In the context of that paragraph, the “economic”
ownership of a debt-claim means the equivalent of ownership for income tax purposes by
a separate enterprise, with the attendant benefits and burdens (e.g. the right to the interest
attributable to the ownership of the debt-claim and the potential exposure to gains or losses
from the appreciation or depreciation of the debt-claim).
25.2 In the case of the permanent establishment of an enterprise carrying on insurance
activities, the determination of whether a debt-claim is effectively connected with the
permanent establishment shall be made by giving due regard to the guidance set forth in
Part IV of the Committee’s report with respect to whether the income on or gain from that
debt-claim is taken into account in determining the permanent establishment’s yield on the
amount of investment assets attributed to it (see in particular paragraphs 165-170 of Part IV).
That guidance being general in nature, tax authorities should consider applying a flexible and
pragmatic approach which would take into account an enterprise’s reasonable and consistent
application of that guidance for purposes of identifying the specific assets that are effectively
connected with the permanent establishment.”
10 Which is quasi-identical to the extract from the Commentary reproduced above.
1.2 Gains derived by non-residents upon

transfers of securities and similar interests
Article 12 (1) (c) (ii) ITA exempts from tax ‘any gains or profits’
capital gains and gains of an income nature included, derived by
non-residents upon certain transfers of securities. Article 12 (1) (c)
(ii) exempts from tax four distinct types of transfers. It exempts
non-residents from tax on gains and profits derived:
( i) on a transfer of any units in a collective investment scheme

as defined in article 2 of the Investment Services Act; and
(ii) on a transfer of units and such like instruments relating
to linked long term business of insurance (including the
surrender or maturity of linked long term policies of
insurance and of any shares or securities in a company
including redemption, liquidation or cancellation);
(iii) any transfer of shares of:
(a) any interest in a partnership11 which is not a property
partnership; and
(b) any shares or securities in a company (which for the
avoidance of doubt includes redemption, liquidation
or cancellation) which is not a property company.11
11 Given that transfers of interests in partnerships have become taxable, the introduction of a
new exemption has been deemed necessary. Act IV provided that in subparagraph (ii) of
paragraph (c) thereof, for the words "long term policies of insurance and of any shares or
securities in a company" there shall be substituted the words "long term policies of insurance,
of any interest in a partnership which is not a property partnership and of any shares or
securities in a company".
Act I of 2010 introduced the concept of‘property company’12

and Act IV of 2011 introduced that of property partnership.
The pre-Act 1 of 2010 version of the law prescribed that the

exemption did not apply to ‘securities in a company which is not a
company the assets ofwhich consist wholly orprincipally ofimmovable
property situated in Malta". There was a degree of disagreement
relating to the meaning of the term company which is not a
company the assets of which consist wholly or principally of
immovable property’13 and it was felt that the introduction of the
concept of‘property company’ was needed.
‘Property Company’ has been defined as meaning:
“"property company" shall mean a company which owns immovable property

situated in Malta or any real rights thereon or a company which holds,
directly or indirectly, shares or other interests in any entity or person, which
owns immovable property situated in Malta or any real rights thereon where
five percent or more of the total value of the said shares or other interests so
held is attributable to such immovable property or rights:
Provided that where a company, entity or person carrying on a trade or
business owns immovable property situated in Malta or any real rights
thereon, consisting only of a factory, showroom, warehouse or office used
solely for the purpose of carrying on such trade or business, such company,
entity or person shall, for the purpose of this definition, be treated as not
owning immovable property if not more then fifty percent of the value of
its assets consist of immovable property situated in Malta or any rights over
12 Property companies are subject to special rules which tend to increase the tax burden because:
1. The transfer of shares in property companies is not subject to the tax exemption
contemplated in article 12(l)(c)(ii) ITA (capital gains derived by non-residents on share
transfers).
2. Shares held in a property company have been excluded from the definition of equity
holding.
3. Transfers of shares in property companies attract a higher rate of duty.
4. In the case of property companies, the application of the intra-group exemption has been
restricted.
5. Property companies are subject to the de-grouping and the value shifting charges.
13 I understand that the point of discussion was whether a company fell within the definition if
it either had less of 75% of its NAV consisting in by immovable property or whether 51% was
sufficient
Important Tax Exemptions
such property and it does not carry on any activity the income from which is
derived directly or indirectly from immovable property situated in Malta;”14
Act No. IV of 2011 introduced the second restriction to the

exemption; the exemption does not apply to property partnerships.
Act IV introduced the definition of ‘property partnership’ a term
which is defined as meaning:
"property partnership" shall mean a partnership as defined in article 5(1)

(b) which owns immovable property situated in Malta, or any real rights
thereon, or a partnership which, directly or indirectly, holds shares or
other proprietary interests in any entity or person, which owns immovable
property situated in Malta, or any real rights thereon, where five percent or
more of the total value of the said shares or other proprietary interests so held
is attributable to such immovable property or rights:
Provided that where a partnership, entity or person carryingon a trade or
14 This definition was amended by Act IV of 2011. It was amended From :
“’property company’ shall mean a company which owns immovable property situated in
Malta, or any rights over such property, or a company which holds, directly or indirectly,
shares or interests in a body of persons which owns immovable property situated in Malta or
any rights over such property:
Provided that where a company or body of persons carrying on a trade or business owns
immovable property situated in Malta or any rights over such property, consisting only of a
factory, warehouse or office used solely for the purpose of carrying on such trade or business,
such company or body of persons shall, for the purpose of this definition, be treated as not
owning immovable property or any rights over such property if not more than fifty percent of
its assets consist of immovable property situated in Malta and it does not carry on any activity
the income from which is derived directly or indirectly from immovable property situated in
Malta;”
To:
'property company' shall mean a company which owns immovable property situated in
Malta or any real rights thereon or a company which holds, directly or indirectly, shares or
other interests in any entity or person, which owns immovable property situated in Malta or
any real rights thereon where five percent or more of the total value of the said shares or other
interests so held is attributable to such immovable property or rights:
Provided that where a company, entity or person carrying on a trade or business owns
immovable property situated in Malta or any real rights thereon, consisting only of a factory,
showroom, warehouse or office used solely for the purpose of carrying on such trade or
business, such company, entity or person shall, for the purpose of this definition, be treated as
not owning immovable property if not more then fifty percent of the value of its assets consist
of immovable property situated in Malta or any rights over such property and it does not
carry on any activity the income from which is derived directly or indirectly from immovable
property situated in Malta”
The 2011 amendment added references to the holding of real rights over immovable property
by subsidiaries and in the proviso added a reference to the holding of real rights (see italics).
business owns immovable property situated in Malta, or any real rights

solely for the purpose of carrying on such trade or business, such partnership,
owning immovable property if not more then fifty percent of the value of its
assets consist of immovable property situated in Malta, or any real rights over
such property, and it does not carry on any activity the income from which
is derived directly or indirectly from immovable property situated in Malta;”
1.3 The Anti-Avoidance Provision which

applies to 12 (I) (c) (i) and (ii) ITA
The exemptions discussed above are subject to an anti-avoidance

provision. The exemptions apply provided that the claimant is
a ‘bona fide non-resident’ The anti-abuse provision applies a
beneficial ownership test. The exemptions apply provided that ‘the
beneficial owner of the interest, royalty, gain or profit, as the case
may be, is a person not resident in Malta and such person is not
owned and controlled by, directly or indirectly, nor act on behalf
of an individual or individuals who are ordinarily resident and
domiciled in Malta.
It would appear that in certain, remote cases, the anti-avoidance

provision creates, via the beneficial ownership test, an additional
hurdle which does not seemed to be compatible with the Interest
and Royalties Directive 90/435/EEC transposed into Maltese law
by L.N. 267 of 2004. Article 4 of the said directive provides inter
alia that,
“where a parent company, by virtue of its association with its subsidiary,

receives distributed profits, the State of the parent company shall, except
when the latter is liquidated, either:
- refrain from taxing such profits, or

- tax such profits while authorizing the parent company to deduct from
the amount of tax due that fraction of the corporation tax paid by the
subsidiary which relates to those profits and, if appropriate, the amount of
the withholding tax levied by the Member State in which the subsidiary is
resident, pursuant to the derogations provided for in Article 5, up to the
limit of the amount of the corresponding domestic tax.”
1.3.1 The Concept of Beneficial Ownership

The anti-avoidance provision in the proviso to Article 12 (1) (c)
ITA refers to the topical concept of beneficial ownership. It is not
the only provision in the Income Tax Acts which refers to this
important concept in tax law. The ITA uses the term and concept
many times15 but the ITA does not define the term. In the absence
of such definition, I would expect authorities to draw a definition
of the term from the Commentary to Article 1016 of the OECD
Model Convention which refers to the concept too.
Like the ITA, the OECD Model uses the term to prevent fiscal
avoidance and evasion. The Commentary gives examples of persons
who cannot be treated as beneficial owners, these include:
(a) Agents;
(b) Nominees;
(c) Conduits;
(d) Fiduciaries; and
(e) Administrators acting on account of other persons.
In other words, a prestanome is not a beneficial owner because

the concept of beneficial ownership is about substance and not
form.
In May 2008, the Subcommittee on Improper Use of Treaties

of the United Nations Economic and Social Council Committee
of Experts on International Cooperation in Tax Matters
commissioned Philip Baker to prepare a report on the issue whether
15 The concept of‘beneficial ownership’ is used in Articles 5 (9) (3) ITA, 5 (9) (c) ITA, 5 (13)
(b) (ii) ITA, 5 (25) ITA, 5 (12A) ITA and other Articles.
16 Point 12 of the Commentary to Article 10..
376 Principles ofMaltese Income Tax Lau> 2019
the concept of beneficial ownership, currently used in Articles 10,

11 and 12, should be extended to the other Articles of the UN
Model Convention.17 Baker’s report (to which this discussion is
heavily indebted) discusses the use of the term in international tax
law and explains its meaning with reference to international tax
jurisprudence. He points out that ‘the precise meaning remains
unclear’ and that ‘several fundamental issues remain unresolved
about the interpretation of the beneficial ownership concept’.18
Undoubtedly, the concept tends to give rise to litigation.
Baker refers to the six known cases on the meaning of the term.
The earliest known case is decision of the Dutch Hoge Raad of 6th
April 1994, referred to by Baker as the “Royal Dutch” case.19 The
Dutch judgment involved a holding of shares which contemplated
the right to receive dividends but not the formal legal title to the
shares. The Dutch Court found that that the holder of the dividend
rights was a beneficial owner. The Dutch Court observed that,
“The taxpayer became owner of the dividend coupons as a result of purchase

thereof. It can further be assumed that subsequent to the purchase the
taxpayer could freely avail of those coupons and, subsequent to the cashing
thereof, could freely avail of the distribution, and in cashing the coupons the
taxpayer did not act as voluntary agent (zaakwaarnemer, SvW) or for the
account of the principal (lasthebber, SvW). Under those circumstances the
taxpayer is the beneficial owner of the dividend. The treaty does not contain
the condition that the beneficial owner of the dividend must also be the
owner of the shares and further it is irrelevant that the taxpayer purchased
the coupons at the time the dividend had already been announced, because
the question who is the beneficial owner must not be answered at the time
the dividend is announced, but at the time the dividend is made payable.”20
17 E/C.18/2008/CRP.2/Add.l Economic and Social Council Committee of Experts on

International Cooperation in Tax Matters Fourth session Geneva, 20-24 October 2008 Note
by the Coordinator of the Subcommittee on Improper Use of treaties: Proposed amendments
Addendum Progress Report of Subcommittee on Improper Use of Tax Treaties: Beneficial
Ownership.
18 Ibid p. 8.
19 Case No.28 638, reported in BNB 1994/217.
20 Reproduced from Baker’s report quoted supra which reproduced an unofficial translation (by
Professor Stef van Weeghel) of the Hoge Raad’s decision.
The judgment of the Swiss Federal Federal Commission of

Appeal in tax matters in R v. SA held that a Luxembourg company
which held the entire share capital of a Swiss company was not a
beneficial ownership because it transpired that the Luxembourg
Company was only the formal direct shareholder and, in reality,
was not entitled to receive dividends paid.
An extensive discussion of the meaning of beneficial ownership

is contained in a recent non-tax case delivered by the UK Court of
Appeal in Indofood International Finance Ltd v. JP Morgan Chase
Bank NA21 when the Court of Appeal explained the meaning of
the term beneficial owner as follows:
““[42] The fact that neither the Issuer nor Newco was or would be a trustee,
agent or nominee for the noteholders or anyone else in relation to the interest
receivable from the Parent Guarantor is by no means conclusive. Nor is the
absence of any entitlement of a noteholder to security over or right to call
for the interest receivable from the Parent Guarantor. The passages from the
OECD commentary and Professor Baker's observations thereon show that
the term ’beneficial owner’ is to be given an international fiscal meaning not
derived from the
domestic laws of contracting states. As shown by those commentaries and
observations, the concept of beneficial ownership is incompatible with that
of the formal owner who does not have ’the full privilege to directly benefit
from the income’...
[43] The legal, commercial and practical structure behind the loan notes is
inconsistent with the concept that the Issuer or, if interposed, Newco could
enjoy any such privilege. In accordance with the legal structure the Parent
Guarantor is obliged to pay the interest two business days before the due
date to the credit of an account nominated for the purpose by the Issuer. The
Issuer is obliged to pay the interest due to the noteholders one business day
before the due date to the account specified by the Principal Paying Agent.
The Principal Paying Agent is bound to pay the noteholders on the due date.
[44] But the meaning to be given to the phrase ’beneficial owner’ is plainly
not to be limited by so technical and legal an approach. Regard is to be had
to the substance of the matter. In both commercial and practical terms the
Issuer is, and Newco would be, bound to pay on to the Principal Paying
21 Court of Appeal decision of 2nd March 2006, reported in (2006) 8 ITLR 653.
Agent that which it receives from the Parent Guarantor.... In practical terms
it is impossible to conceive of any circumstances in which either the Issuer
or Newco could derive any 'direct benefit' from the interest payable by the
Parent Guarantor except by funding its liability to the Principal Paying
Agent or Issuer respectively. Such an exception can hardly be described as
the 'full
privilege' needed to qualify as the beneficial owner, rather the position of the
Issuer and Newco equates to that of an ’administrator of the income.”
The most recent case on the matter is the judgment in Prevost

Car Inc. v. R22 which explained that the characteristics of beneficial
ownership comprised use, enjoyment, risks and rewards,
““[100] In my view the ’beneficial owner’ of dividends is the person who

receives the dividends for his or her own use and enjoyment and assumes
the risk and control of the dividend he or she received. The person who is
beneficial owner of the dividend is the person who enjoys and assumes all the
attributes of ownership. In short the dividend is for the owner's own benefit
and this person is not accountable to anyone for how he or she deals with
the dividend income..... Where an agency or mandate exists or the property
is in the name of a nominee, one looks to find on whose behalf the agent or
mandatary is acting or for whom the nominee has lent his or her name.
When corporate entities are concerned, one does not pierce the corporate
veil unless the corporation is a conduit for another person and has absolutely
no discretion as to the use or application of funds put through it as conduit,
or has agreed to act on someone else's behalf pursuant to that person's
instructions without any right to do other than what that person instructs it,
for example, a stockbroker who is the registered owner of the shares it holds
for clients. This is not the relationship between PH BV and its shareholders.””
In November 2012 the OECD released revised discussion

drafts on the Commentary to the OECD Model concerning
definitions of beneficial owner and permanent establishment. The
discussion draft suggests that trustees of a discretionary trust do
not distribute dividends earned while they were acting as such
could still be treated as beneficial owners. The draft explains the
concept of a constrained right to use or enjoyment which excludes
beneficial ownership. Beneficial ownership is the right to use and
22 Decision of 22nd April 2008, to be published in (2008) 10ITLR.
enjoy income unconstrained by a contractual or legal ownership to

pass on the payment received to another person. An obligation is
treated as a constraint excluding beneficial ownership if it relates
to the payment received, and would not include contractual or
legal obligations unrelated to the payment received even if those
obligations could effectively result in the recipient using the
payment received to satisfy those obligations.23
2. The Participation Exemption
Act II of 2007, the legislative instrument which implemented the

agreement reached between the Maltese Government and the EU,
added paragraph (u) to Article 12(1) ITA. Article 12 (1) (u) ITA
envisages an exemption known as the Participation Exemption.
2.1 Remit of the Tax Exemption
The exemption is specific to income and capital gains from

particular sources. Article 12 (1) (u) ITA, exempts from tax income
and/or capital gains derived by a company registered in Malta from
a participating holding or from the disposal of such holding.
Act I of 2010 extended the remit of the participation exemption

to shares in resident companies because references in to “company
not resident in Malta” were removed from the definition of
participating holding but shares in resident companies which are
property companies cannot qualify for the participation exemption.
The participation exemption applies to holdings in companies only
when such companies are not property companies. Furthermore,
in respect of participating holdings in companies resident in Malta,
the exemption applies only to gains or profits derived from the
transfer of such holdings.
23 Ernst & Young, International Tax Alert 2 November 2012.

Budget Act 2013 provided for the application of the exemption

to gains or profits derived from the transfer of ‘holdings in
companies and partnerships en commandite the capital of which is
not divided into shares, which are resident in Malta. Act VII of 2019
added a lengthy provision addressing the phenomenon of ‘mixed’
companies.24
Budget Act 2013 extended the remit of the participation

exemption in a material way by extending the exemption to branch
profits. Budget Act 2013 introduced a new paragraph, paragraph
12 (u) (1) ITA which includes within the remit of the exemption:
“"(u)(2) any income or gains derived by a company registered in Malta

(hereinafter "the particular company") which are attributable to a permanent
establishment (including a branch) situated outside Malta or to the transfer
of such permanent establishment, whether such permanent establishment
belongs exclusively or in part to the particular company, including a
permanent establishment operated through any entity or relationship other
than a company, in which the particular company has an interest, where the
taxpayer has not shown such income or gains as part of its chargeable income
in the return made pursuant to article 10 of the Income Tax Management
Act, and for these purposes "profits or gains" shall be calculated as if the
permanent establishment is an independent enterprise operating in similar
conditions and at arm’s length:
Provided that where, in the opinion of the Commissioner, a series of
transactions is effected with the sole or main purpose of reducing the amount
of tax payable in terms of this Act by any person by reason of the operation
of this provision, such a person shall be assessable as if this provision did
not apply and, for the purpose of this provision, a series of transactions shall
mean any two or more corresponding or circular transactions carried out by
the same person, either directly or indirectly, as the case may be:
Provided further that for the purpose of this paragraph the word "transfer"
shall have the same meaning assigned to it under article 5(1 )(b);"; and”
24 By allowing the application of the participation exemption with respect to capital gains arising
upon the transfer of holding in certain resident entities if such gains or profits would have
been exempt in terms of sub-paragraph (ii) of paragraph (c) had the transfer of the holding
been made by the beneficial owner of the transferor company. Where the beneficial owner is
more than one (1), and if gains or profits made by one(l) or more thereof would have
been exempt and others not been exempt, the exemption applies to that part of the gain
or profit to which the exempt beneficial owner is beneficially entitled.
2.2 Eligible Person
The Participation Exemption is not an exemption which applies

to all persons, generally. The exemption applies exclusively to a
taxpayer that is a company registered in Malta25. Only companies
registered in Malta are eligible to benefit from the exemption.
2.3 Optional Exemption
The Participation Exemption is optional. The latter limb of Article

12 (1) (u) ITA contemplates a waiver of the exemption. The
taxpayer has the right to waive the exemption by reporting the
income or gain which would have otherwise been exempt from tax
in his tax return and pay tax on such income or gain, accordingly.
2.4 Equity
The participation exemption applies to participating holdings

which, by definition, must fall under the definition of equity’.
Equity holding is defined as meaning:
“...a holding of the share capital in a company which is not a property

company, when the shareholding entitles the shareholder to at least any two
of the following rights (hereinafter referred to as "equity holding rights"):
(i) a right to votes;
(ii) a right to profits available for distribution to shareholders; and
( iii) a right to assets available for distribution on a winding up ofthat company,
and "equity shares ", " equity shareholder " and "equity shareholding" shall be
construed accordingly:
25 A definition of the term ‘company registered in Malta’ is contained in Article 2 ITA

reproduced below:
‘...a company which is resident in Malta or a company which, although not resident in Malta,
carries on any activity in Malta and in the case of a company which is neither incorporated
nor resident in Malta shall mean a company that is registered for this purpose with the
Commissioner in such manner as may be prescribed.’
Although a Legal Notice which regulates the registration of shareholders for the purposes
of the refund has been passed recently, rules relating to the registration of companies for the
purposes of Article 2 have not been prescribed, as yet.
Provided that the Commissioner shall be entided to determine that an

equity holding exists even where such holding is not a holding of the share
capital in a company or does not consist solely of such a holding of share
capital, but where it can be demonstrated that in substance there is at any
time an entitlement to at least two of the equity holding rights;”
The concepts of equity holding and participating holding are

linked to participation rights. Before the Act I 2010 amendments,
the definition of‘Equity Holding’ used to read:
“"equity holding" shall mean a holding of the share capital in a company

when the shareholding entitles the shareholder to a right to votes, to
profits available for distribution to shareholders and to assets available for
distribution on a winding up of that company, and "equity shares", "equity
shareholder" and "equity shareholding" shall be construed accordingly;”
With effect from year of assessment 2010, the definition of

equity holding is not as restrictive as it used to be.
Whereas before the entry into force of Act I of 2010 an equity

holding was considered to be such provided that all three conditions
(rights to votes, profits and assets available for distribution) were
met, the present position is that an equity holding is considered as
such provided that two out of three conditions are met (any two of
right to votes, profits, assets available for distribution).
The definition of equity’ excludes shares in property companies.

A property company is defined as meaning:
“"property company" shall mean a company which owns immovable property

situated in Malta or any real rights thereon or a company which holds,
direcdy or indirecdy, shares or other interests in any entity or person, which
owns immovable property situated in Malta or any real rights thereon where
five percent or more of the total value of the said shares or other interests so
held is attributable to such immovable property or rights:
Provided that where a company, entity or person carrying on a trade or
business owns immovable property situated in Malta or any real rights
solely for the purpose of carrying on such trade or business, such company,
owning immovable property if not more
then fifty percent of the value of its assets consist of immovable property
situated in Malta or any rights over such property and it does not carry on
any activity the income from which is derived directly orindirectly from
immovable property situated in Malta;”
2.5 Participating Holding System
A definition of the term participating holding’ is contained in

Article 2 ITA. The said definition was amended by Act II of 2007
and Act No. VII of 2018. Participating holding is defined as the
holding which arises when:
“"participating holding" shall mean a holding which arises where:

(a) a company holds directly at least five percent of the equity shares of a
company whose capital is wholly or partly divided into shares, which holding
confers an entitlement to at least five percent26 of any two of the following:
(i) right to vote;
(ii) profits available for distribution; and
(iii) assets available for distribution on a winding up:
Provided that the Commissioner shall be entitled to determine that the
provisions of this paragraph are satisfied even where the said minimum level
of entitlement exists in the circumstances referred to in the proviso to the
definition of "equity holding";
(b) a company is an equity shareholder in a company and the equity
shareholder company is entitled at its option to call for and acquire the entire
balance of the equity shares not held by that equity shareholder company to
the extent permitted by the law of the country in which the equity shares are
held; or
(c) a company is an equity shareholder in a company and the equity
shareholder company is entitled to first refusal in the event of the proposed
disposal, redemption or cancellation of all of the equity shares of that
company not held by that equity shareholder company; or
(d) a company is an equity shareholder in a company and is entitled to either
sit on the Board or appoint a person to sit on the Board of that company as
a director; or
(e) a company is an equity shareholder which holds an investment representing
26 Reduced from 10% to 5% by Act No. VII of 2018.
a total value17, as on the date or dates on which it was acquired, of a minimum

of one million, one hundred and sixty-four thousand euro (€1,164,000) (or
the equivalent sum in a foreign currency) in a company and that holding in
the company is held for an uninterrupted period of not less than 183 days; or
(f ) a company is an equity shareholder in a company and where the holding
of such shares is for the furtherance of its own business and the holding is not
held as trading stock for the purpose of a trade:
"Provided that a holding of a company in -
(a) a partnership or EEIG referred to in subparagraph (iii) of paragraph (a)
of the definition of "company" in sub-article (1) of article 2 of the Act, not
being a property partnership, and which has not elected to be treated as a
company in terms of article 27(6) of the Income Tax Management Act; or
(b) a body of persons referred to in subparagraph (ii) of paragraph (b) of the
definition of "company" in sub-article (1) of article 2 of the Act, not being a
property partnership, and which has not elected to
be treated as a company in terms of article 27(6) of the Income Tax
Management Act; or
(c) a collective investment vehicle constituted, incorporated or registered
outside Malta and which is not resident in Malta, where the liability of
investors in such scheme is limited to the amount invested by them, shall
be deemed to constitute a participating holding if it satisfies the provisions
of any of paragraphs (a) to (f ) above which shall apply mutatis mutandis to
such holding. For the purposes of this proviso, the terms "equity shares" or
"shares" shall be construed as referring to the
capital in the said partnership, EEIG, body of persons or collective
investment scheme as the case may be which entitles the holder to at least
two of the following rights:
(i) a right to vote;
(ii) a right to profits available for distribution;
and
( iii) a right to assets available for distribution on a winding up of the said body
of persons, and the term "equity shareholder" shall be construed accordingly
27 Act I of 2010 tweaked paragraph (e). The law no longer speaks of an’ investment value’
but speaks of an investment representing a total value’. Extracts from the law follow:
Pre-2010 Pqsr-2010
(e) a company is an equity shareholder which (e) a company is an equity shareholder which
invests a minimum sum of one million, holds an investment representing a total value,
one hundred and sixtyfour thousand euro as on the date or dates on which it was acquired,
(1,164,000) (or the equivalent sum in a foreign of a minimum of one million, one hundred
currency) in a company not resident in Malta and and sixty-four thousand euro (€1,164,000) (or
that investment in the company not resident in the equivalent sum in a foreign currency) in a
Malta is held for an uninterrupted period of not company and that holding in the company is held
less than 183 days; or for an uninterrupted period of not less than 183
days: or
and the reference to "company" in this definition and in the provisos thereto
shall be deemed
to include also such partnership, EEIG, body of persons or collective
investment scheme as the case may be
Provided that the Commissioner shall be entitled to determine that an equity
holding exists even where the particular company does not have a holding in
the share capital in a company or does not consist solely of such a holding of
share capital, but it can demonstrate that in substance it holds an entitlement
to at least two of the equity holding rights:
Provided further that in the case of a holding falling within the purport of
paragraph (a) above, the provisions of the said paragraph shall be deemed to
be satisfied even where the minimum level of entitlement referred to in that
paragraph exists at any time by reference to the circumstances referred to in
the proviso to the definition of "equity holding";
The general rule is that a participating holding arises upon the

holding of shares held in a company as defined in Article 2 ITA.
Given that the definition of company’ contained in Article 2
ITA includes partnerships en commandite with capital divided
into shares but excludes partnerships en commandite with capital
which is not divided into shares a need to extend the remit of the
application of the participating holding, was felt. Thus, Act II of
2007 added a proviso to the definition of participating holding
which prescribes that in certain cases even shares held in a foreign
partnership an commandite with the capital which is not divided
into shares qualifies as a participating holding.
Paragraphs (a)-(f) above possess certain elements in common.

All the paragraphs refer to the notion of an equity shareholding.
Paragraph (e) of the definition of participating holding includes a

new important feature of the Act II of2007 amendments. It refers to
the 183 day holding period. The holding period must be reckoned
by reference to the date of dividend distribution as a cut-offdate. The
inclusion of the holding period was deemed necessary as a measure
to counterbalance the effect of the deletion of the proviso which was
previously linked to the trading stock requirement.
Act I of 2010 made a major amendment to definition of

participating holding. Act I of 2010 removed the requirement
that a participating holding must be a holding in a non-resident
company by removing the words not resident in Malta’ from the
definition of participating holding.28
2.6 The Anti-Abuse Provision
With respect to dividends, the application of the participation

exemption is linked to an anti-abuse provision. With respect to
dividends, the participation exemption applies provided that the
body of persons in which the participating holding is held satisfies
any one of the following three conditions:
(i) it is resident or incorporated in a country or territory

which forms part of the European Union;
(ii) it is subject to any foreign tax of at least fifteen percent
(15%); or
(iii) it does not have more than fifty per cent (50%) of its
income derived from passive interest or royalties;
Where none of the three conditions listed above are satisfied

then both of the following two conditions must be fulfilled:
(i) the equity holding by the company registered in Malta in

the body of persons not resident in Malta is not a portfolio
investment29 and for this purpose the holding of shares by a
company registered in Malta in a company or partnership
not resident in Malta which derives more than fifty per
cent of its income from portfolio investments shall be
28 Article 10 Act I of 2010.
29 The term ‘portfolio investment’ is a term which is used in the OECD Model. Elements of a
portfolio investment include the following:
(a) Portfolio investments are ‘widely held’;
(b) Portfolio investments tend to form part of a diversified investment;
(c) Portfolio investments tend to be subject to investor-protection.
deemed to be a portfolio investment; and

(ii) the body of persons not resident in Malta or its passive
interest or royalties have been subject to any foreign tax at
a rate which is not less than five per cent (5%).
2.7 The Anti-Abuse Provision Inspired by the

Amendments to the Parent Subsidiary Directive
On 27 January 2015 COUNCIL DIRECTIVE (EU) 2015/121

amended Directive 2011/96/EU the Parent Subsidiary Directive
by adding an anti-abuse clause. Article 1 (2) of the Directive was
replaced by the following paragraphs:
“2. Member States shall not grant the benefits of this Directive to an
arrangement or a series of arrangements which, having been put into place for
the main purpose or one of the main purposes of obtaining a tax advantage
that defeats the object or purpose of this Directive, are not genuine having
regard to all relevant facts and circumstances.
An arrangement may comprise more than one step or part.
3. For the purposes ofparagraph 2, an arrangement or a series of arrangements
shall be regarded as not genuine to the extent that they are not put into place
for valid commercial reasons which reflect economic reality.
4. This Directive shall not preclude the application of domestic or
agreement-based provisions required for the prevention of tax evasion, tax
fraud or abuse.”
The Directive required Member States to bring into force the

laws, regulations and administrative provisions necessary to comply
with this Directive by 31 December 2015 and Malta’s reaction
came in the form of Act XIII of 2015 which added the following
proviso to Article 12(1) (u) ITA:
“"Provided further that as from 1st January, 2016, in the case of distributed
profits received from a participating holding by a parent company that is
resident in Malta or the permanent establishment of a parent company that
is resident in another EU Member State, which permanent establishment is
situated in Malta and which benefit from the exemption from withholding
tax set out in article 5 of EU Directive 2011/96/EU on the common system
of taxation applicable in the case of parent companies and subsidiaries of

different Member States as amended, the exemption under the provisions of
subparagraph (u)(l) shall only apply to the extent that such profits are not
deductible by the relevant subsidiary in that other EU Member State.
For the avoidance of doubt, notwithstanding any other provision to the
contrary in this Act, distributed profits received by the said parent company
or permanent establishment that are deductible by the relevant subsidiary
in such other EU Member State shall fall under the charging provisions of
sub-article (1) of article 4. This proviso implements the provisions of Article
1(1) of EU Directive 2014/86/EU of 8th July, 2014 amending Directive
2011/96/EU on the common system of taxation applicable in the case of
parent companies and subsidiaries of different Member States and the terms
used herein shall, unless the context requires otherwise, be interpreted in
terms of EU Directive 2011/96/EU on the common system of taxation
applicable in the case of parent companies and subsidiaries of different
Member States as amended;"
3. The Royalty Exemption
Act I of 2010 added paragraph 12(1) (v) to the Income Tax

Act, a paragraph which contemplates an exemption in respect of
royalties. The distribution of profits which are exempt in terms of
article 12(1) (v) ITA is exempt from tax as well. The exemption
contemplated in article 12(l)(v) is optional.
Act V of 2012 extended the remit of the royalty exemption. The

exemption is no longer restricted to patents but applies to other
forms of Intellectual Property.
The current version of Article 12 (1) (v) ITA provides for a tax
exemption;
"Royalties, advances and similar income derived from -

(i) patents, in respect of inventions
(ii) Copyright whether in the course of a trade'
whether in the course of a trade, business, profession or vocation or
otherwise, subject to the satisfaction of such terms and conditions

(including any limits on the maximum amount of the exempt
income) and obtaining such determinations as may be prescribed
(iii) trademarks".
Trademarks were added by the Budget Act 2013. Malta’s short

lived Royalty Exemption was implemented by Legal Notice 429
of 2010 but revoked by Legal Notice 4 of 2016 which introduced
a sun-set clause on the exemption. The 2016 Legal Notice added a
rule providing that no determination by the competent authority
allowing the exemption would be issued after the 30th June 2016,
and no benefits under the rules may be availed of after the 30th
June 2021.
4. Retirement Schemes
Act XVII of 2009 tweaked the exemption for retirement funds.

Article 12 (1) (d) ITA, as amended in 2009 and 2019, exempts
from tax:
“he income of any retirement fund or retirement scheme licensed,

registered or otherwise authorized under the Special Funds (Regulation)
Act or any Act replacing the said Act or derived by a company from long
term contracts of insurance that are treated asqualifying personal
retirement schemes or qualifyingoccupational retirement schemes in
terms of the provisions of such rules as may be prescribed, other than
income from immovable property situated in Malta;”
The 2009 amendments had extended the exemption to schemes

which are registered or authorized under the Special Funds
(Regulation) Act too.
ACT No. VII of 2019 extended the remit of the exemption to

cover "derived by a company from long term contracts of insurance
that are treated as qualifying personal retirement schemes or
qualifying occupational retirement schemes in terms of the

provisions of such rules as may be prescribed,";
5. ‘EU Tax exemptions*
Income tax exemptions are contemplated in EU Tax Directives

which have been transposed into Maltese law. The Parent Subsidiary
Directive30 which provides for a tax exemption on distributed
profits and the Interests and Royalties Directive which provides for
a tax exemption on certain royalty payments have been transposed
by S.L. 123.74, the European Union Directives Regulations.31
Annex I of the Parent Subsidiary Directive provides that the

Maltese companies which fall under the definition of company of
a Member State’ and consequently are subject to the directive are:
“companies under Maltese law known as: ‘Kumpaniji ta Responsabilità’

Limitata, ‘Soċjetajiet en commandite li 1- kapital tagħhom maqsum
f’azzjonijiet’;”
Indirectly,32 an identical definition applies in the context of the

Interest and Royalties Directive.
30 90/435/EEC, the application of which was transposed into Maltese law by L.N. 267 of2004.
Article 4 of the said directive provides inter alia that, “where a parent company, by virtue ofits
association with its subsidiary, receives distributed profits, the State ofthe parent company shall,
except when the latter is liquidated, either:
- refrainfrom taxing such profits, or
- tax such profits while authorizing the parent company to deductfrom the amount of tax due
thatfraction of the corporation tax paid by the subsidiary which relates to those profits and, if
appropriate, the amount of the withholding tax levied by the Member State in which the
subsidiary is resident, pursuant to the derogations providedfor in Article 5, up to the limit ofthe
amount ofthe corresponding domestic tax"
31 2003/49/EC, the application of which was transposed into Maltese law by L.N. 267 of2004.
Article 1 of the said directive provides, inter alia, for the following exemption:
“Interest or royalty payments arising in a Member State shall be exemptfrom any taxes imposed
on thosepayments in that State, whether by deduction at source or by assessment, provided that the
beneficial owner ofthe interest or royalties is a company ofanother Member State or a permanent
establishment situated in another Member State ofa company ofa Member State.”
32 Via 2004/66/EC.
Chapter 12
Special Cases
I, The Taxation of Collective Investment Schemes

fCISs’)
1.1 The Special Nature CISs
The term collective investment scheme’ is defined in Article 2

ITA as any scheme or arrangement, which is licensed under the
Investment Services Act’or notified in terms of the Investment
Services Act (List ofNotified AIFs) Regulations.12 A series of rules
scattered in the Income Tax Act and the Collective Investment
Schemes (Investment Income) Regulations3 (‘CISR’) contemplate
a special tax regime which applies to CISs falling under the
particular definition.
1.2 Ad hoc Local Rules
CISs are subject to particular tax accounting rules. Article 67 A ITA

provides that CISs, unlike most companies, do not allocate profits
to the foreign income account. Furthermore, profits resulting
from dividends distributed out of the foreign income account of
another company are allocated to the Maltese taxed account of

2 References to NAIFs were added by Act XVI of 2017.
3 Legal Notice 55 of 2001 as Amended by Legal Notice 111 of 2002.
CISs. Thus, CISs4 use only four accounts, the Final Tax account,
the Immovable Property Account, the Maltese taxed account and
the Untaxed Account.
CISs are generally established as companies but the ITA

contemplates cases when CISs are not established as companies.
Article 67A provides that CISs which are not companies are still
treated as companies for certain purposes. Thus when a CIS, which
is not constituted as a company, distributes profits to persons
non-tax exempt Maltese residents, tax is withheld as though the
collective investment scheme was constituted as a company. In
the latter case tax is deducted from every distribution of profits
which, had the collective investment scheme been constituted as a
company, would have been allocated to the untaxed account.
The taxation of CISs is directly linked to the investment income

provisions which contain a number of rules specific to CISs. The
Investment Income Provisions envisage Article 41A ITA which
deals with the taxation of CISs. Thus, a collective investment
scheme does not have the right to elect to be paid investment income
without deduction of tax being made. Furthermore, Article 41A
ITA provides that in no case shall a refund be made to a collective
investment scheme in respect of tax withheld in accordance with
the investment income provisions from investment income paid to
that collective investment scheme. Article 48 ITA provides that
in no case shall any refund be made in respect of any tax which a
company has deducted or is entitled to deduct from any dividend
paid to a collective investment scheme.
1.3 Two Types of CISs
Income Tax law draws a distinction between two main types of

CISs (i) prescribed funds and (ii) non-prescribed funds. Non
4 As from Year of assessment 2010. Vide Rule 8 TAR as amended by L.N. 205 of2008.
Special Cases 393
prescribed funds benefit from a more fiscally advantageous

treatment than prescribed funds.
A definition of the term ‘Prescribed Fund’ is contained in article

3 of CISR but it is not very helpful because it leaves the matter
up to the discretion of the CIR. The matter is clarified in Rule 4
of the CISR which provides that the CIR shall classify a fund as
a prescribed fund if it is a fund of a Malta based scheme that has
declared in the manner provided for in these regulations that -
(i) the value of the assets situated in Malta allocated to that

fund is on the 1st March 2001 at least 85% of the value of
the total assets so allocated; or
(ii) in the case of a fund that has been granted a collective
investment scheme licence on or after the 1st March
2001 the value of the assets situated in Malta that will be
allocated to that fund for the purpose of its operations is
expected to be at least 85% of the value of the total assets
that will be so allocated.
Essentially, a prescribed fund is therefore a fund which invests

wholly or mainly in assets situated in Malta. Assets are valued for
the purposes of classification in terms of the rules contained in
Rule 6 of the CISR.
Funds which do not fall within the parameters set for the
prescribed fund may apply to be classified as non-prescribed funds
in terms of Rule 5 of the CISR. Rule 5 of the CISR provides
that a fund in an overseas-based scheme shall be treated as a non
prescribed fund.
1.4 Tax Benefits Which Apply to Non-Prescribed

Funds
Article 12(1) (s) ITA exempts from tax the income of a CIS other
than income from immovable property situated in Malta and
investment income to which article 41A(a) ITA refers. Given
that non-prescribed funds are, by definition, funds which do
not principally hold immovable property situated in Malta and
‘Maltese investment income’ the income of non-prescribed funds
is, in practice, wholly or mainly exempt from tax in Malta.
1.5 Taxation of Prescribed Funds
Whereas most of the income of non-prescribed funds is exempt

from tax, most of the income of a prescribed fund is not so exempt.
The tax rate at which a prescribed fund which is a company is
taxable is, by default, at the rate of 35%. However other rates of tax
apply depending on the fund’s income streams. An important rule
relevant to the taxation of prescribed funds is contained in Rule 11
CISR. Rule 11 provides that when a payor of investment income
pays investment income to a CIS the following rates of tax apply:
(i) when the investment income in question is income to

which article 41(a)(i) of the Act refers (namely interest
payable by a person carrying on the business of banking
under the Banking Act) at the rate of at the rate of 15%;
(ii) in every other case (namely investment income other than
bank interest), at the rate of 10%.
Another important rule relative to the tax treatment of

prescribed funds is contained in Article 41A ITA. For the purposes
of the investment income provisions when investment income
consisting in interest is paid to a collective investment scheme it
shall be treated as investment income only to the extent that -
Special Cases 395
(i) it falls to be accounted for by that collective investment

scheme as profits of a prescribed fund; and
(ii) it is not paid by another collective investment scheme.
1.6 Distributions by Non-prescribed Funds
Save for the fact that CISs do not allocate profits to the foreign
income account the normal rules apply to distributions from the tax
accounts. However one must bear in mind that most of the income
of non-prescribed funds is exempt income which is allocated to the
untaxed account of the non-prescribed fund. Therefore, in practice,
distributions are taxed at the withholding tax rate of 15% only
when made to recipients, resident individuals or a non-resident
person (including a non-resident company) owned and controlled
by, directly or indirectly, or who acts on behalf of, an individual who
is ordinarily resident and domiciled in Malta. Other distributions
are not taxed.
Profits distributed by a collective investment scheme that is

not a resident of Malta that are paid through the services of an
authorised financial intermediary out of profits that had been
allocated in that collective investment scheme to a fund that is not
a prescribed fund are included in the list of Investment Income of
Article 41 are accordingly taxed in terms of the investment income
provisions and taxed at the special rate of 15%.
1.7 Distributions by Prescribed Funds
Profits are not allocated to the Foreign Income Account but

normal distribution rules would apply to distributions from the
other accounts.
1.8 Transfers of UNITS in a CIS
The definition of the term securities’ contained in Article 5 includes

units in a collective investment scheme as defined in article 2 of the
Investment Services Act’. Therefore, in principle, the transfer of
units in a CIS gives rise to a taxable capital gain at the rates of tax
applicable to the transferor but several exemptions are envisaged.
Article 5 (6) (c) ITA contemplates an exemption in respect

of the transfer of securities listed on a stock exchange recognised
under the Financial Markets Act, being securities in a collective
investment scheme held in a prescribed fund. Furthermore, Article
12 (1) (c) (ii) ITA contemplates another exemption in respect of any
gains or profits accruing to or derived by any person not resident in
Malta on a transfer of any units in a collective investment scheme as
defined in article 2 of the Investment Services Act. The exemption
does not apply if the CIS is a property company.
In certain cases capital gains arising upon the redemption,

cancellation or liquidation of units in a CIS are subject to the
investment income provisions and taxed at 15%. The investment
income provisions include within their purview capital gains
arising on the disposal of shares or units in a collective investment
scheme where the collective investment scheme redeems, liquidates
or cancels such shares or units, such capital gains to be calculated by
reference to the price at which the shares or units were allotted or
issued by the collective investment scheme or to a value determined
in such manner and on the basis of such criteria as maybe prescribed.
The application of the Investment Income Provisions to capital

gains arising upon the transfer of securities in a CIS is excluded in
the case of:
( i) capital gains arising on the disposal of shares or units held

Special Cases 397
in a prescribed fund of a collective investment scheme;

and
(ii) capital gains arising on the disposal of shares or units held
in a fund of a collective investment scheme that is not
resident in Malta if such a fund is not a prescribed fund
and the disposal is not made through the services of an
authorised financial intermediary.
2. Shipping Companies
On 25 July 2012, the EU Commission notified Malta that the

Maltese tonnage tax system constituted State aid within the
meaning of Article 107(1 ) of the Treaty5 on the Functioning of the
European Union (TFEU). The Maltese authorities and interested
third parties were invited to submit their comments in respect
of the Commissions assessment. The Maltese authorities were
reminded of the standstill obligation laid down in Article 108 (3)
TFEU.
The investigation was formally concluded on 19 December

2017 when the European Commission published its final decision.
Pursuant to the Commissions decision,6 Malta committed to
reforming its Tonnage Tax System as follows:
(1) to specifically exclude from the operation of tonnage tax

Fishing and fish factory ships, Private yachts and ships
used primarily for sport or recreation, Fixed offshore
installations and floating storage units, Non-ocean going
tug boats and dredgers, Ships whose main purpose is to
provide goods or services normally provided on land,
5 EUROPEAN COMMISSION Brussels, 25.7.2012 C(2012) 5072 final, Subject: State aid
SA.33829 (2012/C, ex-2012/NN, ex- 2011/CP) - Malta Tonnage tax scheme and other
State measures in favour of shipping companies in Malta, a part ofwhich has been paraphrased
above.
6 C92017) 8734 final.
Stationary ships employed for hotel and or catering

operations (floatinghotels or restaurants), Ships employed
mainly for gambling/as casinos (floating or cruising
casinos);
(2) to reflect explicitly in legislation, following directly the
terms of the Maritime Guidelines, a restriction of tonnage
tax to vessels engaged in the international carriage of good
or passengers by sea and the following vessels (previously
approved on submission by other Member States) namely
Cable-laying vessels, Pipe laying vessels, Crane vessels and
Research vessels;
(3) to remove the possibility of financial institutions
benefitting from tonnage tax and to restrict the benefits
of tonnage tax to organisations which have assumed risks
and responsibilities for the operation of a tonnage tax ship
(i.e. technical management and crewing) or the carrying
out of shipping activities;
(4) to explicitly limit the application of tonnage taxation to
the chartering out of vessels on bareboat basis and similar
transactions between third parties and to commit that the
chartering out of vessels on bareboat basis to third parties
and similar transactions can be eligible only as ancillary
activity of genuine shipping companies in the context
of temporary overcapacity subject to the following
conditions:
(a) Only to deal with a situation of temporary excess
capacity;
(b) For a maximum period of up to three years;
(c) Bareboat chartered out capacity will not exceed 50%
of the shipping companies’ fleet, calculated on a group
basis;
(d) Excess capacity specifically acquired for chartering out
cannot be eligible.
(5) that existing and new entrants to the tonnage tax scheme
Special Cases 399
must have at least 25% of their tonnage tax fleet EEA-

flagged notwithstanding the requirement to maintain or
increase the share as set out in 3.1 (paragraph 8) of the
Maritime Guidelines;
(6) to explicitly limit eligibility to tonnage taxation for
dredgers to those dredgers whose activity consists in
“maritime transport” - that is, the transport at deep sea of
extracted materials - for more than 50 % of their annual
operational time and only in respect of such transport
activities. Eligible dredgers will be only those registered in
a Member Stat or the EEA;
(7) to explicitly limit eligibility to tonnage taxation for
towage to those vessels whose activity consists in maritime
transport for more than 50 % of their annual operation.
Waiting time may be proportionally assimilated to
that part of total activity effectively carried out by a tug
which constitutes maritime transport. Towage activities
which are carried out inter alia in ports, or which consist
in assisting a self-propelled vessel to reach port will not
constitute maritime transport and only vessels registered
in a Member State or the EEA will be eligible;
(8) to regulate the eligibility of revenues ancillary as set out at
recitals of the Commissions final Decision in the present
case, by way of detailed regulation the draft of which has
been shared with the Commission and that ship specific
and non-ship-specific ancillary activities will not exceed
50% of overall gross revenue (both ship-specific and
other) of a beneficiary company. Malta also commits to
exclude entirely from tonnage taxation revenues from the
activities set out in recital Error! Reference source not
found, of the Commissions final Decision in the present
case;
(9) to ensure that the capital gains exemption on the sale
of ships covers only ships operated under the tonnage
tax regime by companies engaged in genuine shipping

activities and to introduce a requirement that only ships
acquired and sold whilst under the tonnage tax regime
may benefit from such an exemption;
(10) to commit that shipping companies (except ship
management companies) will not benefit from tonnage
tax (except for ship management companies) unless they:
(a) have at least 60% of the tonnage of their fleet under
the flag of a Member State of the Union or of a State
party to the EEA Agreement on entering the scheme;
or
(b) maintain or increase the share of tonnage of their fleet
that they operated under the flag of a Member State of
the Union or of a State party to the EEA Agreement
at the moment that they entered the scheme.
In any event, by the third year ofoperation the organisation
must have at least 60% of the tonnage taxed fleet EEA-
flagged.
However, in connection with the initial entry of a shipping
organisation into the Maltese tonnage tax system, the
said applicable threshold may be reduced to twenty-five
percent (25%). Malta will continue to check that the
share of EEA-flagged fleet has not decreased on average
over a period of three years (both for existing and new
beneficiaries).
(11) that income from non-EEA-flagged vessels will only
be eligible when then above criteria on flagging (see
commitment 10) are met and shall apply only to fleets
which are entirely managed from the EEA for commercial
and strategic management. Ships which are not
commercially and strategically managed from the EEA
will be accepted under tonnage taxation only if flying
an EEA flag (except for vessels bareboat chartered out
under conditions respecting the limitations mentioned in
commitment 4).
Special Cases 401
(12) to commit to introduce a formal provision on control of

the aid ceiling set in Section 11 ofthe Maritime Guidelines.
(13) to commit that legislation will be amended to clearly
distinguish between:
(a) fees which are payable by vessels on registration and
annual taxes on nonqualifying ships under the Maltese
flag; and
(b) tonnage tax, which is only payable in respect of
qualifying ships.
( 14) to commit to publish internal guidelines which will make
clear the ineligibility of a number of activities that may be
in competition with land-based companies, in particular:
(a) ship building;
(b) sale on board of goods or services not customarily
provided to passengers e.g.
cars, domestic appliances or livestock; and
(c) the operation of a port or harbour, ship based holidays
where the ship remains moored and there is no sea
transportation element.
(15) to commit to require beneficiaries of tonnage tax to
submit mandatory annual compliance declarations for all
controllable parameters such as type of vessel, activities
performed with the vessel, net tonnage, days in use, flag,
types of operation and compliance with the aid ceiling;
(16) to commit to remove current sector-specific exemption
from taxation of capital gains on shares in shipping
companies for Maltese residents, as set out in Article 84Z
(1)C of the Merchant Shipping Act;
(17) to commit to remove the exemption in Article 5 of the
Merchant Shipping Taxation Regulations from fees and
charges payable under the Duty on Documents and
Transfers Act;
(18) to commit to amend the legislation to clarify that ships
below 1000 net tonnes may only be declared as eligible
for tonnage tax where that ship is engaged in shipping

activities and which but for its tonnage would be eligible
for such treatment under Article 85 (1) of the Merchant
Shipping Act. and to exercise the power in such cases
where the criteria are met by applicants. Malta will
reformulate Article 85A (1) of the Merchant Shipping
Act in the following way: “The Minister shall with the
concurrence of the Minister responsible for finance and
subject to such conditions deemed appropriate in line
with these Regulations, declare to be a tonnage tax ship,
a ship of any net tonnage, which is engaged in shipping
activities)”.
( 19) to commit to issue guidance clarifying that the ministerial
discretion contained in the First Schedule to the Merchant
Shipping Act to exempt any ship or class of ships from
the payment of fees shall be exercised only in the case of
philanthropic and humanitarian operations which do not
involve the offer of goods or services on a market;
(20) to commit to separate accounting wherever a company is
not solely engaged in shipping activities;
(21) to commit to restrict the benefit of tonnage tax to
organisations which have assumed risks and responsibilities
related to the operation of a tonnage tax scheme or to
the carrying out of shipping activities and will include
a specific definition in legislation following that in the
Maritime Guidelines;
(22) to commit to delete from Article 85 of the Merchant
Shipping Act the words “or as otherwise may be
prescribed”.
(23) to commit that the new rules that will render the measures
of this Decision compatible with the internal market will
come into force within three months of the date of this
Decision.
(24) to commit to continue to administer the tonnage tax
scheme and the other measures forming the object of
Special Cases 403
this Decision in a way that does not lead to payment of

incompatible aid that would then need to be recovered
from the beneficiaries.
(25) to commit to re-notify the tonnage tax scheme within ten
years of the date of the Commission’s final Decision in the
present case.
2.1 The 2018 Tonnage Tax System
Malta’s commitments to the Commission were implemented

via L.N. 128 of 2018, the Merchant Shipping Act (CAP. 234)
Merchant Shipping (Taxation And Other Matters Relating To
Shipping Organisations) Regulations, 2018 (‘the 2018 Rules’)
providing for a brand new tax system. The 2018 Rules cross-refer
to the EU Maritime State Aid Guidelines which, in their own turn,
refer Regulation (EEC) 4055/85 and Regulation (EEC) 3577/92.
The most important rule in the 2018 rules is contained in Rule

5 containing the tax exemptions. Rule 5 provides that if certain
compliance obligations7 are complied with and all relevant tonnage
taxes are duly paid8 by a shipping organisation9 and, in the case of a
7 Namely the condition in Rule 5 (3) prescribing that for the year in respect of which exemption
from tax is applied, separate accounts were kept clearly distinguishing the payments and receipts
by the shipping organisation concerned in respect of shipping activities,including the ownership,
operation, administration or management of a tonnage tax ship, and payments and receipts in
respect of any other business. The Rule clarifies that in determining the chargeable income of any
person, the provisions of the Income Tax Act shall, mutatis mutandis, apply to any income not
falling within paragraph (a) of sub-article (l)including, but not limited to, that all outgoings
and expenses incurred by such person during the year preceding the year of assessment shall be
deductable only to the extent to which such outgoings and expenses were wholly and exclusively
incurred in the production of the income in terms of article 14 of that Act.
8 Rules governing this matter are contained in L.N. 127 of 2018 - Merchant Shipping Act
(Substitution of First Schedule) Regulations, 2018.
9 Defined in Rule 2 as having ‘the same meaning assigned to it in article 84Z (1) of the Act’.
Article 84Z (1) provides that An organisation shall qualify as a shipping organisation under
this Act if its principal objects are one or more of the following activities and it obtains and
maintains a licence from the Registrar-General to enable it to carry on such activities:
(a) the ownership, operation (under charter or otherwise), administration and management
of a ship or ships registered as a Maltese ship in terms of this Act and the carrying on of all
ancillary financial, security and commercial activities in connection therewith;
(b) the ownership, operation (under charter or otherwise), administration and management
of a ship or ships registered under the flag of another state and the carrying on of all ancillary
financial, security and commercial activities in connection therewith;
(c) the holding of shares or other equity interests in entities, whether Maltese or otherwise,
established for any of the purposes stated in this article and the carrying on of all ancillary
financial, security and commercial activities in connection therewith;
(d) the raising of capital through loans, the issue of guarantees or the issue of securities by the
company when the purpose of such activity is to achieve the objects stated in this article for
the shipping organisation itself or for other shipping organisations within the same group;
for the purposes of this paragraph "group" has the same meaning as ascribed to it in the
Companies Act; and
(e) for the carrying on of such other activities within the maritime sector which the Minister
may, on the advice of the Authority, from time to time prescribe by regulations as qualifying
for the above purpose.
(2) A shipping organisation may be established for any lawful purpose contemplated in
subarticle (1) as -
(a) a limited liability company; or
(b) a partnership en nom collectif; or
(c) a partnership en commandite; and a company may have the status of -
(a) a public company; or
(b) a private company.
(3) A shipping organisation may also operate under a trust (a "shipping trust") or be a
foundation (a "shipping foundation").
(4) A shipping organisation may also be any foreign corporate body or other entity enjoying
legal personality in terms of the law under which it has been established or constituted and
which has established a place of business in Malta. (These organisations are referred to in this
Act, as "foreign corporate bodies".).
Rule 2 of the 2018 Rules defines the term operation as follows:
“in respect of a tonnage tax ship includes the operation of such ship in any shipping activities,
whether under charter or under any other commercial arrangement and "operator" shall be
construed accordingly:
Provided that, for the purposes of these regulations, a shipping organisation shall not qualify
as the operator of a tonnage tax ship where the ship has been chartered out by the said shipping
organisation on bareboat charter terms unless:
(a) the ship is bareboat chartered to a shipping organisation forming part of the same group as
the aforementioned shipping organisation; or
(b) the shipping organisation is a genuine shipping organisation and demonstrates, to the
satisfaction of
the Registrar-General, that the ship was bareboat chartered due to short-term over-capacity
and the
term of the charter does not exceed three (3) years.
Provided that, for the purposes of paragraph (b) above, the percentage of net tonnage
operated by the group on a bareboat charter basis is below fifty per cent (50%) of the net
tonnage operated by the group.
Provided further that, for the purposes of paragraph (b) above, the term short-term over
capacity’ shall refer solely to ships acquired (bought or chartered) by the shipping organisation
for the purposes of carrying out its own shipping activities and shall not include any ships
specifically acquired (bought or chartered) for the purposes of chartering out on a bareboat
basis,”
Special Cases 405
ship operated under charter, an amount paid to the Registrar by the

shipping organisation equal to the annual tonnage tax for that year
in addition to that paid by the owner:
(a) no further tax under the Income Tax Act shall be charged or
payable on the income of that shipping organisation, to the extent
that such income is derived from shipping activities,10 and
(b) no further tax under the Income Tax Act shall be charged or
payable on any income, profits or gains of a shipping organisation
derived from the sale or other transfer of a tonnage tax ship which
had been acquired and sold whilst under the tonnage tax system
or from the disposal of any rights to acquire a ship which when
delivered or completed would qualify as a tonnage tax ship. The
exemptoion applies provided that the activities and objects of the
organisation, where applicable, are restricted to such shipping
activities and related activities;
(c) The distribution of profits derived from shipping activities or
from other transactions referred to above are exempt from tax
under the Income Tax Act in the hands of the shareholders.
The definition of the term ‘shipping activity’ is key because the tax
exemptions gravitate around it. Rule 2 defines the term ‘shipping
activities” as meaning:
(a) the international carriage of goods or passengers by sea in terms

of the EUMaritime State Aid Guidelines and such other activities
that have been approved or considered as eligible for tonnage tax
purposes by the European Commission;
(b) such activities as are integral or directly linked to the business of
operating tonnage tax ships, when carried out in conjunction with
activities described in paragraph (a) above;
10 For a meaning of this important term see above.

(c) ancillary activities qualifying in terms of regulation 7,11 when

carried out in conjunction with activities described in paragraph
(a) above.
The reference to the EU Maritime State Aid Guidelines is important

because the applicability of the Guidelines is circumscribed to the
concept of maritime transport’, a concept articulated in Council
Regulations (EEC) Nos. 3577/92 and 4055/86. The EC’s decision
relating to Malta explains that in order to comply with the Maritime
Guidelines, national aid measures must be limited to ships used for
the purpose of maritime transport. Regulation 4055/86 defines
“maritime transport” as “the carriage of passengers or goods
by sea between any port of a Member State and any port or off
shore installation of another Member State or of a third country”.
Regulation adds that “maritime transport” is “the carriage of
passengers or goods by sea between ports situated on the mainland
or the main territory of a Member State (mainland cabotage) or
the carriage of passengers or goods by sea between any port in a
Member State and installations or structures situated on the
continental shelf of that Member State (off-shore supply services)
or the carriage of passengers or goods by sea between ports on the* (ii)
11 Namely ancillary activities linked to maritime transport, may benefit under regulations, as
provided in the Schedule to these regulations: Provided that revenues generated from such
activities is up to fifty per cent (50%) of the gross revenues generated from shipping activities,
which threshold shall be applied on a ship-by-ship basis.
Notwithstanding the provisions of sub-regulation (1), any profits generated from, the
following ancillary activities may also benefit under the regulations -
(a) sales and facilities which are normally provided to customers by seagoing passenger ships,
including -
(i) the provision of food or drink for immediate consumption
(ii) entertainment for which no additional fee is charged, but not betting or gambling;
(c) activities carried on by the shipping organisation in relation to a tonnage tax ship operated
by another qualifying shipping organisation in the same group, which would be shipping
activities of the first-mentioned shipping organisation if carried on in relation to a tonnage tax
ship operated by that shipping organisation;
(d) such other activities that in substance are similar in nature to those listed above or have been
approved or considered as eligible for tonnage tax purposes by the European Commission.
Revenues derived from the sale of goods or services on board ships not customarily provided
to passengers may not benefit interms of these regulations.
Special Cases 407
mainland and an island of the Member State or between ports

situated on the islands of the Member State (island cabotage).
By implication, benefits under the Rules refer to vessels falling

under the definition of ship’. Article 2 of the Merchant Shipping
Act defines the term as meaning “every description of vessel used
in navigation, whether self-propelled or not, and it includes barges,
pontoons, floating establishments, installations or structures,
oil rigs and other similar vessels, and for those parts of the Act
wherever applicable it shall also include a ship under construction”
but the definition contained in the Act cannot be read in isolation.
Regulation 2 of the 2018 Rules incorporates important rules.
Rule 2 INCLUDES within the remit of the regulations:
(a) cable laying ships;

(b) pipe laying ships;
(c) crane vessels;
(d) research vessels; and
(e) multi-purpose, break-bulk and other types of support vessels:
But EXCLUDES from the remit of the Regulations:
(a) fishing and fish factory ships;

(b) private yachts and ships used primarily for sport or recreation;
(c) fixed offshore installations and floating storage units;
(d) non-ocean going tug boats and dredgers;
(e) ships whose main purpose is to provide goods or services
normally provided on land;
(f ) stationary ships employed for hotel and or catering operations
(floating hotels or restaurants);
(g) ships employed mainly as gambling and/or casinos(floating or
cruising casinos);
(h) non-propelled barges;

(i) any other description of ship which may be determined, from
time to time, by the Registrar-General, as not being engaged in the
international carriage of goods or passengers by sea.
Any income derived by a ship manager from ship management

activities is deemed to be income derived from shipping activities
and is exempt from tax provided that:
(a) compliance obligations are abided by;

(b) the ship manager has paid to the Registrar-General annual
tonnage tax;
(c) at least two-thirds of the tonnage of the ships to which the ship
manager provides ship management activities is managed from the
territory of the Union;
(d) the tonnage in respect of which the ship manager provides ship
management activities satisfies the flag-link requirement; and
(e) for the purposes of paragraph (d), the percentage of a ship
manager s total tonnage which is Union-flagged shall be determined
by expressing as a percentage the sum obtained by dividing the
aggregate net tonnage of Union-flagged ships in respect of which
the ship manager provides the ship management activities as at a
particular date by the aggregate net tonnage of all ships in respect
of which the ship manager provides the ship management activities
at such date.
Under Rule 8 (1) the provision of ocean towage services may

benefit from the provisions of the regulations provided that:
(a) the tug is a Union ship;

(b) more than 50% of the towage activity effectively carried out
by the tug constitutes maritime transport. Towage activities which
are carried out inter alia in ports, or which consist in assisting a self
Special Cases 409
propelled vessel to reach port do not constitute maritime transport.

Any waiting time shall be proportionally assimilated to that part
of total activity effectively carried out by a tug which constitutes
maritime transport.
Under Rule 8 (2) the provision of dredging services may benefit

from the regulations provided that:
(a) the ship providing such services is self-propelled and is a

Union ship;
(b) the ship spends at least 50% of its yearly operational time in
maritime transport which includes time spent for travelling to the
dredging site located at sea and for carriage of the dredged goods to
the place of discharge; and
(c) the tax exemption shall only apply in respect of income
derived from maritime transport services.
Companies applying for the exemption under the Regulations

must keep separate accounts clearly distinguishing the payments
and receipts by the shipping organisation concerned in respect
of shipping activities, including the ownership, operation,
administration or management of a tonnage tax ship, and payments
and receipts in respect of any other business.
Rule 5 of the 2018 extends the tax benefits to ship management.

Rule 5(1) prescribes that any income derived by a ship manager
from ship management activities shall be deemed to be income
derived from shipping activities and shall be exempt from tax under
the Income Tax Act provided that:
(a) the condition contained in sub-regulation 4(3) relating to

keeping of separate accounts is complied with; and
(b) the ship manager has paid to the Registrar-General an annual
tonnage tax to be determined as follows:

(i) in respect of any tonnage tax ship registered under Part II or IIA
of the Act, an amount equivalent to twenty-five per cent (25%) of
the annual tonnage tax payable in respect of the particular ship on
the basis of the rates stipulated in the First Schedule to the Act; and
(ii) in respect of any other ship not referred to in paragraph (i)
above, an amount equivalent to twenty-five per cent (25%) of the
annual tonnage tax calculated by reference to the rates stipulated in
the First Schedule to the Act which would have been payable had
the ship been registered under Part II or IIA of the Act;
(c) at least two-thirds of the tonnage of the ships to which the ship
manager provides ship management activities is managed from the
territory of the Union;
(d) the tonnage in respect of which the ship manager provides ship
management activities satisfies the flag-link requirement as set out
in regulation 4(2) above; and
(e) for the purposes of paragraph (d), the percentage of a ship
manager s total tonnage which is Union flagged shall be determined
by expressing as a percentage the sum obtained by dividing the
aggregate net tonnage of Union-flagged ships in respect of which
the ship manager provides the ship management activities as at a
particular date by the aggregate net tonnage of all ships in respect
of which the ship manager provides the ship management activities
at such date.
Rule 6 provides that the provision of ancillary activities linked to

maritime transport, may benefit under the regulations, as provided
in the Schedule12 that revenues generated from such activities is
12 (1) Ancillary activities for the purposes of regulation 7(1),

shall be determined in accordance with the following paragraphs.
(2) Ancillary activities shall mean activities related to a tonnage tax ship as provided for in
paragraphs (3) to (4) of this Schedule, other than commercial activities which form part of the
operation of a port carried on for profit, that have a substantial connection with the shipping
organisation's shipping activities or, where the licensed shipping organisation is a member of a
group, the shipping activities of another qualifying licensed shipping organisation in that group.
Special Cases 411
up to fifty per cent (50%) of the gross revenues generated from

(3) The following ancillary activities benefit, provided that the gross revenue from those
activities is less than fifty per cent (50%) compared to the gross revenue from the licensed
shipping organisation’s shipping activities, which threshold shall be applied on a ship-by-
ship basis: (a) the carriage of passengers or cargo otherwise than on board a tonnage tax ship
operated by the licensed shipping organisation, where -
(i) there is a single contract with the customer for a journey which includes a voyage on the
tonnage tax ship, and
(ii) the transport for the remainder of the journey is purchased or obtained by the licensed
shipping organisation by provision which would have been made as between independent
enterprises;
(b) sales and facilities which are normally provided to customers by seagoing passenger ships,
including
(i) the sale of alcoholic beverages, perfume and tobacco, but not luxury goods,
(ii) the exchange of amounts of different currencies for personal expenditure;
(iii) health and beauty and spa and wellness Services
(c) administrative and insurance services which are directly related to the carriage ofpassengers
or cargo, including under a contract described in paragraph (a) (i);
(d) the provision of holidays, sold to the customer under a single contract, where -
(i) part of the holiday is a voyage on a tonnage tax ship operated by the licensed shipping
organisation, and the remaining part is landbased (‘the land-based part’),
(ii) the land-based part is purchased or obtained by the licensed shipping organisation by
arm’s length provision, and
(iii) the cost to the licensed shipping organisation of the land-based part in accordance
with sub-paragraph (ii) is less than one half of the price paid by the customer under the
single contract;
(e) the loading and unloading of cargo carried on a tonnage tax ship operated by the licensed
shipping organisation, and the provision by the licensed shipping organisation of facilities
used exclusively for those purposes; (f) the consolidation or breaking of cargo carried on a
tonnage tax ship operated by the licensed shipping organisation, immediately before or after
the voyage, where the activity is not haulage-related;
(g) the temporary placement of cargo carried on a tonnage tax ship operated by the licensed
shipping organisation, on or at the dockside, where the activity is not part of a long-term
storage operation;
(h) the rental or provision to customers of containers for goods to be carried on a tonnage tax
ship operated by the licensed shipping organisation;
(i) the provision of excursions for passengers of a tonnage tax ship operated by the licensed
shipping organisation, where any cabin for the passenger remains available for exclusive use;
(j) advertising and marketing, if these correspond to the sale of advertising space on board
tonnage tax ships.
(4) The following ancillary activities benefit at the permitted levels as follows -
(i) betting or gambling facilities normally offered to customers by seagoing passenger
ships for entertainment, and
(ii) the sale to passengers on seagoing ships of luxury goods of a kind normally offered to
such passengers,
Provided that the turnover from such activities amounts to less than twenty-five per cent
(25%) of the turnover from the licensed shipping organisation’s shipping activities referred to
in paragraph 3 of this
Schedule.
shipping activities, which threshold shall be applied on a ship-by-

ship basis.
Rule 6 (2) explains that any profits generated from, the following
ancillary activities may also benefit under the regulations -
(a) the embarkation and disembarkation of passengers on a
tonnage tax ship operated by the shipping organisation;
(b) sales and facilities which are normally provided to
customers by seagoing passenger ships, including -
(i) the provision of food or drink for immediate
consumption,
(ii) entertainment for which no additional fee is charged,
but not betting or gambling;
(c) activities carried on by the shipping organisation in relation
to a tonnage tax ship operated by another qualifying
shipping organisation in the same group, which would
be shipping activities of the firstmentioned shipping
organisation if carried on in relation to a tonnage tax ship
operated by that shipping organisation;
(d) such other activities that in substance are similar in nature
to those listed above or have been approved or considered
as eligible for tonnage tax purposes by the European
Commission.
Rule 6 (3) clarifies that revenues derived from the sale of goods or
services on board ships not customarily provided to passengers may
not benefit in terms of these regulations.
3. Permanent Residents
The rules relating to the taxation of Permanent residents are

contained in Article 56(10) ITA. It provides that persons who have
been granted a residence permit under Article 7 of the Immigration
Special Cases 413
Act (i.e. Permanent Residents) are, via a cross reference to Article

56 (2) ITA, taxable at the beneficial tax rate of 15%. Act IV of
2011 clarified that the favourable tax treatment does not apply
to all local source income. The 2011 amendments to 56 (10) (b)
ITA establish that income derived from Malta and chargeable to
tax under Articles 4 or 5 shall be deemed to constitute chargeable
income to be taxed separately at progressive rates starting at the
rate of 15%.
Sub-paragraph of 56 (10) must be read in conjunction with the

proviso to the sub-paragraph and sub-paragraph b. The proviso to
56 (10) (a) ITA prescribes a minimum deemed chargeable income
of EUR27,950. Furthermore 56 (10) (b) ITA prescribes that
income derived by Permanent residents derivedfrom Malta and
chargeable to tax under article 4(1)(a)ITA and 4 (l)(b)ITA, shall
be deemed to constitute chargeable income to be taxed separately
at the rates laid down in subarticle 56 (l)(a) ITA or 56 (b) ITA
starting at the rate of 15%. Thus, Permanent residents who derive
employment and trading income from Malta would be taxable at
progressive resident rates starting from 15% rising up to 35%.
It is important to point out that the rules relating to the

application for Permanent residence status, the Residents Scheme
Regulations (‘RSR’) prescribe that:
(i) a Permanent Resident must not be a citizen of Malta;

(ii) a Permanent resident must provide documentary proof
that he can bring into Malta an annual income of not
less than €13,950 in his respect and a further €2,300 in
respect of each dependant, provided that in determining
the amount of the annual income brought into Malta no
consideration whatsoever shall be taken of any income
which is retransferred out of Malta; and
(iii) a Permanent Resident must provide documentary proof
that from the date of his application for permanent

residence onwards he has either an annual income of
not less than €23,000 arising outside Malta or has in his
possession a capital of not less than €349,000.13.
Furthermore, Permanent Residents must:
(i) refrain from obtaining a residence permit for the purposes

of Regulation 9 of the Immigration Regulations;
(ii) take up residence in Malta within twelve months of
the date of issue of the certificate and does not, within
fifteen days of taking up residence in Malta, give notice
to the Commissioner, containing the information and
documents requested therein;
(iii) produce evidence that within twelve months of taking up
residence in Malta he has purchased a flat at a cost of not
less than €69,000 or a house of not less than €116,000
or taken on a leased immovable property at not less than
€4,150 per annum. Rules introduced by L.N. 399 of 2011
establish that in the event that the holder of a certificate
either:
(a) sells the aforesaid house or flat; or
(b) terminates the aforesaid lease, the holder of the
certificate must hold a qualifyingproperty holding14. To
13 Rule 6 RSR, Subsidiary Legislation 123.79.
14 The definitions of ‘qualifying property’ and ancillary definitions in the HNWI Rules have
been transposed in the proviso to Rule 7 (c) PTR which prescribes that;
“For the purposes of this regulation:
"qualifying property holding" is a holding which arises where a beneficiary either:
(i) owns qualifying owned property; or
(ii) rents qualifying rented property as lessee; and, in either case, occupies such property as his
primary residence:
Provided that the persons who reside in the qualifying property are not persons other than the
beneficiary and his family members;
"family members" means beneficiary’s ascendants in the direct line, descendants in the direct
line, brothers, sisters, spouse/s or persons with whom beneficiary is in a stable and durable
relationship;
"primary residence" means the dwelling house in which an individual habitually resides in as
his principal place of abode worldwide;
Special Cases 415
a certain extent, the higher standards of the HNWI

Rules have been imposed on Permanent Residents too.
(iv) pay provisional tax payments in accordance with the PTR.
L.N. 399 of 2011 closed-off the scheme for new entrants. A proviso
to Rule 2 barred the Commissioner from issuing certificates of
permanent residence after 1 January 2011.
4. Returned Migrants
Article 56 (11) ITA contemplates a favourable tax regime which

applies to individuals who satisfy a number of conditions,
individuals who are colloquially referred to as Returned Migrants.
Returned Migrants have a right to elect to benefit from the

potentially favourable tax rates contemplated in Article 56 (2) (a)
ITA (15% rate of tax subject to a tax free bracket15). In addition,
Returned Migrants benefit from certain ‘jurisdictional benefits’.
"qualifying property" means either a qualifying owned property or a qualifying rented
property, as the case may be "qualifying owned property" means a property purchased after 14
September 2011 at a consideration of not less than four hundred thousand euro (€400,000),
or a property purchased before 14 September 2011 for a consideration of not less than one
hundred and sixteen thousand euro (€116,000) by a person who filed an application under
these regulations which was duly received and acknowledged by the Commissioner before 14
September 2011:
Provided that, for the purposes of this definition, the Commissioner shall have the discretion,
upon good cause being shown, to treat a property covered by a promise of sale in respect of
which notice thereof under the Duty on Documents and Transfers Act has been given to the
Commissioner before 14 September 2011, and the relative deed of transfer in respect of which
is published by 31 March 2012, as a property purchased by an applicant as aforesaid before 14
September 2011;
"qualifying rented property" means a leased property taken on a lease of not less than €20,000
per annum;";”
15 The rates which apply to Returned Migrants are being reproduced below:
(i) being a married individual to whom article 49 applies -
For every lira of the first Lm 2500...................... 0c
For every lira of the remainder.......................... 15c;
(ii) being any other such individual -
For every lira of the first Lm 1800..................... 0c
For every lira of the remainder........................ 15c:
Notwithstanding that Returned Migrants would be considered

to be ordinarily resident and domiciled in Malta for the purposes
of the law and should, in principle, be subject to tax in Malta on
a worldwide basis such individuals have the right to be treated
as persons with limited tax liability. Article 4 (1) (g) (ITA)
contemplates the following special jurisdictional rules which apply
with respect to Returned Migrants:
‘(ii) no tax shall be payable on capital gains arising outside Malta.... to a

person who is charged to tax at the rate of fifteen cents (0.15) in the euro as
laid down in article 56(11);
(iii) in the case of any person who is charged to tax at the rate of fifteen cents
(0.15) in the euro as laid down in article 56(11), the tax shall be payable only
on any income or capital gains arising in Malta and on any amount of income
arising outside Malta and received in Malta.’
An individual must satisfy the following conditions in order to

benefit from Returned Migrant status, he must, first of all, be an
individual born who was born in Malta who, after emigrating has
returned as a resident in Malta after 1 January 1988. Furthermore
such an individual would have to meet the conditions set out in
either (i) or (ii) below:
(i) he had actually resided outside Malta for an aggregate

period of 20 years falling within a period of 25 years
preceding the first day of the year of assessment in which
the individual returns as resident in Malta after the first
day of January 1988, and that he has received in Malta at
one or more times during the year immediately preceding
the year of assessment an amount of income of not less
than EUR14,000 arising outside the island and chargeable
to tax in Malta. In the case of a married person the said
amount of income EUR14,000 is increased by EUR2,400
in respect of every dependant relative including a spouse;
OR
(ii) he is not a Maltese national and does not satisfy the
Special Cases 417
period of residence outside Malta referred to in (i) above

but he satisfies conditions similar to those established in
respect of Permanent residents existing at the time such
an individual returns to Malta. The minimum liability of
any such individual for any year of assessment in which
the individual elects to pay at the rates laid down in 56
(2)(a)(i) or (ii) shall, after taking into account any double
taxation relief be EUR2,325.
The special rates contemplated in 56 (2) (a) ITA apply exclusively

to foreign source income. 56 (11) (a) (i) (b) (ii)that income arising
in Malta is taxable at Article 56 (1) (a) ITA rates (resident rates)
starting at 15% (i.e. without a tax free bracket).
The misadventures of three returned migrants who took up

residence in Malta on the basis of a legitimate expectation that
they would benefit from certain exemptions from duty created
an important ‘precedent’ on taxpayer protection in 200616. The
returned migrants had been led to believe, by a public office
of the Government of Malta, that they would benefit from
certain exemptions from duty but when they came to Malta they
discovered that the exemption had been revoked. It turned out
that the returned migrants had been provided with outdated
information by the Government. The Ombudsman made the
following recommendations,
“The Ombudsman pointed out that government representative offices abroad

and the websites of government bodies must at all times be considered as
authoritative sources of information, and indeed the last word, especially for
persons outside Malta seeking information about regulations and procedures
that are applicable in Malta...
The Ombudsman pointed out that in all the three cases the returnees were
right to claim that as a result of misleading information given to them by
official sources, they later found out at their own expense that they had based
16 The Maltese legal system does not apply a domestic stare decisis system.
their decision to bring their car to Malta on the wrong grounds....once official
government sources had misled citizens by providing outdated information, it
was up to these authorities to provide compensation to citizens for their failure.
The Ombudsmans conclusions and recommendations were based on the

following legal considerations:
• it is a general principle of law that every person is liable for damage

that occurs through his fault and a person is deemed to be at fault if he
does not act with due prudence and diligence. A person who, through
negligence, imprudence or want of attention, is guilty of any act or
omission that constitutes a breach of a duty imposed by law shall be
liable for any damage that may result;
• these principles apply to public servants, the public administration and
private individuals alike...
In the circumstances the Ombudsman considered that there were sufficient

legal grounds for the application of general principles of law and of good
governance to justify the request by complainants to be compensated for
damages sustained as a result of wrong information given to them by official
government sources.
The Ombudsman pointed out, however, that not all instances of

misinformation by public officers lead to responsibility for damages and that
a number of criteria need to be satisfied such as
• the misinformation must have been given by a person who is authorised

to impart it and has to be material, substantial and determining;
• it has to be established that a person acting on the wrong information
would not have acted in that way were it not for the wrong information
given to him;
• it must be shown that the person requesting the information had sought
it from the proper competent authorities; and
• the link between the negligent or wrongful act and the damage sustained
and claimed has to be clearly established.
The Ombudsman concluded that in the three cases these criteria had been
satisfied....17”
17 Office of the Ombudsman, Case Notes, Case 1 (August 2006)

Special Cases 419
5. Non-Resident Entertainers
Non-resident entertainers are subject to a special withholding tax.

Article 56 (18A) ITA prescribes that when a non-resident derives
income from entertainment activities exercised in Malta for a
period not exceeding fifteen days in the year preceding a year of
assessment, the tax shall be charged at the rate of 10% ofthe gross
payment receivable in respect of the said activities. No set-off or
refund shall begranted to any person in respect of the tax so charged.
When the said activities are exercised in Malta for a period

exceeding fifteen days, the non-resident person shall declare his
income from entertainment activities in a return made in a tax return
and pay tax at applicable progressive rates. In any such case any tax
paid on such income is available as a credit against that persons
tax liability and where any tax so paid is in excess of such liability
it shall be refunded. It is highly debatable whether the levying of a
withholding tax on the gross payments received by a non-Maltese
resident who comes from another EU Member State is in line
with EU law as interpreted in FKP Scorpio Konzertproduktionen
GmbH v Finanzamt Hamburg-Eimsbuttel 18.
6. The Taxation of Trusts
The introduction of the 2004 trust law framework resulted in

several consequential amendments to the ITA and ITMA.
Prior to 2004, the ITA and ITMA rules relating to trusts were
mainly related to the taxation of offshore trusts and the ‘Maltese’
trust (foreign trust in which Maltese residents have an interest) was
generally regulated by tax laws quasi-exclusively within an anti
avoidance context.
The liberalized regime introduced in 2004 required an ad hoc

tax regime for trusts. On one hand, our tax law on trusts had to
provide for those trusts in which non-residents have an interest,
the vehicle which is to substitute (to a limited extant) nomineeship
within the ambit of our financial services industry and on the other
hand this tax law had to contemporaneously provide for trusts
in which residents have an interest. In drafting the new trust tax
law framework the legislator had to abide by two basic terms of
reference. The legislator needed to broadly:
(i) Extend all fiscal benefits previously granted to nominees of

non-residents to trustees of trusts in which non-residents
have an interest; and
(ii) Whilst retaining existing exemptions ensure that trusts
in which the Maltese have an interest are not used are
structures to minimize the incidence of taxation.
Accordingly, our tax law on trusts needs to be read with the two
main objectives above in mind.

Special Cases 421
6.1 Sources of Law Relating to the Taxation of

Trusts
During its existence the Trust gives rise to tax implications under
several laws and the tax laws that regulate the trust are contained in
the following legislative instruments:
(i) Article 5 (1) (a) ITA (which includes ‘transfer of a

beneficial in a trust’ as a chargeable capital gain);
(ii) Article 5(18) ITA (dealing with settlement of property
on trust);
(iii) Article 5(19) ITA (regulating the taxation of the transfer
of the beneficial interest);
(iv) Article 5 (20) ITA (regulating transfer of property in the
administration of trusts);
(v) Article 5 (21) ITA (regulating distribution of property
settled on trust);
(vi) Article 5 (22) (23) ITA (regulating reversion of Trust
Property to settlor and subsequent transfers);
(vii) Article 5 (24) ITA (regulating transfers involving
changes in trustees and particular commercial reasons)
(viii) Article 5 (25) ITA (regulating transfer of shares involving
fiduciary relationships);
(ix) Article 27B ITA (dealing with the taxation of trusts).
(x) Article 27C ITA (dealing with tax obligations of
trustees).
(xi) Article 27D ITA (dealing with the possibility of trustees
being treated as companies);
(xii) Article 5 ITMA (referring to trustees as persons
assessable);
(xiii) Article 6 ITMA (dealing with the tax obligations of
trustees);
(xiv) Articles 24A, 24B, 24C, 42A ITMA and The Trusts
(Income Tax) Regulations 2006 (dealing with
compliance obligations of trustees);

(xv) Article 32 B DDTA (special rules applicable to trusts);
(xvi) Article 35 (3) DDTA (special rules applicable to
declarations);
(xvii) Article 42 DDTA (special rules applicable to trusts);
(xviii) Article 47 (4) DDTA (special exemptions applicable to
trusts);
(xix) Article 66 VAT Act (dealing with representatives).
The laws above create several distinct tax points during the life
of a trust. There is a tax point under the ITA and the DDTA when
property is settled on trust. Similarly, any income derived by the
trust is, in principle, taxable (in the hands of the trustee/s) under
the ITA. Furthermore, any income distributed by the trustees
to the beneficiaries is, in principle, taxable (in the hands of the
recipients). If the beneficiaries transfer their interest in the trust
they are liable to pay income tax on capital gains (much like in a
share transfer situation) and even the termination of a trust gives
rise to tax implications. The numerous tax events in the life of the
trust shall be briefly discussed below in an attempt to give a general
outline of the taxation of trusts.
6.2 Settlement of Property on Trust
The settlement of property amounts to the transfer of a capital

asset from the settlor to the trustees. This transfer gives rise to tax
implications under the Income Tax Act only if the transfer happens
to fall under any one of the heads of ‘taxable transfer’ listed in
Article 5 ITA dealing with capital gains.
Thus, if valuable assets such as antiques, fine arts, coins, stones

and gems are settled on trust the settlement per se will not give rise
to a tax point on the grounds that such a transfer is not deemed
to be a taxable transfer in terms of Article 5 ITA. On the other
hand if the asset to be settled on trust is a security or a patent
Special Cases 423
any capital gain which is deemed to arise is taxable in the hands

of the transferor at prescribed rates. If the asset settled on trust
happens to be immovable property situated in Malta the settlor
is liable to pay property transfers tax on the value of the transfer
value. However, the law envisages several exemptions from income
tax on any capital gain deemed to arise upon a settlement. It has
been previously pointed out that the trust regime does not create
tax planning opportunities but the legislator rightly ensured that
settlement of property on trust does not amount to a more fiscally
onerous regime than the regime otherwise applicable. Accordingly,
the following exemption was introduced in Article 5(18) ITA:
‘On the settlement of property on trust, where the trust is established or

evidenced by means of a written instrument it shall be deemed, for the
purposes of this article that -
(a) no transfer had taken place where the sole settlor is also the sole beneficiary
of such trust;’
In addition, the law provides for an exemption in those cases

where:
1. the trust property had been donated directly by the settlor

of such trust to the beneficiaries that are persons other
than the settlor himself; and
2. the relevant trust instrument specifically provides that the
beneficiaries have an irrevocable vested right to receive all
the property settled in trust as specified in the said written
instrument; and
3. the relevant trust instrument specifically provides that the
beneficiaries are EITHER:
(i) the spouse, descendants and ascendants in the direct
line and their relative spouses, or in the absence
of descendants to his brothers or sisters and their
descendants of the beneficiary. OR
(ii) approved philanthropic institutions. AND
4. the beneficiaries include persons who are in existence at
the time of the settlement of such property on trust.

Article 5(18) ITA excludes from the scope of income tax on
capital gains (no loss or gain is deemed to arise, hence no tax) in
those case where:
1. the relevant trust instrument specifically provides that

the beneficiaries of such trust comprise close relatives,
whether they are in existence or not at the time of such
settlement, in relation to each settlor and may also include
the said settler himself; AND
2. the beneficiaries of such trust include at the time of such
settlement:
(i) a person who by reason of an interdiction,
incapacitation, or of a physical or mental impairment,
or by reason of an irregular or dissolute lifestyle is
substantially limited in his ability to administer or
manage the property settled in trust, OR
(ii) include at the time of such settlement a person who
by reason of a physical or mental impairment is or
may become unable to fully provide for his own
maintenance, AND
(iii) where the trustee of such trust provides the
Commissioner with the necessary evidence proving
such interdiction, incapacitation, impairment or
inability in the form of medical certificates, court
orders or any other relevant documents which the
Commissioner may deem necessary; AND
(iv) the beneficiaries of such trust include persons who
are in existence at the time of the settlement of such
property.
6.3 Taxation of Income Derived by the Trust
In the course of its life the trust derives income (if the trust asset
is an immovable property which is being rented out any rent
Special Cases 425
received represents income) and the general rule is that such

income is taxable in the hands of the trustee qua owner of the trust
assets. Article 27C ITA identifies the trustee as the person who is
responsible to abide by all the tax obligations of the trust,
“The trustee of a trust shall be answerable for doing all matters and things
required to be done under the Income Tax Acts for the purposes of the
determination, assessment and payment of tax in connection with the
income attributable to a trust. Where two or more persons act in the capacity
of trustees of the same trust, they shall be jointly and severally so answerable.”
The fact that the trust tax regime had to be inserted within
our financial services framework meant that our tax law on trusts
had to take into account fiscal incentives offered to non-residents.
Accordingly, this resulted in the creation of a trust tax regime which
is not a unitary regime but a regime which is subject to a significant
number of permutations. Two main regimes apply: Regimes
applicable to trusts where at least one of the trustees is a resident
of Malta (resident trusts) and what are colloquially referred to as
non-resident trusts’.
6.4 Taxation of Resident Trusts
The taxation of resident trusts is governed by Article 27B ITA

which provides that ‘where at least one of the trustees of a trust
is a person resident in Malta, tax shall be payable on any income
attributable to a trust accruing or deriving in the year...’ Income
is expressly treated by the proviso to Article 27B ITA as being
attributable to a trust if it has accrued to or is derived by a trustee or
trustees of a trust from property which was settled in such trust and
from property which was acquired in the administration of such
trust including any income from the employment of such property.
Another genre of gain or profit which is attributable to a trust
is identified by Article 27D (3) (D) ITA which refers to taxable
capital gains derived from the transfer of property settled in trust in
the administration of such trust or in the distribution or reversion
of such property.
Income attributed to the trust is taxed in the hands of the trustee
in terms of Article 27D (3) (e) ITA at the rate of 35% in terms
of Article 27D (5). Furthermore, Article 27D (1) ITA grants a
licensed trustee the right to apply to have the income attributable
to the trust accounted for and treated for tax purposes as if such
income was derived by a company ordinarily resident and domiciled
in Malta. Distributable profits are accounted for and treated for
tax purposes like dividends. Such an election is irrevocable but
due to rules established in terms of Article 27D (1) (b) ITA applies
mainly to passive income.
6.5 Taxation of Non-Resident Trusts
When all the trustees of the trust are non-resident trustees the
general jurisdictional rules prescribed in Article 4 ITA apply.
Trustees must pay tax on all income arising in Malta (broadly,
income which derives from activities performed in Malta). However
special rules are prescribed in specific scenarios. In these scenarios
the law protects the benefits offered to non-resident beneficiaries
by looking through the trust as will be explained below.
6.6 The ‘Exempt Income’ ‘Non-Resident’ trust
The ITA contemplates several points of attraction to foreign

investment. Tax exemptions are envisaged in respect of income
arising outside Malta to temporary residents, interest and royalties
derived by non-residents which are not attributable to Malta and
several other mechanisms aimed at encouraging foreign currency
investment in Malta. This genre of exemptions was transposed in
the Trust regime.
Article 27D 3 (b) ITA provides that in cases where:
(i) all the income attributable to a trust consists of income

Special Cases 427
either arising outside Malta; OR

(ii) Interests or Royalties; AND/OR
(iii) Capital gains on the transfer of certain securities (units
in CISs, shares in Maltese company that do not mainly
hold immovable property situated in Malta) ; AND
(iv) all the beneficiaries of the trust are persons who
are either not ordinarily resident in Malta or not
domiciled in Malta, or are persons whose income is
totally exempt from tax,
the income of the trust is not treated as income attributable to a

trust but as income derived DIRECTLY by the beneficiaries, and
that where the income arising outside Malta is received in Malta by
the trustee of the trust, it shall be deemed to be received in Malta
by such beneficiaries. The trust is thus ‘looked through’ for tax
purposes. In such cases the trustee is bound to notify the beneficiary
of such income and must inform him of his duties under the ITA
and the ITMA.
6.7 The ‘Holding’ ‘Non-Resident’ Trust
The ITA envisages a strong territorial tax base because foreign

source income which is not received in Malta and which is derived
by persons who are either not resident or not domiciled in Malta is
not subject to tax in Malta,19 interest and royalties derived by non
residents is tax exempt20 and the ITMA provides that company
tax paid by on profits which are not effectively connected to the
Maltese situs is refundable.21
Article 27D (3) (c) ITA ensures that the interposition of a trust
in structures reliant on the tax mitigation opportunities mentioned
above is not prejudicial to the benefits mentioned. Article T7 (3)
19 Article 4 (1) (g) ITA.

20 Article 12 (1) (c) (i) ITA.
21 Article 48 (4) ITMA and Article 48 (4A) ITMA, the refundable tax credit system.
(c) ITA provides that in the case where the income attributable to
a trust comprises solely:
(i) Income generally derived by an ‘EXEMPT INCOME’

Non-resident trust (ex. Royalties, interest etc); OR
(ii) Dividends distributed out of the profits allocated to the
dividends paid out of profits
(iii) allocated to any of the taxed accounts; OR
(iv) Both such income and dividends, AND
(v) All the beneficiaries of such trust are persons not resident
in Malta, and the trustee of such trust provides the
Commissioner with a certificate to that effect,
it shall be deemed that such income does not constitute income

attributable to a trust and that such income is derived directly
by such beneficiaries. Thus, even in this case the trust is looked
through and income of the trust is treated as being the income of
the beneficiaries and any ensuing benefits are not lost.
6.8 The ‘Endowment’ ‘Non-Resident ‘Trust
The Income Tax also provides for a third type of ‘look through
trust’, the ‘Endowment Trust’. Income attributable to a trust is
treated for tax purposes as allocated DIRECTLY to beneficiaries
in each of the following cases:
(i) amounts over which beneficiaries had a vested right in the

basis year.
(ii) amounts over which an entitlement had been bestowed to
beneficiaries in the basis year.
(iii) amounts representing income attributable to a trust for the
year of assessment which were distributed to beneficiaries
by the end of the basis year which amounts do not form
part of the amounts referred to in (a) and (b) above.
Special Cases 429
Endowment trusts are ‘looked through’ provided the compliance

obligations contemplated in 27D (4) (b) ITA are abided by.
6.9 Distributions of Trust Income to Beneficiaries
The ITA is, generally, averse to economical double taxation and

incorporate mechanisms such as the full imputation system to avoid
re-taxing profits which have already been taxed. This principle was
retained in the trust tax regime. The general rule is that no further
tax is charged on income attributable to a trust which has suffered
tax in the hands of the trustee. Article 27D (7) ITA provides that,
‘Unless otherwise provided for in this article, no person shall be charged to

further tax under this Act in respect of income attributable to a trust which
has been charged to tax in accordance with the provisions of subarticles (1),
(2) and (3)’
The sub-articles referred to above refer to cases where trusts are

treated as companies and ‘look through trusts’.
In all other cases the beneficiaries are bound to pay tax on all
income distributed to beneficiaries in terms of ordinary rules.
Act IV of 2011 introduced a rule in 27D (8) (c) ITA prescribing

that, for the purposes of double taxation relief, income distributed
to beneficiaries retains its character for tax classification purposes.
It retains its character as ‘to type and country of source’. The rule is
subject to a proviso which stipulates that income characterisation
retention applies where none of the trustees of a trust is a person
resident in Malta and the beneficiaries of the such trust include
persons that are -
(i) ordinarily resident and domiciled in Malta; or

(ii) ordinarily resident or domiciled in Malta and the relevant
income is received in Malta.
6.10 Distributions of Trust Property to

Beneficiaries
The distribution of trust property to beneficiaries is regulated by

Article 5 (21) ITA. Transfers of assets which are taxable under
Article 5 ITA give rise to a tax point. Property is deemed to have
been distributed to beneficiaries of a trust when the trustee transfers
property of a trust to any beneficiary of such trust provided that
such transfer does not constitute a reversion of property settled on
trust. A tax exemption is envisaged in the case of transfers involving
close relatives of the settler and incapacitated persons.
6.11 Transfers of Beneficial Interest
The beneficial interest is the beneficiary’s right in the trust, a right

analogous to the right to shareholding in a company context. The
beneficial interest is one of the taxable assets listed in Article 5 ITA
dealing with capital gains. Article 5(1) (iii) ITA provides that
gains or profits arising from a transfer of the beneficial interest in a
trust in accordance with are taxable.
The taxation of capital gains arising upon transfers of beneficial

interests in trust is regulated by Article 5 (19) ITA. The term
‘Transfer of the beneficial interest in a trust’ is deemed to include
a transfer of a full or partial beneficial interest in a trust and
any alienation of any such full or partial interest as a result of a
disclaimer of such interest or as a result of a person not remaining
a beneficiary of such trust. However, Article 5(19) (a) ITA inserts
an important rule which restricts the scope of taxation upon
transfer of the beneficial interest. Gains or profits are deemed to
arise on the date of the execution of a written instrument whereby
there is a transfer of the beneficial interest in a trust which includes
taxable trust property. Therefore, if the trust property does not
include taxable trust property there is no tax. Article 5 (19) (b)
Special Cases 431
ITA provides that, ‘the gain or profit arising from the transfer of
the beneficial interest in a trust which has taxable trust property
shall be equal to the consideration for the said beneficial interest as
declared in the relevant transfer instrument. No deductions shall
be allowable against the consideration payable to the transferor’.
Article 5 (19) (c) ITA adds a rule which prescribes that any
gain arising upon the transfer of the beneficial interest is taxable
at the rate of 35% without the possibility to claim any relief,
reduction, credit or set-off of any kind”. Any person transferring
the beneficial interest in a trust which includes taxable trust
property must, within forty-five days of the date on which the
transfer instrument was executed, provide the trustee of such trust
with an authenticated copy of the said transfer instrument and
shall require the trustee to collect the tax due. The trustee is like a
Notary, he exercises the role of tax collector. The tax so collected
by the trustee from the transferor is a debt due from the trustee
to the Commissioner payable by not later than the fourteenth day
following the end of the month in which the trustee had collected
the tax. The trustee of the relevant trust is bound, by not later than
fifteen days from the date when he receives acknowledgement from
the Commissioner of receipt of the tax and ancillary documents
furnish the parties to the transfer instrument with a certificate
evidencing that the tax has been paid and that his obligations have
been fulfilled. Any transfer of a beneficial interest in a trust which
includes taxable trust property shall not have any effects for the
purposes of any law unless the said transfer is made by means of a
transfer instrument and unless the transferor and the trustee have
fulfilled all tax obligations.
Exemptions from tax upon the transfer of the beneficial interest22

are envisaged in the following two situations:
22 Article 5 (19) (i) ITA.

(i) where the Commissioner is satisfied that an irrevocable

disclaimer of a beneficial interest was not effected with the
sole or main purpose of avoiding, reducing or postponing
liability to tax and where he has, at his discretion, issued
an order in writing to that effect;
(ii) any transfer of beneficial interest in a trust where the
trustee holds property solely for the purpose of a designated
commercial transaction as defined in 56 (24) ITA.23
7. Revaluation of assets on Relocation
Act I of 2010 added Article 4AITA to the Income Tax Act. Article
4A ITA provides for an opportunity for tax mitigation on inbound
relocations. As from 1 January 2009, assets belonging to one of
three special type of tax payers are deemed, for the purposes of
the valuation of its assets, taken by election,24 as at the date of
the relocation at a cost which is proved to the satisfaction of the
Commissioner to be market value.
The three special taxpayers who are entitled to the revaluation

are persons who fit into one of the following three categories:
(i) Persons who change their residence and become resident

in Malta and were at no time domiciled or resident in
Malta prior to such change in residence; or
(ii) Persons who change their domicile and becomes domiciled

in Malta and were at no time domiciled or resident in
Malta prior to such change in domicile; or
23 Article 56 (24) (c) ITA defines ‘designated commercial transaction’ as the custody of
investment instruments, the establishment or holding of real or personal security interests
(including hypothecs, privileges, pledges and guarantees), and any other commercial
transaction which may be prescribed’.
24 To be made by end of year of assessment.
Special Cases 433
(iii) Persons who are “a company resulting from the merger”

which is registered in Malta as set out in regulation 3(2) of
the Cross-border Mergers of Limited Liability Companies
Regulations (hereinafter referred to as “Cross-border
Mergers Regulations”) and none of the assets owned by
the company on the day of the merger was owned by any
merging company which is domiciled and, or resident
in Malta at any time prior to the date of the particular
merger...”
The revaluation regime applies to companies which redomicile,

companies which shift the seat of their management and control
and companies involved in cross-border mergers.
8. Investment Services and Insurance Expatriates
Article 6 ITA contemplates tax benefits for insurance and

investment services expatriates. The tax benefits consist in
exemptions from certain fringe benefits and the right to benefit
from the non-resident’ tax exemptions in 12 (1) (c) (ii) ITA. The
tax benefit is subject to a ten year moratorium.
8.1 Definition of Investment and Insurance

Expatriate
As from 1 January 2009, the ITA defines ‘investment services

expatriate’ as “any individual who is an employee of, or provides
services to, an investment services company which holds an
investment services licence issued under article 6 of the Investment
Services Act or a company which is recognised by the relevant
competent authority for the purposes of article 9 A of that said Act,
and whose activities solely comprise the provision of management,
administration, safekeeping or investment advice to collective
investment schemes as defined in the aforesaid Act.” An Insurance
Expatriate is defined as meaning an “employee of, or provides

services to, an insurance company authorised under article 7 of the
Insurance Business Act, an insurance manager as defined in article
2 of the Insurance Intermediaries Act25 and a company carrying on
the business of insurance broking under article 12 of the Insurance
Intermediaries Act and either:
(a) is not ordinarily resident and not domiciled in Malta; or
(b) was not resident in Malta for a minimum period of
three years immediately preceding the year in which he
commences such employment with or provides services to
any investment services company or insurance company
as aforesaid and provided that during the said three years
such individual has been engaged on a full time basis in a
similar position outside Malta.
8.2 The Tax Benefits
An investment services expatriate or insurance expatriate, for

the period from the year preceding the first year of assessment in
which he is first liable to tax under the provisions of this Act up
to and including the year preceding the tenth year of assessment,
may opt not to be liable to tax on income relating to the following
expenditure incurred for the benefit of the investment services
expatriate or insurance expatriate or his immediate family by the
investment services company or insurance company of which he
is an employee or to which he provides investment or insurance
services:
(a) removal costs in respect of relocation to or from Malta;

(b) accommodation expenses incurred in Malta;
(c) travel costs in respect of visits by the investment services
expatriate or insurance expatriate and his immediate
family to or from Malta;
25 The reference to the Insurance Intermediaries Act was added by Act XIII of 2015.
Special Cases 435
(d) provision of a car for the use of the investment services

expatriate or insurance expatriate in Malta;
(e) a subvention of not more than six hundred euro (600) per
calendar month;
(f) medical expenses and medical insurance; and
(g) school fees in respect of the children of the investment
services expatriate or insurance expatriate.
Article 6 (3) ITA prescribes that an investment services

expatriate or insurance expatriate is treated as not resident in Malta
for the purposes of article 12(l)(c) ITA.
Act V of 2012 introduced rules which provide that the benefit

is optional.
9. The Highly Qualified Persons Rules fHQPR’)
Act I of 2010 added Article 56 (21) ITA, an article which creates a

beneficial tax regime for persons who receive emoluments payable
under a qualifying contract of employment. The said article
contemplates a potentially favourable tax rate of 15% which can
be applied at the option of the tax payer. The 15% rate may be
used both in respect of work duties carried out in Malta as well as
work as work duties in respect of any period spent outside Malta
in connection with work duties. The 15% rate applies subject to
a minimum tax payment. Article 56 (21) ITA empowered the
Minister of Finance to make rules addressing:
(i) the conditions under which a contract of employment is
to be deemed as a qualifying contract of employment;
(ii) the maximum period or number of years for which, the
said option may be exercised;
(iii) the procedure to be used for the exercise of the said option;
(iv) such other conditions and restrictions as the Minister may
deem fit.
Relevant rules were enacted in 2011 with S.L. 123.126, the

Highly Qualified Persons Rules (‘HQPR’). Since 2011, the
purview of the HQPR has been widened significantly and the
highly successful legal structure of the HQPR have inspired
Subsidiary Legislation 123.168, the Qualifying Employment in
Aviation (Personal Tax) Rules and Subsidiary Legislation 123.141,
the Qualifying Employment in Innovation and Creativity
(Personal Tax) Rules and, more recently, L.N. 140 of 2018 the
INCOME TAX ACT (CAP. 123) Qualifying Employment in
Maritime Activities and the Servicing of Offshore Oil and Gas
Industry Activities (Personal Tax) Rules, 2018.26 The latter laws are
quasi-identical to the HQPR. One of the few differences relates to
the minimum salary.27
Rule 3 HQPR prescribes that income is subject to the beneficial

tax treatment contemplated in the HQPR if it meets a number of
conditions namely:
(a) It is derived by a beneficiary,

(b) It is derived from a qualifying contract ofemployment-,
(c) It is not paid by an employer who has received a benefit
or benefits under business incentive laws28 or arrangement
in terms of the business incentive laws or is paid by a
person who is related to the employer who has received
a benefit or benefits under any business incentive laws or
arrangement in terms of business incentive laws.
(d) It consists in employment income;
(e) Is of a minimum of €75,000 (exclusive of the annual value
of any fringe benefits); and
(f ) Consists of emoluments from an eligible office.
26 The Creativity Rules ceased to have effect with effect from the 31st December 2017.
27 Unlike the HQPR, S.Ls 123.168 and 123.141 provide for minimum emoluments of €45,000.
The 2018 L.N. provides for minimum emoluments of €65,000.
28 In Rule 2 HQPR the term "business incentive laws" is defined as includingt\\c Malta Enterprise
Act and the Business Promotion Act.
Special Cases 437
9.1 Beneficiary
Rule 4 HQPR stipulates that a beneficiary is an individual who

meets all of the following conditions:
(a) he is an individual who derives income subject to tax

under article 4(l)(b) ITA, being emoluments payable
under a qualifying contract of employment, and received
in respect of work or duties carried out in Malta, or in
respect of any period spent outside Malta in connection
with such work or duties, or on leave during the carrying
out of such work or duties;
(b) he is protected as an employee under Maltese law,
irrespective of the legal relationship, for the purpose of
exercising genuine and effective work for, or under the
direction of, someone else, is paid, and has the required
adequate and specific competence, as proven to the
satisfaction of the competent authority,
(c) he proves to the satisfaction of the competent authority
that he is in possession of professional qualifications29;
(d) he is not a person who has benefitted under article 6 ITA;
(e) he fully discloses for tax purposes and declares emoluments
received in respect of income from a qualifying contract of
employment and all income received from a person related
to his employer paying out income from a qualifying
contract as chargeable to tax in Malta;
29 "professional qualifications" means qualifications attested by evidence of education

qualifications or, by way of derogation, when provided for by national law, attested by at least
five years of professional experience of a level comparable to education qualifications and
which is relevant in the profession or sector specified in the work contract or binding job offer,
"education qualification" means any diploma, certificate or other evidence of formal
qualifications issued by an educational establishment attesting the successful completion of
a postsecondary education programme, namely a set of courses provided by an educational
establishment recognised as a education institution by the State in which it is situated. An
education qualification shall be taken into account, on condition that the studies needed to
acquire it lasted at least three years;
"professional experience" means the actual and lawful pursuit of the profession concerned.
(f) he proves to the satisfaction of the competent authority

that he performs activities of an eligible office-, and
(g) he proves to the satisfaction of the competent authority
that:
(i) he is in receipt of stable and regular resources which
are sufficient to maintain himself and the members
of his family without recourse to the social assistance
system in Malta;
(ii) he resides in accommodation regarded as normal for
a comparable family in Malta and which meets the
general health and safety standards in force in Malta;
(iii) he is in possession of a valid travel document;
(iv) he is in possession of sickness insurance in respect of
all risks normally covered for Maltese nationals for
himself and the members of his family; and
(v) he is not domiciled in Malta.
9.2 Eligible Offices30
The employments and offices which are eligible for the reduced
rate of tax are listed in the Schedule to the HQPR and consist in
employments with companies licensed and/or recognised by the
30 The 2012 Budget Speech had announced that the remit of the rules would be extended
significantly: “to attract more experts in these specialised sectors to our shores, we are
extending the flat 15 percent income tax scheme for international professionals such as game
directors and game designers. We will also extend this scheme to academics and researchers in
the research and development sectors.
In order to increase the high-added-value of Maltese industrial sectors and to continue
to develop a manufacturing industry based on research, innovation and technological
development, the Minister announced that the fiscal incentives, launched for the financial
services and online gaming sectors, (which consist of the right to pay tax at a flat rate of 15%),
are to be extended to three other categories:
• to those Maltese with a prestigious career and who wish to return to Malta to work in
important industrial sectors;
• to those highly qualified and skilled foreign workers who are required for certain
industrial sectors; and
• to those persons who would like to carry out research or market an invention or
technology in Malta.”
The Minister created 2 special schemes for the persons mentioned.
Special Cases 439
competent authority or with undertakings holding an air operators’

certificate issued by the competent authority, consisting in the
following employments or offices:
(1) (a) Chief Executive Officer, Chief Risk Officer (including

Fraud and Investigations Officer), Chief Financial
Officer, Chief Operations Officer (including Aviation
Accountable Manager), Chief Technology Officer,
Chief Commercial Officer,
(b) Portfolio Manager, Chief Investment Officer,
Senior Trader/Trader, Senior Analyst (including
Structuring Professional), Actuarial Professional,
Chief Underwriting Officer, Chief Insurance
Technical Officer, Odds Compiler Specialist, Head of
Research and Development (including Search Engine
Optimisation and Systems Architecture), Aviation
Continuing Airworthiness Manager, Aviation Flight
Operations Manager, Aviation Training Manager, and
Aviation Ground Operations Manager,
(c) Head of Marketing (including Head of Distribution
Channels), Head of Investor Relations.
(2) Employments with undertakings holding an aerodrome
licence issued by the competent authority, consisting in
employment as Chief Executive Officer.
(3) Employment in the Assisted Reproductive Technology
sector consisting in employment as:
(a) Embryologist;
(b) Responsible Person;
(c) Lead Quality Manager?1
9.3 The Competent Authority

Rule 2 HQPR defines competent authority’ as meaning
respectively:
31 Added by L.N. 141 of 2018INCOME TAX ACT (CAP. 123) Highly Qualified Persons
(a) the body referred to in article 12(1) of the Financial

Institutions Act, in respect of any employment or office
with any company licensed and, or recognised by the said
body; and
(b) the body referred to in article 9 of the Lotteries and Other
Games Act, in respect of any employment or office with
any company licensed and, or recognised by the said body;
and
(c) the Authority for Transport in Malta established in terms
of article 5 of the Authority for Transport in Malta Act, in
respect of any employment or office with any undertaking
holding an air operators’ certificate issued in terms of
article 4 of the Civil Aviation (Air Operators’ Certificates)
Act or an aerodrome licence issued in terms of article 71 of
the Air Navigation Ordered) Office of the Chief Medical
Officer to Government.32
9.4 The Benefit
The benefit contemplated in the HQPR consists in the right to

pay tax at the reduced rate of 15% under Article 56 (21) ITA.
Rule 4 HQPR provides that when an individual exercises the
option available under article 56(21) ITA, the minimum amount
of income which shall be chargeable to tax at the reduced rate in
respect of that year of assessment shall be deemed to be €75,000.
The minimum amount of income of €75,000 is adjusted

annually in line with the Retail Price Index as published in the
Gazette by the National Statistics Office.
Should income from a qualifying contract of employment

exceed the sum of €5,000,000, no further tax would be charged
on income from a qualifying contract of employment in excess of
€5,000,000.
32 Added by L.N. 141 of 2018 INCOME TAX ACT (CAP. 123)Highly Qualified Persons
Special Cases 441
The rate of 15% applies without the possibility to claim any

relief, deduction, reduction, credit or setoff of any kind except for
deductions to which he is entitled to under the FSS rules.
9.5 Claw-Back of Benefits
With respect to EEA and Swiss nationals, the benefit applies for
a consecutive period of five years. With respect to third-country
nationals, the benefit applies for a consecutive period of four years.
Subject to rule 14, beneficiaries, irrespective of whether they have
availed themselves of the benefit provided by these rules or not,
shall be eligible, upon application, for a one-time extension of five
years to his qualifying period, subject to the continued adherence
to the other provisions of the rules. Such an extension shall not be
available to any person who was resident in Malta prior to the 1st
ofJanuary 2008 and that the maximum qualifying period shall not
exceed a consecutive period of ten years. L.N. 7 of 2017 clarifies
that the ten year period applies as a consecutive period of ten years
commencing from the year preceding the first year of assessment in
which that person is first liable to tax under the provisions of the
Act (as opposed to 10 years of assessment).
Rights acquired under the HQPR are withdrawn with

immediate effect if the grant of the benefit and the beneficiary’s
stay in Malta are not in the public interest33.
Rights acquired under the HQPR are deemed to have been

withdrawn with retrospective effect if a beneficiary is a third
country national and he either -
(a) physically stays in Malta, in the aggregate, for more than

1,460 days; or
33 A term which is defined as including the interests of public safety, the protection of public
order, national security, territorial integrity, public health or morals.
(b) directly or indirectly acquires real rights over immovable

property situate in Malta or holds a beneficial interest
directly or indirectly consisting in, inter alia, of real rights
over immovable property situated in Malta.
10. Foundations
The tax treatment of Foundation is regulated by S.L. 123.114

Foundations (Income Tax) Regulations which in Rule 3 prescribe
that:
(a) a foundation shall, for the purposes of the ITA, be treated

in the same manner as a company that is ordinarily resident
and domiciled in Malta;
(b) Tax shall be payable on the profits of a foundation at the
rate of 35% and is payable in the same manner applicable
to companies that are ordinarily resident and domiciled in
Malta.
(c) Distributable profits of foundations must be allocated to
tax accounts in the same manner applicable to companies
that are ordinarily resident and domiciled in Malta.
(d) Any transfer of a beneficial interest in a foundation is
deemed to be a transfer of a security for all the purposes of
the Income Tax Acts.
The rules above imply that a Foundation is eligible to benefit

from the participation exemption and that foundations allocate
profits to tax accounts triggering the mechanism of the refundable
tax credit system.
Rule 4 prescribes that the administrators of a foundation may

by notice in writing to the Commissioner irrevocably elect that a
foundation shall be taxed under the provisions of the Act applicable
to trusts.
Special Cases 443
11. Petroleum Profits
Act IV of 2011 created a new tax regime for petroleum profits. The
regime is contemplated in Article 23 ITA which can be divided in
two distinct parts:
(a) 23 (1) (2) (3) (4) and 23 (6) ITA which deal with
income derived by persons falling within the definition of
Contractor); and
(b) 23 (5) ITA dealing with profits derived by sub-contractors.
Both parts apply to profits from petroleum, a term which the

2011 amendments defined as follows:
“petroleum’” means crude oil of whatever density, natural gas and other
hydrocarbons and substances that may be extracted therefrom;”
ILI Profits derived by ‘Contractors’
The 2011 rules create a regime which contemplates special

deductions and a particular way of accounting for tax.
The application of Article 23 is restricted to a particular

scenario, income from the commercial exploitation of a Product
Sharing Agreement. Article 23 applies to persons:
(a) engaged in the business of exploration for, and the

production of, petroleum defined in the law as ‘the
Contractor’;
(b) who derive, or aims to derive, gains or profits through a
Production Sharing Contract (defined by the law as ‘the
Contract’) granted to such person by the Government of
Malta by way of licence in accordance with the provisions
of the Petroleum Production Act, the Continental Shelf
Act and the Petroleum (Production) Regulations, or
any provision amending or substituting the said Acts or

Regulations, the chargeable income of the said person
from such business shall be determined as set out in this
article.
Gains or profits derived by a Contractor from the production

of petroleum:
(a) shall be arrived at by deducting the recoverable costs as

defined in the Contract and not yet fully recovered by the
Contractor, from the total of the value of the cost recovery
petroleum and of the share of profit petroleum, as defined
in the Contract, allotted to the Contractor for that year,
to which shall be added any ancillary or incidental income
for the same year.
(b) Where after such deduction as is referred to in paragraph
(a) there remains any balance of unabsorbed recoverable
costs, the amount of such unabsorbed costs shall be carried
forward to the following year and shall be added to and
become part of the recoverable costs for that year and are
carried forward until all recoverable costs shall have been
absorbed.
(c) each Contract is deemed to constitute a separate and
distinct source of income and any Contractor deriving
gains or profits from more than one Contract shall be
subject to tax as if he were a separate and unconnected
person with respect to each such Contract.
(d) Where more than one petroleum field is in production in an
area covered by the same Contract, the gains or profits from
each such field is determined as if each such field constitutes
a separate and distinct source of income arising to a separate
person, so however that the Contractor shall have the right to
identify the fields in the said area where the cost ofexploration
and development operations are to be taken into account in
determining the relative gains or profits.
Special Cases 445
(e) Surrendering of losses is not allowed.
Act No. IV of 2011 introduced a dividend tax exemption on

profits derived by contractors. The dividend tax exemption is
contained in 12 (1) (p) ITA:
“(p) any dividend paid by a company whose main source of income in the
relevant year is charged at the rate provided for in article 56(13) in respect
of a Contractor;”
L.N. 247 of 2011 INCOME TAX ACT (CAP. 123) Tax

Accounts (Income Tax) (Amendment) Rules, 2011 established
that gains or profits chargeable to tax under Article 23 are allocated
to the Final Tax account.
11.2 Profits derived by Sub-Contractors
Article 23 (5) ITA contemplates a special tax regime for persons

who fall under the definition of subcontractors. The regime
comprises a special withholding tax rate and particular compliance
obligations.
Article 23 (5) ITA applies exclusively to non-resident sub

contractor who render services to a Contractor in Malta imposing
the following special rules on them and on contractors too:
(a) Contractors must withhold tax at the rate of 10% on

payments made to the sub-contractor for services rendered
in Malta;
(b) Tax withheld34 must be paid to the Commissioner within

thirty days from the deduction;35
12. Tax Schemes for High Earners
Act XVI of 2011 was entitled the Retirement Pensions Act, 2011
but it incorporated two important amendments to the ITA because
it created the legal infrastructure needed to create new tax schemes
for high earners. Act XVI introduced Article 56 (23) ITA36 which
provides that:
“(23) Notwithstanding the provisions of sub-articles (1) and (2) in the

case of an individual who, after 1 January 2011, has been granted a special
tax status under such terms and conditions as the Minister may prescribe,
the tax upon the chargeable income of that individual, other than income
mentioned in sub-article (10)(b) shall be charged at the rate of fifteen cents
(0.15) on every euro thereof:
Provided that the Minister shall prescribe the minimum tax payable by such
individual in respect of any year of assessment.””
34 The nature of the withholding tax depends on the will of the subcontractor. Article 23 (5) (c)
ITA prescribes that the tax withheld shall be considered as a final withholding tax unless the
sub-contractor notifies the Commissioner that this tax is to be considered as a provisional tax
payment to be credited against the tax liability of the said subcontractor’s chargeable income
for the relevant year of assessment computed in accordance with the provisions of the ITA.
35 Article 23 (5) (b) ITA prescribes that where a Contractor fails to deduct and pay tax in
accordance with paragraph (a), the provisions of article 73(4) of this Act and of article 40(1)
of the Income Tax Management Act shall apply mutatis mutandis.
36 Act XVI created a second enabling provision, Article 56 (24) ITA which prescribes that:
“(24) In the case of an individual or individuals who, after 1 January 2011, has or have been
granted a special temporary tax status under such terms and conditions as the Minister may
prescribe, the tax upon the chargeable income, other than income mentioned in sub-article
(10)(b) shall be charged at the rate of fifteen cents (0.15) on every euro thereof:
Provided that the Minister shall prescribe the minimum tax payable by such individual or
individuals in respect of any year of assessment.”
56 (24) ITA has not been implemented yet.
Special Cases 447
12.1 S.L. 123.148 Global Residence Programme

Rules (‘GRPR’)
This law is modelled on the HQPR and follows the same structure
of the HQPR.
12.1.1 The Benefit

Article 56 (23) ITA prescribes that a person who has been granted
special tax status is eligible to pay tax at the rate of 15%. The
beneficial rate does not apply to Article 56 (10) (b) ITA income,
income derived from Malta and chargeable to tax under articles 4
or 5 ITA.
12.1.2 Computational Rules

Rule 5 GRPR explains how the tax benefit works. The 15% rate
applies on any income arising outside Malta which is received in
Malta (including income arising outside Malta and received in
Malta during the whole of the year in which the special tax status
was granted) by a beneficiary, the beneficiary’s spouse and children
falling under the definition of the term “dependant” in rule 2. The
reduced rate applies with the possibility to claim relief of double
taxation under article 74 ITA. Nonetheless, the minimum amount
of tax payable in respect of the income arising outside Malta of
beneficiaries is deemed to be €15,000 for any year of assessment.
Such minimum amount is payable in full in both the year when the
special tax status was granted and in the year when the individual
ceases to possess the said special tax status.
Income of a beneficiary, the beneficiary’s spouse and dependants

that is not chargeable to tax at 15% is charged as separate income
at the rate of 35%.
12.1.3 Beneficiary
An individual qualifies as a beneficiary under the rules if he is
not a long-term resident37 and he proves to the satisfaction of the

Commissioner that:
(a) he is a third country national and is not a Maltese, EE A or
Swiss national;
(b) he is not a person who benefits under the Residents
Scheme Regulations, the High Net Worth Individuals -
EU / EEA / Swiss Nationals Rules, the High Net Worth
Individuals - Non-EU / EEA / Swiss Nationals Rules,
the Malta Retirement Programme Rules, the Qualifying
Employment in Innovation and Creativity (Personal Tax)
Rules or the Highly Qualified Persons Rules;
(c) he holds a qualifyingproperty holding,
(d) he is in receipt of stable and regular resources which are
sufficient to maintain himself and his dependants without
recourse to the social assistance system in Malta;
(e) he is in possession of a valid travel document;
(f ) he is in possession ofsickness insurance in respect of all risks
across the whole of the European Union normally covered
for Maltese nationals for himself and his dependants;
(g) he can adequately communicate in one of the official
languages of Malta; and
(h) he is a fit and proper person.
12.1.4 Qualifying Property Holding

The concept of qualifying property holding is a concept which
admits both ownership and rental.
“Qualifying property holding” is defined as meaning a holding

which arises where a beneficiary either:
37 The term "long-term resident" is defined as meaning:

(a) a person who has long-term resident status in terms of the Status of Long-term Residents
(Third Country Nationals) Regulations;
(b) a person who applies for long-term resident status under the Status of Long-term Residents
(Third Country Nationals) Regulations;
Special Cases 449
(a) owns qualifying owned property-,™ or

39 as lessee ;
(b) rents qualifying rented property38
and, in either case, occupies such property as his primary
residence40.
12.1.5 Cessation of Status

Rule 6 prescribes that special tax status is withdrawn:
(a) if the individual becomes a Maltese, EEA or Swiss national;

(b) if, at any time, after the appointed day, such individual
does not hold a qualifying property holding, including
in the case where the said individual lets or sublets the
qualifying property holding;
(c) if, at any time, after the appointed day, such individual
becomes a long-term resident;
(d) if, after the appointed day, the individual is not in
possession of sickness insurance in respect of all risks
normally covered for Maltese nationals for himself and his
dependants;
(e) if the individual s stay is not in the public interest, or (f ) if
the individual stays in any other jurisdiction for more than
one hundred and eighty-three days in a calendar year.
38 Defined as meaning an immovable property purchased at a consideration of not less than:

(a) subject to the provisions of paragraph (b), two hundred and seventy-five thousand euro
(€275,000) for a property situated in Malta; or
(b) two hundred and twenty thousand euro (€220,000) for a property situated in Gozo or in
the south of Malta:
An immovable property purchased before the date of publication of these rules for a
consideration which is less than the amounts indicated in paragraphs (a) or (b) above shall be
considered to be "qualifying owned property" insofar as the value of such immovable property
as declared on the date of application by the applicant is not less than the amounts indicated
in paragraphs (a) or (b) above as supported by a separate and independent architect valuation
including architect’s plan which are delivered to the Commissioner upon application:
39 Defined as meaning of not less than :
(a) subject to paragraph (b), nine thousand and six hundred euro (€9,600) per annum for a
property situated in Malta; or
(b) eight thousand and seven hundred and fifty euro (€8,750) per annum for a property
situated in Gozo or in the south of Malta.
40
12.2 Subsidiary Legislation 123.160 Residence

Programme Rules (‘RPR’)
The GRPR do not apply to EEA and Swiss nationals. In the GRPR
the acquisition of either EEA or Swiss nationality results in loss of
special tax status.
S.L.126. 160 contemplates a special scheme for EEA or Swiss
Nationals. It is extremely similar to the GRPR scheme.
Beneficiaries under RPR benefit from the right to pay tax at

15%. The minimum amount of tax payable is of €15,000)..
The conditions which a beneficiary must meet under RPR are

similar to those imposed by the GRPR. Rule 3 establishes that
applicants must not permanent residents ofMalta .4I
13. Subsidiary Legislation 123.134 Malta Retirement

Programme Rules (the ‘MRPR’)
Article 56 (23) ITA was used as an enabling provision for a third

special tax system. In September 2012, the Minister created a
special tax system for pensioners. The MRPR draw heavily from
the HNWI EU Rules, employing identical definitions and using
the same legal structure. The MRPR are basically a restricted
version of the HNWI EU Rules with lower eligibility thresholds.
13.1 Beneficiary
Rule 4 MRPR prescribes that a beneficiary is an individual who

proves to the satisfaction of the Commissioner that:
41 Defined as meaning:
“(a) a person who has right of permanent residence in terms of article 6 and is in possession
of a permanent residence certificate issued in terms of article 7 of the Free Movement of
European Union Nationals and their Family Members Order; or
(b) a person who applies for right of permanent residence in terms of article 6 of the Free
Movement of European Union Nationals and their Family Members Order;”
Special Cases 451
(a) he holds a qualifyingproperty holding-,

(b) he is not a person who benefits under the Residents
Scheme Regulations, the High Net Worth Individuals -
EU / EEA / Swiss Nationals Rules, the High Net Worth
Individuals - Non-EU / EEA / Swiss Nationals Rules or
the Highly Qualified Persons Rules;
(c) he is neither a Maltese national nor a third-country national ;
(d) he is in receipt of a pension42, as supported by documentary
evidence, all of which is received in Malta and constitutes
at least 75% of the beneficiary’s chargeable income;
(e) he is in possession of a valid travel document;
(f ) he is in possession ofsickness insurance in respect ofall risks
across the whole of the European Union normally covered
for Maltese nationals for himself and his dependents;
(g) he is not domiciled in Malta and that he does not, within
five years from the date of application, intend to establish
his domicile in Malta; and
(h) he is a fit and proper person.
Paragraph (d) is the main distinguishing feature of the MRPR.
42 "pension" is defined as meaning means periodic payments paid to a former employee in respect
of past employment including where remunerations are paid in respect of services rendered to
a State or a political subdivision or local authority thereof. The term "pension" also includes
remunerations paid as lifetime or temporary annuities, as well as regular income from an
occupational retirement scheme, personal overseas retirement plan and insurance policies but
does not include a pension in the form of a lump sum payment without periodic pension
payments and any capital sum received by way of commutation of pension, retiring or death
gratuity or received as consolidated compensation for death or injuries that are exempt under
article 12( 1 ) (h) of the Act;
"overseas retirement plan" means a bona fide scheme or arrangement, organized under the
laws of a country outside of Malta, which govern the rights and responsibilities of the parties
thereto, and under which payments are made to beneficiaries for the principal purpose of
providing retirement benefits;
"overseas retirement scheme" means a scheme or arrangement, organised under the laws of a
country outside Malta with the principal purpose of providing retirement benefits;
"occupational retirement scheme" means a retirement scheme established for, or by, an
employer or a number of employers or an association representing employers, jointly or
separately, for the benefit of employees and includes an overseas retirement scheme.
13.2 Qualifying Property Holding under the MRPR
The thresholds of the MRPR are lower than those contemplated in

the HNWI rules. The definition of qualifying property holding is
quasi-identical to that contained in the HNWI rules save for two
important exceptions. The proviso to the definition of qualifying
property holding contained in the MRPR allows special carers’43 to
reside with the beneficiary in the qualifying property holding. Even
the definitions of qualifying rented property and qualifying owned
property are different to those contained in the HNWI rules. The
MRPR definitions contemplate lower standards to the equivalent
definitions contained in the HNWI Rules. Interestingly, for
properties in Gozo, sub-standards are contemplated:
”(a) after 1 January 2011 up to 30 June,2013 at a consideration of not

less than:(i)two hundred and seventy-fivethousand euro (€275,000) for
a propertysituated in Malta; or(ii)two hundred and fifty thousandeuro
(€250,000) for a property situated inGozo;(b)on or after 1 July, 2013, at
aconsideration of not less than:(i)subject to the provisions ofparagraph
(b), two hundred and seventy-fivethousand euro (€275,000) for a
propertysituated in Malta; or(ii)two hundred and twenty thousandeuro
(€220,000) for a property situated inGozo or in the south of Malta:..;”
13.3 The Tax Benefit under the MRPR
The tax benefit is the right to pay tax at fifteen per cent under 56
(23) ITA. The MRPR contemplate lower minimum tax than the
HNWI Rules but the MRPR have a restricted scope because Rule 4
(d) MRPR establishes that a beneficiary must be a person in receipt
of a pension all of which must be received in Malta which must
constitute 75% of chargeable income. Rule 5 MRPR explains that:
43 Defined as meaning ‘an individual who has been providing substantial and regular curative or
rehabilitative health care services to the beneficiary or dependent in a systematic manner for at
least three years prior to the application in terms of rule 3. The rendering of such service needs
to be regulated by a contract of service and such individual shall be registered with the relevant
tax authorities in Malta;
Special Cases 453
“...the rate of fifteen cents (0.15) on every euro shall apply on any income
arising outside Malta which is received in Malta by the beneficiary or
dependent, with the possibility to claim relief of double taxation under
article 74(a) and (b) of the Act:
Provided that the minimum amount of tax payable in terms of these rules in
respect of any year of assessment shall be seven thousand and five hundred
euro (€7,500) in respect of the beneficiary and five hundred euro (€500) per
year of assessment for every dependent and every special carer.
(2) Income of a beneficiary or dependent that is not chargeable to tax under
these rules at the rate referred to in sub-rule (1) shall be charged as separate
income at the rate of thirty-five cents (0.35) on every euro.
(3) Any tax paid under these rules, excluding any tax paid under sub-rule (2),
shall not be refundable.”
13.4 Cessation of Status
Rule 6 MRPR prescribes that loss of tax status occurs if:
(a) if, at any time, after the appointed day, such individual
does not hold a qualifying property;
(b) if the individual becomes a Maltese national or a third
country national;
(c) if the individual fails to receive in Malta all the pension
indicated in the documentary evidence submitted to the
Commissioner according to rule 4(d);
(d) if, after the appointed day, the individual is not in
possession of sickness insurance in respect of all risks
normally covered for Maltese nationals for himself and
dependents;
(e) if the individual establishes his domicile in Malta;
(f ) if the individual acquires a permanent residence certificate
in terms of article 7 of the Free Movement of European
Union Nationals and their Family Members Order;
(g) if the individual’s stay is not in the public interest;
(h) if the individual resides in Malta for less than ninety days
a year averaged over any five year period; or
(i) if the individual stays in any other jurisdiction for more

than one hundred and eighty-three days in a calendar year.
15. Subsidiary Legislation 123.142 Repatriation of

Persons Established in a Field of Excellence Rules
(the ‘RPEFE Rules’)
The enabling provision of this special scheme is Article 56 (25) ITA

which prescribes that:
“(25) An individual who is established in a field of excellence and returns as

an ordinary resident in Malta may opt to have his income from employment
exercised in Malta charged to tax at the rate of 15 cents on every euro,
provided that he has been ordinarily resident in Malta for at least twenty
years but has not been ordinarily resident in Malta for the ten consecutive
years prior to his return, and subject to such terms and conditions as may be
prescribed, including the minimum income chargeable and the number of
years over which the benefit may be availed of.”
Even the RPEFE draws heavily from the HQPR and the HNWI
Rules.
15.1 The Benefit
The RPEFE Rules consists in the right to pay tax at the reduced rate
of 15%. Rule 5 RPEFE prescribes that when an individual exercises
the option available under article 56(25) ITA, the minimum
amount of income which shall be chargeable to tax at the reduced
rate is deemed to be seventy-five thousand euro (€75,000).
The rate of 15% shall apply without possibility to claim any

relief, deduction, reduction, credit or setoff of any kind other than
FSS deductions in terms of Article 23ITMA. Where an individual
exercises the option available under article 56(25) ITA, the
income that is charged to tax at the rate of 15% shall be deemed to
Special Cases 455
constitute the first part of the individual’s total income for the year
of assessment in question and the tax on the remaining income shall
be calculated at the rate or rates that would have been applicable to
that remaining income had the option not been exercised.
The option available under article 56(25) ITA may not be
exercised in respect of any year of assessment preceding the year of
assessment 2013.
The option available under article 56(25) ITA applies for

a consecutive period of five years commencing from the year
preceding the first year of assessment in which that person is first
liable to tax under the provisions of the Act after returning to reside
in Malta.
15.2 Scope of the RPEFE Rules
The benefit applies to income from a qualifying contract of

employment when it is received by an eligible person who is a
beneficiary and consists in employment income (exclusive of the
annual value of any fringe benefits) of a minimum of seventy-five
thousand euro (€75,000) and consists of emoluments received by
an eligible person.
A qualifying contract of employment is considered to be such if

such contract of employment is approved in writing by the Malta
Enterprise.
15.3 Eligible Person and Beneficiary
“Eligible person” is defined as meaning an individual who is

established in afield ofexcellence and returns as an ordinary resident
in Malta provided that he had been ordinarily resident in Malta for
at least twenty years but has not been ordinarily resident in Malta
for the ten consecutive years prior to his return to Malta.
“Field of excellence” is defined as meaning an area ofprofessional

competence in which an eligible person has excelled and which area
is relevant for the manufacturing and research and development
sectors, as may be defined in Guidelines which may be issued by
Malta Enterprise Corporation in terms of the Malta Enterprise Act.
Rule 4 establishes that a beneficiary is an eligible person who,

to the satisfaction of the Corporation, meets all of the following
conditions:
(a) he is an individual who derives income subject to tax under
article 4(l)(b) of the Act, being emoluments payable
under a qualifying contract of employment, and received
in respect of work or duties carried out in Malta or in
respect of any period spent outside Malta in connection
with such work or duties or on leave during the carrying
out of such work or duties;
(b) he proves to the satisfaction of Malta Enterprise
Corporation that he is in possession of educational
and, or professional qualifications as are relevant in the
profession or sector specified in the binding job offer or
in the qualifying contract of employment as these may
be further defined in Guidelines which may be issued
by Malta Enterprise Corporation in terms of the Malta
Enterprise Act;
(c) he is protected as an employee under Maltese law,
irrespective of the legal relationship, for the purpose of
exercising genuine and effective work for, or under the
direction of, someone else, is paid, and has the required
adequate and specific competence, as proven to the
satisfaction of Malta Enterprise Corporation.
Special Cases 457
16. L.N. 324 of 20II Income Tax Act (cap. 123)

Securitisation Transactions (Deductions) Rules, 2011
(the fSTDR9)
The STDR are an interesting experiment because they introduce

a number of concepts which in Maltese tax law are quite novel.
The STDR provide for special tax treatment for vehicles which
fall under the definition of Securitisation Vehicle contained in the
Securitisation Act.44
The STDR contemplate computational rules which seamlessly

align tax treatment with accounting treatment. Taxable income is
recognised when it is recognised for accounting purposes.
Securitisation vehicles are allowed the following special tax

deductions:
(a) sums payable by the securitisation vehicle to the originator

or assignor -
(i) for the transfer of securitisation assets to the said
securitisation vehicle; or
44 Chapter 484 of the Laws of Malta which defines "securitisation vehicle" means as a vehicle as
referred to in article 3 namely:
(a) a company, including an investment company;
(b) a commercial partnership;
(c) a trust created by a written instrument; or
(d) any other legal structure which the competent authority may, by notice, permit to be used
for a securitisation transaction, established under the laws of Malta or those of a jurisdiction
recognised by the competent authority.
When a securitisation vehicle is established under this Act:
(a) the objects and purposes of such vehicle shall be limited to such matters which are necessary
to carry out all or any transactions intended or required to implement or participate in a
securitisation transaction and all related and ancillary acts including, without limitation, the
acquisition, management and collection ofcredits and other receivables or other securitisation
assets, the assumption of risks, the granting of secured loans, the issue of financial instruments
or the borrowing of funds to finance the acquisition of assets or assumption of risks, the
engagement of service providers to administer or support its activities and the entering into
derivative instruments; and
(b) its constitutive document shall state expressly that it is a vehicle established subject to the
provisions of this Act.
(ii) as a result of any risks of the said originator assumed

by the said securitisation vehicle;
(b) premiums, interest or discounts in relation to financial
instruments issued, or funds borrowed, by the securitisation
vehicle to finance the acquisition of securitisation assets or
the assumption of risks; and
(c) any expenditure incurred by the securitisation vehicle
in respect of the day to day administration of the
securitisation vehicle itself, including expenditure relating
to statutory requirements, and of its assets and risks,
including the collection of any relevant claims.
(d) Where the securitisation vehicle opts to delegate such
administration, or part thereof, to another person, the
amount of expenditure incurred for the services received
from such other person for the performance of the said
administration may be deducted.
(e) Where, after taking into account the relevant deductions
contemplated in article 14 of the Act and the above,
tax is chargeable on any remaining total income of
the securitisation vehicle, a further deduction of an
amount equal to the said remaining total income may
be claimed. The deduction is allocated to the FTA.
Such further deduction may be claimed at the option of
the securitisation vehicle (subject to the satisfaction of
the commissioner upon evidence being shown relevant
originator or assignor, or their assigns or successors in title,
has given his irrevocable written consent to the exercise
of such option in relation to the relevant contract. For
this purpose, the securitisation vehicle needs to provide
proof of such written consent giving details of identity of
the originator or assignor, including the tax registration
number for Maltese income tax purposes where applicable,
and the place where the control and management of its
business is exercised).
Special Cases 459
For obvious reasons, Securitisation vehicles are proscribed

from benefitting from group loss relief. The STDR contemplate a
specific anti-abuse provision.45
17. Insurance Companies
Companies which are in the business of insurance are subject to

special rules which are contained in Articles 2, 15A, 27,41 (2) (c)
ITA, 41 (3) (f ) (ii) (C) and 17ITMA.
17.1 Special Tax Accounting Rules
In Article 2, the definition of company’ contains a special provision

relating to cell company as defined in the Companies Act (Cell
Companies Carrying on Business of Insurance) Regulations’. Every
cell of a cell company and that part of a cell company in which
non-cellular assets are held, for tax purposes are considered to be
a separate company.
Another important tax accounting rule for insurance companies

is found in the definition of foreign income account. Paragraph (e) in
the definition of foreign income account contains a series of provisos
which establishes that a company registered in Malta authorised
under article 7 of the Insurance Business Act. (not being a company
registered under the Malta Financial Services Authority Act) cannot
allocate profits from the business of insurance in relation to risks
situated outside Malta to the foreign income account
45 Rule 9 STDR prescribing that where in relation to a transaction, or to a series of transactions,
involving at some point a securitisation contract, sums are determined such that the originator
or assignor, or any person which is controlled and beneficially owned directly or indirectly to
the extent of more than 50% by the same shareholders, is in a position to obtain an undue
advantage which has the effect of reducing their liability to tax in a manner which is not
reconcilable with the object and purpose of these rules, the Commissioner shall consider
any such transaction, or series thereof, to be a profitmaking scheme for the purposes of the
provisions of article 4(l)(a) of the Act and shall determine the relevant liability to tax in such
manner and in such amount as may be necessary so as to nullify the said advantage.
17.2 Insurance Managers
Article 15 A ITA prescribe that companies which, on the 1 st October,

2003 were authorised to act as insurance managers under article 13
of the Insurance Business Act can avail themselves of the benefits
contemplated in Article 15ITA relating to investment managers.
17.3 Special Computational Rules
Article 27 ITA provides that profits derived from the business of

insurance as insurer is, as from 2000, ascertained with reference to
special computational rules. Article 27ITA is divided in two parts;
part (a), the first part, regulates the profits of a person carrying
on general business, other than a person carrying on long term
business, part (b), the second part, regulates the profits carrying
on long term business, either exclusively or in addition to general
business.
General Business
In the case of a person carrying on general business, other than a
person carrying on long term business, total income is ascertained
by taking for the year immediately preceding the year of assessment
(i) technical provisions at the commencement of the year;

(ii) the equalisation reserve at the commencement of the year;
(iii) gross premiums written;
(iv) reinsurance recoveries received;
(v) income from investments received and receivable and
interest income earned;
(vi) profits or gains from the sale or disposal of investments;
(vii) capital gains subject to tax under the provisions of this
Act;
(viii) realised differences on exchange;
(ix) other technical income including commissions, allowances
and fees received and receivable;
Special Cases 461
(x) profits or gains not falling under any of the foregoing sub
paragraphs, and deducting from the aggregate of the above
the aggregate of the following:
(xi) technical provisions at the end of the year;
(xii) the equalisation reserve at the end of the year;
(xiii) the deductions allowable under Part IV ITA, including:
(1) claims paid;
(2) reinsurance premiums paid;
(3) losses from the sale or disposal of investments.
Long Term Business

Total income derived from long term business is ascertained by
taking -
(i) income from investments received and receivable and

interest income earned, other than those of a long term
fund;
(ii) capital gains subject to tax under the provisions of this
Act, not being gains derived from a long term fund;
(iii) commissions, allowances and fees received and receivable
not credited to a long term fund;
(iv) profits or gains from the sale or disposal of investments
not relating to a long term fund;
(v) realised differences on exchange not relating to a long
term fund;
(vi) the surplus in a long term fund which shall be ascertained
by taking -
(1) technical provisions at the commencement of the
year;
(2) gross premiums written;
(3) reinsurance recoveries received;
(4) income from investments received and receivable and
interest income earned, relating to the long term fund;
(5) profits or gains from the sale or disposal of investments,
which gains or profits shall, for the purposes of this

paragraph, in all cases be deemed to be gains or profits
falling within the purport of article 4(1) (a), so however
that where any investments were capital assets as at the
thirty-first (31st) day of December 2008, the cost of
acquisition of such investments for the purpose of this
paragraph shall be the market value applicable thereto
as at that date;
(6) capital gains subject to tax under the provisions of
this Act and derived from the transfer of assets other
than investments referred to in sub-paragraph (5) and
realized differences on exchange relating to the long
term fund;
(7) other technical income including commissions,
allowances and fees received and receivable; and
deducting from the aggregate of the above the
aggregate of the following:
(8) the deductions allowable under Part IV relating to the
income of the long term fund including -
(i) claims, maturities and surrenders paid, including, for
the avoidance of doubt, the tax paid by the insurer in
respect of determinable amounts due in relation to
contracts of long term business in terms of sub-article
(2);
(ii) reinsurance premiums paid;
(iii) other technical charges including commissions and
allowances paid and payable;
(9) losses from the sale or disposal of investments and
other assets of the long term fund referred to in sub
paragraphs (5) and (6), so however that where any
investments were capital assets as at the thirty-first
(31st) day of December 2008, the cost of acquisition
of such investments for the purpose of this paragraph
shall be the market value applicable thereto as at that
date; and
Special Cases 463
(10) technical provisions at the end of the year;

(vii) gains or profits not falling under any of the foregoing
paragraphs not being gains or profits derived from a long
term fund, and deducting from the aggregate of the above -
(viii) the deductions allowable under Part IV of this Act
and which have not been taken into account in the
determination of the surplus in a long term fund; and
(ix) any deficit arising out of the computation in subarticle (1)
(vi):
(b)
Non-Residents Deriving Income from Long Term

Business
Where the person is not resident in Malta and the gains or profits
accrue in part in Malta and in part outside Malta, the total income
on which tax shall be payable shall -
(a) in the case of a person doing general business, be
ascertained as provided for in sub-article (l)(a)(i) to (xiii)
on the business carried on in or from Malta;
(b) in the case of a person carrying on long term business, be
ascertained by taking the surplus in the long term fund
computed in accordance with sub-article (l)(b)(vi) of the
business earned in or from Malta;
(c) in determining the total income as aforesaid, any income
from investments held outside Malta to back Malta
business, where such income cannot be readily ascertained,
shall be computed by taking a proportion of the persons
worldwide investment income in the year preceding the
year of assessment equal to the proportion which the
investments as aforesaid bore to the persons worldwide
investments.
Aligning Tax Laws to EU Directives

Act XV of 2016 added new-sub-article to Article 27 ITA. The
recently introduced 27 (8) ITA empowers the Minister to prescribe
rules that take into account EU directives on solvency and IFRS

rules for insurance as adopted by the EU.
18. Investment Managers
Article 15 ITA provides for special computational rules for

companies (IMs) which on the 1 st October, 2003 held an investment
services licence issued under article 6 of the Investment Services
Act (‘ISA’), or a company which, on the 1st October, 2003 was
recognised by the relevant competent authority for the purposes of
article 9A ISA, and whose activities solely comprise the provision
of management, administration, safekeeping, or investment advice
to collective investment schemes as defined in the ISA.
IMs may opt to be allowed as deductions in addition to or as

a replacement for, as the case may be, the amounts allowed under
article 14(1) ITA, the following special deductions:
(a) rental, energy costs, building maintenance, building

insurance and other building occupancy costs incurred
in the period from the year preceding the first year of
assessment in which the investment services company
first becomes liable to tax up to and including the year
preceding the tenth year of assessment shall be allowed as
an additional one hundred per cent of such expenditure;
(b) a one hundred per cent deduction shall replace the
deductions provided for under article 14(l)(f) and (j)
ITA in respect of expenditure which is incurred in the
period commencing from the year preceding the first year
of assessment in which the investment services company
first becomes liable to tax under the provisions of ITA
up to and including the year preceding the fifth year of
assessment and, in addition, expenditure in respect of
office premises shall be eligible for such deduction as if the
Special Cases 465
said premises were industrial buildings;

(c) the amounts invested by an IM for its own account in a
collective investment scheme managed by that company
shall be allowed as a deduction if such investment is made
during the period commencing from the year preceding
the first year of assessment in which the IM first becomes
liable to tax up to and including the year preceding the
fifth year of assessment:
Such funds so invested must not be disinvested from
such collective investment scheme within two years of
the making of the said investment and the additional
deduction must not affect the amount which is to be
taken as the cost of acquisition of such investment for the
purposes of any other provision of ITA. Such deductions
cannot be carried forward as part of a loss to be set off
against the company’s liability in respect of a capital gain
arising on the disposal of its investments in the collective
investment scheme;
(d) remuneration paid by an IM to its employees who are
resident in Malta are allowed as an additional one hundred
per cent of that remuneration if such expenditure is
incurred during the period commencing from the year
preceding the year of assessment in which the investment
services company first becomes liable to tax and including
the year preceding the tenth year of assessment;
(e) there shall be allowed as a deduction any other expenses
and outgoings incurred by the investment services
company wholly and exclusively for the purposes of
carrying on its business and which would otherwise not
have been allowed as a deduction under the provisions of
article 14(1) ITA.
Special rules apply to pre-trading expenses.

19 Subsidiary Legislation 123.90 Venture Capital

Fund (Tax Credit) Regulations
Companies falling under the definition of a “designated venture

capital fund” are eligible to special tax credits. “Designated venture
capital fund” is defined as meaning a collective investment scheme -
(a) which is a prescribed fund in terms of article 41 A(b) ITA;
and
(b) where the securities issued by such scheme are securities
listed on a stock exchange recognised under the Financial
Markets Act; and
(c) which is named as such by the Corporation by means of a
designation that has not been revoked; and
(d) in which the Corporation holds securities; and
(e) which was set up with the purpose of increasing the
amount of private investment capital available for Malta
based companies in the seed or early stage of business
development as well as to provide finance for innovative
processes, ideas and techniques; and
(f) concerning which the Corporation has informed the
Commissioner of the relevant details referred to in
paragraphs (a), (b), (c), (d) and (e) hereof.
A tax credit certificate is a certificate which is issued by the

Commissioner after he receives a notice by a designated venture
capital fund of purchase of securities by investors, and he is satisfied
that such securities have been actually fully paid for.
A designated venture capital fund holding a tax credit certificate
may claim a tax credit equivalent to thirty percent (30%) of the
total nominal value shown on the said certificate if it surrenders the
certificate to the Commissioner.
The maximum amount of tax credit claimed by any person

for all the relevant years of assessment taken together may not be
greater than €350,000.
Special Cases 467
A tax credit certificate may only be surrendered after the lapse of

the third year from the date when the person holding the certificate
had acquired the securities which gave him the right to apply for
the certificate.
The person surrendering the certificate has continuously held

the securities referred to in the previous proviso during the said
three years.
20. The Financial Leasing Rules (‘FLR’)46
The FLR came into force as from year of assessment 2006. The
FLR create special rules relating to the determination of chargeable
income derived by a lessor and a lessee in a finance lease47. A Finance
Lease is governed by the FLR when:
(1) the lessor is a finance leasing company; and

(ii) the period of the lease is for four years or more and is
not shorter than the period of the asset s depreciation as
established in the Schedule to the Deduction (Wear and
Tear of Plant and Machinery) Rules; and
(iii) notification of the lease contract is made to the
Commissioner by the finance leasing company, or, if the
finance leasing company falls under paragraph (b) of the
definition of “finance leasing company” in rule 2, by the
lessee, within three months of the signing of the lease
46 Subsidiary Legislation 123.88. Finance Leasing Rules legal notice 369 of 2005.
47 Defined in Rule 4 FLR as,
‘A finance lease is constituted by the lease of an asset Finance leases, on or after the 1st January,
2005 involving the payment by the lessee to the lessor over a number of years of the full, or
nearly the full cost of the asset together with a return on the finance provided by the lessor and
such other remuneration as may be reasonable in the circumstances of the case. The lessee shall
substantially assume all the risks and rewards normally associated with the ownership of an
asset, other than the legal title thereto.
(2) A contract of hire purchase, a lease purchase agreement, an operating lease and similar
arrangements, as well as sale and leaseback transactions shall not constitute a finance lease.’
contract, on the prescribed form in the Schedule together

with an authenticated copy of the relative lease contract.
Given that the term ‘finance leasing company’ is defined as

meaning -
(i) a company as defined in the ITA, being a duly licensed

financial institution which has its objects expressly limited
to that of being engaged solely in the business of granting
finance leases and in such other acts and activities as are
necessary for the conduct of the said business;
(ii) a company incorporated outside Malta and of a nature
similar to that mentioned in paragraph (a)
the application of the FLR is limited to licensed Financial

Institutions. Financial leasing is, generally, an activity which
may be performed by persons who possess a licence in terms of
the Financial Institutions Act (‘FIA’)48 but the FIA provides that
companies which provide financial leases to intra-group companies
do not require a licence49. Therefore the application of the FLR is
somewhat limited in scope.
Rule 5 FLR prescribes that for the purpose of determining the

income chargeable to tax under the ITA of a lessor and of a lessee
the following arrangements shall apply in the case of a qualifying
finance lease:
(i) without prejudice to the right for any deduction

properly attributable there against, the lessor shall be
chargeable to tax on the full amount of the annual
lease payments;
(ii) the lessor shall be entitled to the wear and tear
allowance;
49 Article 3 FIA.
Special Cases 469
(iii) the lessee shall be entitled to a deduction in respect of

the full amount of the lease payments made by him in
respect of the leased asset as well as all other deductions
properly due under article 14 ITA excluding the wear
and tear allowance.
A finance leasing company is deemed not to constitute part of

a group of companies for the purposes of surrendering of losses50.
The Revenue has issued a special guideline relating to the tax

treatment of yachts. It reads as follows:
“Tax Guide to Leasing of Yachts
Where leasing arrangements of yachts do not fall within the scope of

Legal Notice 369 of 2005 and where the aforesaid lease is deemed by the
Commissioner of VAT to be in accordance with guidelines issued by the
VAT department from time to time, the Inland Revenue Department has
decided that in such special case, the following tax treatment is to be adopted
for each year for the duration of the lease:
the lessor is charged to tax only on the annual finance charge, namely the
difference between the total lease payments less the capital element divided
by the number of years of the lease;
the lessee is allowed a deduction in respect of the (i) the finance charge; (ii)
maintenance; (iii) repairs; and (iv) insurance;
the lessee is allowed capital allowances in respect of the yacht and the parties
may not opt to shift the burden of wear and tear onto the lessor;
where the lessee exercises an option to purchase the yacht on the termination
of the lease, the purchase price received by the lessor shall be considered to be
of a capital nature and no tax thereon shall be payable by the lessor.”
2/. FLR Aviation
The Inland Revenue has published an FLR guideline for aviation.

The Guideline prescribes that where finance leasing arrangements
50 Rule 8 FLR.
of aircraft do not fall within the scope of Legal Notice 369 of2005,
the Inland Revenue Department has decided that with respect
to finance leasing of aircraft, the following tax treatment is to be
adopted for each year for the duration of the finance lease:
(a) the lessor is charged to tax on the annual finance charge,

namely the difference between the total lease payments
less the capital element divided by the number of years of
the lease;
(b) the lessee is allowed a deduction in respect of the (i) the
finance charge; (ii) maintenance; (iii) repairs; and (iv)
insurance;
(c) the lessee is allowed capital allowances in respect of the
aircraft and the parties may not opt to shift the burden of
wear and tear onto the lessor;
(d) where the lessee exercises an option to purchase the
aircraft on the termination of the finance lease, and the
lessor is not trading in the purchase and sale of aircraft, the
purchase price received by the lessor shall be considered to
be of a capital nature and no tax thereon shall be payable
by the lessor.
22. Branches of Oversea Companies
A branch or place of business of an oversea company which is

formally registered at the Registry of Companies in terms of Part
XI of the Companies Act51 is treated as a permanent establishment
for tax purposes. The oversea company of the said permanent
establishment would be taxable in Malta on the profits attributable’
to the said Maltese permanent establishment in terms of general
rules of international taxation. Income tax would be charged at the
rate of thirty-five per cent if such oversea company is any body of
51 Mainly articles 384-389 of CA.

Special Cases 471
persons constituted, incorporated or registered outside Malta, and

either of a nature similar to a partnership anonyme or a partnership
en commandite, the capital of which is divided into shares.52
Important changes relating to the taxation of branches were

introduced in 2007. The definition of the term a company registered
in Malta’contained in Article 2 of the Income Tax Act includes !.. a
company which, although not resident in Malta, carries on any activity
in Malta and in the case ofa company which is neither incorporated
nor resident in Malta shall mean a company that is registeredfor this
purpose with the Commissioner in such manner as may be prescribed’.
Consequently, a branch qualifies to be considered as la company
registered in Malta’ which implies that branches registered with the
Commissioner are covered by the tax accounting system and the
refundable tax credit system, like a company.
The definition of distributable profits contained in Article 2 of

the Income Tax Act incorporates a proviso which contemplates
a tax accounting rule which applies to branches. In the case of a
company which is neither incorporated nor resident in Malta, the
distributable profits shall be the profits attributable to the activities
of such company in Malta and in respect of which it has registered
with the Commissioner less any of such profits which the company
has distributed in previous years.
The 56 (20) ITA Regime

The basis for the current version of 56 (20) ITA may be traced back
to the Budget Measures Implementation Act, 2011. Article 56 (20)
applies when there is a shareholder of a Maltese resident company who
is a resident of a company with which Malta has entered into a Double
Tax Treaty. In brief, the effect of 56 (20) ITA is that of extending the
purview of reduced rates of tax contemplated in treaties.
52 Article 2 ITA.
Article 56 (20) (a) ITA prescribes that where a member of

a company resident in Malta is a resident of a State or territory
with which Malta has entered into a double tax treaty, and under
the Treaty a dividend distributed by such a company is subject to
income tax in Malta at a rate lower than that chargeable on the
income out of which the dividend is distributed, such company
shall be entitled to require that the gains or profits, or part thereof,
derived by it from its trade or business and which are distributable
by way of dividend subject to tax at a lower rate as aforesaid shall,
notwithstanding that the dividend, or part thereof has not been
distributed, be taxed at the said reduced rate and not at the rate
properly chargeable under this Act on the gains or profits of the
company:
Article 56 (20 (a) ITA carries 4 provisos restricting its

application. The first proviso prescribes the regime shall only be
applicable with respect to companies which do not sell by retail
and a person shall be deemed not to sell by retail if its sales of goods
or services are made to:
(i) a person who carries on a trade, business, profession or

vocation and the goods or services so sold to such person
are either resold by such person or are used by such
person for the purpose of his trade, business, profession
or vocation; or
(ii) a person, other than an individual, who uses those goods
for the purposes of an undertaking carried on by such
person:
The second proviso adds that where a company has opted to be

taxed at the reduced rate of income tax, no person in receipt of
a dividend paid by such company out of profits which have been
subject to tax at such reduced rate of tax shall be entitled to claim a
refund under the refundable ta credit system.
The third proviso further adds that when a company has opted
Special Cases M3
to be taxed at the reduced rate of income tax and such company

distributes gains or profits derived by it from its trade or business
which have been subject to tax at the rate properly chargeable under
this Act to the member resident in the said state or territory, such
member shall not be entitled to claim a refund under the provisions
of the Income Tax Acts in respect of any dividend paid by such
company out of the said gains or profits.
The fourth proviso contemplates an important rule, prescribing

that where a company has opted to be taxed at the reduced rate
of tax distributes gains or profits derived by it from its trade or
business which have been subject to tax at the reduced rate of
tax to any person not entitled to a reduced rate of tax under any
arrangement, such gains or profits shall be taxed at a rate being the
difference between the rate referred to in article 56(6) and the rate
actually applied and such tax shall be tax payable by the company in
the year of assessment in which such profits are distributed.
Consolidated Tax
Budget Act 2013 created an enabling provision which allows
groups of bodies of persons to elect to compute and bring to charge
their chargeable income or losses on a collective basis as a single
taxable person. The relevant provision reads as follows:
“22A. The Minister for finance may make rules providing for bodies of
persons under common ownership to be entitled to elect to compute
and bring to charge their chargeable income or losses as the case may be,
on a collective basis, and for the consequent carrying out of the relevant
provisions and obligations under the Income Tax Acts as if they are a single
body of persons, subject to such terms and conditions as may be laid down
in such rules.”
The relevant rules are prescribed in L.N. 110 of 2019, the

Income Tax Act, Consolidated Group (Income Tax Rules, 2019).
The Article 27G Regime

Act XV of 2016 added Article 27G ITA providing for a special tax
system applicable to profits derived by listed companies from the
transfer of immovable property forming part of a project. Profits
from the transfer of immovable property are ring-fenced and taxed
at 35%. Article 27G is directly linked to Article 5A (3) (j) ITA
allowing for an opt-out from Article 5A ITA. Companies electing
for Article 27G are subject to ad hoc rules relating to the set-off of
provisional tax and losses.

Voluntary Occupational Pension Scheme Rules,
2017 (‘VOPS’)
VOPS provides for a special tax credit a (deduction from the
amount of income tax).
Rule 5 of VOPS prescribes that a qualifying employer making

qualifying contributions to a qualifying scheme for the benefit of
one or more qualifying employees shall, in respect of each such
qualifying employee and subject to the rules, be entitled to a tax
credit amounting to the lower of 15% of the amount of qualifying
contribution paid during a year and one hundred and fifty euro
(€150) or such other amount as may be prescribed by the Minister
from time to time. The tax credit may be carried forward. Any
contributions or payments referred to above made by a qualifying
employer for the benefit of a qualifying employee shall not be
deemed to be a benefit provided by the qualifying employer to
the qualifying employee by reason of employment or office for the
purposes of the Fringe Benefits Rules.
Rule 4 establishes that VOPS apply only in respect of qualifying

contributions made to a qualifying scheme by or on behalf of any
individual who:
Special Cases 475
(i) derives chargeable income in terms of article 4(l)(b) of

the Act and who is duly registered for Maltese income tax
purposes;
(ii) is employed by the qualifying employer; and
(iii) does not benefit under the Highly Qualified S.L. 123.126
Persons Rules.
A qualifying employee who also makes qualifying contributions

into the qualifying scheme is eligible for a tax credit amounting to
15% of the aggregate amount of the qualifying contributions made
during a year, up to a maximum of €150 or such other amount as
may be prescribed by the Minister from time to time. Qualifying
contributions eligible to the credit shall be disclosed in the Payee
Statement of Earnings (FS3) that the payer is required to prepare
in terms of rule 21 of the Final Settlement System (FSS) Rules.
A qualifying contribution made to a qualifying scheme which

is reported to the Commissioner in accordance with the rules is
considered as approved by the Commissioner for the purposes of
article 14(1) (e) of the Act but the total deductions that can be
claimed by the qualifying employer in terms of the provisions of
article 14(l)(e) of the Act in respect of qualifying contributions,
shall in respect of each qualifying employee amount to the lower
of the qualifying contribution actually paid and two thousand euro
(€2,000).
The term “qualifying employer” is defined as meaning any

person, whether corporate or unincorporate, and whether vested
with legal personality or not, which employs individuals to carry
out the economic activity for which it is established and which
is registered as a payer for the purposes of the Final Settlement
System (FSS) Rules. A qualifying employer includes a self-occupied
person;
“Qualifying contribution” is defined as a contribution or

payment made to a qualifying scheme in respect of which the
provisions of the rules apply.
“Qualifying employer” is defined as meaning any person,

whether corporate or unincorporate, and whether vested with
legal personality or not, which employs individuals to carry out the
economic activity for which it is established and which is registered
as a payer for the purposes of the Final Settlement System (FSS)
Rules.
“Qualifying employee” is defined as an individual on whose

behalf or by whom contributions or payments to a qualifying
scheme are made who fulfils the requirements of rule 4;
“Qualifying scheme” is defined as meaning a retirement scheme

or a long term contract of insurance that fulfils the following
requirements and which is approved by the Commissioner:
Compliance obligations apply and apply to beneficiaries of

VOPS as well as to licence holders.

Deduction (Embellishment Project) Rules, 2017
Rule 3 of LN 274 prescribes that where a qualifying person incurs

expenditure in an undertaking a qualifying project, a deduction
equivalent to 120% of the cost incurred on such expenditure in any
year may be claimed in the relative year of assessment against the
said persons income from trade or business chargeable to tax. The
deduction claimed under the rules may not exceed €90,000 in any year.
‘Qualifying person is defined as meaning a person carrying on a

trade or business who undertakes a qualifying project. ‘Qualifying
project’ is defined as meaning an embellishment or other project
Special Cases 477
useful to the local community that has been approved as such in

writing by the Local Council and the Directorate on or after 1st
January 2017, following an application made in this respect on
such form as the Directorate may require. Such project must
be wholly a community asset on which the qualifying person
retains no proprietary rights and for which the said qualifying
person is not remunerated in any way.
When a deduction is claimed under the rules, no other

deduction may be claimed in respect of the same expenditure and
when the qualifying person benefits from any form of assistance
in relation to the said expenditure by the Government or from
any other entity, the amount of such benefit or assistance shall be
subtracted from the expenditure on which the deduction under
these rules may be claimed. A qualifying person may not claim a
deduction under the rules for more than one qualifying project in
any year. Compliance obligations apply.
Chapter 13
Tax Accounting and the Refundable

Tax Credit System
The 1994 amendments to the ITA and ITMA introduced a specific

tax accounting system in terms of which profits derived by a
company are allocated to a number of tax accounts. Tax accounting
is strongly linked to the refundable tax credit system.
The tax accounting system and the refundable tax credit system
contemplated in the ITA and the ITMA were changed in 2007.
/. The Tax Reform of 2007
The tax reform of2007 had been in the pipe-line even before Malta
joined the EU. A glimpse at the chronology of the events which led
to the tax reform of2007 is necessary because the objectives of the
reform emerge from formal communications between Malta and
the EU.
In August 2003, the European Commission raised a number of

concerns relating to features of the Malta tax system, including the
International Trading Company and Companies which operate
the Foreign Income Account. It would appear that certain offices
of the EU questioned the compatibility of the ITC and CFI regime
with EU norms relating to harmful tax practices in terms of the
Code of Conduct and the State Aid Rules.
On March 23,2006, the EU Commission,
‘formally requested Malta under EC Treaty state aid rules1 to abolish the
tax regime for Maltese Companies with Foreign Income (CFI) and the
International Trading Companies’ (ITC) regime by the end of 2010 at the
latest’.
The CFI and ITC system were described as being,
offshore tax regimes...The schemes provide sizable aid to companies that

are owned by non-Maltese and produce revenues outside of Malta, and
are therefore highly distortive without promoting growth of the Maltese
economy’
The Commissions communication appears to have coincided

with an agreement the Maltese Government had just reached with
the EU In fact, the Maltese Government promptly reacted to the
Commissions Release by announcing, on the same day, that,
‘Malta has reached an agreement with the EC that effectively preserves intact
its competitive imputation tax system for business in Malta. The proposal
... ensures that the tax system will not be discriminatory for EU State aid
purposes. The Government will be publishing the relevant legislation in the
coming months...’
The features of the tax regime agreed to with the EU were

described as consisting in an extension of the,
‘refundable tax credit system for all companies distributing their revenues as
dividends to their shareholders, both resident and non-resident, regardless
of their legal form or status, the business activity exercised, their size, sector,
and the source and type of the income derived by the companies.’
1 The legislative instrument which prohibits the grant of distortive State Aid by Member
States is the EU Treaty itself (including Articles 87, 88, 89 of the EC Treaty and subsidiary
legislation contained in guidelines). Tax benefits can constitute a form of State Aid (certain
forms of aid may be deemed to be compatible with the Treaty). The State Aid Rules are, unlike
the Code of Conduct, not soft law but are binding and enforceable.
Tax Accounting and the Refundable tax Credit System 481
The Maltese Government stressed that,
‘the proposals, although still advantageous for foreign investors’, would not
be selective...’
Additional information relating to the reform agreed with the

EU was published by the Government of Malta in the pre-budget
document of October 20062 when the Government of Malta
announced that it intended,
'• retaining the present imputation system whereby the tax paid by companies
will essentially remain a prepaid tax on behalf of the shareholders at which
level the tax is finally determined.
introducing the notion of economic rent within our system as well as
enhancing the distinction as to how profits are derived, directly or indirectly,
whereby profits from immovable property will be excluded from the tax
refund mechanism agreed to with the EU Commission.’
The main features of the 2007 tax reform consisted in:
(i) A retention of the Full Imputation System;

(ii) An enhancement of the tax accounting system via the
addition of two new tax accounts.
(iii) A retention of Article 48 (4) ITMA refunds (full refund
and 2/3 refund).
(iv) An introduction of a Participation Exemption.
(v) An introduction of certain anti-abuse provisions.
(vi) The introduction of the notion of Advance Company
Income Tax (ACIT’).
(vii) The Introduction of 2 new refunds of ACIT which are
available, in respect of profits which are allocated to
the Foreign Income Account and the Maltese Taxed
Account, indiscriminately.
(viii) An extension of the Refundable Tax credit system to
2 Department of Information (Malta), Pre-Budget Document 2006, A Better Quality of Life

(Malta 2006).
branches.
(ix) Abolition of the ITC.
(x) A tightening of rules relating to the Flat rate Foreign
Tax Credit.
2. The Implementation of the Agreement reached

with the EU
The agreement which Malta reached with the EU was implemented

via a number of legislative instruments namely, Act II of2007, Act
IX of 20073, the Tax Refunds and Registration Procedure Rules,
2008 and the Tax Accounts (Income Tax) Rules, 2008 (‘TAR’).
Salient changes included the introduction of the Final Tax Account
and the Immovable Property Account and the creation of a second
pillar within the refundable tax credit system, Article 48 (4A)
ITMA.
3. Tax Accounting
The Tax Accounting system is created via a number of rules

contained in the interpretative provisions of the ITA. An important
rule relating to tax accounting is enshrined with the definition of
the term ‘distributable profits’ contained in Article 2 ITA which
provides that,
‘distributable profits’ shall mean the total profits which are available for
distribution by a company registered in Malta... and the distributable profits
shall... be allocated to the following accounts, that is to say, final tax account,
immovable property account, foreign income account, Maltese taxed
account, and untaxed account, and for the purposes of this definition these
accounts shall comprise the distributable profits as set out in the respective
definitions...’
3 To a lesser extant.
A company’s distributable profits are thus allocated to five

different tax accounts and must be reported accordingly in the
company’s tax return4. Important tax consequences are linked to
tax accounting.
An allocation and distribution sequence is prescribed in a

number of norms as explained below.
Article 2 ITA prescribes that,
‘final tax account’ shall mean the taxed account to which an amount of
distributable profits which suffered tax, calculated in such manner and in
such amount as may be prescribed, shall be allocated before any distributable
profits are allocated to any other taxed account;
Similarly, ‘immovable property account’ is defined as,
‘the taxed account to which distributable profits which have suffered tax and
which are not allocated to the final tax account calculated in such manner as
may be prescribed, shall be allocated before any distributable profits are
allocated to the other taxed accounts.’
The rules above have been mirrored in 68 (3) ITA which

prescribes that,
A dividend paid by a company shall be paid out of profits allocated to the

immovable property account before any profits allocated to the Maltese
taxed account are distributed.’.
The general rule is that profits allocated to tax accounts are

allocated net of tax.5 Additional rules relating to tax accounting
are contained in Article 68 ITA. Article 68 ITA prescribes that a
dividend paid by a company shall be paid out of profits allocated
to the final tax account and the immovable property account
(including the amount of profits allocated to these taxed accounts
4 Presently part 4 of page 6 of the return.
5 Debono, Elaine Marie, ACCA Lecture Notes F6/P6 (Richard Clarke Academy 2017)
in the accounting period in which the dividend is paid) before

any profits allocated to the Maltese taxed account are distributed.
Furthermore, Article 68 (5) ITA prescribes that,
‘(5) When any person is registered in terms of article 48 (4A) of the Income
Tax Management Act for the purposes of claiming a refund of tax chargeable
on a company and that company has any profits allocated to its Maltese
Taxed Account or its foreign income account the whole or part of which
are actually distributed or deemed to be distributed under any provision of
the Income Tax Acts, such person who is so registered shall be deemed to
have received, whether upon an actual distribution or deemed distribution
as aforesaid, so much of such profits from each such account as corresponds
to his percentage entitlement to participate in a distribution of profits of the
said company. Any provisions in the memorandum and articles of association
of the company or in any agreement which provide that a shareholder, who is
so registered, shall be entitled to be paid dividends solely or mainly from the
Maltese Taxed Account or the foreign income account shall be disregarded
for the purpose of the Income Tax Acts:
Provided that where profits have been subject to tax at a rate pursuant to
article 15 of the Business Promotion Act or article 56(20) of this Act, the
provisions of this subarticle shall not apply as regards such profits and unless
the shares (including any shares substituting the original shares resulting from
any share exchange or reorganisation) which gave rise to the entitlement that
such profits be taxed in accordance with the aforementioned articles are no
longer in existence, such profits shall be distributable only to the person in
respect of whom the aforementioned articles were applicable or to any other
person who acquired the shares from such person.”
The allocation sequence discussed above is, at the sake of

repetition, reflected in Rule 5 (4) TAR,
‘For the purpose of allocating profits to the immovable property account

in accordance with sub-rule (3) and (h) the allocation of profits to the tax
accounts shall first be made .... been allocated to the Maltese Taxed Account
and the Foreign Income Account and for this purpose such amount shall
first be transferred from amounts which would have been allocated to the
Maltese Taxed Account and then from amounts which would have been
allocated to the Foreign Income Account.’
The total income allocated to the 5 tax accounts should be

equivalent to the retained earnings figure for the financial period as

contained in the Statement of Changes in Equity, retained earnings
carried forward.6
4. Profits that stand to be allocated to the Final tax

account
A reference to the Final tax account is contained in Article SA (10)

(d) ITA7 which prescribes that distributable profits which are taxed
under Article 5A ITA are allocated to the Final tax account. The
definition of the ‘final tax account’ contained in Article 2 ITA,
discussed above, refers to allocation rules prescribed by legal notice.
The relevant rules are contained in Rule 2 of the TAR which

prescribes that the following profits must be allocated to the Final
tax Account:
(a) profits after tax resulting from income which has been
charged to tax under the investment income provisions,
and where such investment income is that referred to in
article 41(a)(viii) (2), (3), (4) and (5) ITA and when the
company has actually received that income;8
(b) profits which have been exempt from tax under the
provisions of any Maltese law and where the distribution
of such profits by the company is exempt from tax in the
hands of the shareholders;
(c) dividends paid out of profits allocated to the final tax
6 Ibid Debono, Elaine Marie.
7 Sub-article 10 of Article 5A of the Income Tax Act prescribes that every company resident in
Malta shall allocate the distributable profits derived from property transfers subject to Article
5A to the final taxed account.
8 This was an amendment made L.N. 247 of 2011 INCOME TAX ACT (CAP. 123) Tax
Accounts (Income Tax) (Amendment) Rules, 2011. The references to the IIP are references to
net refunds and net dividends. The 2011 amendment provides that such income is allocated
to the FTA if actually received and not when it is deemed to have been received in terms of
deemed distribution orders.
account of another company;

(d) The profits after tax derived from the transfer of property
chargeable to tax under article 5A of the Income Tax
Act (Property Transfers Tax) and such profits to be
determined as prescribed in terms of subarticle 10(d) of
the said article 5A;9
(e) Gains or profits chargeable to tax under Article 23
(petroleum profits);1011
(f) any profits after tax which under the provisions of
Maltese law are not subject to tax when such profits are
distributed by a company to any person and where upon
such a distribution no person is entitled to claim any tax
credit in respect of any tax paid on such profits;
(g) the amount of chargeable income after tax of a company
which has exercised the option referred to in article
48(4A)(b)(i)(l)H of the Income Tax Management
Act earned while it was not an international trading
company;
(h) the amount which should be allocated to the Maltese
Taxed Account computed in accordance with rule 13 of
the Sale of Agricultural Produce Rules, 2005;
(i) profits resulting from income or gains in respect of
which Article 12(l)(u) of the Income Tax Act (the
Participation exemption) may and has been applied;
(j) profits resulting from any grant or subsidy where the
distribution of such profits is exempt from tax in the
hands of the shareholders;
(k) profits after tax resulting from rents to which articles
31A to 3 ID of the Income Tax Act are applicable (rental
9 There seems to be an element of over-lap here. Article 5 A ( 10) (d) provides that:
‘Every company resident in Malta shall allocate the distributable profits derived from transfers to
which this article applies to the final taxed account. The said distributable profits shall be
determined in such manner as may be prescribed.’
10 Added by L.N. 247 of 2011 INCOME TAX ACT (CAP. 123) Tax Accounts (Income Tax)
11 A shareholder of an ITC which has switched to the Article 48 (4A) refund system (6/7
refunds, in this case);
income subject to final tax on gross income);

(l) Profits referred to in any of the preceding paragraphs
which as at the end of the accounting period ending
in the year preceding year of assessment 2007 have not
been distributed.
(m) Act IV of 2011 prescribes that every company resident
in Malta shall allocate the distributable profits derived
from a transfer which is exempt in terms of 5A (4) (j)
ITA12 to the final tax account.
(n) Rule 7 (2) of L.N. 324 of 2011 INCOME TAX ACT
(CAP. 123) Securitisation Transactions (Deductions)
Rules, 2011 prescribe that the special further notional
deduction contemplated in Rule 4 (2) (b) is allocated to
the FTA.
(o) Where profits of a company are relieved from tax
through NID, an amount corresponding to 110% of the
amount of profits which are so relieved from tax shall
be allocated to the company’s final tax account in the
following manner:
(i) an amount corresponding to 100% of the amount
of profits which areso relieved from tax shall be
allocated directly to the final tax account (referred
to as the "direct allocation"); and
(ii) an additional reallocation of profits of an amount
corresponding to 10% of the relieved profits, out
of the tax account to which such relieved profits
would, ignoring the provisions ofthis sub-rule,
otherwise fall to be allocated(hereinafter referred
to as the "additional reallocation"):
If the amount of the additional reallocation exceeds the total
profits of the undertaking for the particular basis year that would
have, ignoring the provisions of this sub-rule, been allocated to
the tax account to which such profit would otherwise have been
12 The exemption which refers to a transfer by a company to its main shareholder in the course of
a winding up.
allocated, any such excess shall be ignored for the purposes of the
additional reallocation. Provided further that:
(i) the additional reallocation shall be effected

subsequent to any tax account reallocation required
in terms of sub-rules (4) and (7) of rule 5 TAR; and
(ii) the direct allocation and the additional reallocation
shall not be effected in respect of deemed interest
that is claimed as a deduction against interest
income deemed to be received by the shareholder
or partner of the undertaking.13
5. Profits that are allocated to the Immovable

Property Account
Article 2 ITA contains a definition of ‘Immovable Property

Account’, a definition which has been reproduced above. The
definition contained in Article 2 ITA refers to ‘profits ... calculated
in such manner as may be prescribed’. The rules relating to the
allocation of profits to the Immovable Property Account are
contained in the same set of rules which prescribes the profits
which are allocated to the Final Tax Account, the TAR. The profits
which stand to be allocated to the Immovable Property Account
are described and listed in Rule 5 of the TAR. Rule 5 TAR repeats
that Immovable Property Account profits consist in profits which
have suffered tax and which do not stand to be allocated to the final
tax account. However the TAR definition builds on the Article 2
ITA definition by prescribing that Immovable Property Account
profits consist in the aggregate of two types of profits, the profits in
5 (2) TAR and the profits in 5 (3) TAR.
Immovable Account profits are profits which, by definition,
13 L.N.38of2018INCOMETAXACT (CAP. 123)Tax Accounts (Income Tax) (Amendment)

Rules, 2018.
have been derived, directly or indirectly, from immovable property

situated in Malta.
5 (2) TAR
The profits in 5 (2) TAR are dividends paid out of profits allocated
to the immovable property account of another company and after
the entry into force of L.N. 247 of 2011 INCOME TAX ACT
(CAP. 123) Tax Accounts (Income Tax) (Amendment) Rules,
2011 and the amount of chargeable income after tax resulting
from profits in respect of which a company has exercised a Rule 9
election.14
5 (3) TAR
The profits listed in 5 (3) TAR may be classified into 4 main
categories:
(i) Profits or gains from the transfer of immovable property;

(ii) Net profits or gains deemed to have been derived from
immovable property;
(iii) Gross amounts which are deemed to have been derived
from immovable property;
(iv) Annual Market Rent.
Profits or Gains from the Transfer of Immovable

Property Situated in Malta
5 (3) TAR provides that the amount of chargeable income after
tax resulting from any profits or gains of whatever nature derived
from the transfer of such immovable property or of any rights
whatsoever on such property or in relation thereto is allocated to
the Immovable Property Account.
There is an element of apparent over-lap between the Final

Tax Account and the Immovable Property Account in relation
14 Vide infra.
to profits from the transfer of immovable property. The issue

revolves around the Article 5/Article 5A conundrum. However,
two rules must be borne in mind for the purposes of allocation of
profits: (i) the rule in the preamble of rule 5 which provides that
the Immovable Property Account receives profits which have not
been allocated to the Final Tax account and (ii) the rule contained
in Rule 3 (e) which provides that it is profits from the transfer of
property chargeable to tax under Article 5A which are allocated
to the Final Tax Account (and not all gains and profits derived
from the transfer of immovable property). Consequently, all other
profits from immovable property including profits taxed in terms
of Article 5 ITA are allocated to the Immovable Property Account.
Net profits or gains which are deemed to have

been derived from immovable property situated
in Malta
Rule 5 (3) (b) TARprescribes that the Immovable Property Account
receives the amount of chargeable income after tax derived from
rents, premiums , provision of accommodation and any income or
gains however described and of whatever nature derived, directly
or indirectly, from such immovable property situated in Malta
including15:
(a) any gains or profits derived from any timeshare operation

or any other operation of a similar nature;
(b) any gains or profits derived from the provision of
accommodation at the rate established in terms of item
T’ of the Eighth Schedule of the Value Added Tax Act
or which would have been so subject but for the fact that
the company is not required to charge Value Added Tax
by virtue of it being registered under article 11 of the
Value Added Tax Act (hereinafter in these rules such
15 This wording creates an undesirable reality. The definition is not exhaustive in this regard.
sales being referred to as the “ Vatable Sales”) and where

such gains or profits are derived from the carrying on
of a trade, business or other activity which includes the
provision of other services or goods in addition to the
provision of such accommodation, such gains or profits
shall be calculated by dividing the total chargeable
income of the said company derived from that trade,
business or other activity by the value of its total sales
of that trade, business or other activity and multiplying
the result by the value of its 5% Vatable Sales of that
same trade, business or other activity. For this purpose
companies which derive income from the provision
of accommodation must maintain accounting records
such that the gains or profit derived from the provision
of accommodation may be readily ascertained in the
manner provided herein. Where a company derives
income from the provision of accommodation and does
not maintain such accounting records the whole of its
profit shall be deemed to be derived from the provision
of accommodation;
(c) the amount of chargeable income after tax resulting
from profits directly derived from, and not merely from
the utilisation of, services provided through the use of
cables, wires, pipes and any other material, device or
apparatus, where such cable, wire, pipe, material, device
or apparatus is annexed to a tenement or installed in the
ground permanently to remain incorporated therewith.
For the purpose of this sub-paragraph, the provision of
services shall include the provision of electricity, energy,
gas, fuel, water, telephone services, telecommunication
infrastructures, electronic communications services,
electronic communication networks, associated
facilities, services and data, radio and television (added
byL.N. 247 of 2011);
(d) the amount of chargeable income after tax, derived from

work carried out on or in relation to such immovable
property consisting of brokerage and professional
services, construction work, project management of
construction work and work of tradesmen;
(e) the amount of chargeable income after tax resulting
from profits derived from the provision of management
services in relation to any activity as a result of which
income is derived from the provision of accommodation
subject to VAT and where as a result of that activity
income is derived from the provision of other
services or goods in addition to the provision of such
accommodation, such profit shall be calculated by
dividing the income derived from the said management
services by the value of the total sales of that activity and
multiplying the result by the value of sales of that same
activity which are Vatable Sales;
(f) Any other profits however described where the
Commissioner is of the opinion that the said profits
are directly or indirectly derived from such immovable
property and in such case the Commissioner may
determine the manner in which such profits are to be
determined;
(g) Profits or gains after tax however described derived from
the disposal of shares or other interests in any entity which,
directly or indirectly, principally owns such immovable
property.16
The term ‘including’ suggests that the list above is not an

exhaustive one.
16 Probably more than 50% of net asset value.

Gross amounts which are deemed to have been

derived from immovable property
Rule 5 (3) (e) TAR prescribes that the following
gross amounts shall be allocated to the Immovable
Property Account:
(a) the interest, fees or any other consideration howsoever

described derived, directly or indirectly, from the
granting ofloans or from any form of credit to finance the
acquisition, development, construction, refurbishment,
renovation of such immovable property or any right
thereon including professional fees related thereto
(including fees related to the acquisition of finance) and
any other matter which increases or enhances the value
of such immovable property or any right thereon; and
(b) insurance premiums related to the insurance of such
property;
Given that the TAR were not intended to create a new tax,
Rule 5 (3) (e) TAR contains a proviso which stipulates that where
the allocation of the gross amounts cannot for any year be made
because there are no or insufficient profits which have suffered tax,
the amount required to be allocated to the immovable property
account in accordance with this paragraph, or part thereof,
which for such reason could not be allocated shall, in so far as not
allocated to the immovable property account of a related company
or companies, shall be added to the amount to be allocated for the
following year.
Annual Market Rent

Rule 5 (3) (h) TAR prescribes another entry which must be made
in the Imovable Property Account: The amount of the annual
market rent of such immovable property owned17 and used by
17 The term includes property held by a company under title of emphyteusis - Rule 6 (2) (a) of
the Legal Notice.
the company for the purpose of its activities (excluding property

which is rented by the said company to other parties) calculated by
multiplying the aggregate surface area in square metres of all floors
of such premises so owned and used by two hundred fifty Euros
(Euro 250)18 per annum.
Rule 5 (3) (h) TAR contains an important proviso to the effect

that figures are allocated to this account after other allocations.
Where the allocation of annual market rent cannot for any year
be made because there are no or insufficient profits which have
suffered tax, the annual market rent required to be allocated to the
immovable property, which for such reason could not be allocated
shall be added to the amount to be allocated for the following year
and deemed to be part of that amount, or if there is no such amount
in respect of that year, be deemed to be the amount to be allocated
for that year and so on for subsequent years.
An important rule relative to annual market rent is contained in

Rule 6 TAR. Rule 6 is an anti-avoidance provision which prevents
special intra-group arrangements which would, deliberately or
otherwise, shift the burden of annual market rent onto a special
purpose vehicle.
6 (2) (b) TARprescribes that where acompany uses any immovable

property for the purpose of its activities owned by a related person for
no consideration or for a consideration which in the opinion of the
Commissioner is less than the market rental value of that property
and the said consideration is less than two hundred and fifty euro
(€250) per square metre per annum, the said immovable property
shall be deemed to be owned by the said company and the amount
which shall be allocated to the immovable shall be reduced by the
amount of consideration paid by the said company to the related
18 Was increased from EUR60 per square metre to EUR250 per square metre by L.N. 247 of
2011 INCOME TAX ACT (CAP. 123) Tax Accounts (Income Tax) (Amendment) Rules,
2011.
person for the use of the said immovable property.

A person is deemed to be related to a company if:
(i) that person and the company are, directly or indirectly,

controlled or beneficially owned to the extent of more
than 25% by the same persons; or
(ii) that person owns, directly or indirectly, more than 25%
of the ordinary share capital or voting rights of the
company; or
(iii) that person, in any capacity whatsoever including that
of a trustee, holds the said property or receives the said
consideration for and on behalf of or for the benefit of a
related person.
Check-the-Box I PA (Rule 9)
L.N. 247 of 2011 INCOME TAX ACT (CAP. 123) Tax Accounts
(Income Tax) (Amendment) Rules, 2011 adds Rule 9 to the TAR.
Rule 9 TAR allows Companies to elect that profits which would
normally be allocated to the FIA and MTA are not so allocated and
are allocated to the IPA instead.
A Rule 9 company would use only the FTA, IPA and UA. The
election is exercised by notice to be signed by all directors. An
election may be renounced only with Commissioner s permission.
Upon election, undistributed reserves in MTA and FIA are
allocated to the IPA. A Rule 9 election results in an exemption’
from the obligation to allocate gross interest and premia but the
requirement to allocate to a related party continues to apply.
A rule introduced by Legal Notice 183 of 2015 prescribes that

when an election under Rule 9 is done, it shall also apply to all
subsequent years, and may not at any time be renounced unless,
upon being requested, the Commissioner gives his permission in
writing.
Allocations to Related Party

L.N. 247 of 2011 Income Tax Act (Cap. 123) Tax Accounts
(Income Tax) (Amendment) Rules, 2011 provided for what are
known as secondary allocations.
The salient rules are contained in Rule 5 (7) TAR which, in brief,
provide that if a company does not have sufficient profits to meet the
requirement for an IPA allocation such allocation is transferred to the
IPA of a related party19. The operation can be compared to a surrendering
of losses a revers™ Allocations to related parties must not exceed amount
of distributable profits and an allocation sequence is contemplated. In the
case of more than one related party the rules give precedence to highest
percentage beneficial entitlement.
19 Defined in 5 (9) TAR as follows:
“a company shall be deemed to be related to another company if during the year preceding the
relevant year of assessment or any part thereof, both companies are:
(i) resident in Malta; and
(ii) one is a subsidiary of the other or both are subsidiary companies of a third company,
resident in Malta.
For the purpose of this sub-rule a company shall be deemed to be a subsidiary of another
company, hereinafter referred to as the "parent company":
(i) if and so long as more than 25% of its ordinary share capital and more than 25% of its
voting rights are owned directly or indirectly by the parent company; or
(ii) the parent company is beneficially entitled either direcdy or indirectly to more than 25%
of any profits available for distribution to the ordinary shareholders of the subsidiary
company; or
(iii) the parent company would be beneficially entitled either directly or indirectly to more
than 25% of any assets of the subsidiary company available for distribution to its ordinary
shareholders on a winding up.
The Commissioner may, in his absolute discretion, deem a company to be related to another
company where, in his opinion, the relationship between the companies has been structured
with the sole or main purpose of circumventing the provisions of sub-rule...’
20 The relevant rule is being reproduced hereunder:
“(7) (a) Where, in accordance with the provisions of sub-rule (3)(e) and (h), the allocation of
profits in terms of the said paragraphs cannot for any year be made by a company because there
are no or insufficient profits which have suffered tax, or is not made as a result of the company
making an election in accordance with rule 9, the amount required to be allocated to the
immovable property account in accordance with the said paragraphs, which for such reason
could not be so allocated or is not so allocated, shall be allocated to the immovable property
account of a related company.
For the purpose of this sub-rule a related company excludes a company which has made an
election in accordance with rule 9:
Provided that the amount allocated to the immovable property account of the related
company shall not exceed the amount of distributable profits derived by the related company,
which would have, ignoring the provisions of this sub-rule, been allocated to the Maltese
Taxed Account and the Foreign Income Account.”
6. Profits that stand to be allocated to the Foreign

Income Account
Certain forms of foreign source income stand to be allocated to

the foreign income account. Only foreign source passive income,
foreign source capital gains, foreign source dividends, and, by way
of exception, ‘...profits derived from an overseas branch, agency or
permanent establishment21’ are allocated to the Foreign Income
Account. The profits that are allocated to the foreign income
account are listed in Article 2 ITA.
Article 2 of the Income Tax Act provides that foreign income

account means any of the following categories of distributable
profits arising in that year:
(a) profits resulting from royalties and similar income arising

outside Malta and from dividends, capital gains, interest,
rents, income or gains derived from a participating
holding or from the disposal of such holding other
than a participating holding in a company resident in
Malta, or in a partnership en commandite the capital
of which is not divided into shares which is resident in
Malta, and any other income derived from investments
situated outside Malta, which are liable to tax in Malta
and shown as part of the company’s chargeable income
in the return made pursuant to article 10 of the Income
Tax Management Act, and are receivable by a company
registered in Malta not being a company registered
under the Malta Financial Services Authority Act, and
(b) profits resulting from investments, assets or liabilities
situated outside Malta to a company not registered
under the Malta Financial Services Authority Act, and
either licensed as a bank in Malta or in possession of a
21 MFSA; Malta, A Guide to Taxation (Malta) p.2.

licence granted under the provisions of the Financial

Institutions Act.22
(c) all profits or gains of a company registered in Malta,
which are liable to tax in Malta and shown as part of
the company’s chargeable income in the return made
pursuant to article 10 of the Income Tax Management
Act and attributable to a permanent establishment
(including a branch) situated outside Malta, and for
these purposes "profits or gains" shall be calculated
as if the permanent establishment is an independent
enterprise operating in similar conditions and at arm’s
length; and
(d) profits resulting from dividends paid out of the foreign
income account of another company registered in Malta.
Ad hoc rules apply to companies which are banks.23
22 With effect from the year of assessment 2016, this paragraph does not be appapply to any
company which is not specifically empowered to receive such profits or gains.
23 Defined in Article 2 as:
"banking group" shall comprise only Maltese registered companies, at least one of which
must be a bank licensed in Malta, and which companies are members of a banking group of
companies. Two companies shall be deemed to be members of a banking group of companies
if one is the ten per cent affiliate of the other or both are ten per cent affiliates of a third
company. For this purpose, a company shall be deemed to be a ten per cent affiliate of another
company (parent company):
(i) if and so long as more than ten per cent of its ordinary share capital and more than ten per
cent of its voting rights are owned directly or indirectly by the parent company; or
(ii) the parent company is beneficially entitled either directly or indirectly to more than
ten per cent of any profits available for distribution to the ordinary shareholders of the
affiliate company; or
(iii) the parent company would be beneficially entitled either directly or indirectly to more
than ten per cent of any assets of the affiliate company available for distribution to its
ordinary shareholders on winding up:
Provided that notwithstanding the above provisions, a company which has been acquired
by a bank in satisfaction of a debt and which does not otherwise form part of the bank’s
business shall be deemed not to form part of a banking group;
"average daily deposits" shall be computed by taking the total deposits at the end of
each day for the financial year and dividing such amounts by the number of days in that
financial year and average dailydeposits taken from persons who are not resident in Malta
shall be computed in like manner. The word "deposits" shall have the meaning assigned to
it in the Banking Act;
(c) the amount of the consolidated average daily deposits of a banking group shall include
only deposits accepted by companies forming part of the banking group placed by persons
other than such companies:’
Foreign income account profits are further sub-divided into

income from a participating holding and, by exclusion, income
which is not from a participating holding.
7. Profits that stand to be allocated to the Maltese

taxed account
Article 2 ITA defines ‘Maltese taxed account’ as those profits of a

company that are not included in the foreign income account and:
(a) which have suffered tax; or

(b) which have been exempt from tax under the provisions
of any Maltese law and where the distribution of such
profits by the company is also exempt from tax in the
hands of the shareholders.
With effect from year of assessment 2015 the following
profits, previously allocated to the FTA, are allocated to
the MTA:
“the amount of chargeable income the tax chargeable on which has

been relieved from payment by any tax credits where the distribution
of such profits is exempt from tax in the hands of the shareholders;
(1) the amount of the chargeable income the tax chargeable on which
has been relieved from payment by any tax credits under any of the
following rules or regulations:
(i) the Business Promotion Regulations;
(ii) the Reinvestment Tax Credit (Income Tax) Regulations;
(iii) the Deductions and Tax Credits (Research and Development) Rules;
(iv) the Tax Credit (Back Office Operations) Rules;
(v) the Tax Credits (Owners and Operators of Warehouses Situated in
Free Zones) Rule;
(vi) the Tax Credit (Electronic Business) Rules;
(vii) the Reinvestment Tax Credit (Income Tax) Rule;
(viii) the Deductions and Tax Credits (General and Specific Qualifications)
Rules;
(ix) the Tax Credit (Audiovisual Infrastructure) Regulations, made under
the Malta Film Commission Act;”
8. Profits that stand to be allocated to the Untaxed

account
Article 2 ITA prescribes that the untaxed account shall consist of

those profits (or losses as the case may be), which represent the total
distributable profits (a positive amount) or the total accumulated
losses (a negative amount) as the case may be, and deducting
therefrom the total sum of the amounts allocated to other taxed
accounts. Thus, the Untaxed Account is made up of a balancing
figure.
Items that are typically allocated to the untaxed account include

depreciation added back, increases in provisions added back,
decreases in provisions, accounting losses and gains on sales of
assets, balancing allowances, balancing charges and tax refunds.24
9. The Taxation of Dividends
The full imputation system applies to distributions from the

Immovable Property account, the foreign income account and the
Maltese tax account but not to distributions from the Final Tax
Account. Distributions from the untaxed account are, in certain
cases, subject to a withholding tax. The refundable tax credit system
applies to distributions from the Foreign Income Account and the
Maltese taxed account. Certain distributions are tax exempt.
The Full Imputation system is a mechanism which is created

via the interplay of three articles, Article 31 ITA, Article 59 ITA
and Article 60 ITA. The application of the system results in the
elimination of any further effective tax on a dividend.
Article 31 ITA prescribes that when tax has been deducted from
particular dividends, the income of the recipient is to be considered
24 Ibid Debono Elaine Marie.

as being the gross amount prior to effect the tax deduction. Thus,
a dividend is declared, by way of legal fiction, gross of the tax paid
by the distributing company. Article 59 ITA adds that a company
which is resident in Malta is entitled to deduct from the amount of
any dividend, tax at the rate paid or payable by the company on the
income out of which the dividend is paid.
Article 60 ITA provides for the full imputation credit; a credit

equivalent to the tax paid by the company on the tax paid on the
taxed profits distributed by way of dividend which is to be allowed
against the shareholder s tax liability on the said dividend. The
application of the said full-imputation system25 could give rise to a
situation where an individual may be entitled to a refund of the tax
paid by the company, in certain cases26.
ECJ pronouncements with respect to full imputation systems
resulted in changes to the ITA. The ECJ delivered two judgements
on the compatibility of full imputations system with EU law. In a
reference for a preliminary ruling by the Korkein Hallinto-oikeus
by order of that Court in the appeal brought by Petri Mikael
Manninen27 the ECJ held that,
“Articles 56 EC and 58 EC preclude national legislation whereby the

entitlement of a fully-taxable person in a Member State to a tax credit on
dividends paid to him by limited companies, which offsets the corporation
tax due by those companies against the tax due from the shareholder by way
of income tax on revenue from capital, is excluded where those companies
are not established in that State.”
and found that certain full imputation systems are not

compatible with EU law. Another decision which could be
interpreted as constituting a blow to certain full imputation
25 The leading case on the application of the full imputation system is Case 46 of the Court
of Appeal when the Court confirmed that the full imputation system only applies when a
company pays tax on its profits. This concept is now enshrined in the wording used in article
59(1) of the Income Tax Act.
26 Attard, Robert, An Introduction to Income Tax Theory (Malta 2004) p. 123.
27 Case C-319/02.
systems was delivered by the ECJ in a judgement delivered on

12 December 2006 (reference for a preliminary ruling from the
High Court of Justice of England and Wales, Chancery Division,
United Kingdom) in Test Claimants in the FII Group Litigation v
Commissioners of Inland Revenue28 when the ECJ held that,
“Articles 43 EC and 56 EC must be interpreted as meaning that, where a

Member State has a system for preventing or mitigating the imposition of a
series of charges to tax or economic double taxation as regards dividends paid
to residents by resident companies, it must treat dividends paid to residents
by non-resident companies in the same way.’
Articles 43 EC and 56 EC preclude legislation of a Member State which

allows a resident company receiving dividends from another resident
company to deduct from the amount which the former company is liable
to pay by way of advance corporation tax the amount of that tax paid by
the latter company, whereas no such deduction is permitted in the case
of a resident company receiving dividends from a non resident company
as regards the corresponding tax on distributed profits paid by the latter
company in the State in which it is resident.”
Given that, the application of the full imputation system under

the ITA is available in respect of dividend distributions made by
Maltese companies and is not available in respect of dividends
distributed by foreign companies (including companies established
in other EU member states) issues of compatibility with EU law
appear to have arisen. Consequently, the ITA has recently been
amended in such a manner as to widen the scope of a particular
form of double tax relief by providing credits analogous to full
imputation credits in respect of dividends received from abroad29.
28 Case C-446/04.
29 The amendments made to Article 82 of the Income Tax Act by Act II of 2007 (Art. 20)
which extended the purview of the application of unilateral relief (relief for underlying tax)
to individuals removed certain distortions which previously existed in relation to the tax
treatment of dividends. The application of Unilateral Relief (and relief for underlying tax)
used to prevent or mitigate the imposition of a series of charges to tax or economic double
taxation in respect of foreign dividends applies in a very similar manner to the full-imputation
9.1 Distributions from the Final tax account
No further tax is charged upon a distribution from the Final tax

account. The rules which were, prior to the 2007 amendments,
applicable to the Property Transfers Reserve are now applicable
to distributions from the Final tax account. Paragraph (c) which
was added to Article 68 of the Income Tax Act by Act IX of 2007
provides that:
“Any dividends paid out of profits allocated to the final tax account shall not
be charged to further tax and shall not form part of the chargeable income
of any person and no person may claim a credit or refund in respect of any
tax directly or indirectly paid on such profits and for the purpose of this
paragraph any dividends received from a company not registered in Malta
from profits which would have been allocated to the final tax account had
such company been registered in Malta shall be deemed to be dividends paid
out of profits allocated to the final tax account.”
9.2 Distributions from the Immovable Property

Account
Distributions from the Immovable Property Account are subject to

the full imputation system.
9.3 Distributions from the Foreign Income

Account
Companies generally pay tax at 35% but the tax paid by a company
may be refunded to the company’s shareholder in terms of the
refundable tax credit system explained below. Several types of tax
refunds are contemplated in Articles 48 (4) and 48 (4A) ITMA.
system used to prevent or mitigate the imposition of a series of charges to tax or economic
double taxation in respect of domestic dividends.
The Full Refund and the Two-Thirds Refund

[Article 48 (4) ITMA]
The participation exemption is optional. A company may elect to
pay tax on its income from a participating holding but the tax paid
by the company may be refunded in full in terms of paragraph of
Article 48 (4) (b) ITMA.
When profits distributed out of the foreign income account of

a company are derived from a participating holding or from the
disposal of such holding, a claim may be made by a non-resident30
for a refund of all of the Malta tax paid in respect of those profits.
With respect to dividends, the application of the full-refund
system is restricted by an anti-abuse provision which applies to
participating holdings acquired on or after 1 January 2007. The
full refund is only due in respect of participating holdings acquired
after the cut-off date provided that the conditions set out in either
paragraph (i) or paragraph (ii) below are satisfied:
(i) it is resident or incorporated in a country or territory

which forms part of the European Union;
(ii) it is subject to any foreign tax of at least fifteen percent
(15%);
(iii) it does not have more than fifty per cent (50%) of its
income derived from passive interest or royalties;
Where none of these conditions are satisfied then both of the

following two conditions must be fulfilled:
30 Defined in Article 48 (4) (a) as a person who is either:

‘(i) not resident in Malta and who is, where applicable, not owned and controlled by, directly
or indirectly, nor acts on behalf of, a person who is ordinarily resident and domiciled in
Malta; or
(ii) a company resident in Malta which is wholly owned by a person or persons not resident
in Malta, provided that such person or persons are not owned and controlled by, directly
or indirectly, or act on behalf of a person or persons ordinarily resident and domiciled in
Malta.’
(i) the equity holding by the company registered in

Malta in the body of persons not resident in Malta is
not a portfolio investment and for this purpose the
holding of shares by a company registered in Malta in
a company or partnership not resident in Malta which
derives more than fifty per cent of its income from
portfolio investments shall be deemed to be a portfolio
investment; and
(ii) the body of persons not resident in Malta or its passive
interest or royalties have been subject to any foreign tax
at a rate which is not less than five per cent (5%).
A non-resident person, in receipt of a dividend paid to him

from profits allocated to the foreign income account or any profits
distributed by an international trading company31, as the case may
be, may claim a refund of two-thirds of the Malta tax paid by the
company in respect of those profits distributed to him by way of
such dividend.
It is important to note that the 2007 amendments introduced an

exception to the general rule contained in Article 48 (4) ITMA which
used to provide that only non-residents are entided to the full and 2/3
refund. Proviso 48 (4) (c) (ii) ITMA allows, Maltese residents to apply
for a refund in terms of48 (4)32 ITMA, in certain cases.
31 Subject to a cut-off date.

32 The relevant proviso reads as follows:
‘(ii) a person resident in Malta, registered for the purpose of making a claim in terms of this
subarticle in such manner as may be prescribed, may also claim a tax refund contemplated by
this subarticle with respect to dividends paid from profits allocated to the foreign income
account when such dividend is paid:
(1) by a company which was a company registered in Malta on or after 1 January 2007 but was
not resident in Malta before that date; and
(2) by any other company registered in Malta out of profits derived by the said company in
respect of accounting periods which commenced on or after 1 January 2011.’
The Six-Sevenths ACIT Refund [Article 48 (4A)

ITMA]
A person, in receipt of a dividend paid to him by a company registered in
Malta from profits allocated to its foreign income account not consisting
in passive interest or royalties33 may, in terms of Article 48 (4A) ITMA,
claim a refund of six-sevenths of the Advance Company Income tax
(ACIT’)34 paid by the distributing company pertaining to those profits
distributed to him by way of dividend.
The six-sevenths ACIT refund does not apply in those cases when the
dividend is paid out of profits allocated to the foreign income account
and in respect of which profits the company has claimed relief of double
taxation35.
ACIT is defined in 42B ITMA as:
“...the tax which a company is entided to deduct in terms of article 59 of the

Income Tax Act in respect of such dividend together with any additional tax
payable in terms of article 44(1) (a), after deducting any tax credits relative to
the profits out of which the dividend is paid excluding any tax credits relative
to a claim for relief of double taxation under the articles referred to in articles
74(a), (b) and (c) of the Income Tax Act,”
The Five-Sevenths ACIT Refund [Article 48 (4A)

ITMA]
Distributions of profits derived from passive interest or royalties
are not subject to the six-sevenths ACIT refund but are subject to
33 Defined in Article 2 of the Income Tax Act as:
“’passive interest or royalties’ shall mean interest or royalty income which is not derived,
directly or indirectly, from a trade or business, where such interest or royalties have not
suffered or suffered any foreign tax, directly, by way of withholding, or otherwise, at a rate of
tax which is less than five per cent (5%);’
34 Defined in sub-article 2 of Article 42B of the Income Tax Management Act.
‘(2) Upon the payment of a dividend from profits allocated to the foreign income account or
the Maltese taxed account the tax which a company is entitled to deduct in terms of article 59
of the Income Tax Act in respect of such dividend together with any additional tax payable in
terms of article 44(l)(a), after deducting any tax credits relative to the profits out ofwhich the
dividend is paid excluding any tax credits relative to a claim for relief of double taxation under
the articles referred to in articles 74(a), (b) and (c) of the Income Tax Act, shall be referred to
as Advance Company Income Tax.’
35 Sub-paragraph (ii) of paragraph (a) of sub-article 4A of Article 48 of the Income Tax
Management Act.
a refund of five-sevenths of the AC IT paid by the company. The

same refund applies, following the enactment of Act IX 2007
to dividends received from a participating holding in a body of
persons which does not satisfy the anti-abuse conditions referred
to in the proviso to article 12(l)(u) ITA.
The five-sevenths ACIT refund may not be applied in those cases

when the dividend is paid out of profits allocated to the foreign income
account and in respect of which profits the company has claimed relief of
double taxation3637
.
9.4 Distributions from the Maltese Taxed Account

[Article 48 (4A) ITMA]
Whereas the purview of the refundable tax credit system contemplated

in Article 48 (4) ITA is limited to dividend distributions from the foreign
income account, and is generally31 further restricted to distributions to
non-residents, the ACIT refundable tax credit system contemplated in
Article 48 (4A) ITMA is not selective. 48 (4A) ITMA does not limit
the grant of refunds to non-residents and expressly contemplates the
application of the refundable tax credit system in the case of refunds from
the Maltese tax account. Thus, the six-sevenths and five-sevenths ACIT
refunds contemplated above apply to distribution from the Maltese taxed
account, as well. It is also important to repeat that the full imputation
system applies to distributions from the Maltese taxed account, as well.
9.5 Distributions from the Untaxed Account
The tax treatment of a distribution from the untaxed account

depends on whether the person receiving the dividend falls under
the definition of the term ‘recipient’ contained in Article 61 ITA.
The tax rules relating to distributions from the untaxed accounts are
similar to the rules contained in the investment income provisions.
36 Sub-paragraph (ii) of paragraph (a) of sub-article 4A of Article 48 of the Income Tax
Management Act.
37 Saving the exception contained in the proviso to 48 (4) ITA discussed. The proviso refers to
cases where the refund may be applied by resident persons as well.
Article 62 ITA imposes a 15% tax on distributions from the

untaxed account made to a recipient. Article 65 ITA prescribes
that a recipient of an untaxed dividend may declare such dividend
on his tax return and when a declaration is made, any tax withheld
is credited against the recipients income tax liability and could
give rise to a tax refund.
Article 66 ITA prescribes that dividend distributions from the untaxed

account to a non-recipient are not taxed. Non-resident individuals and
non-resident bodies of persons which are not owned and controlled,
directly or indirectly, by persons who are ordinarily resident and
domiciled in Malta are not ‘recipients’ for the purposes of Article 61 ITA
and are therefore not subject to the 15% withholding tax on dividends.
Even resident companies38 are excluded from the definition of‘recipient’
and accordingly the 15% tax rate does not apply to distributions made to
them as well. Thus, generally39, the 15% withholding tax rate applies when
the person who receives a dividend from the untaxed account is a resident
individual but there is a remote case when the 15% withholding tax
applies to distributions to non-resident bodies of persons (non-resident
body of persons that are owned and controlled by, directly or indirectly,
or who acts on behalf of, an individual who is ordinarily resident and
domiciled in Malta), as well. The latter rule seems to create problems of
compatibility with EU law, including in particular, the Parent Subsidiary
Directive40 and Articles 56EC and 58EC as interpreted in Amurta S.G.P.S
v Inspecteur van de Belastingdienst41. The ECJ held, in Amurta, that,
38 Article 61 (a) defines a recipient ‘as a person, other than a company’.

39 Subject to the rule which prescribes that a non-resident person (including a non-resident
company) who is owned and controlled by, directly or indirectly, or who acts on behalf of, an
individual who is ordinarily resident and domiciled in Malta is a recipient.
40 90/435/EEC, the application of which was transposed into Maltese law by L.N. 267 of 2004.
Article 4 of the said directive provides inter alia that, “where a parent company, by virtue of
its association with its subsidiary, receives distributed profits, the State of the parent company
shall, except when the latter is liquidated, either:
- refrain from taxing such profits, or
- tax such profits while authorizing the parent company to deduct from the amount of tax due
that fraction of the corporation tax paid by the subsidiary which relates to those profits and,
if appropriate, the amount of the withholding tax levied by the Member State in which the
subsidiary is resident, pursuant to the derogations provided for in Article 5, up to the limit of
the amount of the corresponding domestic tax.”
41 Judgment of the Court (First Chamber) of 8 November 2007 (reference for a preliminary
“Articles 56 EC and 58 EC preclude legislation of a Member State which,

where the minimum threshold for the parent company's shareholdings in
the share capital of the subsidiary set out in Article 5( 1 ) of Council Directive
90/435/EEC of 23 July 1990 on the common system of taxation applicable
in the case of parent companies and subsidiaries of different Member States
is not reached, provides for a withholding tax on dividends distributed by
a company established in that Member State to a company established in
another Member State, while exempting from that tax the dividends paid to
a company liable to corporation tax in the first Member State or which has a
permanent establishment in that Member State which owns the shares in the
company making the distribution.
A Member State may not rely on the existence of a full tax credit granted
unilaterally by another Member State to a recipient company established
in the latter Member State in order to escape the obligation to prevent
economic double taxation of dividends resulting from the exercise of its
power to tax in a situation where the first Member State prevents economic
double taxation of dividends distributed to companies established in its
territory. Where a Member State relies on a convention for the avoidance of
double taxation concluded with another Member State, it is for the national
court to establish whether account should be taken, in the main proceedings,
of that convention, and, if so, to determine whether it enables the effects of
the restriction on the free movement of capital to be neutralised.”
ruling from the Gerechtshof te Amsterdam - Netherlands) - Amurta S.G.P.S v Inspecteur van
de Belastingdienst (Case C-379/05).
Chapter 14
The Investment Income Provisions
The Investment Income Provisions are contemplated in Articles

32A-42A ITA, both inclusive. The term ‘investment income
provisions’ is not a colloquial term but a term which is used by the
law, in Article 32ITA, to refer to a tax mechanism which applies
in respect of certain payments. Article 33 ITA contemplates a
potentially favourable tax rate, generally of 15%* which may be
applied in respect of income defined as ‘investment income’.
I. Relevant Definitions
The purview of the investment income provisions is obviously

restricted. The application of the Investment Income Provisions is
linked to a number of definitions namely the definition of the term
‘payor’, the definition of the term ‘recipient’ and the definition
of the term ‘investment income’. The terms are defined in the
interpretative provision of the Investment Income Provisions,
Article 41 ITA.
1.1 ‘Investment Income’
An exhaustive list of income which constitutes investment income

for the purposes of the provisions is contained in Article 41 ITA.
Investment income is defined as comprising ‘only certain categories
1 In certain cases the tax rate is not of 15% but may either be of 10% or of 15%.
of income’2. Investment income ‘does not include all types of

income from investments’.3 The long winded definition of the term
investment income may split up as follows.
1.2 Interest Income
The following interest income is considered to be investment

income.
(i) interest payable by a person carrying on the business of

banking under the Banking Act, in respect of a sum of
money in whatever currency deposited with it in any
account whatever (except interest payable in respect of
any bearer account);
(ii) interest, discounts or premiums payable by the
Government of Malta or by any agency thereof;
(Hi) interest, discounts or premiums payable by a corporation
or authority established by law;
(iv) interest, discounts or premiums payable in respect of:
(1) a public issue by a company, entity or other legal
person howsoever constituted and whether resident
in Malta or otherwise; and
(2) a private issue by a company, entity or other legal
person howsoever constituted and resident in
Malta paid to a collective investment scheme.
The Investment Income provisions contain important rules

relating to the tax treatment of collective investment schemes. The
distinction which is maintained between traditional bank interest
and other investment income is very important for the purposes of
the tax rules applicable to prescribed funds.
2 41 ITA.
3 Ibid Gatt Slide 3.
The Investment Income Provisions 513
1.3 Capital Gains
The following capitals gains are considered to be investment income.

An extract from the definition is being reproduced hereunder:
“(v) (1) capital gains arising on the disposal of shares or units in a collective
investment scheme where the collective investment scheme redeems,
liquidates or cancels such shares or units, such capital gains to be calculated
by reference to the price at which the shares or units were allotted or issued
by the collective investment scheme or to a value determined in such manner
and on the basis of such criteria as may be prescribed:
Provided that this item shall not apply to:
(1) capital gains arising on the disposal of shares or units held in a prescribed
fund of a collective investment scheme; and
(ii) capital gains arising on the disposal of shares or units held in a fund of a
collective investment scheme that is not resident in Malta if such a fund is
not a prescribed fund and the disposal is not made through the services of an
authorised financial intermediary;
(2) capital gains arising on the surrender or maturity of units and such like
instruments relating to linked long term business of insurance where the
benefits are at least eighty five per cent determined by reference to the value
of units or shares in, or income derived from, collective investment schemes:
Provided that in calculating such capital gains -
( i) no account shall be taken of any part of the said benefits that is determined
by reference to the value of units or shares in collective investment schemes
that were held in prescribed funds for a continuous period spanning the
whole life of the relevant linked long term contract of insurance or three
years from the date of the relevant maturity or surrender whichever period
is the lesser;
(ii) the cost of acquisition shall be calculated by reference to the total
amount of premiums paid in relation to the linked portion of the contract of
insurance or to a value determined in such manner and on the basis of such
criteria as may be prescribed;
(3) capital gains arising on the redemption, liquidation or cancellation of
securities not referred to in items (1) and (2) hereof and not being shares in
a company;”
The treatment of certain gains as investment income dovetails

within the network of rules governing collective investment
schemes which are sparse throughout our tax laws. These rules will
be read in perspective in the Chapter which discuss the taxation of
collective investment schemes.
1.4 Foreign Investment Income
The following investment income, all of which originates outside

Malta, is considered to be investment income. An extract from the
law is being reproduced hereunder:
“(vi) profits distributed by a collective investment scheme that is not resident

in Malta that are paid through the services of an authorised financial
intermediary out of profits that had been allocated in that collective
investment scheme to a fund that is not a prescribed fund;
(vii) interest payable by a person carrying on the business of banking in
accordance with foreign legislation in respect of a sum of money in whatever
currency deposited with it in any account whatever where the payment
of the income from investment is made through an authorised financial
intermediary as is provided for in items (i), (ii) or (iii) of paragraph (c) of
article 41 A;
(viii) (1) profits distributed by a company that is not resident in Malta (and
that is not a collective investment scheme), and where such profits are paid
through the services of an authorised financial intermediary to an individual
who is resident in Malta, provided that such distributed profits constitute
income in the hands of such individual that is derived from shares in
such company, each share being a qualifying asset as defined in the provisions
of article 9B
1.5 Net Dividends and Net Refunds
Amendments made to Article 41 ITA in 2007 added net dividends

and net refunds to the list of investment income. Net dividends
and net refunds are considered to be investment income when the
recipient shareholder registers for tax purposes. It is important to
note that 48 (4) ITMA refers to the full refund and the two thirds
‘foreign income account refund’ while 48 (4A) ITMA refers to
the six-sevenths refund and the five-sevenths refund which apply
to distributions from the foreign income account and the Maltese
taxed account. Article 43 ITA refers to deemed distribution

orders. 43 (6) (a) ITA refers to a scenario when an individual who is
resident in Malta becomes beneficially entitled to the 48 (4) ITM A
and 48 (4A) ITMA refunds and 43 (6) (c) ITA refers to a scenario
when a resident individual becomes entitled to profits which have
been relieved from tax in terms of the participation exemption.
1.6 The Definition of ‘Payor’
The term ‘payor’ is defined as meaning the person who is liable to

make, or if different, who makes a payment of investment income
and with respect to investment income consisting in a deemed
dividend means the company which earned the profits deemed
distributed. In certain cases, even the Commissioner is treated
as a payor. Article 41 ITA must be read in conjunction with 41A
ITA which includes a second definition of the term payor. The
latter definition treats an authorised financial intermediary4 as a
payor. Payment of investment income is considered to be payment
of investment income for the purposes of the law if it is effected
through the services of an authorised financial intermediary when
such payment -
(i) is made to the intermediary who holds the relevant

investment for the benefit of the recipient;
(ii) is made directly to the recipient who requires that an
authorised financial intermediary collects an amount of
tax equal to fifteen per cent of such income for onward
payment to the Commissioner;
(iii) is made through an arrangement approved by the
Commissioner, which arrangement enables the
collection of tax on such income through an authorised
financial intermediary.
4 Defined as ‘a person holding an investment services licence issued under the Investment
Services Act who is registered with the Commissioner and who satisfies such other conditions
as may be prescribed’ in 41A ITA.
1.7 The Definition of ‘Recipient’
The term ‘recipient’ is defined as meaning:
(i) a person who is resident in Malta during the year in

which investment income is payable to him or which
is payable to a person under (ii) or (iii) below (other
than a person who during that year carried on banking
business under the Banking Act, or a person carrying on
the business of insurance or any other company which
is owned and controlled, directly or indirectly, by such
persons or a company which is registered under article
24 of the Malta Financial Services Authority Act5), or
(ii) a receiver, guardian, tutor, curator, judicial sequestrator
or committee acting on behalf of a person referred to in
(i) above, or
(iii) a trustee or foundation pursuant to or by virtue of which
any money or other property whatsoever shall for the
time being be paid or applied to or for the benefit of a
person referred to in (i) above, or
(iv) an EU/EEA individual (and his or her spouse where
applicable) in the circumstances envisaged by the first
and second provisos to article 56(1 )(c) ITA.6.
With respect to investment income consisting in net dividends

and net refunds a person is treated as a ‘recipient’ for the purposes of
the law only if such person is an individual who is resident in Malta
and, in the case of a deemed distribution order, such individual is a
resident if he is ordinarily resident and domiciled in Malta.
5 Given that the offshore regime was phased out in 2004 the reference to offshore companies is
wasted space, at this point in time.
6 Paragraph (iv) was added by Act XII of 2014. An EU/EEA individual falls under 56 (c)
(1) ITA if the Commissioner is satisfied that at least 90% of the said individual’s worldwide
income is derived from Malta.
2. Applicable by Election
The application of withholding tax in terms of the Investment

Income provisions is, generally, not mandatory. The recipient has
the right to elect to opt out of the withholding tax system7 in which
case he would be bound to declare his investment income in his tax
return.8
3. The Characteristics of Tax Charged in terms of

the Investment Income Provisions
Tax charged in terms of the Investment Income provisions may be

described as as a final tax.9
Article 39 ITA, as amended in 2012, prescribes that, when

a recipient does not declare his investment income in his return,
no further tax is charged in respect of investment income in
respect of which tax is withheld. Furthermore, a recipient who is
an individual shall not be obliged to disclose the existence of the
investment income in any return10.
The election to receive investment income gross does not apply

in the case of investment income consisting in the net dividend, the
net refund and any deemed distribution.
7 35 ITA.
8 36 ITA.
9 Because Article 37 ITA as amended by Act XII of 2014 prescribes that any tax withheld under
the Investment Income Provisions shall not be available as a credit or refund.
10 39 ITA.
4, The Tax Rate
The rate of withholding tax is prescribed in Article 33 ITA as

amended by Act I of 2010.11 The default rate is 15% but the 56 (1)
(c) ITA 35% rate applies in the case of 41 (a) (viii) ITA investment
income (profits distributed by a foreign company via an authorised
financial intermediary, net dividends, net refunds and other
cases).11
12
11 Act I of 2010 added the following proviso :

“Provided that where the recipient derives, or is deemed to have derived pursuant to the
provisions of article 43(6)(a), (b) or (c), investment income referred to in article 41(a)
(viii), tax shall be deducted at the rate specified in article 56(6) or such other rate as may be
prescribed and rules may also be prescribed on how the investment income provisions are to
be applied in particular circumstances.”
12 Namely when 41 (a)(viii)ITA which lists:
“(1) profits distributed by a company that is not resident in Malta (and that is not a collective
investment scheme), and where such profits are paid through the services of an authorised
financial intermediary to an individual who is resident in Malta, provided that such distributed
profits constitute income in the hands of such individual that is derived from shares in such
company, each share being a qualifying asset as defined in the provisions of article 9B;
(2) the amount of the net dividend paid by a company registered in Malta in respect of which
the recipient shareholder is registered for the purpose of article 48(4) or article 48(4A) of the
Income Tax Management Act;
(3) the amount paid pursuant to article 48(4) or article 48(4A) of the Income Tax Management
Act;
(4) the dividend referred to in article 43(6)(a) and the income or gains referred to in article
43(6)(c);
(5) the income referred to in article 43(6)(b);
(b) "payor" shall mean the person who is liable to make, or”
Chapter 15
The Elimination of International

Double Taxation
The principal rules which deal with the phenomenon of double

taxation are contained in Articles 74-95 ITA, not to mention the
legal notices which incorporate Malta’s double tax treaties.
The Maltese tax system contemplates four mechanisms which

may be used to eliminate international double taxation. The
said mechanisms are listed in Article 74ITA and consist in the
following:
(i) double taxation relief, as provided in articles 76 to 78

ITA, both inclusive;
(ii) unilateral relief, as provided in articles 79 to 88 ITA,
both inclusive;
(iii) relief in respect of Commonwealth income tax, as
provided in article 89 ITA; and
(iv) a flat-rate foreign tax credit, as provided in articles 92 to
95 ITA, both inclusive.
The wording of Article 75 ITA, the article which regulates the

interaction between the four reliefs suggests a hierarchical system
of reliefs. Thus, article 75 (a) ITA prescribes that unilateral relief
is applied in calculating a persons tax liability in those cases where
double taxation relief and relief in respect of Commonwealth income
tax are not available to the person making the claim. Furthermore,
the provisions concerning the flat-rate foreign tax credit are applied
in calculating a persons tax liability only in those cases where

double taxation relief, relief in respect of Commonwealth income
tax and unilateral relief, as governed by articles 79 to 88 ITA, are not
available to the person making the claim. However, it would appear
that the hierarchy suggested in Article 75 ITA has been superseded
by a consistent Revenue practice which allows taxpayers a certain
amount of latitude in applying reliefs. The Revenue practice seems
to be based on rules such as the rule contained in Article 77 (8)
ITA which prescribes that a taxpayer has the right to elect not to
avail himself of double tax treaty relief.
/. Double Tax Treaty Relief
Domestic law provisions relating to double tax relief are contained

in Articles 76-78 ITA which refer to tax relief obtained by
reference to bilateral double tax treaties. Double tax treaties
are, qua international agreements, governed by the Vienna
Convention and over-ride the Income Tax Acts, in case of conflict.
Double Tax Treaties are subject to the legal maxim of -pacta sund
servanda (agreements must be honored) and are enforceable by
the contracting states. Given that Malta applies the principle of
Parliamentary Supremacy, treaties become enforceable by taxpayers
after such treaties are either transposed or incorporated into
Maltese law1. Treaties are ratified by Legal Notice passed by the
Minister of Finance pursuant to a power vested in him by Article
76 ITA. Most of the double tax treaties Malta has entered into
are based on the OECD Model Convention.12 One of the most
notable exceptions is the Treaty which Malta has signed with the
US which is based on the 1996/2006 US Model Convention.
1 Rohatgi ibid p. 20.

2 The definitive works on the OECD Model Convention is Philip Baker s, A Manual on the
OECD Model Tax Convention on Income and on Capital (London 2005), and Vogel, Klaus,
Klaus Vogel On Double Taxation Conventions (Munich 1999) to which readers are referred
to.
The Elimination ofInternational Double Taxation 521
Article 77 ITA refers to the credit method as a method which is

applied for the elimination of double taxation relief. Furthermore,
it prescribes that double taxation relief must not exceed the tax due
on the income relieved by the credit. It incorporates rules relating
to the calculation of the credit which is to be applied in respect of
income which is liable to tax in Malta on a remittance basis and
prescribes rules relating to the limitation of the credit. Any claim
for an allowance by way of credit must be made not later than two
years after the end of the year of assessment to which the claim
refers, and in the event of any dispute as to the amount allowable
the claim is subject to objection and appeal in like manner as an
assessment.
Articles 76-78 ITA lay down the conditions which must be

satisfied by a taxpayer for the purposes of claiming double tax
treaty relief. Double taxation relief can be applied provided that
(i) double taxation arrangements must be in force by

Ministerial order between Malta and the relevant
foreign territory;3
(ii) the person entitled to the income must be a resident in
Malta for the year immediately preceding the year of
assessment;4
(iii) taxpayer must5 be in possession of evidence of tax paid
abroad;6
(iv) tax paid abroad is either income tax or any tax of a
similar character imposed by the laws of that territory.7
3 Article 76 (1) of Cap. 123 of the Laws of Malta.

4 Article 77 (2) of Cap. 123 of the Laws of Malta.
5 By implication.
6 MFSAop.citp.17.
7 Article 76 ( 1 ) Cap. 123 of the Laws of Malta.
BSC 5/028 is one of the few, if not the only, Maltese case which
deals with double tax treaty relief. The Revenue s synopsis of the
case is being reproduced below:
“Once it is ascertained that a person has performed his employment duties

in Libya, such income is exempt from tax in Malta and no proof regarding
the amount of any tax paid in Libya is necessary - article 13 of the Double
Taxation Relief Agreement between Malta and Libya
During objection stage the Commissioner had asked taxpayer to produce

proof of the tax paid in Libya. Such proof was never produced and the
objection was refused.
Appellant claimed, before the Board, that it was enough for him to prove
that he had actually performed his employment duties in Libya. From this it
followed that his income was exempt from tax; it was not necessary for him
to obtain certificates from the Libyan authorities regarding the amount of
tax paid in Libya.
The Board held that according to article 13 of the Tax Treaty between the
two countries, salaries, wages and similar emoluments earned in one of
the contracting states were to be taxed only in the state where the services
were rendered. It had been ascertained that appellant had performed his
employment duties in Libya. Now the said article 13 exempted from tax
in Malta that income that had been earned in the other contracting state
(Libya), therefore the amount of tax paid in Libya was completely irrelevant.
The Board accepted appellant's grounds and ordered the revision of the
assessments.”
2. Unilateral Relief
The rules relating to Unilateral Relief are prescribed in Articles

79-88 ITA. Unilateral relief9 provides relief for double taxation
in a manner which is very similar to double taxation treaty relief.
However, it applies outside of a restricted tax treaty context.
Unilateral relief is granted unilaterally, in the absence of a double
8 Decided: 7 November, 2002.
9 Articles 79 to 88 of Cap. 123 of the Laws of Malta.
tax treaty. In addition, unilateral relief0 incorporates a mechanism

for the relief for underlying tax under Article 82, by allowing, in
defined cases11, relief for foreign tax when such foreign tax includes
tax paid in respect of a dividend indirectly11. Unilateral Relief
and relief for underlying taxation can be used to provide relief for
corporate tax paid by the company which distributes the dividend.
The principal conditions relating to a persons right to benefit

from unilateral relief are prescribed in Articles 80 ITA, 81 ITA and
88 ITA:
(i) It is availed of in respect of income which arises outside

Malta. The law does not limit the credit to income
which is allocated to the foreign income account. It
applies to income which is allocated to the Maltese
Taxed Account too.
(ii) Is subject to any tax of a similar character to that
imposed under the Income Tax Acts under the laws of a
territory outside Malta, including, in the case of a claim
13 tax
for relief to which article 82(a) and (b) ITA apply,10
12
11
imposed under the Income Tax Acts. A foreign tax is not
prevented from being of a similar character by reason
only that it is payable under the law of a province, state
or other part of a country, or is levied by or on behalf of
a municipality or other local body14.
(iii) The person who claims the credit must either be a
resident of Malta or must be company registered in
Malta.15.
10 Article 82 of Cap. 123 of the Laws of Malta.

11 Vide Article 82 of Cap. 123 of the Laws of Malta.
12 Such as when tax was paid by the company distributing such dividend.
13 Dividends from a related party. A company is considered to be related to the overseas company
if the overseas company controls, directly or indirecdy, not less than 10% of the voting power
of the related company.
14 Article 80 ITA.
15 Proviso to Article 81 ITA.
(iv) The person who claims Unilateral Relief must prove to

the satisfaction of the Commissioner that the income to
be relieved by unilateral relief has borne foreign tax of a
similar character to that imposed under the ITA 16.
The conditions listed in (ii) above are a product of the 2007

amendments. Articles 28 and 29 of Act 1 of 2010 amended articles
80 and 81 ITA allowing relief for underlying tax in respect of
domestic dividends as well. Before 2010, relief for underlying tax
used to apply to foreign dividends only.17
Prior to the enactment of Act II of 2007, the only persons who
used to be eligible to benefit from Unilateral Relief used to be
16 Article 88 ITA.
17 See comparative table below:
Pre-2010 Post-2010
80. Unilateral relief may be available in 80. Unilateral relief may be available in
respect of a claim for respect of a claim for
relief of double taxation where tax under
relief of double taxation where tax under this Act is computed by reference to
this Act is computed by reference to income income which:
which: (a) arises outside Malta; and
(b) is subject to any tax of a similar
(a) arises outside Malta; and character to that imposed under the
Income Tax Acts under the laws of a
(A) is subject to any tax of a similar character territory outside Malta, including, in the
to that imposed under the Income Tax Acts case of a claim for relief to which article
under the laws of a territory outside Malta. 82(a) and (b) applies, tax imposed under
the Income Tax Acts.
For the purposes of paragraph (A), a tax For the purposes of paragraph (b), a tax
shall not be prevented from being of a shall not be prevented from being of a
similar character by reason only that it is similar character by reason only that it is
payable under the law of a province, state
payable under the law of a province, state or or other part of a country, or is levied by or
other part of a country, or is levied by or on on behalf of a municipality or other local
behalf of a municipality or other local body.
body
companies. Unilateral reliefnow applies to individuals, as well18. The

latter change came in the wake of decisions of the European Court of
81. The amount of the tax referred to in 81. The amount of the tax referred to in
article 80(£) which is article 80(b) is to be
allowed as a credit against the income tax
payable in a territory other than Malta is to chargeable in Malta in respect of the income
be allowed as a credit against the income tax under article 80, and the amount of the inc
chargeable in Malta in respect of the income me tax so chargeable shall be reduced by the
under article 80, and the amount of the amount of the credit:
income tax so chargeable shall be reduced Provided always that the credit shall not be
by the amount of the credit: allowed against
income tax for any year of assessment unless
Provided always that the credit shall not be the person entitled to the income is resident
allowed against in Malta or is a company registered in Malta
for the year immediately preceding the year
income tax for any year of assessment unless of assessment.
the person entitled to the income is resident
in Malta or is a company registered in Malta
for the year immediately preceding the year
of assessment.
References to ‘territory outside Malta’ were removed.

18 The extension of the credit to persons not being companies was effected via an amendment to
Article 82 ITA as explained below:
Article 82 (a) ITA (pre-Act II2007) Act 82 (a) ITA (post-Act II of 2007)
“’tax not chargeable directly or by “’tax not chargeable directly or by

deduction in respect of the dividend’ shall deduction in respect of the dividend’ shall
include tax payable in respect of a dividend include tax payable in respect of a dividend
distributed by a company not resident distributed by a company which is related
in Malta which is related to the overseas to the overseas company as specified in
company as specified in paragraph (b), paragraph (b) hereinafter referred to in this
hereinafter referred to in this article as article as "related company", where such
"related company", where such dividend dividend forms part of a chain of successive
forms part of a chain of successive dividends distributed from one related
dividends distributed from one related company to another ending in the dividend
company to another ending in the dividend received by the person making the claim,
received by the Malta company, or on the or on the profits out of
profits out of which such dividend was which such dividend was distributed;”
distributed;”
Justice such as the Manninen19 and the FII Group Litigation Case20
relating to distortions which are created, somewhat unwittingly, by
certain full imputation systems. Full imputation systems such as
the Maltese system apply exclusively to domestic dividends and the
territorial limitations of such benefits could give rise to allegations
of discriminatory treatment. Consequently unilateral relief and
especially relief for underlying taxation have been used as a stop gap
measure to create benefits similar to those which apply to domestic
dividends under the full imputation system to foreign dividends. It
would appear that the benefits offered under the extended unilateral
relief system are similar but not equivalent to the benefits under
the full imputation system. Whereas there are cases when the
application of the full imputation might result in a credit of tax paid
19 (C-319/02) when the ECJ held that,

“Articles 56 EC and 58 EC preclude national legislation whereby the entitlement of a
fully-taxable person in a Member State to a tax credit on dividends paid to him by limited
companies, which offsets the corporation tax due by those companies against the tax due
from the shareholder by way of income tax on revenue from capital, is excluded where those
companies are not established in that State.
Such tax legislation constitutes a restriction on the free movement of capital in that it has
the effect of deterring fully-taxable persons in the Member State concerned from investing
their capital in companies established in another Member State. It also has a restrictive effect
as regards companies established in other Member States in that it constitutes an obstacle to
their raising capital in the Member State concerned.
That legislation cannot be justified by an objective difference in situation capable of giving rise
to a difference in tax treatment in accordance with Article 58(l)(a) EC. In the face of a tax
rule which aims to prevent double taxation of the profits distributed by the company in which
the investment is made - corporation tax and then income tax - shareholders who are fully
taxable in the Member State concerned find themselves in a comparable situation, whether
they receive dividends from a company established in that Member State or from a company
established in another Member State, since in both cases the dividends are, apart from the tax
credit, capable of being subjected to double taxation’.
20 (C 446/04) when the ECJ held that,
Articles 43 EC and 56 EC must be interpreted as meaning that, where a Member State
has a system for preventing or mitigating the imposition of a series of charges to tax or
economic double taxation as regards dividends paid to residents by resident companies, it
must treat dividends paid to residents by non-resident companies in the same way...Articles
43 EC and 56 EC preclude legislation of a Member State which allows a resident company
receiving dividends from another resident company to deduct from the amount which the
former company is liable to pay by way of advance corporation tax the amount of that tax
paid by the latter company, whereas no such deduction is permitted in the case of a resident
company receiving dividends from a non resident company as regards the corresponding tax
on distributed profits paid by the latter company in the State in which it is resident.’
by the company21 the application of unilateral relief is subject to the

restrictions prescribed in Article 84 ITA. Whereas unilateral relief
and relief for underlying taxation cannot result in a refund of tax, the
full imputation system can give rise to an entitlement to a refund, in
certain cases.
Norms which are contemplated in the provisions which regulate

double tax treaty relief are, by cross reference contained in Article
87 ITA, incorporated in the rules which regulate unilateral relief.
The rules contained in Articles 77 (8), (9) and (10) ITA apply to
unilateral relief, as well. Thus, unilateral relief is applied by election
and any claim for a credit must be made within two years.
3. Commonwealth Relief
Relief in respect of Commonwealth taxation is contemplated in

Article 89 ITA. It is rarely applied in practice. Commonwealth
Relief can be applied provided certain conditions are fulfilled. The
rules which prescribe conditions for eligibility to the benefits are
divided in two separate limbs. Even non-residents fall within the
remit of Commonwealth Relief. The relevant provisions are being
reproduced below:
“(1) If any person resident in Malta who has paid, by deduction or otherwise,
or is liable to pay, tax under this Act for any year of assessment on any part of
his income, proves to the satisfaction of the Commissioner that he has paid,
by deduction or otherwise, or is liable to pay, Commonwealth income tax
for that year in respect of the same part of his income, he shall be entitled to
relief from tax in Malta paid or payable by him on that part of his income at
a rate thereon to be determined as follows:
(a) if the Commonwealth rate of tax does not exceed one half of the rate of
tax appropriate to his case under this Act in Malta, the rate at which relief is
to be given shall be the Commonwealth rate of tax;
21 In those cases when the average tax rate which applies to the taxpayer is lower than the
company rate.
(b) in any other case the rate at which relief is to be given shall be half the rate
of tax appropriate to his case under this Act.
(2) If any person not resident in Malta who has paid, by deduction or
otherwise, or is liable to pay, tax under this Act for any year of assessment on
any part of his income, proves to the satisfaction of the Commissioner that
he has paid, by deduction or otherwise, or is liable to pay, Commonwealth
income tax for that year of assessment in respect of the same part of his
income, he shall be entitled to relief from tax paid or payable by him under
this Act on that part of his income at a rate thereon to be determined as
follows:
(a) if the Commonwealth rate of tax appropriate to his case does not
exceed the rate of tax appropriate to his case under this Act, the rate at which
relief is to be given shall be one-half of the Commonwealth rate of tax;
(b) if the Commonwealth rate of tax appropriate to his case exceeds the
rate of tax appropriate to his case under this Act, the rate at which relief is to
be given shall be equal to the amount by which the rate of tax appropriate to
his case under this Act exceeds one-half of the Commonwealth rate of tax.”
Commonwealth Relief is, by definition, available in respect of

Commonwealth Income Tax, a term which is defined as any income
tax or tax of a similar nature charged under any law in force in any
country of the Commonwealth, other than Malta or the United
Kingdom of Great Britain and Northern Ireland, if the legislature
of such country has provided for relief in respect of tax charged
on income both in that country and in Malta in a manner which
appears to the Commissioner to correspond to the relief granted
by article 89 ITA.
4. The Flat Rate Foreign Tax Credit (‘FRFTC’)
The rules relating to the flat rate foreign tax credit are found in
Articles 92, 93, 94 and 95 ITA. FRCTC is given in respect of
income or gains:
(i) which are received by a company registered in Malta.

Thus, FRFTC can be availed only by a particular type of
taxpayer, the company registered in Malta as defined in

Article 2 ITA22; and
(ii) which the company is specifically empowered to receive
and fall to be allocated to the foreign income account.
FRFTC is thus specific to a particular form of income.

Furthermore, FRFTC is not available to foreign source
income, generally. Certain types of foreign source
income are not allocated to the foreign income account
and cannot be relieved by FRFTC23.
A company registered in Malta can apply FRFTC

provided that such company is specifically empowered
to do so. The requirement is satisfied if the company
incorporates an objects clause which empowers the
company to apply FRFTC. The condition which
contemplates an empowerment clause was introduced
in 2007.
Given that paragraph (d) of the definition of Foreign

Income Account profits prescribes that profits resulting
from dividends paid out of the foreign income account
of another company resident in Malta are allocated
to the foreign income account, the latter profits have
been expressly excluded from the sphere of activity of
FRFTC.
(iii) in respect of which documentary evidence is available
which indicates to the satisfaction of the Commissioner
that such income or gains, as the case may be, fall to be
22 In the case of a company resident in Malta prior to the 1 January 2007, the first condition of
this paragraph shall apply as from the 1 January 2011, or, where such company informs the
Commissioner as contemplated in article 48(4A)(b)(l) or (2) of the Income Tax Management
Act, as from the date on which such information is effective, whichever is the earlier
23 Profits of a company registered in Malta which are not attributable to a permanent
establishment situated outside Malta are not allocated to the foreign consequently FRFTC
cannot be availed of in respect of such income.
allocated to the foreign income account as provided in

paragraph (ii). For the purposes of this requirement, a
certificate issued by a certified public accountant and
auditor shall be satisfactory documentary evidence.
The absence of a condition which prescribes that evidence of tax

paid abroad is required is conspicuous for its absence.
Act XIII of 2015 introduced a rule allowing Rule 9 companies

to avail themselves of FRFTC. The rule allowing Rule 9 companies
to avail themselves of FRFTC was introduced in 92 (2) ITA
providing that FRFTC may be availed of with respect to:
“Income or gains which are received -

(a) by a Rule 9 company registered in Malta;
(b) which the Rule 9 company is specifically empowered to receive and would
fall to be allocated to the foreign income account as defined in article 2 were
it not a Rule 9 company, but excluding profits resulting from dividends paid
out of the foreign income account of another company resident in Malta;
and
(c) in respect of which documentary evidence is available which indicates to
the satisfaction of the Commissioner that such income or gains, as the case
may be, would fall to be allocated to the foreign income account were it not
a Rule 9 company, as provided in paragraph (b). For the
purposes of this requirement, a certificate issued by a certified public
accountant and auditor shall be satisfactory documentary evidence.
For the purpose of this sub-article, "Rule 9 company" shall mean a company
which has made an election not to allocate its gains or profits to the foreign
income account and the Maltese taxed account in terms of rule 9 of the Tax
Accounts (Income Tax) Rules.”
FRFTC, unlike Double Tax Treaty Relief and Unilateral Relief,

is computed by reference to a twenty five per cent flat rate generally
calculated on foreign profits24 net of foreign tax irrespective of the
24 Article 93 Cap. 123 of the Laws of Malta provides that,

'(1) Theflat-rateforeign tax credit shall be twenty-five per cent ofthe income orgains receivable by
the company within the provisions ofarticle 92, before any deductions or payments whatsoever are
madefrom the said income or gains.
rate of tax paid abroad, if any and is not granted in respect of tax
actually paid abroad. FRFTC is subject to a limitation rule. The
proviso to Article 94 (2) ITA contemplates a limitation to the
amount of the said credit,
‘...where the amount of the flat-rate foreign tax credit exceeds eighty-
five per cent of the tax payable computed by taking the tax payable on
those profits which are to be allocated to the foreign income account and
deducting therefrom any foreign tax set-off under the double taxation
relief, Commonwealth income tax relief and unilateral relief provisions, the
amount of such exceeds shall not be available for set-off or refund for any
purposes of the Income Tax Acts.’
The limitation rule discussed above is managed via arithmetical

mechanisms which can be used to adjust a priori the amount of
FRFTC claimed in such a manner that the amount claimed does
not exceed the maximum allowed by law. The latter mechanisms
are known colloquially as optimisation’25.
Article 94 (3) ITA prescribes that the provisions of article 77

(8), (9) and (10) ITA apply mutatis mutandis in relation to the
flat-rate foreign tax credit as they apply to double taxation relief.
Consequently, FRFTC is applied by election and any claim for a
credit must be made within two years.
(2) In the case of income comprising dividends, capital gains, interest, royalties, rents and other
income which are receivable by a company resident in Malta and derived, where applicable, from
investments situated outside Malta, theflat-rateforeign tax credit shall be computed on the amount
receivable, after deducting anyforeign tax (charged directly or by way ofwithholding) but before any
other deductions orpayments whatsoever are made.’ Cases falling under ( 1 ) are thus very few.
25 Attard, R, Ibid Table 6.
Chapter 16
Income Tax on Capital Gains
The principal rules which regulate the taxation of capital gains are
contained in Articles 4ITA and 5 ITA, 43 ITMA and the Capital
gains Rules1 (‘CGR’). Only capital gains which arise upon the
transfer of specific assets are subject to tax. Maltese tax law does not
contemplate a blanket tax on all capital gains but an extraordinary
tax which charges to tax capital gains derived from the disposal of
certain assets. Furthermore, Maltese tax law does not contemplate
a ring-fenced capital gains tax but charges to tax capital gains with
income. Maltese tax rules on capital gains are a law within a law.
Albeit the ITA contemplates rules which are capital gains specific,
capital gains are reported in the general’ income tax return and are
aggregated to income for the purposes of the determination of the
tax charge. The general rule laid down in Article 2 is that, saving
certain exceptions, income includes capital gains.
I. The Special Jurisdictional Rule Contained in 4 (I)

(g) (ìi) ITA
The proviso to Article 4 (1) (g) (ii) ITA contains an important

rule relating to the taxation of capital gains. It creates a special
jurisdictional rule relating to the taxation of foreign source capital
gains, which breaks off from the general jurisdictional rule which
applies to foreign source income. Whereas foreign source income
which is remitted to Malta by persons who are:
(i) ordinarily resident in Malta but not domiciled in Malta;

or
(ii) domiciled in Malta but not ordinarily resident in Malta
is taxable in Malta, foreign source capital gains derived by the

aforesaid persons are not taxable in Malta at all.
2. Taxable Transfers
Article 5 (1) (a) ITA lists the transfers which give rise to taxable
capital gains. Only the following transfers of ‘taxable assets’ give
rise to taxable gains:
1. the transfer of the ownership or usufruct of any

immovable property or the assignment or cession of any
rights over such property;
2. the transfer of the ownership or usufruct of or from the
assignment or cession of any rights over any:
(a) securities including beneficial interests in a
foundation;2
(b) business;
(c) business permits (added by Act I of 2010) ;3
(d) goodwill;
(e) copyright;
(f) patents,
(g) trademarks,trade-names and other intellectual
property;4
3. the transfer of the beneficial interest in a trust.
2 L.N. 312 Foundations (Income Tax) Regulations, 2010 prescribes that any transfer of a
beneficial interest in the foundation by such beneficiaries shall be deemed to be a transfer of a
security for all the purposes of the Income Tax Acts.
3 Article 12.
4 Intellectual property was added Act XII of 2014.
Income Tax on Capital Gains 535
4. Degrouping5 (introduced, as a concept, in 2009 and

fully adopted in 2010);
5. Value Shifting (added by Act I of 2010);6
6. the assignment or cession of any rights over any interest
in a partnership (added by Act IV of 2011).
Thus, the transfer of valuable assets such as antiques, fine arts,

coins, stones and gems will not give rise to tax liability because
transfers of such assets are not deemed to be taxable transfers in
terms of Article 5 ITA.
The term ‘transfer’ has a special meaning for the purposes of

capital gains. Transfer is defined as ‘including’ “any assignment, sale,
emphyteusis or sub-emphyteusis, partition, donation, settlement
of property on trust, distribution and reversion of property settled
on trust, sale by instalments, and any alienation under any title
including any redemption, liquidation or cancellation of units or
shares in a collective investment scheme as defined in article 2 of
the Investment Services Act and maturity or surrender of linked
long term policies of insurance, but does not include a transfer
causa, mortis. The fact that the definition of the term ‘transfer’
excludes transfers causa mortis implies that tax on capital gains is
not due upon testamentary successions.
The term ‘transfer’ includes a donation and consequently a

donation is considered a deemed sale made at the market value of
the property at the time of the transfer. A tax exemption applies in
the case of donations to close relatives as discussed below.
The 2010 amendments included degrouping and value shifting

in the definition of‘transfer’. Act IV of 2011 added the following
extract to the definition of transfers:
5 Article 5A (12A) ITA on degrouping in property transfers was added by Act II of 2009. 5
(9A) ITA on degrouping in capital gains was introduced by Act i of 2010.
6 Article 5 (13) ITA
“and for the avoidance of doubt includes any transfer of an asset by a company
to its shareholders, or by a commercial partnership en nom collectif or
commercial partnership en commandite the capital of which is not divided
into shares to its members, in the course of winding up the company or
partnership or in the course of a distribution of assets to its shareholders or
partners pursuant to a scheme of distribution”
The 2011 amendment clarifies that, in principle, even transfers

of assets in the course of a winding up generate taxable transfers.
Act XIII of 2015 made a further change to the definition of
transfer. The 2015 amendments exclude from the meaning of
transfer a transfer of property by the trustee of a disability trust
or disability foundation to any one or more of the remaining
beneficiaries of such trust or foundation or the heirs of the disabled
beneficiary upon the death of the disabled beneficiary of such trust
or foundation and where such remaining beneficiaries or heirs
comprise only persons referred to in sub-article (2)(e)(i)’.7
3. General Rules Relating to the Taxation of Capital

Gains
Article 43 ITMA creates a withholding tax mechanism which

applies generally to all taxable transfers. Article 43 ITMA
prescribes that a withholding tax is payable to the Commissioner
of Inland Revenue within fifteen days from the date of transfer of
taxable assets.
With respect to transfers of immovable property that are not

subject to property transfers tax, the rate of provisional tax (paid on
account of the final tax charge) is generally 7% of the consideration
relating to the transfer of the property but special rules apply to
certain transfers of immovable property.
7 Namely close relatives.

With respect to transfers of securities being transfers of a

controlling interest, the rate of provisional tax (paid on account of
the final tax charge) is 7% of the higher ofthe market value and the
consideration8 relating to the transfer of the property but special
rules apply to certain transfers of immovable property.
The withholding tax rate of 7% may, in theory, by reduced to 0%.

Paragraph 3 of Article 43 ITMA prescribes that the Commissioner
may authorise a lower rate of withholding tax whenever the
projected gain is less than 20% of the consideration.
Other important rules relating to the general taxation of taxable

capital gains are contained in Article 5(10) ITA which prescribes
that a capital loss is computed in the same manner of a capital gain
and that capital losses set-off exclusively capital gains. Capital losses
cannot be used to set off income.
4. Transfers of Immovable Property, 3 Mutually

Exclusive Taxes
It is important to point out that the Income Tax Acts contemplate

3 distinct, mutually exclusive taxes, which apply to the taxation of
rights over immovable property. The inter-relationship between
the 3 regimes may be somewhat mind boggling but the remit of the
3 rules is prescribed in rules such as the rules contained in Article 5
(11) ITA and the rule contained in article 5A (3) ITA.
Article 5 A ITA applies to transfers of immovable property

situated in Malta, generally. It applies unless its application is
excluded. Article 5A applies to property transfers regardless of
whether the transfer is a transfer ofan asset ofa capital nature or a
trading transaction9’. When Article 5A applies provisional tax in
terms of Article 43 ITMA is not payable10.
8 This rule was added by Act I of 2010.
9 Fiott, Antoine, Tax on Capital Gains and Property Transfers (MIT Slide Presentation) p.8
10 Article 5A (10) (a) ITA.
When the application of Article 5A is expressly excluded and

Article 5A ITA does not apply, either Article 5 ITA or Article 4
(1) ITA apply depending on whether the transfer the transfer is of
a capital or an income nature11.
Article 43 (2) ITM A provides that provisional tax is not payable

in respect of transfers of immovable property which are taxable in
terms of Article 4. Paragraph 2 of Article 5 A ITA confirms that any
gains or profits derived from the assignment of any right obtained
in terms of a promise of sale (konvenju), including a promise to
alienate in any manner immovable property or a promise in respect
of emphyteusis, are deemed to be, in all cases, gains or profits
derived from a trade, business, profession or vocation falling within
the scope of article 4(1) (a) ITA. Article 5 ITA and Article 5 A ITA
incorporate similar substantive parallel rules, as shall be discussed
below.
4.1 Computational Rules
Article 5 (2) ITA lays down the computational rules which apply to
the taxation of capital gains arising upon the transfer of immovable
property. Article 5 (2) (a) contemplates the following deductions:
( i) the cost of acquisition ;

(ii) the inflation element;
(iii) any ground-rent paid on the property and for which a
deduction is not due to the taxpayer under any other
provision of the Income Tax Act,
(iv) maintenance,
(v) Improvements;
(vi) other expenses that have increased the value of the
immovable property since it was acquired; and
(vii) other expenses directly related to the transfer.
11 Ibid Fiott.
Incoine Tax on Capital Gains 539
The rules contained in Article 5 (2) (a) ITA are supplemented by

Rule 2 of the Capital Gains Rules12 (CGR). Rule 2 CGR prescribes
rules relating to the determination of the cost of acquisition,
namely:
(a) In the case of a property originally acquired inter vivos-.

(i) the cost of the property as declared in the deed of
acquisition;
(ii) expenses directly related to the deed of acquisition
including duty under the Stamp Duties Ordinance,
the Duty on Documents Act, the Duty on
Documents and Transfers Act, and agents’, legal
and notarial fees proved to the satisfaction of the
Commissioner;
(iii) in the case of a donation, the value declared in
the deed of donation including duty paid on the
donation;
(b) In the case of a property originally acquired causa mortis-.

(i) the value of that property established in the deed/
notice of transfer in accordance with the CGR;
(ii) duty paid in terms of the Duty on Documents and
Transfers Act on the transfer causa mortis of the
immovable property in question, including
(iii) duty paid on a deed of adjustment relating to that
property made in terms of the Adjustments to
(c) In all cases:

(i) the increase in inflation determined in accordance
with rule 8 CGR;
(ii) any expenditure proved to the satisfaction of the
Commissioner to have been wholly and exclusively

incurred in developing the property being

transferred;
(iii) improvements to immovable property after
acquisition proved to the satisfaction of the
Commissioner;
(iv) any expenditure proved to the satisfaction of the
Commissioner to have been wholly and exclusively
incurred in developing the property being
transferred;
(v) a maintenance allowance calculated at 0.4% of
the value of the building, cost price or cost of
completion for every year between the year of
acquisition or completion and disposal;
(vi) other expenses duly received and directly related to
the transfer and not exceeding five per cent of the
sale price.
Increase in inflation is calculated by reference to the following

formula, which in turn, refers to an inflation index which is
established by law.
cost of acquisition/improvements x index^ - index*5

1 indexya
indexyd is the index for the year immediately preceding that in

which the transfer is made.
indexya is the index for the year immediately preceding that in

which the property in question had been acquired or completed,
whichever is the later, or, when it relates to improvements, for the
year immediately preceding that in which the cost for carrying
outthe improvements was incurred.
The deduction for inflation must not exceed the figure yielded by
the following formula:
TP - CA-D
where -
(i) TP = the transfer price of the property

(ii) CA = the cost of its acquisition, taking into account any
reduction in the value of property that may be required
in terms of rule 2(4)
(iii) D other deductions, excluding the deduction for
inflation, allowable in terms of these rules.
Specific rules are contemplated in respect of grants of

emphyteusis.13
A special 30% rate of income tax applies to transfers of 31 CITA

property (restored property). The special rate of tax for restored
property was introduced in 2012 by Act V of the same year.14
4.2 Exchanges of immovable Property
Transfers of immovable property made by means of a deed of

exchange are considered as separate multiple transfers for the
purposes of the law15. The same rule applies in the context of share
transfers.
4.3 Exemptions on Transfers of Immovable

Property
4.3.1 Contracts of Partition When An Owelty is

Not Paid
Article 5 ITA contemplates ad hoc exemptions relating to transfer of
immovable property. The first exemption is not really an exemption
13 Article 5 (2) (c) ITA.
14 Article 56 (9) ITA.
15 Article 5 (2) (b) ITA.
but merely a restriction of the meaning of the term ‘transfer’ The

definition of the term ‘transfer’ incorporates partitions and Article
5 (2) (d) (iii) ITA prescribes that owelties paid upon partitions are
subject to tax qua capital gains. Article 5 (2) (d) (i) ITA excludes
certain partitions from the scope of tax on capital gains. Article 5
(2) (d) ITA provides that a contract of partition where no owelty
is due to any of the co-partitioners is not taxable because it is not
a transfer for the purposes of the law16. However, in the case of a
re-transfer of the partitioned property the cost of acquisition is
deemed to be the cost of acquisition of the property in question
at the time of acquisition by the co-partitioner. Furthermore, only
immovable property held in common and partitioned is taken into
account. When money or other movables are assigned by way of
consideration in for the reduction of a share in an immovable the
law considers such a partition as being one where an owelty has
been paid, a taxable transfer.
4.3.2 Transfer of Own Residence

Article 5 (5) ITA lists a number of transfers which fall outside the
scope of income tax on capital gains. The most popular ‘exemption’
is the exemption contained in paragraphs b and c. The transfer of a
property which has been owned and occupied for at least three years
as the transferor’s own residence falls outside the scope of income
tax on capital gains provided that the property is disposed of within
twelve months from the vacation of the premises.
‘Own residence’ is defined as meaning the principal residence

owned by the taxpayer or his spouse being a dwelling house which
has been the owner s only or main residence, including land,
transferred through the same deed with the principal residence,
which the owner has for his own occupation and enjoyment with
that residence as its garden or grounds consisting of an area
which, regard being hadto the size and character of the dwelling
16 One cannot really speak of a full transfer of ownership, in such a case. Fiott, Antoine, Final
Tax on Property Transfers, Notes on Partitions & Apportionment (MIM 2007/8) p.l.
house, is required for the reasonable enjoyment of it as a

residence. A garage attached to or underlying a house or a block
of flats, or a garage of not more than seventy square metres
situated within five hundred metres of the dwelling house, and
transferred through the same deed with the principal residence
shall be deemed to be included as part of the residence.
For the purposes of the exemption, the period of residence is

deemed to include the physical occupation of the premises and any
absences from Malta such as on account of foreign employment,
illness, holiday or study. Any part of the house, garden or grounds
which is used exclusively for commercial purposes for any time
within two years of the transfer, or which is not required for the
reasonable enjoyment of it as a residence is not considered to fall
under the definition of "own residence" and such part shall be
apportioned on the basis of the area occupied for this purpose as a
proportion of the whole area of the relative dwelling house, garden
or grounds.
4.3.3 Property Taken Over by the Government

of Malta
No income tax on capital gains is due in respect of property
which was taken over by Government and in respect of which a
declaration by the President of Malta has been issued in terms of
the Land Acquisition (Public Purposes) Ordinance before the 25ch
November, 1992.
4.3.4 Assignments of Emphyteusis of 50 years or

less
Assignments of temporary Emphyteutical concessions for fifty
years or less are out of scope of tax.
5. Transfers of Securities
5.1 Definition of Securities
The exhaustive list of taxable transfers contained in Article 5 ITA

refers to securities’ but the term securities has a specific meaning.
The term is defined as meaning 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 as defined in article 2 of
the Investment Services Act, and units and such like instruments
relating to linked long term business of insurance. Thus, the
transfer of instruments which either do not entitle the holder to
participation rights or are subject to a fixed rate of return does not
amount to a transfer of securities for the purposes of the law and
falls out of scope of income tax on capital gains. Thus, the transfer
of certain preference shares is not subject to income tax on capital
gains.
Whereas the definition of the term securities’ is circumscribed,

as discussed above, the concept of transfer in Article 5 ITA is
extremely wide. Article 5(13) (b) ITA considers reductions in the
share capital of a company as deemed transfers for the purposes of
the law. A reduction of the share capital of a company is considered
to amount to a transfer of such proportion of the holding of the
owner as is equal to the proportion of the reduction of the capital
of the company is deemed to constitute a gain or loss in the year
in which such reduction occurs but the general rule is that when
there is only a proportionate reduction in the shareholding of all
the shareholders, no loss or gain is deemed to arise.
Even mergers and divisions give rise to deemed gains which are,
in principle, taxable under Article 5 ITA because a retrospective
amendment to CA passed by Act II of2003 had deleted the general
tax exemption which applied to gains deemed to have been derived
upon the amalgamation and division of a company. However,

certain mergers and divisions are tax exempt.17
Rule 7 of the CGR exempts from tax, in terms of the old’ tax
exemption contained in Article 5 (14) ITA, exchanges of shares
on a restructuring of holdings upon mergers, demergers, divisions,
amalgamations and reorganizations when the exchange of the shares
does not produce any change 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.
5.2 Valuation Rules
Important valuation rules relating to the taxation of transfers of

securities are contained in Article 5 (3) ITA.
The acquisition cost ofshares acquired before the 25 th November,

1992 is valued on the higher of:
(i) the Equity method of share valuation (net asset

value) based on the last accounts submitted to the
Commissioner by the 18th December, 1992 by taking
into account the value of immovable property existing
in the said accounts and adjusted in terms of the law;
(ii) the actual purchase price, whichever is the higher
Shares whose return is limited to a fixed rate of return are

excluded.Shares acquired after the 25th November, 1992 are
valued on the cost of acquisition but shares acquired in terms of a
share option scheme are valued according to subsidiary legislation.
17 Namely those falling under 5 (14) ITA and Subsidiary Legislation 123.140 Rulings (Income
Tax and Duty Treatment of Mergers and Divisions) Rules.
When, on a share transfer, the rights pertaining to those shares

are changed in any way, the transfer value of the shares shall be
taken as if no such change has been made. Any transfer consisting
of an exchange is considered as if two separate transfers were taking
place.
5.3 Transfers of a Controlling Interest
The CGR create special valuation rules which apply to a transfer

which has the characteristics of a transfer of a controlling interest
in a company. Rule 5 CGR creates a tax on a deemed gain and
may well give rise to a tax on a phantom gain’. Thus, Rule 5 CGR
created, by legal notice, a new tax which goes beyond the original
scope of Article 5ITA. Constitutional concerns may be expressed
in this context because the Constitution of Malta contemplates a
‘no taxation without representation rule’ relating to enactment of
new taxes 1 2 .
It is important to point out that for the purposes of the valuation

rule contained in Rule 5 CGR the term ‘shares’ has a specific
meaning which limits the purview of rule 5 to ‘domestic shares’ and
foreign shares with underlying Maltese assets:
Sub-rule 15 of Rule 5 CGR defines shares as meaning:
(i) shares in a company which is resident in Malta in terms

of article 2 ITA; or
(ii) shares held directly or indirectly in any other company
the assets of which consist wholly or principally of
immovable property, provided that where such shares
are held by a company whose shareholders are, either
directly or indirectly, all not resident in Malta (excluding
the holding by any person resident in Malta of not more
18 Namely article 73 of the Constitution of Malta.

Income Tax on Capital Gains
than one share in the company), immovable property

situated outside Malta shall be disregarded for the
purpose of making the determination contemplated in
this paragraph; or
(iii) shares in a chargeable company holding shares in a
company which had been acquired from another
company and such acquisition was exempt from tax in
terms of the intra-group exemption.
Shares whose return is limited to a fixed rate of return are

considered to be shares’ for the purposes of the rule because such
instruments are not even securities’ in the first place.
Rule 5 CGR consider a transfer to be a transfer of a controlling

interest when any of the following criteria apply to the shares held
by the transferor at any time during the period of eighteen months
immediately preceding the transfer:
(i) their aggregate nominal value represents at least twenty-

five percent of the nominal value of the issued share
capital of the company;
(ii) the aggregate voting rights attached to them represent
at least twenty-five per cent of the voting rights in that
company;
(iii) the aggregate rights attached to them give the right to
the holder to be appointed or to nominate or appoint
or to withhold the nomination or appointment of a
director of that company;
(iv) the aggregate rights to profits available for distribution
attached to them represent at least twenty-five percent
of the total rights to profits available for distribution to
the ordinary shareholders of the company.
Rule 5 CGR incorporates an anti-avoidance mechanism.

Taxpayers might attempt to structure their way out of the
controlling interest regime by breaking down a share transfer in a

series of transfers. Therefore Sub-Rule 3 of Rule 5 prescribes that
when two or more transfers of shares in the same company ("the
relevant transactions") are made by the same or by related persons
within a period of eighteen months or less, then, for the purpose
of determining the chargeable gains arising from the last of those
transfers, the relevant transfers shall be deemed to be one transfer
("the global transfer") made by the same person on the date of that
last transfer, and if the global transfer satisfies any of the criteria a
controlling interest, the following rules apply:
(i) the last of the relevant transactions shall be deemed to

be a transfer of a controlling interest;
(ii) the market value of the shares transferred in the last
transfer shall be deemed to be equal to the market
value of the global transfer reduced by the total value
that was or is to be taken into account for the purpose
of determining the chargeable gain arising from each
of the relevant transactions preceding the last of those
transfers.
An individual is deemed to be related to another person if

that other person is his spouse, his descendant in the direct line,
his adoptive child, the spouse of any such descendant or adoptive
child, his brother or sister, or a company of which the individual is,
directly or indirectly, a shareholder.
Two bodies of persons are deemed to be related persons if they

are companies within the same group of companies in terms of
provisions on surrendering of losses or are directly or indirectly
controlled and beneficially owned as to more than fifty per cent by
the same persons.
A transfer of a controlling interest is deemed to be made at the

higher of the consideration and the market value of the shares but
income Tax on Capital Gains 549
the determination of market value’ is determined in valuation rules

which tend to have confiscatory effect.
Sub-rule of 5 of Rule 5 CGR as amended by Legal Notice 105

of 2013 prescribes that the market value of shares in a company
must be determined in accordance with the following formula:
Y = (0.4 x A) + (0.2 x B) + (0.4 x C) where -
(a) 'Y' represents the percentage to be determined;

(b) ‘A’ is the percentage of the issued share capital represented
by the nominal value of those shares;
(c) ‘B’ is the percentage of the total voting rights in the
company represented by the total voting rights attached
to those shares; and
(d) ‘C’ is the percentage of the profits available for distribution
to the ordinary shareholders represented by the profits
available for distribution to the holder of those shares.
The market value of shares that are listed on a stock exchange

recognised under the Financial Markets Act is the last quoted price
of those shares on that exchange before the date of the transfer.
When the transferor submits, together with the relevant

Schedule, a share valuation prepared by an expert (specialist valuer)
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 shall be such amount as determined by
the expert. The share valuation must be accompanied by the expert s
report which shall include a detailed description of the methods of
valuation which have been used in determining the market value of
the shares.
A transferor shall only be authorised to submit a share valuation

where:
(a) the capital gain differential exceeds ten per centum

(10%); and
(b) the capital gain differential exceeds thirty thousand euro
(€30,000).
"Capital gain differential" means the difference between the

capital gain computed by applying the formula prescribed in this
sub-rule and the capital gain computed on the basis of the share
valuation.
6. Exemptions Applicable to Transfers of Securities,

Business, Goodwill, Trademarks, Trade-names,
Copyright and Patents
The following transfers are exempt from income tax on capital gains:
(i) transfer of Malta Government Bonds and Stocks;

(ii) transfer of shares in a company listed, or in consequence
ofa listing,19 on a stock exchange recognised under the
Financial Markets Act, not being securities in a collective
investment scheme;20
( iii) transfer ofsecurities listed on a stock exchange recognised
under the Financial Markets Act being securities in a
collective investment scheme held in a prescribed fund
as defined in article 41A(b) ITA;
(iv) transfer of units and such like instruments relating
to linked long term business of insurance where the
benefits are wholly determined by reference to the value
of, or income from, securities to which either paragraph
(b) or (c) applies.
19 Text in italics was added by Act XVI of 2017.

20 In 2010 the remit of the exemption was restricted via the addition of 3 provisos but the 3
provisos were removed by Act XVI of 2017.
p
7. Donations to C/ose Relatives
Article 5 (2) (e) ITA which deals with the taxation of capital gains
derived on the transfer of immovable property exempts from tax
certain donations to close relatives. It exempts from tax donations
made by a person to:
(i) his spouse, descendants and ascendants in the direct line

and their relative spouses or in the absence ofdescendants
to his brothers or sisters and their descendants, or
(ii) philanthropic institutions approved in terms of Article
12(l)(e) ITA.
The exemption incorporates an anti-avoidance provision.

Paragraph (f) of the same sub-article prescribes that where the
property which had been donated is disposed of by the donee
within five years of the donation, the donee shall be 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 (historic
cost). However, when the property is sold by the donee after the
lapse of five years the cost of acquisition is taken as be the value of
the property as declared in the deed of donation.
The remit of this exemption and anti-avoidance provision has

been extended by Article 5 (3) (f ) ITA so as to include transfers
of assets listed in 5 (1) (a) (ii) ITA (namely securities, business,
goodwill, trademarks, trade-names, copyright, patents BUT NOT
beneficial interest in a trust).
8. Dissolution of the Community of Acquests
Article 5 (5) (e) and (f) exclude from the scope of tax certain
transfers made consequent to a dissolution of the community of
acquests. The scope of this exemption is extended by Article 5 (6)
(e) ITA to incorporate all Article 5 ( 1 ) (a) (ii) transfers of securities.

The assignment between spouses of taxable assets consequent to a
judicial or consensual separation and a divorce are out of the scope
of tax as are similar assignments upon dissolution of the community.
9. Exemption which applies to all taxable transfers -

Intra-Group Transfers
An important exemption is contained in Article 5 (9) ITA which

applies to the transfer of any taxable asset without limitation. The
purview of the exemption is somewhat restricted because it applies
exclusively to the transfer by one company to another company.
Thus, persons who do not fall within the definition of company’
contained in Article 2 ITA do not benefit from the intra-group
exemption.
The definition of a group of companies for the purposes of the

intra-group exemption is broader than the definition applied in a
surrendering of losses context. The Article 5 (9) ITA definition of
a group encompasses both:
(i) Companies that are deemed to be a group of companies

for the purposes of surrendering of losses, or
(ii) Companies that are controlled and beneficially owned
directly or indirectly to the extent of more than fifty per
cent by the same shareholders.
Thus, companies which do not satisfy the intra-group test for

the purposes of surrendering of losses may satisfy the intra-group
test for the purposes of the income tax on capital gains exemption.
The intra-group exemption is technically not a tax exemption but
merely an event which is excluded from the purview of tax on
capital gains. Article 5 (9) ITA prescribes that no loss or gain is
deemed to have been derived in an intra-group transfer. When
the asset transferred intra-group is subsequently transferred extra

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.
/0. Restriction of the Intra-Group Exemption
The anti-abuse measures announced in the 2010 Budget Speech

included a restriction to the intra-group exemption. Act I of 2010
introduced a series of provisos in Article 5 (9) (iii) ITA limiting
the remit of the intra-group exemption. In brief, the Intra-group
exemption will apply only when the individual beneficial owners
of the transferee and transferring company substantially retain the
same percentage interests. The recently introduced provisos are
being reproduced hereunder:
“‘...the proportions held in each company does not exceed twenty percent:
Provided further that where an individual holds, directly or indirectly, less
than five percent of the nominal share capital and voting rights in only one
of the companies referred to in this subarticle, such individual shall, for the
purpose of this paragraph, not be taken into account in determining whether
the individual direct or indirect beneficial owners of the companies referred
to in the said subarticle are the same:
Provided also that if more than one individual holds, directly or indirectly,
less than five percent of the nominal share capital and voting rights in
only one of the aid companies, the previous proviso shall not apply where
together such individuals hold, directly or indirectly, five percent or more of
the nominal share capital and voting rights in the company;”
11. Roll Over Relief
Article 5 (8) ITA creates a cash flow benefit to businesses. It

contemplates a tax on capital gains deferral opportunity in respect
of assets which have been subject to capital allowances. The benefit
is known as roll over relief which basically postpones the tax burden
of a disposal of a capital asset by setting-off a profits derived from

the sale of an asset against the cost of acquisition of a replacement
asset.
Fixed assets which qualify either as plant and machinery or as

industrial buildings or structures are subject to capital allowances
and the disposal of such assets may give rise to either a deduction
(balancing allowance) or a balancing charge (addition to taxable
income). Where a taxable asset is used in a business for a period of
at least three (3) years is transferred and replaced within one year by
an asset used solely for a similar purpose in the business, any capital
gains realised on the transfer is not taxed but the cost of acquisition
of the new asset is reduced by the said gain. Thus, tax is not paid
on transfer but capital allowances on the replacement are taken
by reference to a reduced cost of acquisition base. The proviso to
the sub-article confirms that a person who wishes to avail himself
of roll-over relief would still need to apply to the Commissioner
of Inland Revenue for an abatement of additional tax in terms of
Article 43 (3) ITMA.
12. Value Shifting and De-Grouping
In the 2010 Budget Speech, the Minister of Finance announced that:
“...in a time when tax revenue depending on economic activity is expected to

decrease, different countries are introducing more specific provisions in their
laws against abuse in order to protect their revenue. The introduction of the
so-called anti-abuse provisions help to avoid tax leakage, and therefore help
avoid placing more burdens on society in general. We will address, amongst
other things, certain aggressive tax planning that has been noticed recently,
and that is resulting in tax losses for the Government, whereby some are
abusing of deficiencies or lack of clarity in fiscal laws. With the use of various
provisions which will be introduced in the committee stage of the Draft Law
on Budget Measures, we will decrease uncertainties in the application and
interpretation of fiscal laws.”
The anti-abuse’ measures which were introduced included the

introduction of a tax on transactions which previously were not
taxable. A tax on a deemed transfer was imposed on transactions
which fall under the definition of degrouping and value shifting.
The tax on the deemed transfer applies even when degrouping and
value shifting are not done solely or mainly to avoid tax.
12.1 De-Grouping
The concept of a degrouping charge was first introduced in a

property transfers tax context when Act II of 2009 introduced 5A
(12A)ITA.
Act I of 2010 added Article 9A to the ITA. The de-grouping

charge occurs when a company which had availed itself of the intra
group exemption exits the group before the lapse of six years from
the exempt transfer. Exempt transfers taking place before 1 January
2010 are disregarded for the purposes of determining whether a
company ceases to be a member of a group. In certain cases, the
burden of the de-grouping charge may be shifted to another
member of the group.
The remit of the de-grouping charge is circumscribed to shares

in a company’, a term which is defined as meaning: “shares in a
company which, on the date of the acquisition referred to in the said
paragraph owned, directly or indirectly, any immovable property
situated in Malta and the said property or any part thereof is still,
directly or indirectly, owned by such company on the date it ceases
to be a member of the group. A company is treated as indirectly
owning immovable property if it holds, directly or indirectly,
shares or interests in a body of persons which owns any immovable
property situated in Malta. By implication, companies which do
not own directly/indirectly immovable property situated in Malta
are not subject to the de-grouping charge provisions.
12.2 Value Shifting
Act I of 2010 added Article 13(b)(ii) ITA which prescribes that

where as a result of the change in the issued share capital of the
company or in the voting rights attached to its shares, the market
value of the shares held by transferor has been reduced and such
value passes into other shares or rights in the company of the
transferee, the transferor shall be deemed to have transferred the
said shares at such a reduced value to the transferee. Gains or profits
are calculated in accordance with the difference in the market value
of the shares before and after the above-mentioned change.
In the following cases, tax on the phantom gain which is deemed

to arise on a reduction in the real value of the shares is not charged:
(a) where the change in the issued share capital or in the

voting rights does not give rise to any change either in
the individual beneficial owners (direct/indirect) of
the company or in the proportion in the value of the
company represented by shares held by such individual
beneficial owners;
(b) where the change in the issued share capital consists of
an allotment of shares in a company resulting from an
exchange of shares following an exempt restructuring of
holdings (article 5(14));
(c) where the company has its securities listed on a stock
exchange recognised under the Financial Markets Act;
(d) where the transfer ofvalue is made by the transferor to his
spouse, descendants and ascendants in the direct line and
their relative spouses, or in the absence of descendants to
his brothers or sisters and their descendants.
(e) where the company is not a “property company” and it
is proved to the Commissioner of Inland revenue that
the transfer is bona fide and is not part of a scheme to
avoid tax.
For the purposes of the value shifting provisions, a special

definition of ‘property company’ applies. Property Company is
defined as:
“a company which owns immovable property situated in Malta, or any rights

over such property, or a company which holds, directly or indirecdy, shares
or interests in a body of persons which owns immovable property situated in
Malta, or any rights over such property.”
When a taxable value shift occurs, provisional tax equivalent to

7% of the deemed gain is payable.
Important provisions on value-shifting are contained in Rule 5 A

CGR prescribing valuation rules. The value transferred or acquired
by aperson is determined in accordance with the following formula:
Y= (A-B) + C - D where-
(a) 'Y' represents the amount to be determined;
(b) 'A' is the market value of the shares held in the company
immediately before the change;
(c) 'B' is the market value of the shares held in the company
immediately after the change;
(d) 'C' is the consideration paid for the acquisition of
shares or additional shares issued by the company,
where the change consists of an issue of share capital for
consideration;
(e) 'D' is the amount paid by the company in respect of a
cancellation of shares, where the change consists of a
reduction of share capital of the company.
When the market value of the company immediately before the

change does not exceed the value of the paid up share capital of
such company, the value of'Y' is taken as zero. When such person
does not hold any shares in the company immediately before or
after the change, the value of A' or 'B' in the said formula, as the
case may be, is taken as zero.
When the change in the issued share capital consists of a

conversion of securities, the market value of shares not being
securities as defined in article 5( 1 )(b) ITA is taken as zero.
When the amount determined in accordance with the said

formula is a negative amount, such person shall be deemed to have
acquired value equal to the said amount and such value shall be
deemed to have passed into shares in or rights over the company
held by him.
For the purpose of determining the chargeable gain there shall

be allowed as a deduction, a portion of the cost of acquisition of the
shares held by the transferor immediately before the change in the
issued share capital or voting rights (referred to as the "change"), to
be determined in accordance with the following formula -
Z = ((A - B) / A) x E where -
(a) 'Z' represents the amount to be determined;
(b) A' is the market value of the shares held by the transferor
immediately before the change;
(c) 'B' is the market value of the shares held by the transferor
immediately after the change; and
(d) 'E' is the cost of acquisition of the shares held by the
transferor immediately before the change:
The deduction to be allowed against the said gains or profits,

cannot exceed such gains or profits.
When the amount determined in accordance with the said

formula is a negative amount, such amount shall be taken to be
zero.
13. Assignments and Cession of any rights over any

interest in a Partnership
Act IV of 2011 rendered the assignment or cession of any rights

over any interest in a partnership a chargeable event by adding the
transaction in 5 (1) (a) (v) ITA. Transfer is defined as meaning:
(a) a transfer of a full or partial interest and any alienation

of any such full or partial interest in a partnership; and
(b) a deemed transfer of an interest in the partnership.
Where a person acquires or increases a partnership
share there is a deemed transfer of an interest in the
partnership to that partner from the other partners.
Act IV of 2011 introduced the following definition of

‘partnership’ but it was found to be inadequate:
“‘partnership’ shall mean a commercial partnership en nom collectif, or

commercial partnership en commandite the capital of which is not divided
into shares and, except for the purposes of subparagraph (v)(b), shall include
any other partnership having a legal personality distinct from that of its
members other than a commercial partnership en commandite the capital of
which is divided into shares;
‘partnership share’ means the share to which a person is entitled in the income
of the partnership and to assets available for distribution on a winding up of
the partnership;”
Act V of 2012 improved the original definition of‘partnership’21

proposed in 2011. The new definition refers to the European
Economic Interest Grouping.
“"partnership" means -
(a) any partnership constituted under the Companies Act or under the
Commercial Partnerships Ordinance, being either a commercial partnership
en nom collectif or a commercial partnership en commandite the capital of
which is not divided into shares;
(b) any other partnership having a legal personality distinct from that of
its members constituted, incorporated or registered under any other law in
force in Malta;
(c) any body of persons constituted, incorporated or registered outside
Malta, and of a nature similar to the aforesaid partnerships;
(d) a European Economic Interest Grouping (EEIG)22 formed pursuant
to the provisions of the Companies Act (European Economic Interest
2011 2012
‘"partnership" shall mean a (a) any partnership constituted
commercial partnership en under the CA/CPO, being either
nom collectif, or commercial a commercial partnership en
partnership en commandite the nom collectif or a commercial
capital of which is not divided partnership en commandite the
into shares and, except for the capital of which is not divided
purposes of subparagraph (v) into shares;
(b), shall include any other (b) any other partnership having
partnership having a legal a legal personality distinct from
personality distinct from that that of its members constituted,
of its members other than a incorporated or registered under
commercial partnership en any other law in force in Malta;
commandite the capital of which (c) any body of persons
is divided into shares;’ constituted, incorporated or
registered outside Malta, and of
a nature similar to the aforesaid
partnerships;
(d) a European Economic Interest
Grouping....
22 AN EEIG is a legal person registered in terms of Council Regulation (EC) No. 2137/85. It
has unlimited liability and is fiscally transparent (profits are taxable only in hands of members.
Grouping) Regulations;
"partnership share" means the share to which a person is entitled in the
income of the partnership and to assets available for distribution on a
winding up of the partnership;”
For the words "any other partnership having a legal personality",

the Budget Act 2013 substituted the words "except for the
purposes of subparagraph (v)(b), any other partnership having a
legal personality".23
Article 5 (3A) ITA incorporates computational rules to value

the gain arising upon the transfer in a partnership:
“(a) the acquisition cost in each of the circumstances mentioned in this

paragraph shall, subject to any adjustments that may be prescribed, be
determined as follows:
(i) the acquisition cost of an interest acquired from an existing partner shall
be the actual purchase price;
(ii) the acquisition cost of an interest acquired causa mortis shall be the lower
of the value declared in a deed of transfer causa mortis and the price which
that interest would have fetched had it been sold on the open market on the
date of that acquisition;
(iii) the acquisition cost of an interest acquired by way of a capital
contribution made to the partnership shall be the amount or value of such
contribution;
(iv) the acquisition cost of an interest resulting from a conversion of a
company into a partnership as referred to in article 45A shall be the cost
of acquisition of the shares (representing that interest) held in the company
23 After the 2013 amendment the definition will read as follows:

“"partnership" means -
(a) any partnership constituted under the Companies Act or under the Commercial
Partnerships Ordinance, being either a commercial partnership en nom collectif or a
commercial partnership en commandite the capital of which is not divided into shares;
(b) except for the purposes of subparagraph (v)(b), any other partnership having a legal
personality;
(c) any body of persons constituted, incorporated or registered outside Malta, and of a nature
similar to the aforesaid partnerships;
(d) a European Economic Interest Grouping (EEIG) formed pursuant to the provisions
of the Companies Act (European Economic Interest Grouping) Regulations; "partnership
share" means the share to which a person is entitled in the income of the partnership and to
assets available for distribution on a winding up of the partnership;”
that had been converted into the said partnership:

Provided that where the said shares consist of shares whose return is limited
to a fixed rate of return the acquisition cost shall be taken to be zero; and
(b) any transfer consisting of an exchange shall be considered as if two
separate transfers were taking place; and
(c) the provisions of subarticle (2)(d), (e), and (f) and shall apply mutatis
mutandis to this subarticle."
Subarticles (2) (d), (e) and (f ) refer to exemptions on partitions

and donations implying that the exemptions which apply in a
transfer of immovable property context apply in a partnership
context too.
Rule 5D CGR contains important computational rules. The

adjusted cost of a partner s interest in a partnership is the cost of
such interest determined in accordance with article 5(3A)(a) ITA,
and -
(a) increased by the sum of:

(i) any additional capital contributions made by the
partner to the partnership during the period he was
a partner,
(ii) the partners total share of partnership profits for
the period during which he was a partner, and
(b) reduced by (but not below zero) the sum of:
(i) the amount of capital contributions drawn out or
received back,
(ii) all partnership profits distributed to the partner
during the period he was a partner,
(iii) the partner s total share of partnership losses for the
period during which he was a partner.
A number of specific definitions apply. "Partnership profits" is

defined as meaning the income of the partnership as referred to in
article 27 ITMA, declared by the partners in a return of income.
"Partnership losses" is defined as meaning the amount of losses

incurred by the partner from the partnership as referred to in
articles 5(10)(a) ITA and 14(1)(g) ITA. "Partner or partners" is
defined as meaning any person holding an interest in a partnership.
Where the transfer is a transfer of a partial interest the adjustments
are made pro rata.
The market value of a partnership is the total of the net asset

value of the partnership as resulting from a balance sheet showing
the state of affairs of the partnership as at the date of the transfer,
to be prepared by a certified public accountant, and drawn up using
the same methods and the same layout as used for its financial
statements for the financial year preceding that in which the
transfer is made but:
(a) where the assets of the partnership include shares in a

company, and such shares represent at least ten percent
of the nominal value of the issued share capital of that
company, their book value but where the market value is
a negative figure, market value shall be taken to be zero;
(b) where the assets of the partnership include immovable
property, the book value of that property shall be
replaced by its market value, that is to say, the price that
the property would fetch if sold on the open market on
the date of the transfer;
(c) the net asset value shall be increased by an amount,
representing the value of the goodwill, equivalent to two
years’ average profits calculated by reference to the profits
of the partnership for the five financial years immediately
preceding the year in which the transfer is made;
(d) where the partnership has not been in existence for a
sufficient period to determine the value of the goodwill,
the average profits shall be calculated by reference to the
total profits for the years preceding that during which
the transfer is made;
(e) in determining the value of the goodwill, any dividends

paid to the partnership out of profits for the years
being considered, by another company in which the
partnership is a shareholder, are excluded from the
calculation;
(f) where the value of the goodwill determined in is
negative, the value that shall be taken into consideration
is nil.
The concept of value shifting applies in a partnership context

too. Computational rules are contained in Rule 5E CGR. Where
a person (referred to as "the transferee") acquires or increases a
partnership share (referred to as "the change"), other than by way
of an acquisition of an interest in the partnership from another
partner or partners, it shall be deemed that a transfer of an interest
in the partnership has been made by the other partner or partners
(referred to as "the transferor") to that person.
The chargeable gain arising from the deemed transfer is

determined in accordance with the following formula:
Y = A - B where -
(a) 'Y' represents the amount to be determined;
(b) 'A' is the market value of the interest held by the partner
in the partnership immediately before the change;
(c) 'B' is the market value of the interest held by the partner
in the partnership immediately after the change.
Where the value of'Y' in the formula results in a positive amount

such partner shall be deemed to have transferred an interest in the
partnership. Where the value of ' Y' is a negative amount or is below
one hundred euro (€100), it is taken to be zero. Where the deemed
transfer is made in the context of an exempt donation contemplated
in article 5(2)(e)(i) ITA, the value of'Y' shall be taken to be zero.
A reduction in the contribution of a partner in a partnership is
deemed to be a transfer of such proportion of the partner s interest

in the partnership as is equal to the proportion of the reduction in
the contribution of the partner and shall constitute a gain or loss in
the year in which such reduction is effected.
When there is a proportionate reduction in the contribution of

all the partners, such that the proportion of the interest of each
partner with respect to profit sharing ratios and share of assets on
winding up is equal both before and after the reduction is effected,
it shall be deemed that no loss or gain has arisen from the transfer:
Chapter 17
Property Transfers Tax
Act II of 2006 added Article 5A to the ITA and created property

transfers tax, a new tax. Major amendments to Article 5 A ITA were
passed after 2013. Property transfers tax is a special tax on property
transfers which must be paid within 15 working days from the date
of the relative transfer.1 The main characteristic of the Article 5 A
regime is explained in paragraph 5 of Article 5A. Property transfers
tax is, generally, a tax on transfer value, a term defined, in paragraph
6 of the same clause, as the higher of the market value of that
property and the consideration paid or payable for the transfer.
Property transfers tax is final and separate and distinct from income
tax and income tax on capital gains. Property transfers tax is a final
tax and is not available as credit against tax liability.1
2
I. Scope of Article SA
Article 5A ITA applies, by default, to all transfers of immovable

property. It does not apply only in those limited cases when it is
specifically excluded. Over the years, the list of exclusions was
significantly reduced.
The substantive rules of Article 5A closely mirror the rules of

Article 5 ITA but there are some important differences. Article 5A
1 Article 5A (11) ITA.

568 Principles ofMaltese Income Tax Law
borrows several definitions from Article 5 ITA3 but it incorporates

some special definitions such as the definition of the term project’.4
Unlike Article 5 which applies to all taxable transfers of capital

assets, Article 5A applies exclusively to transfers of immovable
property. Furthermore, it applies exclusively to transfers of
immovable property situated in Malta and any right over such
property. Thus, transfers by a Maltese taxable subject of immovable
property situated outside Malta can either be taxed in terms of
Article 4 or in terms of Article 5 depending on the nature of the sale
(trade/non-trade). Given that the definition of‘Malta’ contained
in Article 2 ITA includes airspace and the seabed Article 5A ITA
should apply to the assignment of real rights over the Maltese
seabed and Maltese airspace, as well.
2. Rates of Tax
2.1 The 8% Rate
Generally, as from 2015,5 property transfers tax is charged at

8% of transfer value.6 The default rule is the 8% rate levied on
transfer value butin certain cases other rates of tax apply. There are
cases,when a 12% tax is levied by reference to the excess, if any, of the
transfer value over its acquisition (as opposed to transfer value). In
3 Meaning of‘transfer’, meaning of‘own residence’. The partition of property were no owelty is
due is excluded from the definition of‘transfer’ in Article 5A.
4 Defined as meaning ‘property that has been developed by the owner into more than one
transferable unit or divided for transfer into more than one transferable portion:
Provided that it shall not include land acquired by the owner and divided for transfer into
more than one transferable portion, where the land is transferred by the owner in the same
state as when acquired (i.e. no excavation or any other works whatsoever have been carried
out on the property) and no permit has been issued by the Planning Authority during the
period of ownership by the owner sanctioning the development of the land into more than
one transferable unit, "property" means any immovable property situated in Malta and any
right over such property’.
5 The default rate used to be 12%.
Property Transfers Tax 569
some other cases tax is levied at the rate of 7% of transfer value. The
relevant rules will be explained in more detail below.
2.2 12% of the Excess7
Tax is levied, by way of exception, at the rate of 12% of the excess in

the case of property:
(i) that was acquired by the transferor in terms of a transfer

causa mortis that happened after the 24th November,
1992; or
( ii) that was acquired by the transferor in terms of a donation
made more than five years before the date of the transfer
in question.
The rate above does not apply where the transfer is of a property
forming part of a project. In addition, a proviso added by Act VII
of 2019 prescribes that 5A (5) (b) ITA contemplating tax of 12%
of the excess shall not apply if the transferor so elects by means of a
declaration made to the notary at the time of the publication of the
deed of the transfer andrecorded in the said deed
2.3 7% of Transfer Value8
The 7% tax on transfer value applies in the case of:
(a) a transfer of property that was acquired by the transferor

in terms of a transfer causa mortis that happened before
the 25th November, 1992;
(b) The said acquisition causa mortis happened on or after
the 25 November 1992, and the property is transferred
by means of a judicial sale by auction.
7 Article 5A (5) (b) ITA.

8 Article 5A (5) (c) ITA.
24 10% of Transfer Value9
Act V of 2012 provides for a 10% tax on transfer value with respect
to restored property to which 31C ITA refers to. Restored property
qualifies under 31C ITA if restoration is done in accordance with
MEPA Schemes for Grade 1 and Grade 2 Scheduled properties
situated in an urban conservation area.
Article 5 A (5) (f) ITA provides that the 10% rate applies to
transfers of property originally acquired by the transferor before 1st
January 2004 and in respect of which a notice of promise of sale has
not been given before 17th November 2014.
2.5 5% of Transfer Value
The 5% rate applies in two distinct scenarios.
Case I1011
The first case when the 5% rate applies is when there is a transfer of
property not forming part of a project that is made not later than
five years after date of acquisition is taxed at 5% of transfer value.11
Case 212
In addition, the 5% rate applies to transfers meeting all the following
conditions:
(a) the property being transferred is a property situated in

an urban conservation area or scheduled by the Malta
Environment and Planning Authority (MEPA) in terms
of article 81 of the Environment and Development
Planning Act;
9 Article 5A (5) (d) ITA.

10 Article 5A (5) (e) ITA.
11 Article 5A (5) (e) ITA.
12 Article 5A (5) (h) ITA.
(b) the transferor declares to the notary receiving the deed

of the transfer that he has carried out works on that
property in compliance with a permit issued by MEPA
providing for the restoration and, or rehabilitation of
that property upon an application for that purpose that
was filed with MEPA;
(c) the 5% rate was not applied in respect of any previous
transfer of the same property;
(d) the restoration and, or rehabilitation works have
been certified by MEPA as having been completed in
compliance with the relative permit;
(e) the MEPA certificate referred to above is produced to
the notary who receives the deed of the transfer and
the notary produces a certified copy of the certificate to
the Commissioner together with the notice required by
article 51 of the Duty on Documents and Transfers Act;
(f) the person who transfers the property submits any forms
and documentation that the Commissioner may require
in connection with the said works and with the transfer.
2.6 2% of Transfer Value13
A 2% tax on Transfer Value applies to:
(a) A transfer of a property that was immediately before the

transfer owned by an individual, or co-owned by two
individuals, who had for the purposes of article 32(4) (a)
of the Duty on Documents and Transfers Act declared
in the deed of the acquisition of that property that the
said property had been acquired for the purpose of
establishing therein or constructing thereon his or their
sole ordinary residence; and
(b) When the transfer is made not later than three years
13 Article 5A (5) (g) ITA.

after the date of the acquisition thereof; and.

(c) When the transferor is an individual who does not own
any other residential property at the time of the transfer;
(d) A number of compliance obligations are adhered to
namely the notary who receives the deed must record
in the deed a written declaration by the individual so
transferring that he does not own any other residential
property at the time of the transfer and the notary
shall warn the said individual of the importance of the
truthfulness of such declaration.14
3. The Cases When the Application of Article 5 A is

excluded
Article 5A does not apply (and consequently either Article 4 or

Article 5 ITA would apply) in the following cases:
( i) a transfer in respect ofwhich all the following conditions

are satisfied:15
(a) the property was, immediately before the transfer,
co-owned by two individuals and the transfer is
made by one of the co-owners to the other;
(b) the co-owners had, for the purposes of article 32(4)
(a) of the Duty on Documents and Transfers Act,
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;
(c) the transferor elects, by means of a declaration made
to the notary at the time of the publication of the
deed of the transfer and recorded in the said deed, to
exclude that transfer from the scope of Article 5A.
14 Article 5A (5) (g) ITA.
15 In this case opt-out is optional.
(iv) Certain expropriations.16

(ii) A transfer made by means of a judicial sale by auction or
in the course of a winding up by the Court;17
(iii) When roll over relief applies;18
(iv) A transfer of property by a person who is not resident
in Malta19 and who is resident for tax purposes in
another country if that person produces to the notary
who publishes the deed of transfer a statement signed
by the tax authorities of the country of that person’s
residence that confirms that persons residence in that
country and that certifies that that person is subject to
tax in that country on gains or profits derived from the
transfer of immovable property situated in Malta. The
notary must attach the statement to the deed and deliver
an authenticated copy thereof to the Commissioner.
In 2010 an anti-abuse condition was added to this
provision. Article 5A (3) (h) ITA used to contain a
loophole. Unlike 12 (1) (c), Article 5 (3) (h) ITA did
not incorporate a non-resident beneficial ownership
test. A Maltese resident individual could exploit a literal
application of the law and abuse of the mechanism by
interposing a non-resident company. An amendment
clarified that a person is treated as a non-resident if he
is a bona fide non-resident. The proviso which added by
Act I of 2010 prescribes that:
“Provided that such person is not owned or controlled by, directly or

indirectly, nor acts on behalf of, an individual or individuals who is
or are ordinarily resident and domiciled in Malta;”
(v) A transfer of property pursuant to a lease agreement

that included the option of purchase of the property
17 In this case opt-out is mandatory.
at an agreed price, where the said arrangements had

been made prior to, but the transfer occurs after, the 1st
November 2005;20
(vi) A transfer of property forming part of a project made
by a company which has issued debt securities to the
public and such debt securities are listed on a stock
exchange recognised under the Financial Markets Act,
and if the transferor elects, by means of a declaration
made to the notary at the time of the publication of
the deed of the transfer and recorded in the said deed,
to exclude that transfer from the scope of Article 5A
When such an election is made it shall also apply to
all subsequent transfers of property forming part of
that project made by the said transferor and all such
transfers. In addition, where the right to opt-out applies
only when the reason for the offer and use of proceeds,
as disclosed in the prospectus published when the debt
securities are offered to the public, is solely to develop
and construct the said project.
4. Exemptions - Article 5A ITA
The exemptions which apply to transfers regulated in Article 5A

ITA mirror some of the exemptions which apply in an Article 5
ITA scenario, the relevant rules are either reproduced or applied
by cross-reference. This is the case with the following exemptions:
(i) Donations to close relatives;21

(ii) Donations to philanthropic institutions;
(iii) Transfers of ‘Own Dweling House’ not forming part
of a project (subject to some clarifications which are
20 In this case opt-out is mandatory.

21 Act VII of 2018 added a proviso determing cost of acquisition on subsequent transfer as date
of original acquisition.
particular to Article 5A);

(iv) Assignment of property consequent to a personal
separation or a divorce;22
(v) Assignment of property consequent to a dissolution of
the assets of the community of acquests or a divorce;23
(vi) Intra-Group Transfers: Act I of 2010 extended the
remit of the intra-group exemption establishing that
the exemption applies even when the transfer is not a
transfer of a capital asset and the transfer is part of a
restructuring, involving the transfer of the whole or part
of a company’s business to another company.
(vii) the transfer of property upon the incorporation of a
business or a partnership en nom collectif as a going
concern into a limited liability company;
(viii) The ‘Trust’ Exemptions;24
(ix) Transfers by certain exempt persons;25
(x) Act IV of 2011 added a new exemption, the exemption
contemplated in 5A (4) (j) ITA. Conditions for
eligibility to the exemption were rendered less strict by
Act V of 2012.
The exemption refers to a transfer of property by a
company to its shareholder or to an individual related
to its shareholder26 in the course of winding up or in the
22 L.N. 218 of 2012.

23 L.N. 218 of 2012.
24 Namely the exemption in 5 (18) (b) ITA referring to settlement of property on trust, Article
55 (22) (b) ITA referring to distributions of property previously settled on trust and Article
5 A (4) (b) ITA transfers of property from a trust involving a mere change in trustees.
25 Namely persons falling under Article 12 (1) ITA and 5A(4)(i) ITA.
26 An individual is related to the said shareholder if such individual is his spouse, his descendant
or ascendant in the direct line, or the spouse of any such descendant or ascendant, or, in
the absence of any descendants in the direct line, his brother or sister or a descendant of his
brother or sister:”
Before the entry into force of Act V of 2012, the definition of related party was different. It
used to read,
“ For the purpose of this paragraph an individual is related to the said shareholder if such
individual is his spouse, his descendant or ascendant in the direct line, or the spouse of any
such descendant or ascendant, or, in the absence of any descendants in the direct line, his
brother or sister or a descendant of his brother or sister.”
course of a distribution where the said shareholder is an

individual or his spouse, who owns or own, 95%17 of
the share capital27
28 of the said company transferring the
property.
The exemption applies only where all the following
conditions have been satisfied:
(a) the said shareholder held 95%29 of the share capital
(disregarding the holding of one share having no
preferential rights) of the company transferring the
property for a period exceeding 5 years.
(b) the said property consists of a dwelling house, garage,
shop, office, store or warehouse;30
(c) the said property is held as a capital asset by the company
and has been so held for a period exceeding 5 years
immediately preceding the date of the transfer of the
property as aforesaid:31
of the decujus in favour of the offspring will be exempt from transfer
tax. This will be backdated to 1st January 2013.”
5. Degrouping in Property Transfers Tax
Act II of 2009 introduced the concept of degrouping charge in

the Income Tax Act and the concept was first tested in a property
transfers tax context. Act II of 2009 introduced Article 5A (12A)
ITA which prescribes that the degrouping charge applies when:
27 Prior to Act V of 2012 the conditions for the exemption were stricter. The law used to speak
of‘all the sharecapital’.
28 Disregarding the holding of one share having no preferential rights.
29 Prior to Act V of 2012 the conditions for the exemption were stricter. The law used to speak
of‘all the sharecapital’.
30 Before the Act V of 2012amendments the law used to refer to ‘one transferable unit, being
either’.
31 Act VII of 2018 added a proviso determing cost of acquisition on subsequent transfer as date
of original acquisition.
(a) a company (defined as the "the chargeable company")

owns property which had been acquired from another
company; and
(b) such acquisition was exempt from tax in terms of the
intra-group exemption; and
(c) the chargeable company ceases to be a member of the
original group before the lapse of six years from the date
of the said acquisition.
A cessation caused by dissolution is not considered to be a

cessation which triggers the degrouping charge. The chargeable
company is treated as having ceased to be a member of the original
group, if such company and the company from which it had
acquired the property no longer qualify to be treated as members
of the same group in terms of article 5 (9) (i) and (iii) ITA.
A degrouping charge is treated as a deemed disposal and the tax

on such deemed transfer is charged at the rate of 8% of the transfer
value but if the acquisition of property occurred before the 1st
January, 2004 tax is of 10%.32.
32 Article 5A (12A) (e) ITA.

Chapter 18
Anti-Avoidance Provisions
1. Recent Developments
In recent years, the debate relating to anti-avoidance has been

dominated by two pan-European initiatives that gathered
momentum in 2016. On 20 June 2016 the European Council
adopted Directive (EU) 2016/1164, the Anti-Avoidance Directive
(ATAD 1). On 25th October 2016, the Commission presented
proposals enhancing existing rules on hybrid mismatches (ATAD 2).
ATAD 1 and ATAD 2 build on the 2015 OECD recommendation
to address BEPS and have been described as the EU s response to
BEPs. The implications of the two directives are far-reaching and
will be analysed at the end of this chapter.
2. Evasion, Avoidance and Mitigation
All taxpayers, the Maltese taxpayer especially, can reduce their tax
burden by resorting to acts and omissions which can be classified
under three distinct heads; tax mitigation, tax evasion and tax
avoidance. Tax law considers tax evasion and tax avoidance to be
illicit. Tax evasion is punishable with criminal sanctions. On the
other hand, tax mitigation is perfectly legitimate. Distinguishing
between the three may not always be easy, in practice.
Tax avoidance and tax mitigation have been said to take place
before the tax liability arises. On the other hand, tax evasion takes
place after tax liability arises1.
2.1 Tax Evasion
Tax evasion “involves the intentional disregard of the legislation in

order to escape the liability to tax. Tax evasion may be achieved by the
understating ofincome, overstating expenses, makingfalse claimsfor
allowances orfailing to disclose a chargeability to tax”12. Tax evasion
involves intentional misbehaviour and knowledge of wrongdoing
such as an intentional failure to declare income and other forms of
intentional concealment. Deliberately claiming a deduction when
there is knowledge that such a deduction is not due amounts to
evasion as is any form of intentional misrepresentation3. In CIR v.
Challenge Corporation Ltd Lord Templeman described evasion as
follows,
“Evasion occurs when the Commissioner is not informed of all the facts
relevant to an assessment of tax. Innocent evasion may lead to re-assessment.
Fraudulent evasion may lead to a criminal prosecution as well as re
assessment.”4
Recently, the ART delivered an important and scholarly

decision which explains the concept of tax evasion.
2.1.1 Case 66/11VG on ‘the avoidance of tax ...

due to evasion or fraud’
Case 66 involved a series of cases which involved an allegation
that taxpayer had not declared his interest income. The assessment
which created the casus belli had been raised after the lapse of the
1 Committee of Experts on Tax Compliance; Report to the Treasurer and Minister of Revenue
(New Zealand 2003) Cap.6 p.5.
2 Nightingale, K; op.cit p.44.
3 Baker op.cit p.7.
4 (1949) 79m CLR 296. From Report to theTreasurer op.cit supra.
Anti-Avoidance Provisions Tax 581
peremptory period established by law. Taxpayer raised a preliminary

plea asking the ART to summarily dismiss the case on the basis that
the assessment was statute barred.
The Revenue rested its case on Article 30 (5) ITMA which

allowed the Revenue to raise an assessment after the lapse of the
term contemplated whenever tax avoidance is due to evasion or
fraud’. Article 30 (5) ITMA prescribes that,
“(5) Notwithstanding the provisions of subarticle (4), where a person has

not made to the Commissioner the returns required by the Income Tax Acts
for any year of assessment preceding the year of assessment 1999 or a full and
true disclosure of all material facts necessary for his assessment for any such
year and there has been an avoidance of tax, the Commissioner, where he is
of the opinion that the avoidance of tax is due to fraud or evasion, may at any
time assess such person at such amount or additional amount as according to
his judgement ought to have been charged and take action for the payment
of tax, additional tax and any penalty.”
Taxpayer argued that, in such cases, the onus of proof was on

the Revenue and that the concept of evasion or fraud’ involved a
certain degree of malice. Taxpayer contended that it has not been
demonstrated that he had acted in bad faith. The ART agreed
with taxpayer, it held that the Revenue failed to prove fraud or
evasion. The ART could not rely on conjecture. Interestingly,
the ART interpreted the concept of tax fraud with reference to
notions of civil law relating to the proof necessary in fraud. The
ART held that when the Revenue alleged allegations of evasion
or fraud it had to prove ‘scienter raggiri fraudolenti u artifizji li
huma gravi u determinanti, which the Revenue had not done.
The ART concluded that allegations of fraud or evasion’ (which
had not been mentioned in the notice of refusal) were being used
to unjustifiably excuse the issue of a late assessment. An extract
from this important judgement which is now res judicata is being
reproduced hereunder:
“Minn ezami ta dan 1-affidavit it-Tribunal jifhem li 1- Kummissarju tat-Taxxi

Interni ra li bin-nuqqas da parte tar-
Rikorrenti li jsemmi fit-tax returns tieghu 1-imghaxijiet imsemmija u
li skond 1-istess Kummissarju huma taxxabbli, punt dan kontestat mir-
Rikorrenti, 1-istess Rikorrenti evita 1-hlas tat-taxxa reiattiva (avoided tax) u
konsegwentement il-Kummissarju assuma u wasal ghallkonkluzzjoni li kien
hemm frodi jew evazjoni da parte tieghu (evasion of tax). Ghall-Kummissarju
tat-Taxxi Interni ghalhekk, tax avoidance tekwivali ghal tax evasion.
Bid-dovut rispett lejn il-Kummissarju tat-Taxxi Interni u lezercizzju tad-
diskrezzjoni tieghu, fil-fehma tat-Tribunal din ma hijiex 1-interpretazzjoni
li ghandha tinghata lill- Artikolu 30(5) tal-Kap.372 tal-Ligijiet ta’ Malta u
1-affidavi ta Neil Piccinino ma jikkostitwixxix prova, imqar prima facie, ta’
1-allegata frodi jew evazjoni tal-Fisco da parte tar-Rikorrenti.
It-test ta’ 1-Artikolu 30(5) tal-Kap.372 tal-Ligijiet ta’ Malta, li jipprovdi
li meta persuna ma ddikjaratx b’mod komplet u veritier kull fatt materjali
mehtieg ghall-istima taghha ghal xi sena u b’hekk tevita t-taxxa, il-
Kummissarju, meta jidhirlu li dak li sar jkun dovut ghal frodi jew evazjoni,
jista’ f’kull zmien jaghmel stima ta’ dik il-persuna b’dak lammont jew ammont
addizzjonali hekk kif skond 1-ahjar gudizzju tieghu dik il-persuna kellha tigi
intaxxata u ghandujiehu passi biex isir il-hlas tat-taxxa, taxxa addizzjonali jew
penali, juri bic-car li ma kenitx u ma hijiex 1-intenzjoni tal-Legislatur li kull
kaz ta’ tax avoidance jigi inekwivokabilment ekwiparat u meqjus bhala tax
evasion, u li 1-Kummissarju tat-Taxxi Interni ghandu jezercita ddiskrezzjoni
tieghu fejn tidhol kwistjoni ta’ frodi u evazjoni fuq fatturi u provi konkreti u
mhux fuq mera assunzjoni jew presunzjoni.”
The ART observed that tax evasion cannot be presumed,
Tl-fatt li I-Kummissarju tat-Taxxi ma jistax u ma ghandux jikkonkludi li

fejn giet evitata t-taxxa necessarjament kien hemm frodi jew evazjoni da
parte tat-taxpayer u li ma jistax jezercita d-diskrezzjoni tieghu fuq semplici
presunzjoni jew assunzjoni izda in segwitu ghal ezercizzju akkurat u ben
dokumentat, jirrizulta b’mod car middecizjoni fl-ismijiet Winston Carbone
v. Kummissarju tat-Taxxi Interni moghtija mill-Bord ta’ Kummissarji
Specjali fl-24 ta’ Ottubru 2007 u ikkonfermata mill-Qorti ta’ 1-Appell (Sede
Inferjuri) fis-6 ta’ Gunju 2008.”
The ART referred to British texts on the meaning of tax evasion,
“F’dak il-kaz il-Bord ta’ Kummissarji Specjali kien ikkonkluda li

1-Kummissarju tat-Taxxi Interni ma ressaqx prova sodisfacenti ta’ 1-allegata
frodi jew evazjoni tattaxpayer vis-à-vis uhud mill-istimi hemm kontestati

u bbaza d-decizjoni tieghu inter alia fuq dak li jghid Tiley, Revenue Law,
4th Edition, 2000, fir-rigward ta’ tax evasion, u qal: tax evasion itself has
developed a number of frayed edges. U jiccita bhala ezempju ta’ dawn li
“Evasion may result from taking a position on tax legislation which is
later shown to be incorrect” u jzid li “its [ta’ 1-evazjoni] greatest cause may
not be fraud or greed, but the complexity of tax legislation” u li “[evasion]
can be a matter of judicial hindsight.” ... Ezercizji purament
numerarji (akkurati u ragjunati tajjeb, izda mhux sostnut minn evidenza
dokumentata) mhumiex bizzejjed biex isostnu t-tezi ta frodi u/jew evazjoni,
li mbaghad kienet tkun hi li, f’dan il-kuntest, trid twaqqa 1-posizzjoni ta’
lappellant fl-invokazzjoni tieghu tal-preskrizzjon ai termini
ta’ 1-Artikolu 30(5).”
Evidence of tax evasion must be unequivocal and the ART

concluded that the evidence brought against taxpayer did not
satisfy the required degree of proof.
“Fil-fehma tat-Tribunal 1-affidavit ta’ Neil Piccinino u ddokumenti annessi

mieghu ma jilhaqx il-grad rikjest mill-Kummissarju tat-Taxxi Interni biex
effettivament jipprova frodi jew evazjoni da parte tar-Rikorrenti. In effetti
tali affidavit lanqas biss jilhaq il-minimu rikjest mill- Kummissarju, u cioè
prova prima facie ta’ 1-allegata frodi jew evazjoni da parte tar-Rikorrenti.”
In this case, the ART referred to the fact that the allegation of
fraud had not been made a tempo vergine but had been made quite
late in the day.
2.2 Tax Avoidance
Tax avoidance is, unlike tax evasion, not a criminal wrong but it is
considered to be illicit under tax laws. Tax avoidance occurs when
a person enters into an arrangement solely or mainly to obtain a
tax advantage. One of the leading British cases5 on avoidance is
5 Even the US Courts delivered a string of informative judgements on the matter. In 1999
the US Tax Court delivered an important judgement in the ADR case when it struck down
a scheme which involved the purchase of shares cum div and sale ex div for the purposes of
avoiding tax on the grounds of‘lack of business purpose’.
Furniss v. Dawson6. In Furniss the Court held that a transaction,

which has no commercial purpose7 other than the avoidance of
tax, must be rejected as a sham8 and set aside9. As the dominant
or sole purpose in the case in question was to reduce or eliminate
tax liability, the Court by passed form to look at the substance of
the transaction1011and assessed the taxpayer by disregarding the tax
avoidance measures he had availed himself of. The British Courts
delivered another interesting pronouncement on avoidance in IRC
v. McGuckian11 when the House of Lords held that,
“Steps inserted artificially with no commercial (business) purpose other

than tax avoidance may be disregarded. Whilst the steps inserted into a
scheme may have some business effect, the question is not what is the effect
of inserting the artificial steps but what is their purpose”.1213
‘Everything that is not criminal and is not avoidance is then

tax mitigation^ tax mitigation is identified by elimination. A
transaction which eliminates or reduces tax constitutes tax
mitigation if it neither amounts to tax avoidance nor tax evasion.
Tax mitigation neither breaches criminal law nor the administrative
provisions of the Income Tax Acts. Lord Templeman described tax
mitigation in CIR v. Challenge Corporate Ltd as follows:
“Income tax is mitigated by a taxpayer who reduces his income or incurs

expenditure in circumstances which reduce his assessable income or entitle
him to reduction in his tax liability. Section 99 does not apply to mitigation
6 (1984) STC 153.

7 Only ‘Intended to give third parties the appearance of creating between the parties legal rights
and obligations different from the actual legal rights and obligations’. Snook v. London &
West Riding Investments Ltd (1967) 2 Q.B. 786.
8 “...for a transaction to be ignored as a sham, two conditions must be fulfilled: (i) the parties
must have a common intention that their actions or documents are not to create the legal
relationships which they give the appearance of creating; and (ii) there must be some element
of incompleteness or lack of genuineness”. Giglio, J: Income Tax Anti-Avoidance Measures : A
Maltese Perspective (University of Malta LL.D. 2003) p.53.
9 Nightingale, P; op.cit p.47.
10 Hinckes, Dashwood v. Hinckes (1921) 1 Ch. 475 at p.489.
11 (1997) STC 908 HL.
12 http://www.taxbar.com/case.htm.
13 Baker, P; Tax Avoidance, Tax Mitigation and tax Evasion (Taxbar.com) p.6.
because the taxpayer’s advantage is not derived from an arrangement but

from the reduction of income which he accepts or the expenditure which
he incurs.”14
The nature of mitigation was described in the House of Lords

decision, IRC v. Willoughby15 (Baker formed part of the team
which argued the case for Willoughby) at the House of Lords,
“The hallmark of tax mitigation, on the other hand, is that the taxpayer takes
advantage of a fiscally attractive option afforded to him by the tax legislation
and genuinely suffers the economic consequences that parliament intended
to be suffered by those taking advantage of that option.”
2.2.1 Tax Avoidance in Civil Law

The Maltese Civil Courts have recently delivered an interesting
decision on the nature of tax avoidance in Grove Enterprises
Limited vs Frank Bowers et16.
Grove was the owner of a house at Santa Maria Estate which

it leased to Mr. Bowers. The lease arrangement was for a definite
term and it prescribed that rent had to be paid for whole term
even in the case of an early termination. The consideration due in
terms of the rent agreement had been split up, for some obscure tax
minimisation purpose, into 2 separate considerations, the rent for
the villa and the rent of the furniture contained in the Villa. Mr.
Bowers left the villa before the expiration of the term envisaged in
the agreement and he refused to pay the rent due for the rest of the
term as per contract. When Grove sued Bowers for the rent due
Bowers plead that Grove s case was unenforceable because it was
vitiated by illicit cause, it had been structured in such a way as to
minimise the tax burden. The Court disagreed.
The Court held that plaintiff had not derived any fiscal benefit
by structuring the lease agreement the way it had done. It was
14 (1986) 8 NZTC 5,219.
15 (1997) STC 995.
16 Cit. Nru. 536/2003,14/12/06.
ironically the defendant who stood to gain a tax advantage from

the manner the lease agreement had been structured. The Court
held that the tax planning element was not material in this case.
The Court held that one could not really classify the tax planning
idea employed as being an illegality which vitiated the contract. It
delivered sentence as follows:
“Dan premess, lill-Qorti ma jirrizultalhiex li l-ftehim ta' lokazzjoni hu

innifsu karpit b' illegalita'. L-ewwel net, ma jirrizultax jekk il-qasma tal-
kirja, b'tant ghall-fond u tant ghall-ghamara, kienetx forma ta' “tax
evasion”, li hu illegali, jew “tax avoidance”, li hu permessibbli. Ma hemm
xejn hazin li persuna tirranga s-sitwazzjoni finanzjarja taghha b'mod li
tigi li thallas 1-anqas ammont ta' taxxa possibbli. Sakemm dak li jkun
jinqeda, b'mod lecitu, bl-ghodda li taghtih il-ligi, ma jkun qed jaghmel
xejn hazin jekk juza dawk 1-ghodda biex inaqqas 1-impenn fiskali tieghu.
Min-naha tas-socjeta' attrici, il-hlas tal-kera kien jigi dikjarat fl-intier tieghu
lill-awtoritajiet kompetenti u ma jirrizultax li 1-ftehim gew uzati ghal xi
evazjoni fiskali. Da parti tal-konvenut, ma giex muri lanqas li 1-arrangament
sar bi skop jew wassal ghal xi evazjoni ta' hlas ta' taxxa, a differenza minn
utilizazzjoni tal-ghodda legali biex jitnaqqas 1-obbligu fiskali.”
The Court spoke of tax avoidance, and this will be a balm to

most tax advisors, as being‘permissible’! However, the controversial
judgement in Grove must be read in perspective. The Grove case
was a civil dispute and must be read as such. Tax avoidance may
not be a civil wrong17 for the purposes of the doctrine of unlawful
consideration18 but tax avoidance is certainly a wrong for the
purposes of the Income Tax Acts wherein provisions against tax
avoidance abound. The said provisions may be classified under two
categories: measures aimed at specific anti-avoidance schemes and
blanket generic anti-avoidance measures. The legislator is said to
adopt a sniper approach in the former case and a gunshot approach
17 Plaintiff lost his case because of Kawza Illecita’ on another ground. Plaintiff was not in
possession of a licence to rent to non-residents as required by law. This flaw vitiated the
contract with an unlawful consideration. A person cannot enforce a claim in respect of a
service he is nor licensed to perform.
18 Discussed in the annex.
in the latter case. Some anti-avoidance measures have already been

discussed in previous chapters.
2.2.2 Sniper Approach Tax Avoidance Provisions

Most of the targeted anti-avoidance provisions limit the abuse of
tax mitigation opportunities. When arrangements have as their
sole or main the avoidance of tax the Commissioner has the right to
disregard the said arrangements and raise his assessment as though
such arrangements were not in place.
Act II of 2009 and Act I of 2010

A number of anti-avoidance provisions were introduced in
2009 and 2010. Act II of 2009 added article 5A (I2A) ITA,
an anti-avoidance de-grouping charge discussed in Chapter
16. Act I of 2010 introduced a number of anti-avoidance
measures including rules on de-grouping and value shifting.
The 2010 amendments introduced an-anti avoidance provision
prescribing that when the value of shareholding is inflated by
a bonus issue intended to inflate the base cost of the shares in
anticipation of a subsequent transfer of such shares, the cost of
acquisition is taken at 0.
Surrendering of Losses
Article 19 ITA seeks to curtail, through the use of more or less
ambiguous wording, any abuse of the surrendering of losses
mechanism by ‘looking through’ a group that has been artificially
created mainly or solely for reasons of tax efficiency. Article 19
provides that if a company is a member of a group of companies,
and arrangements are in existence the sole or main purpose of
which is to reduce any company’s19 liability, and by virtue of the
said arrangements that company would cease to be a member of
19 The term ‘any company’ within the axiom extends the applicability of this Article to all the
companies within the group and theoretically even companies bearing no relationship to the
taxpayer?;
that group of companies, then that company shall be treated as not

being a member of that group of companies. BSC9/94 was a case
in issue which involved the acquisition of a loss making company
exclusively for the purposes of utilising its tax losses. The Board
disregarded the transaction and disallowed the loss on the strength
of the general anti-avoidance measure contained in Article 51 (2)
ITA.
3. The Investment Income Provisions
Article 42 ITA is directed against the abuse of another tax mitigation

opportunity, the potentially beneficial 15% withholding tax rate of
the investment income provisions. Article 42 ITA provides that
if, in the opinion of the Commissioner, a series of transactions is
effected with the sole or main purpose of reducing the amount
of tax payable by a person by reason of the operation of the
investment income provisions, such a person is assessable as if the
aforesaid provisions did not apply. However, the anti-avoidance
provision equitably provides that if the Commissioner decides to
apply the anti-avoidance provision any tax withheld at the rate of
15% is available as a credit against the tax liability of the person
receiving such income or for a refund, as the case may be, for the
relevant year of assessment20. It is interesting to note that Article 42
includes a definition of the term series of transactions’. The term
series of transactions’ is defined as ‘any two or more corresponding or
circular transactions, carried out by the same person, either directly or
indirectly, as the case may be!
20 Thus, contrary to popular belief, the investment income provisions do not create a final
withholding tax but apply a withholding tax which, in the exceptional circumstance of an
anti-avoidance measure, is refundable in accordance with general principles.
4. Deemed Distributions
Articles 43ITA to 46ITA grant the Commissioner the power to

issue deemed distribution orders. The power to issue deemed
distribution orders consists in the power to deem that a company’s
undistributed profits, or part thereof, have been distributed and to
tax such deemed distributions accordingly.
Deemed distribution orders used to be a very effective anti

avoidance measure when the highest rate of tax prescribed for
individuals stood at 65% and shareholders used to retain their
profits in companies in order to avoid being taxed at 65%. Deemed
distributions orders used to be regularly put to use and cases on
deemed distributions abound21.
The importance of deemed distribution orders declined when

the personal rate of tax was reduced from 65% to progressive rates
which go up to 35%. The alignment of the company rate of tax
with the highest rate of tax which applies to individuals rendered
deemed distribution orders redundant. However, the importance
of deemed distributions was re-discovered recently when Act II of
2007 created a new role for deemed distribution orders. Deemed
distribution orders now form part of the network of rules which
tend to effectively restrict the benefits of the refundable tax credit
system, in certain cases. Article 43 (6) ITA contemplates four
distinct situations when deemed distributions apply. Deemed
distribution orders apply in the following cases:
(i) 43 (6) (a) ITA - When a resident individual’s is directly/

indirectly entitled to a tax refund in terms of either
Article 48 (4) ITA or 48 (4A) ITA;
(ii) 43 (6) (b) ITA - When a resident individual is direct/
indirectly entitled to the profits of an entity which
21 Including Cases 168a,168b, 182 and 183 of the Court of Appeal.

receives a tax refund and a net dividend;

(iii) 43 (6) (c) ITA - When a resident individual is
directly/indirectly beneficially entitled to the profits
of a company which has applied the 14 (1) (o) ITA
deduction;
(iv) 43 (6) (d) ITA - When a resident individual becomes
entitled to undistributed profits consisting in a net
dividend and a tax refund
The Commissioner has been granted an absolute discretion’

not to apply deemed distribution orders in the case of distributions
by certain public companies22.
4.1 43 (6) (a) ITA - When a resident individual

is directly/indirectly entitled to a tax refund in
terms of either Article 48 (4) ITA or 48 (4A) ITA
When an individual resident in Malta is registered for the purposes

of the refundable tax credit system, or is beneficially entitled,
directly or indirectly, to the profits of a company which is so
registered, such individual is deemed to have received a dividend
or dividends corresponding to the amount of profits23 that he is
beneficially entitled to receive from such company or companies,
on the first day of the accounting period next following that in
22 The relevant provision is reproduced hereunder:
‘Where the direct or indirect beneficial entidement referred to above is an entitlement to the
profits of a public company or other entity, and where one or more individuals, ordinarily
resident and domiciled in Malta, do not own or control a substantial part of such company
or entity, or are not beneficially enrided to a substantial part of the profits or income of such
company or entity, and the shares or other similar security in relation to such company or
entity -
(i) are listed on a stock exchange determined by the Commissioner for the purpose of this
provision, and the Commissioner is satisfied that the shares or other similar security are widely
held and frequently traded; or
(ii) although not listed on such a recognised stock exchange and not frequently traded, are
widely held, the Commissioner may, in his absolute discretion, determine that the provisions
of this subarticle are not applicable.’
23 The profits net of the tax paid or payable by the company in respect of which he or the said
company are so registered.
which such profits were earned by the said company or companies:

provided that such profits have not been distributed before that
date.
An important rule relating to the application of a deemed

distribution order issued in terms of 43 (6) (a) ITA is contained in
Article 43 (6) (e) ITA. 43 (6) (e) ITA restricts the scope of a 43 (6)
(a) order. The deemed distribution mechanism is not applicable
when the immediate shareholder of the company is a non-resident
body of persons which is not owned by an individual who is both
ordinarily resident and domiciled in Malta. Thus, the deemed
distribution mechanism introduced in 2007 does not prejudice the
beneficial treatment which would otherwise apply to a person who
is ordinarily resident but not domiciled in Malta (such as the typical
permanent resident) who holds shares in a Maltese company via a
foreign resident entity.
4.2 43 (6) (b) ITA - When a resident individual

is direct/indirectly entitled to the profits of an
entity which receives a tax refund and a net
dividend
43 (6) (b) ITA contemplates the issue of deemed distribution

orders whenever a Maltese resident individual receives or is entitled
to receive a tax refund and a net dividend paid by a company
registered in Malta in terms of Articles 41(a)(viii)(2)24 and (3)25.
The quantum of the deemed distribution is equivalent to that
much of that income which corresponds to resident individual’s,
direct or indirect, entitlement to the tax refund and net dividend.
24 ‘(2) the amount of the net dividend paid by a company registered in Malta in respect of which
the recipient shareholder is registered for the purpose of article 48(4) or article 48 (4A) of the
Income Tax Management Act;’
25 ‘(3) the amount paid pursuant to article 48(4) or article 48(4A) of the Income Tax
Management Act;
The proviso to the paragraph adds that, in the case of a distribution

of a net dividend the dividend distribution mechanism does not
apply to income which is deemed to have been derived in terms of
paragraph (4) of article 41(a)(viii)26 ITA (the tax refund and the
net dividend and income from a participation exemption).
4.3 43 (6) (c) ITA - When a resident individual

is directly/indirectly beneficially entitled to the
profits of a company which has applied the 14(1)
(o) ITA deduction
A deemed distribution order is issued as soon as a resident individual

becomes entitled either directly or indirectly to the profits of a
company which has applied the the 14 (1) (o) ITA deduction.
4.4 43 (6) (d) ITA - When a resident individual

becomes entitled to undistributed profits
consisting in a net dividend and a tax refund
The deemed distribution mechanism is triggered off as soon as a
resident individual acquires the shares of a company which retains
undistributed profits consisting in article 41 (a) (viii) (2) and (3)
ITA net dividends and tax refunds.
5. Advances to Shareholders
Article 46 ITA seeks to look through the extraction of profits from

a company done by means other than a dividend distribution. It
has been suggested that Article 46ITA might create a disguised
thin-capitalisation rule27.
26 the dividend referred to in article 43(6)(a) and article 43(6)(c);

27 MIT Notes, Diploma Course in Taxation 2006/2007, Aspects of Taxation of Companies &
Individuals (Malta 2006) p. 85.
Article 46 ITA grants the Commissioner the power to treat

advances of monies, distributions of assets by way of advances
or loans granted by companies to their shareholders, as well as
payments made by companies on behalf or for the benefit of their
shareholders, as dividends.
Article 46 ITA provides that,
“(1) If any amounts are advanced or any assets distributed by a company

to any of its shareholders by way of advances or loans, or any payment is
made by the company on behalf of, or for the individual benefit of, any of
its shareholders, so much, if any, of these advances, loans or payment, as, in
the opinion of the Commissioner represents distribution of income shall, for
all purposes of this Act, be deemed to be dividends paid by the company to
those shareholders out of profits derived by it.
(2) Where the amount of any advance, loan or payment is deemed, under
the last preceding sub-article, to be a dividend paid by a company to its
shareholders, and in any year subsequent to that in which the dividend is so
deemed to be paid, the company sets off any dividend distributed by it in that
subsequent year, in satisfaction of the whole or part of the amount of that
advance, loan or payment, that dividend shall, to the extent to which it is so
set off, be deemed not to be a dividend for the purposes of this Act.”
One may question whether Article 46ITA is compatible with

EU law as interpreted in Lasertec Gesellschaft fur Stanzformen
mbH v Finanzamt Emmendingen28. In Lastertec the ECJ held that,
“A national measure in accordance with which the loan interest paid by a

resident capital company to a non-resident shareholder who has a substantial
holding in the capital of that company is, under certain conditions, regarded
as a covert distribution of profits, taxable in the hands of the resident
borrowing company, primarily affects freedom of establishment within the
meaning of Article 43 EC et seq. Those provisions cannot be relied on in a
situation involving a company in a non-member country.”
28 Order of the Court (Fourth Chamber) of 10 May 2007 (reference for a preliminary
ruling from the Finanzgericht Baden-Wiirttemberg (Germany) - Lasertec Gesellschaft fur
Stanzformen mbH v inanzamt Emmendingen (Case C-492/04). The language of the case is
German.
6. Flat Rate Foreign Tax Credit

Article 95 ITA is directed against abuse of the flat-rate foreign
tax credit, a mechanism that provides relief from double taxation.
Article 95 follows the general pattern of the anti-avoidance
provisions described above by providing that where, in the opinion
of the Commissioner, a series of transactions is effected with the
sole or main purpose of reducing the amount of tax payable by any
person by reason of the operation of the flat-rate foreign tax credit,
such a person shall be assessable as if the provisions did not apply.
In Article 95, the term "series oftransactions' is attributed the same
meaning attributed to it in Article 42 ITA discussed above.
6.1 Article 5 (6) ITMA

Another important anti-avoidance provision is contained in Article
5 (6) ITMA which seem to incorporate a transfer pricing element:
Article 5 (6) ITMA prescribes that:
“Where a non-resident person carried on business with a resident person,

and it appears to the Commissioner that, owing to the close connection
between the resident person and the non-resident person and to the
substantial control exercised by the non-resident person over the resident
person, the course of business between those persons can be so arranged and
is so arranged that the business done by the resident person in pursuance of
his connection with the non-resident person produces to the resident person
either no profits or less than the ordinary profits which might be expected
to arise from the business, the non-resident person shall be assessable and
chargeable to tax in the name of the resident person as if the resident person
were an agent of the non-resident person.”
The purview of Article 5 (6) ITMA is circumscribed to dealings

between residents and non-residents and does not seem to apply
to dealings between residents and residents and dealings between
non-residents and non-residents who establish a permanent
establishment in Malta. Furthermore, it applies when the resident
and the non-resident are closely connected and when the non
resident exercises substantial control’ over the resident.
6.2 Article 5 (7) ITMA
Another anti-avoidance measure is contained in Article 5 (7)

ITMA which contemplates an exceptional tax on a resident person s
turnover. Article 5 (7) ITMA must be read in conjunction with the
proviso to Article 5(1) ITMA which provides that, in certain cases,
a non-resident person shall be assessable and chargeable in respect
of any income arising, whether directly or indirectly, through or
from any agency in the name of his resident agent. Article 5 (7)
ITMA prescribes that,
“(7) Where it appears to the Commissioner that the true amount of the
gains or profits of any non-resident person chargeable to tax in the name
of a resident person cannot in any individual case be readily ascertained,
the Commissioner may, if he thinks fit, assess and charge the non-resident
person on a fair and reasonable percentage of the turnover of the business
done by the non-resident person through or with the resident person in
whose name he is chargeable as aforesaid and in such case the provisions of
the Income Tax Acts as to the delivery of returns or particulars by persons
acting on behalf of others shall extend so as to require returns or particulars
to be furnished by the resident person of the business so done by the non
resident person through or with the resident person, in the same manner as
returns or particulars are to be delivered by persons acting for incapacitated
or non-resident persons in respect of income to be charged...”
The compatibility of Article 5 (7) ITMA with EU law as

interpreted in FKP Scorpio Konzertproduktionen GmbH v
Finanzamt Hamburg-Eimsbuttel29, is highly debatable.

6.3 Conversions of Commercial Partnerships
The Budget Acts of 2010 and 2011 introduced a number of anti

avoidance measures including an anti-avoidance measure directed
against partnership conversions done for tax avoidance purposes.
Article 45BITA confirms that conversions of commercial
partnerships into companies do not create tax exposures but for
the purpose of determining the chargeable income or gains on a
transfer of the converted partnerships assets, the cost and date
of acquisition taken into account shall be the cost and date as
applicable to the commercial partnership that has been converted.
““45B. Notwithstanding anything contained in this Act, where, in accordance

with the provisions of the Companies Act, a commercial partnership en nom
collectif or a commercial partnership en commandite the capital of which is
not divided into shares is converted into a company, it shall be deemed for all
the purposes of the Income Tax Acts that no transfer or acquisition of assets
has taken place and for the purpose of determining the chargeable income
or gains on a transfer of the said assets by the company, the cost and date of
acquisition taken into account shall be the cost and date as applicable to the
commercial partnership that has been converted.”
6.4 The HQPR
An interesting anti-avoidance rule is contained in the HQPR.

Rule 8 HQPR prescribes that where any person, in order to obtain
benefits under the rules, makes use of artificial arrangements, the
Commissioner shall, by order in writing, determine the liability to
tax of the said person, for any year of assessment, in such manner
and in such amount as may be necessary, in the circumstances of

the case to nullify benefits obtained under these rules.
A person who disagrees with an order served upon him

as aforesaid shall have the right to object and appeal. Rule 2
HQPR defines the term artificial arrangements’ as including an
arrangement in terms of which a beneficiary receives any benefit
or payment, in whatever form, from a person who is related to his
employer and such beneficiary does not declare for tax purposes
such benefit or payment in Malta or is not liable to tax on such
income in Malta.
6.5 Gunshot Approach
The Income Tax Act’s primary anti-avoidance provision is contained

in Article 51 ITA. Article 51 may be split into two distinct parts:
The first two sub-articles of Article 51, which incorporate the
general blanket anti-avoidance provision, and the subsequent two
sub-articles which are in reality of a more or less targeted nature.
7. Article 51 (I) ITA
The first sub-article of article 51 prescribes that:
“Where any scheme30 which reduces the amount of tax payable by any person
is artificial or fictitious or is in fact not given effect to, the Commissioner
shall disregard the scheme and the person concerned shall be assessable
accordingly.”
A scheme is an anti-avoidance scheme for the purposes of

Article 51 if it is artificial, fictitious or ‘something’ which is ‘not
given effect to’. The words ‘Where any scheme...is ... not given effect
30 Sub-article 5 of Article 51 ITA defines a ‘scheme’ as including any disposition, agreement,
arrangement, trust, grant, covenant, transfer of assets and alienation of property, whatsoever,
irrespectively of the date on which such scheme was made, entered into or set up.’
to’\cnd themselves to ambiguity because it is unclear what must or

must not be given effect to in order for Article 51 ( 1 ) to be triggered
off. In Case 3531 of the Court of Appeal the latter, unclear limb of
Article 51 was taken to mean a disposition which is not given effect
to32.
A determination relating to whether a transaction is artificial

or fictitious is a question of fact3334
. A transaction is "artificial or
fictitious if it is a paper transaction "...a charade a cloak to conceal
different transactions’^.
8. Article 51 (2) ITA
The second sub-article of Article 51 ITA provides for a second far-

reaching anti-avoidance provision as follows:
‘”2) Where any person, as a direct or indirect result of any scheme of which
the sole or main purpose was the obtaining of any advantage which has the
effect of avoiding, reducing or postponing liability to tax, or of obtaining
any refund or set-off of tax, has obtained or is in a position to obtain such
an advantage, the Commissioner shall, by order in writing, determine the
liability to tax or the entitlement to a refund or set-off of tax of the said
person, or of any other person, for any year of assessment, in such manner
and in such amount as may be necessary, in the circumstances of the case, to
nullify or modify the said scheme and the consequent advantage.”
There is an element of over-lap between the first two sub-articles

of Article 51 ITA and the points of difference between the two
sub-articles are, in practice few35. A scheme is an anti-avoidance
31 Decided on 8 March 1960.

32 In Case 35 the Court, unlike the author, split this provision into two in seeking to give
meaning to the ‘not given effect to’ brainteaser: ‘Ghalhekk hemm zewg alternattivi: jew li jkun
hemm xi operazzjoni fittizja jew li xi disposizzjoni ma tkunx qed tigi esegwita’.
33 IRC v. Gavin (1981) 55 T.C. 24p.62.
34 Eilbeck v. Rawling (1981)54 T.C. 101.
35 Whereas Article 51 ( 1 ) is directed against artificial transactions, Article 51 (2) also catches real
transactions in its net.
scheme if its sole or main purpose is directly or indirectly linked to

the obtaining of any tax advantage. A tax advantage is considered
to be such if it has the effect of avoiding, reducing or postponing
liability to tax, or of obtaining any refund or set-off of tax.
The determining factor is the purpose of the transaction. If the

primary purpose,
‘...is to obtain tax benefits and the transaction would not have been carried
out in absence of those benefits, the transaction...36’
such a transaction constitutes tax avoidance. On the other hand,

a scheme designed mainly or solely to achieve business objectives’
does not fall within the prohibition of Article 5137ITA. Thus, in
BSC43/8638 the Board did not disregard the change in shareholding
of a company even though the change, incidentally, gave rise to a
tax advantage because the change in shareholding was not made
mainly or solely in order to reap a tax advantage.39.
Act XXXIII of 2015 added a new paragraph to 51 (2) ITA;

paragraph (b) reflecting changes to the Parent Subsidiary Directive.
The recently introduced 51 (2) ITA prescribes that:
"(b) The benefits of EU Council Directive 2011/96/ EU on the common

system of taxation applicable in the case of parent companies and subsidiaries
of different Member States (as amended) shall not be granted to any
arrangement or a series of arrangements which, having been put into place for
the main purpose or one of the main purposes of obtaining a tax advantage
that defeats the object or purpose of the said EU Council Directive 2011/
96/EU, are not genuine having regard to all relevant facts and circumstances.
For the purpose of this paragraph -
(i) an arrangement may comprise more than one step or part;
36 Giglio op.cit. p.74.

37 Giglio, J; op.cit. p.79.
38 Decided in November, 1986.
39 Article 51, Cap. 123, refers to tax and the term ‘tax’ is defined as ‘income tax’ in the Income
Tax Act to the exclusion of other taxes. Vide Spiteri, Dr. P; Company Tax Planning under
Maltese Law (University of Malta LL.D. 1988) p.17.
(ii) without prejudice to any remaining genuine steps or parts of any

particular arrangement, an arrangement or a series of arrangements
shall be regarded as not genuine to the extent that they are not put
into place for valid commercial reasons which reflect economic reality;
and
( iii) where a single step or part in an arrangement ora series of arrangements
is, by itself and without regard to the remainder of the arrangement or
series of arrangements, not genuine, the provisions of this paragraph
shall apply only to such step or part that is not genuine, without
prejudice to the remainder of the arrangement or series of arrangements
that are genuine.
The provisions of this paragraph -
(i) implement EU Council Directive 2015/121 of 27 January 2015
amending Directive 2011/96/EU on the common system of taxation
applicable in the case of parent companies and subsidiaries of different
Member States; and
(ii) shall not preclude the application of any other provision in the Income
Tax Acts or any rules issued thereunder concerning the prevention of
tax evasion, tax fraud or abuse.".
Article 51 (3) contemplates another anti-avoidance measure. It

refers to those typically Maltese incestuous relationships sons and
fathers tend to enter into solely for the purposes of cheating the tax
man. It reads as follows,
“(3) Where, as a direct or indirect result of any disposition made during the
life of the disponer, any income is payable to or for the benefit of a child40
in the year immediately preceding the year of assessment, the income shall,
if at the commencement of that year the child was unmarried or has not yet
reached the age of eighteen years, be treated for the purposes of this Act as
the income of the disponer for that year and not as the income of the said
child.”
40 Sub-article 5 defines child’ as including:

(a) a stepchild, or an adopted child, or an illegitimate child of the individual or of the
individual’s spouse; or
(b) a child orphan of or abandoned by either of the parents and living with the individual or
the individual’s spouse;
It seems that Article 51 (3) ITA was copied from the British
Finance Act, 193641 and this factor constitutes yet another reason to
draw from the British experience on anti-avoidance42. The Court of
Appeal confirmed decisions by the Board which ruled that the said
sub-article applies exclusively to dispositions. The Court of Appeal
held that the term ‘disposition is a term which refers exclusively to
transfer by gratuitous title43 as opposed to transactions44 made for
a consideration. The said sub-article refers to bestowals by deed or
gift, being bestowals of income and capital alike45. Consequently
in dealing only in dispositions, Article 51 (3) ITA has a much more
limited scope than sub-article (1) which catches any transaction in
its net46. On the other hand Article 51 (3) ITA does not require the
element of fictitiousness or artificiality provided for in sub-article
(1). Sub-article 3 disregards through dispositions to children
even when such dispositions are not simulated dispositions, even
when such dispositions are not made to elude taxation47. Once
41 Articles 21 (1) and 21 (9) (b) of the Finance Act, 1936. Minor differences exist between the
British and Maltese texts (whereas our provision speaks of‘dispositions’, the British text speaks
of settlements’). The word ‘settlement’ was said to be an alien term in Maltese law and its
principal codes in Case 10 of the Court of Appeal.
42 The leading British judgement on the matter is Thomas v. Marshall when Lord Morton
established that the phrase ‘transfer of assets’ incorporates all kinds of transactions which
would not ordinarily be regarded as settlements. Our Courts also quoted Hood v. Barris
20.11.46.
43 Case 18 of the Court of Appeal decided on March 11,1957.
45 In Case 10 the Court of Appeal noted “Even this argument is not acceptable because the law
does not distinguish between acts transferring income and acts transferring capital.” The ad
hoc definition of‘disposition’ includes transfers of assets.
46 “B’din il-kelma ‘benefit’ tidher izjed palezi 1-intenzjoni tal-legislatur li kien qieghed
jirreferixxi ghal atti a titolo gratuito billi kien qieghed jipprospetta biss il-beneficju ta’ parti
wahda, jigifieri t-tfal mentri fil-kuntratti b’titolu oneruz dak il-beneficcju huwa sperar miz-
zewg kontraenti. Kieku kellha tigi abbraciata 1-interpretazzjoni sottomessa mill-appellant
nominee il-konsegwenza tkun li missier li jkollu negozju u li ma jkunx irid jew ma jkunx
jista’ ikompli f’dak in-negozju jekk jitrasferih b’titolu oneruz lil wiehed mit-tfal tieghu li ma
jkunx mizzewweg ikollu jkompli jhallas it-taxxa kollha hu qiesu dak it-trasferiment ma sarx u
jkollu ukoll ihallas it-taxxa fuq 1-ammont li rcieva bhala korrispettiv ghall-istess trasferiment
minn ghand ibnu, jigifieri zzid ir-rata tat-taxxa li jkollu jhallas; mentri jekk jaghmel dak it-
trasferiment lil barrani jigi mehluz mit-taxxa fuq 1-income tal-haga trasferita. Fi frit kliem dak
il-missier ikun jaqbillu li jaghmel dak it-trasferiment lil barrani a preferenza ta’ ibnu haga li
certament ebda legislatur qatt ma ried biss jikkontempla u inqas jissanzjona.”
47 Case 18 of 1952 is a case in point.
a disposition is made to an unmarried child, in terms of this sub-

article such income is treated as the income of the disponer48.
Article 51 (4) ITA is a targeted anti-avoidance article aimed at

specific tax avoidance behaviour involving companies. It is mainly
aimed at changes in the shareholding of companies and schemes
aimed solely or mainly towards the obtaining of tax advantages,
including deductibles such as losses,
“(4) Where, as a direct or indirect result of any scheme or of any change in

the shareholding of a company income has been received by or has accrued
to the company in the year immediately preceding the year of assessment,
then, unless it is proved that the said scheme had not been entered into, or
the said change had not been effected, solely or mainly for the purpose of
obtaining the benefit of any loss, or of the balance of any loss incurred by the
company in any year preceding the year of assessment, or of any wear and tear
or initial allowances, or of the balance of any such allowances due in respect
of any year as aforesaid, so as to avoid liability on the part of that company or
of any other person to the payment of any tax...”
When Article 51 (4) ITA is infringed the taxpayer loses his right
to avail himself of losses and wear and tear allowances obtained
through the scheme.
11. Local Case-Law on Tax Avoidance
11.1 Old Judgments from the BSC
The Board delivered its first decision on the meaning of term

artificial and fictitious’ in BSC11/5249 which involved the
48 Case 10 of the Court of Appeal decided on May 17,1954.
49 The Court of Appeal subsequently confirmed the Board’s decision in Case 9.
constitution of a family partnership. The Board observed that

the family partnership was run in an unusual manner. No entries
relating to allotment of the partnership’s capital were made in
the accounts of the partnership and capital was divided only in a
second stage upon advice received from the auditor. No payment
was made in return for the subscription to the partnerships capital
and the constitution of the partnership was not made in terms of
the requirements prescribed by commercial law50. The Board51 used
tests analogous to those under the British legal system to establish
whether a partnership was actually in existence and concluded, on
the basis of the facts, that the partnership was not a real partnership
but a fictitious one.
The Board delivered another important decision relating to

the interpretation of Article 51(1) ITA in BSC41/59 when it
pronounced itself on the concept of ‘dispositions not given effect to’.
This case involved a prima facie suspicious series of four notarial
deeds. The first notarial deed consisted in a loan granted by the
taxpayer to his children, the second consisted in a transfer of the
taxpayer s business to his children, the third was a donation made
by the taxpayer to his children and the fourth incorporated a
rescission of one of the earlier agreements and the constitution of
a further loan. The Commissioner opined that the last notarial act
minimised the tax due and accordingly fell within the aegis of the
general anti-avoidance clause. The taxpayer took the matter to the
Board and the Board was asked to determine whether a taxpayer
could enter into a real (as opposed to a fictitious) contract in order
to reduce the tax due by him. The Board noted that the general
anti-avoidance measure hit against the entering into fictitious
transactions and the non-fulfilment of obligations in order to
reduce tax liability. The Board found that the said rescission
could not be classified as an artificial or fictitious transaction in
that it amounted to a genuine annulment of a contract previously
50 The parties did not file an application to obtain a trading licence.
51 Implicitly.
entered into. The parties had a genuine interest to see that contract
rescinded and replaced it with a new bona fide arrangement
which was actually fulfilled. Moreover, the Board added that the
transactions under review did not infringe the second limb of the
general anti-avoidance provision. Although the Commissioner
was correct in pointing out that the parties were not giving effect
to a transaction, the parties were not doing so by failing to fulfil
contractual obligations as the anti-avoidance provision stipulated
but by terminating an obligation by rescission in terms of law52. The
Board held that the anti-avoidance provision hit against the non-
fulfilment of obligations and not the annulment of obligations by
means and rights accorded by the law itselP3. Such annulment of
rights did not amount to a fictitious transaction and consequently
tax avoidance.54
BSC29/68 involved a tax avoidance scheme which fell flat on its

face. In order to escape the tax base a taxpayer arranged his affairs
in such a manner that rents due by him were received directly by
his creditors who were applying such funds against capital and
interest due to them from taxpayers. The Board held that although
the taxpayer did not receive the income the ploy constituted an
application of income and this was chargeable to tax55.
11.2 The Most Recent Judgements
Some interesting judgements on tax avoidance have been delivered

recently. The Court of Appeal delivered an important judgment on
52 “Dwar it-tieni alternattiva kontemplata mill-ligi huwa veru li 1-att kostituttiv tal-vitalizzju
mhuwiex ‘being given effect to’ imma ghar-raguni li 1-istess att ma ghandux izjed jezisti. II-
Bord huwa tal-fehma li 1-Iigi hija applikabbli ghal kontrattazjonijiet li ghadhom jezistu u li
legalment jiwinkolaw il-partijiet u li biex tigi evasa 1-ligi ma jkunux qed jigu esegwiti imma
mhux ghall-operazzjonijiet li legalment qishom qatt ma saru.” From the Board’s decision
published in Case 35 of the Court of Appeal.
53 Article 1168 Cap. 16 of the Laws of Malta.
54 “Il-ligi certament ma tapplikax ghal kazi simili meta ma jkunux fittizji. Intant il-kuntratt
originarju ma jkunx qieghed jigi izjed esegwit, u ma jkunx qieghed jigi esegwit appuntu
ghaliex legalment ma jkunx izjed ezistenti.”
55 January 8, 1969.
tax avoidance is Case 3 of 2009,56 a case which involved a series

of transfers which, according to the Revenue were artificial and
fictitious. The Court of Appeal held that in cases of involving
allegations of tax avoidance there is a reversion of the onus of proof
and that the onus of proof reverts on the Revenue,
“Minn din il-fehma interpretativa tinzel il-konsegwenza illi biex tissussisti

fil-konkret xi wahda minn dawk 1-iskemi din ghandha tigi provata gjaladarba
1-ligi ma tikkreja ebda presunzjoni, favur jew kontra, u, barra minnhekk,
skond il-principju generali tad-dritt, min jallega 1-mala fede jew it-tentattiv
ta’ evazjoni ghandu, boneru, iressaq il-prova, soda u konvincenti, ta’ din
1-allegazzjoni tieghu. Jikkonsegwi fil-kaz partikolari illi kien jinkombi fuq
il-Kummissarju appellanti li jipprova li giet prattikata mill-kumpanija skema
bi hsara tal-Fisco. Ragonevolment, prova bhal din setghet anke tigi estratta
minn indizzji basta li dawn ikunu gravi, determinanti u konklussivi b’mod li
jingeneraw il-konvinzjoni illi t-transazzjoni kienet tabilhaqq mahsuba biex
tigi raggirata 1-ligi;”
The Court of Appeal confirmed that decisions relating to the

existence of a tax avoidance scheme are decisions over a point of
law which cannot be appealed form. In Case 3 of 2009 the Board
had suggested that a tax avoidance scheme could not be presumed’.
To date, the Administrative Review Tribunal has delivered 3

important judgments on avoidance. Case 66/11VG,57 a very well-
written judgment was its first judgment on matters of evasion and
avoidance. The Tribunal’s judgment was largely based on Case 3 of
2009, another remarkable judgment. The Tribunal confirmed that
wrongdoing could not be presumed.
Subsequently, the Administrative Review Tribunal continued

to apply the rule that, whenever avoidance is alleged, the onus on
proof falls on the Revenue. Nonetheless, the most recent judgments
suggest evidence of avoidance need not be overwhelming. The
conclusions reached in Cases 85 /11VG and 278/11VG are entirely
56 17 April, 2009.
57 Discussed above.
symmetrical. Both cases referred to complex restructuring exercises

occurring before the introduction ofvalue-shifting and de-grouping
rules. Both cases led to transfers of beneficial ownership over assets
leading the Tribunal to reach the same conclusion; transfers had
been done to avoid taxation when assets were transferred out.
Case 85 /11VG delivered in 2015 involved a series oftransactions

involving a capitalisation. The ultimate beneficial owner of a group
of companies divided his holding company into two companies.
Initially, title over an immovable property of a substantial value was
retained in one of the companies but, in a second step, the property
was transferred to a newly constituted company and the intra-group
exemption was claimed with respect to the transfer. In a third step,
the ultimate beneficial owner s shareholding in the company was
diluted via an allotment of shares to third parties. Consequently,
the ultimate beneficial owner s right over the asset was significantly
reduced. Following an investigation, the Commissioner concluded
that the whole restructuring exercise was a sham and retracted
the intra-group exemption bringing to charge the transfer of
the property. Taxpayer held that the whole series of transactions
was part of a bona fide restructuring exercise but his objection
was refused. Several years later, with punitive interest running at
exorbitant rates, the Administrative Review Tribunal agreed with
the Revenue. According to the Tribunal the whole restructuring
exercise was undertaken for the sole or main purpose of avoiding
tax on the transfer of the company’s principal asset.58 The Tribunal
58 “Applikati dawn il-principji ghall-fattispecie tal-kaz in ezami wiehed ma jistax ma jasalx ghall-
konkluzzjoni li t-transazzjonijiet esegwiti minn ... tramite d-diversi kumpaniji taghhom kienu
immirati ghal ghan wiehed u uniku u cioè li ma tithallasx it-taxxa dovuta fuq it-trasferiment
tal-... mis-socjetà Rikorrenti a favur is-socjetà ...
It-Tribunal in fine josserva li s-socjetà Rikorrenti tikkritika lill-Kummissarju tat-Taxxi Interni
ghail-fatt li bbaza 1-konkluzzjonijiet tieghu anke fuq il-fatt li iz-zieda fil-kapital tas-socjetà ...
bl-allotment of shares a favur is-socjetà... sehhet fi zmien sentejn mit-trasferiment tal-Parklane
Aparthotel mis-socjetà Rikorrenti lill-istess..., skontu dan mhux tul ta’ zmien apprezzabbli
biex jirrendi tali transazzjoni bhala wahda genwina,. Tikkontendi li dan 1-element ma jistax
jixhet dell ikrah fuq jew addirittura jgib fix-xejn il-genwinità ta' transazzjonijiet effettwati
snin qabel u in sostenn tas-sottomissjoni taghha irreferit ghas-sentenza fl-ismijiet Busuttil &
Busuttil Holdings Ltd v. Kummissarju tat-Taxxi Interni deciza mill-Qorti ta’ 1-Appell (Sede
confirmed the assessment commenting on the pre-ordained series

of transactions’ absence of commercial purpose. In this case the
Tribunal felt compelled to mitigate penalties imposed.
In Case 278/11VG delivered in April 2017 the Tribunal

looked-through’ a series of transfers leading to the transfer of
title over a property. The Tribunal concluded that there had been
tax avoidance because, in its opinion, it had not seen evidence of
an economic or commercial test justifying the complex series of
transactions undertaken. According to the Tribunal, the sole or
main purpose of the restructuring exercise was tax avoidance. The
short interval of time between the steps in the restructuring exercise
was highly suspicious. Quoting extensively from traditional British
case-law59 on tax avoidance, the Tribunal confirmed the assessment
Inferjuri) fis-17 ta’ April 2009, li kienet... It-Tribunal ghalhekk iqis li 1-Kummissarju tat-Taxxi
Interni huwa gustifikat f’li jikkonsidra u jikkonkludi li s-socjetà Rikorrenti kienet involuta
fi skema bl-intenzjoni li tigi eviatat t-taxxa fuq it-trasferiment tai-... u konsegwentement f’li
johrog il-Likwidazzjoni ta’ Taxxa opportuna fir-rigward tas-sena ta’ stima 2002”
59 “Ghall-finijiet ta 1-Artikolu 51 tal-Kap.123 tal-Ligijiet ta Malta u dwar jekk trasferiment
jikkostitwixxix o meno skema artificjali intiza biex jigi evitar il-hlas tat-taxxa dovuta, dak li
ghandu jigi kkunsidrat ma huwiex it-trasferiment tat-proprjetà isolatament, kif tippretendi
s-socjetà Rikorrenti, izda l-elementi kollha marbuta ma' u li jiccirkondaw tali trasferiment,
hekk kif fil-fatt ghamel u debitament ipprova li ghamel il-Kummissarju tat-Taxxi. Din
1-osservazzjoni tat-Tribunal issib konferma a f’dak osservar minn Lord Wilberforce fid-
decizjoni Ramsay Ltd. v. IRC. Dwar il-mertu tal-kaz Lord Wilberforce osserva li: [This] is
an appeal by W. T. Ramsay Ltd., a farming company. In its accounting period ending May
31, 1973, it made a "chargeable gain" for the purposes of corporation tax by a sale-leaseback
transaction. This gain it desired to counteract, so as to avoid the tax, by establishing an
allowable loss. The method chosen was to purchase from a company specializing in such
matters a ready-made scheme. The general nature of this was to create out of a neutral situation
two assets one of which would decrease in value for the benefit of the other. The decreasing
asset would be sold, so as to create the desired loss; the increasing asset would be sold, yielding
a gain that it was hoped would be exempt from tax. Dwar ir-rwol tal-Qorti fir-rigward ta’
skemi intizi ghall-evitar tal-hlas ta’ taxxa u b’mod partikolari fir-rigward ta’ 1-skema ezaminata
fil-kaz in kwistjoni Lord Wilberforce osserva: it is the task of the Court to ascertain the legal
nature of any transaction to which it is sought to attach a tax or a tax consequence and if
that emerges from a series or combination of transactions intended to operate as such, it is
the series or combination which may be regarded ... [It would be ] a faulty analysis, to pick
out, and stop at, the one step in the combination which produced the loss, that being entirely
dependent upon, and merely, a reflection of the gain. The true view, regarding the scheme as a
whole, is to find that there was neither gain nor loss and so I conclude.. Dan 1-istess hsieb gie
ribadit minn Lord Diplock fid-decizjoni Inland Revenue Commissioners v. Burmah Oil: It
would be disingenuous to suggest, and dangerous on the part of those who advise on elaborate
imposing tax on a deemed transfer. The amounts involved were

highly material but the assessment, penalties interest and all
were confirmed in full. An extract from the judgment is being
reproduced hereunder:
“Il-kostituzzjoni tas-socjetà Trenchy Limited bl-ishma allokati ugwalment u

eskulssivament bejn George Farrugia u Emanuel Zammit u t-trasferiment ta’
tali shareholding favur terzi, senjatament favur 1-ahwa Montebello tramite
s-socjetajiet taghhom JPM Brothers Limited u Samirjess Limited, fuq
medda ta’ zmien ferm qasir - ossia bejn bejn 1-20 ta’ Jannar 2003 - frit xhur
qabel it-trasferiment tal-proprjetajiet f’Rahal Gdid, tas-Sliema u Bugibba
mis-socjetà Rikorrenti a favur is-socjetà Trenchy Limited - u 1-31 ta’ Lulju
2003 - frit xhur wara 1-imsemmi trasferiment, huma bla dubju ta’ xejn fatturi
importanti u determinanti ghall-konsiderazzjoni jekk it-trasferiment in
kwistjoni ghandux jitqies li ma huwa xejn ghajr skema fittizja jew artificjali
intiza unikament biex jigi evitat il-hlas tat-taxxa dovuta. Ghalkemm is-socjetà
Rikorrenti tramite r-rapprezentanti taghha George Farrugia u Emanuel
Zammit, tikkontendi li f’tali transazzjonijiet il-Kummissarju tat-Taxxi
qed jara affarijiet u johloq suspetti li in verità ma jezistux, 1-istess George
Farruga u Emanuel Zammit ma tawx spjegazzjoni sodisfacenti ghalfejn
fuq medda ta’ ftit xhur mill-kostituzzjoni tas-socjetà Trenchy Limited
ittrasferew is-shareholding kollu taghhom f’dik is-socjetà a favur 1-ahwa
Montebello 1-ewwel bl-allokazzjoni ta’ ishma a favur JPM Brothers Limited
tax avoidance schemes to assume, that Ramsays case did not mark a significant change in the
approach adopted by this House in its judicial role to a preordained series of transactions
(whether or not they include the achievement of a legitimate commercial end) into which
there are inserted steps that have no commercial purpose apart from the avoidance of a liability
to tax that, in the absence of those particular steps, would have been payable u mill-gdid minn
Lord Brightman fid-decizjoni Furniss v. Dawson: first, there must be a pre-ordained series of
transactions; or, if one likes, one single composite transaction. This composite transaction
may or may not include the 16 achievement of a legitimate commercial (i.e. Business) end.
... Secondly, there must be steps inserted which have no commercial (business) purpose apart
from the avoidance of a liability to tax - not “no business effect”. If those two ingredients exist,
the inserted steps are to be disregarded for fiscal purposes. The court must then look at the
end result. Precisely how the end result will be taxed will depend on the terms of the taxing
statute sought to be applied u iktar recenti fid-decizjoni Schofield v. HMRC which involved a
capital gains tax avoidance scheme. The Upper Tribunal confirmed that four option contracts
forming part of the avoidance scheme constituted a single, composite transaction and so
the scheme failed to achieve the desired tax advantage. Akin to earlier case law, the Upper
Tribunal applied existing case law, to disallow the scheme on the basis of the circularity of the
transaction. The Tribunal focused on rhe ultimate outcome of the scheme, therefore making
it more difficult for taxpayers contemplating such schemes to avoid a challenge by HMRC by
contriving to design a tax avoidance scheme to appear more commercial.”
u Samirjess Limited u finalment bit-trasferiment ta 1-ishma taghhom a favur

JPM Brothers Limited, bil-konsegwenza li 1-proprjetà trasferita lis-socjetà
Trenchy Limited effettivament ghaddiet f 'idejn terzi persimi...
Meta allura jigi kkunsidrat li: (a) sa mill-2001 kienu 1-ahwa Montebello u
mhux George Farrugia u/jew Emanuel Zammit u/jew is-socjetà Rikorrenti
li kienu qed juru interess attiv fl-izvilupp ta’ 1-art sitwata fir-Rahal Gdid; li
(b) is-socjetà Trenchy Limited, ghad illi giet kostitwita bi shab bejn George
Farrugia u Emanuel Zammit, già socji fis-socjetà Rikorrenti, fl-20 ta Jannar
2003, fuq medda ta’ frit xhur, senjatament bejn Jannar 2003 u Lulju 2003,
ghaddiet fil-kontroll komplet u assolut proprio ta’ 1-ahwa Montebello; u li
(c) il-proprjetajiet akkwistati minn Trenchy Limited gew immedjatament
utilizzati bhala garanzija kontra self li s-socjetà Samirjess Limited hadet
minghand 1-HSBC Bank Malta p.l.c., 1-unika konkluzjoni li wiehed jista’
jasal ghaliha hi li s-socjetà Rikorrenti riedet tittrasferixxi 1-proprjetajiet
in kwistjoni lill-ahwa Montebello tramite s-socjetajiet taghhom, u li
t-trasferiment ta’ 1-istess proprjetajiet mis-socjetà Rikorrenti a favur is-socjetà
Trenchy Limited in forza tal-kuntratt fl-atti tan-Nutar Dottor Bartolomeo
Micallef datata 28 ta Aprii 2003, kien biss veikolu biex is-socjetà Rikorrenti
tevita li thallas it-taxxa dovuta fuq tali trasferiment, liema taxxa hija taxxa a
tenur ta’ 1-Artikolu 4(1)(a) tal-Kap.123 tal-Ligijiet ta’ Malta...
Kuntrarjament ghal dak pretiz mis-socjetà Rikorrenti, fid-Decizjoni
appellata il-Kummissarju tat-Taxxi mhux qed jghid jew jimplika li s-socjetà
Rikorrenti ippruvat tevadi 1-hlas tat-taxxa fuq il-qligh kapitali qual’ volta
dovut a tenur ta’ 1-Artikolu 5 tal-Kap.123 tal-Ligijiet ta Malta, imma dak
li qed jghid huwa li bil-mod kif gie imfassal it-trasferiment tal-proprjetajiet
f’Rahal Gdid, Tas-Sliema u Bugibba mis-socjetà Rikorrenti a favur is-socjetà
Trenchy Limited, is-socjetà Rikorrenti ppruvat tevadi 1-hlas tat-taxxa dovuta
fuq tali trasferiment, bin-natura tat-taxxa tigi determinata fid-dawl jekk it-
trasferiment ghandux jitqies bhala negozju jew inkella bhala trasferiment
ta assi kapitali. Una volta li 1-Kummissarju tat-Taxxi gustament wasal ghall-
konkluzjoni li t-trasferiment kif imfassal ma kien xejn ghajr skema artificjali
intiza biex jigi evitat il-hlas ta’ taxxa dovuta, huwa necessarjament kellu
jikkonkludi li fl-ewwel lok 1-esenzjoni kontemplata fl-Artikolu 5(9) tal-
Kap.123 tal-Ligijiet ta’ Malta ma tapplikax ghal dan it-trasferiment, u dana
billi c-cirkostanzi tat-trasferiment bhala intra group transfer gew imfassla bi
skop preciz ta’ evazjoni tat-taxxa, u fit-tieni lok li hija dovuta taxxa a tenur ta’
1-Artikolu 4(1 )(a) tal-Kap.123 tal-Ligijiet ta’ Malta in kwantu t-trasferiment
in kwistjoni ma kien xejn ghajr negozju car ta’ trasferiment ta’ trading stock
tas-socjetà Rikorrenti a favur 1-ahwa Montebello.”
11.3 Refund Blocking

Act I of 2010 introduced a provision which is extremely effective
in ensuring tax compliance. Income tax refunds are not paid to
persons who are not in line with the VAT Act,
“(IB) Notwithstanding the provisions of subarticle (1), in no case shall any

refund be made under this Act to any person registered for the purpose of the
Value Added Tax Act, unless and until such person has filed all tax returns or
declarations required to be furnished for the purpose of the Value Added Tax
Act in respect of tax periods up to and including the last complete tax period
in the year preceding that in which the refund would have been payable but
for the application of this subarticle.”
A similar provision60 referring to compliance with FSS law was

added by Act VII of 2019.
11.4 Power to Make Rules
Act II of 2004 fortified the Revenues anti-avoidance arsenal by

added the following sub-article to Article 5 ITA61,
“(17) The Minister may make rules making provision for the purpose
of removing the effect of any scheme made for the purpose of avoiding,
reducing or postponing any tax due under this article, and in addition the
Minister may make rules providing that any transfer of any right referred
to in subarticle (1) hereof shall only be valid if it is made by agreement in
writing and if payment of such portion of the provisional tax on the capital
gains due thereon is made as may be prescribed and if the said agreement is
registered in such manner as may be prescribed with such authority as may
be prescribed.”
/ 2. Advance Revenue Rulings
Article 52 ITA grants taxpayers the right to apply for and obtain
an advance revenue ruling which confirms their opinion relating
60 Article 48(1 A) ITMA.
61 Dealing with capital gains.
to the tax treatment of a particular transaction. It grants tax payers

legal certainty by providing taxpayers with the right to receive a
ruling which confirms that the Revenue will not apply the anti
avoidance provisions discussed above to their transaction. Article
52 ITA was amended by Act II of 2007 which incorporated a
transitory provision, added a new sub article (sub article 5A) and
added a proviso to sub article 8. Article 52 ITA is split up in 6 main
sub-articles, each of which will be discussed below.
Article 52 (1) of the Income Tax binds the Commissioner to

grant rulings, upon an application being made by a company which
is a party to a transaction, as to whether a transaction amounts to a
tax avoidance scheme or otherwise. The said sub-article does not
limit the scope of such ruling to any specific type of business and
speaks of ‘any transaction. The only condition for the issue of the
said rulings is that the Commissioner must issue the said ruling
only if he is satisfied ‘that the transaction is to be effectedfor bonafide
commercial reasons’.
Article 52 (2) binds the Commissioner62, upon application

being made by any63 person64, to rule whether a holding constitutes
a participating holding for the purposes of paragraph (f ) of the
definition of ‘participating holding in article 265. Similarly, the
Commissioner is bound to, upon the application any person which is
a company, notify his ruling on the tax treatment of any transaction
which concerns any financial instrument or other security66.
The Commissioner is likewise bound by Article 52 (3) ITA to,

upon on the application ofany person67, notify his ruling on the tax

63 The use of the word ‘any’ appears to theoretically not require any form of juridical interest.
64 Unlike other cases not only companies;
65 And consequently whether income flowing from such a holding would be covered by the
refund mechanism. However the latter matter would not be provided for in the ruling itself.
67 Not necessarily a company.
treatment of any transaction, which involves international business.

However, the said imposition on the Revenue is somewhat
mitigated by the fact that it is the Commissioner who determines
what constitutes international business68.
Article 52 (4) ITA binds the Commissioner likewise to rule,

upon an application being made by any person, as to whether a
company qualifies as an international trading company69.
Article 52 (5) ITA speaks of advance revenue rulings relating

to the status of companies as International Trading Companies
(‘ITC’) but Act II of2007 established that no ITC status ruling can
be granted in respect of a company which was a company registered
in Malta on or after 1 January 2007 but was not resident in Malta
before that date. Companies registered in Malta between the 18
April 2006 and 31 December 2006 which would like to obtain a
ruling relating to ITC status must apply for a ruling by not later
than 30 June 2007.
Act II of 2007 added Article 52 (5A) ITA to the ITA. Article

52 (5A) ITA is linked to the anti-abuse provision contemplated
in Article 48 (4A) ITMA which excludes from the purview of
the refundable tax credit system70 a company incorporated after 1
January 2007 whose trade consists in the same business, expansion,
duplication, replacement of a business carried on before 1 January
2007. Article 52 (5A) ITA grants persons who establish Maltese
subsidiaries the necessary peace of mind relating to their right to
benefit in terms of the new system by providing them with formal
written confirmation that the activities they envisage for their new
business is not considered to be a duplication of an old business
provision that new investors. Article 52 (5A) ITA prescribes that
the Commissioner shall, on the application of any person, notify

70 Up to 31 December 2010.
his ruling that a company is not precluded from being a company

to which the new refundable tax credit system applies.
Applications for rulings must be made in writing and must

contain all material particulars of the transactions to be effected.
The Commissioner must notify his ruling to the applicant
within thirty days of receiving the application. A ruling by the
Commissioner remains binding on the Commissioner for a period
of two years from the time of any relevant change in statutory
provisions subsequent to such ruling, or for a period of five years
from the time of such ruling, whichever is the lesser.
A ruling by the Commissioner may, at the option of the

applicant, be renewed for a further period of five years. However
rulings relating to ITCs, including any renewal of such rulings, are
not effective as from 1 January 201171.
Act IV of 2011 grants the Minister the power to enact laws

levying fees with respect to rulings, certificates and registrations.
/ 3. The Transposition of the ATAD 172
In December 2018, the Minister for Finance transposed the Anti

Avoidance Directive (‘the Directive’) by L.N. 411 of 2018, a legal
notice that faithfully transposes the contents of the Directive
which came to be known as ATAD l.73 L.N.411 transposes ATAD
1 almost lock stock and barrel reproducing most of its contents
verbatim. Discussing the contents of ATAD 1 in detail is beyond
the scope of this book.
71 Articles 52 (6) - 52 (8) ITMA.

72 COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 laying down rules against tax
avoidance practices that directly affect the functioning of the internal market.
73 COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016.
ATAD 1 put forward some major tax policy changes to Maltese

law because it provided for a genre of norms that were previously
not contemplated in Maltese tax law at all. ATAD 1 provides
structured mandatory Controlled foreign company (CFC) rules
(to deter profit shifting to a low/no tax country) and Exit taxation
(to prevent companies from avoiding tax when re-locating assets),
two genres of norms that were previously not be found in Maltese
law. In addition, ATAD 1 introduced Interest limitation rules to
discourage artificial debt arrangements designed to minimise taxes
and a General anti-abuse rule (GAAR) to counteract aggressive
tax planning. Although Maltese law74 did previously provide for
some basic interest limitation rules, the policy impact of interest
limitation rules driven by ATAD is expected to be significant.
Given that the wording of the GAAR contemplated by ATAD is
comparable to the wording in Article 51 ITA, ATAD s introduction
of a new GAAR is not expected to leave a huge impact. Targeted
rules on hybrid mismatches will leave an impact too.
Exit Taxation
Rules on Exit Taxation are contemplated in Article 5 of the
Directive as transposed in Rule 5 of L.N. 511 with the wording of
the two legal instruments being very similar75. Article 5 and Rule
5 provide for an imputed taxable gain that is triggered whenever
certain transfers occur.
The two legal instruments provide that a taxpayer shall be

subject to tax at an amount equal to the market value of the
transferred assets, at the time of exit of the assets, less their value for
tax purposes, in any of the following circumstances:
74 Both Maltese statutory law and case-law provide for interest deduction limitation rules. Article
26 (h) ITA provides for a statutory law interest deduction limitation. Case law providing for
interest deduction limitation rules includes BSC 23/64, BSC 28/1961,8/1963,21/1963 ,
14/1968,36/1969,45/1969 and Case 60 of the Court of Appeal.
75 Albeit non-identical because Rule 5 refers to the concept of a tax on capital gain.
(a) a taxpayer transfers assets from its head office to its

permanent establishment in another Member State or
in a third country in so far as the Member State of the
head office no longer has the right to tax the transferred
assets due to the transfer;
(b) a taxpayer transfers assets from its permanent
establishment in a Member State to its head office or
another permanent establishment in another Member
State or in a third country in so far as the Member State
of the permanent establishment no longer has the right
to tax the transferred assets due to the transfer;
(c) a taxpayer transfers its tax residence to another Member
State or to a third country, except for those assets
which remain effectively connected with a permanent
establishment in the first Member State;
(d) a taxpayer transfers the business carried on by its
permanent establishment from a Member State to
another Member State or to a third country in so far as
the Member State of the permanent establishment no
longer has the right to tax the transferred assets due to
the transfer.
Both Legal instruments provide for the possibility of a tax

deferral. Paragraph 2 of Article 5 of the Directive and paragraph
2 of Rule 5 of the L.N. prescribe that a taxpayer shall be given the
right to defer the payment of exit tax by paying it in instalments
over five years, in any of the following circumstances:
(a) a taxpayer transfers assets from its head office to its

permanent establishment in another Member State or
in a third country that is party to the Agreement on the
European Economic Area (EEA Agreement)76;
76 Tax deferral applies to third countries that are party to the EEA Agreement if they have
concluded an agreement with the Member State of the taxpayer or with the Union on the
mutual assistance for the recovery of tax claims, equivalent to the mutual assistance provided
(b) a taxpayer transfers assets from its permanent

establishment in a Member State to its head office or
another permanent establishment in another Member
State or a third country that is party to the EEA
Agreement;
(c) a taxpayer transfers its tax residence to another Member
State or to a third country that is party to the EEA
Agreement;
(d) a taxpayer transfers the business carried on by its
permanent establishment to another Member State or a
third country that is party to the EEA Agreement.
If a taxpayer defers payment of exit tax, interest may be

charged and if there is a demonstrable and actual risk of non
recovery, taxpayers may also be required to provide a guarantee as
a condition for deferring the payment. In certain cases, the deferral
of payment is discontinued and the tax debt becomes recoverable
immediately.77
for in Council Directive 2010/24/EU.

77 Namely when:
(a) the transferred assets or the business carried on by the permanent establishment of the taxpayer
are sold or otherwise disposed of;
(b) the transferred assets are subsequently transferred to a third country;
(c) the taxpayer's tax residence or the business carried on by its permanent establishment is
subsequently transferred to
a third country;
(d) the taxpayer goes bankrupt or is wound up;
(e) the taxpayer fails to honour its obligations in relation to the instalments and does not correct its
situation over
a reasonable period of time, which shall not exceed 12 months.
Points (b) and (c) shall not apply to third countries that are party to the EEA Agreement if they have
concluded an
agreement with the Member State of the taxpayer or with the Union on the mutual assistance for
the recovery of tax
claims, equivalent to the mutual assistance provided for in Directive 2010/24/EU.
The CFC Rule

Article 7 of the Directive puts forward a CFC Rule. Article 7 has
been transposed via Rule 7 of L.N. 411.
The Directive provides that an entity, or a permanent

establishment of which the profits are not subject to tax or are
exempt from tax in that Member State, shall be treated as a
controlled foreign company where the following conditions are
met:
(a) in the case of an entity, the taxpayer by itself, or together

with its associated enterprises holds a direct or indirect
participation of more than 50 percent of the voting
rights, or owns directly or indirectly more than 50
percent of capital or is entitled to receive more than 50
percent of the profits of that entity; and
(b) the actual corporate tax paid on its profits by the entity
or permanent establishment is lower than the difference
between the corporate tax that would have been charged
on the entity or permanent establishment under the
applicable corporate tax system in the Member State
of the taxpayer and the actual corporate tax paid on its
profits by the entity or permanent establishment.78
Where an entity or permanent establishment is treated as a

controlled foreign company, the taxpayers tax base is deemed to
include:
(a) the non-distributed income of the entity or the income

of the permanent establishment which is derived from
the following categories:
78 The permanent establishment of a controlled foreign company that is not subject to tax or is
exempt from tax in the jurisdiction of the controlled foreign company shall not be taken into
account. Furthermore the corporate tax that would have been charged in the Member State of
the taxpayer means as computed according to the rules of the Member State of the taxpayer.
(i) interest or any other income generated by financial

assets;
(ii) royalties or any other income generated from intellectual
property;
(iii) dividends and income from the disposal of shares;
(iv) income from financial leasing;
(v) income from insurance, banking and other financial
activities;
(vi) income from invoicing companies that earn sales and
services income from goods and services purchased
from and sold to associated enterprises, and add no or
little economic value;
Where an entity or PE is treated as a CFC, ATAD 1 provides

Member States with two options for CFC taxation. Malta has
opted for option B namely CFC taxation of non-distributed
income of the entity or PE arising from non-genuine arrangements
which have been put in place for the essential purpose of obtaining
a tax advantage.
An arrangement or a series thereof shall be regarded as non-

genuine to the extent that the entity or PE would not own the
assets or would not have undertaken the risks which generate all,
or part of, its income if it were not controlled by a company where
the significant people functions, which are relevant to those assets
and risks, are carried out and are instrumental in generating the
controlled company’s income, provided that the said company is
the taxpayer and the said significant people functions are carried
out in Malta.
In addition, Malta has applied the option to exclude from the

scope of CFC taxation, an entity or PE with:
• accounting profits < €750,000 and non-trading income
of <€75,000; or
• accounting profits < 10% of its operating costs;
In computing the CFC income, the income to be included in

the tax base of the taxpayer must be limited to amounts generated
through assets and risks which are linked to significant people
functions carried out by the controlling company. The attribution
of CFC income shall be calculated in accordance with the arm’s
length principle.
The Interest Deductibility Limitation Rule

Rule 4 of Ln. 411 draws heavily from Article 4 of ATAD
prescribing that: exceeding borrowing costs shall be deductible in
the tax period in which they are incurred only up to 30 percent
of the taxpayer's earnings before interest, tax, depreciation and
amortisation (EBITDA).
For the purpose of this rule, in accordance with guidelines

issued by the Commissioner, Malta may also treat as a taxpayer:
(a) an entity which is permitted or required to apply the

rules on behalf of a group, as defined according to
national tax law;
(b) an entity in a group, as defined according to national
tax law, which does not consolidate the results of its
members for tax purposes.
In such circumstances, exceeding borrowing costs and the

EBITDA may be calculated at the level of the group and comprise
the results of all its members.
The EBITDA shall be calculated by adding back to the income

subject to corporate tax in the Member State of the taxpayer the
tax-adjusted amounts for exceeding borrowing costs as well as
the tax-adjusted amounts for depreciation and amortisation. Tax
exempt income shall be excluded from the EBITDA of a taxpayer.
By derogation from paragraph 1, Malta has given taxpayers the

right:
(a) to deduct exceeding borrowing costs up to EUR 3 000

000;
(b) to fully deduct exceeding borrowing costs if the taxpayer
is a standalone entity.
For the purposes of the second subparagraph of paragraph 1,

the amount of EUR 3 000 000 shall be considered for the entire
group.
For the purposes of point (b) of the first subparagraph, a

standalone entity means a taxpayer that is not part of a consolidated
group for financial accounting purposes and has no associated
enterprise or permanent establishment.
Malta has exercised the option to exclude from the scope of the
interest limitation rule exceeding borrowing costs incurred on:79
(a) loans which were concluded before 17 June 2016,

but the exclusion shall not extend to any subsequent
modification of such loans;
(b) loans used to fund a long-term public infrastructure
project where the project operator, borrowing costs,
assets and income are all in the Union.
For the purposes of point (b) of the first subparagraph, a long

term public infrastructure project is defined as meaning a project
to provide, upgrade, operate and/or maintain a large-scale asset
that is considered in the general public interest by a Member State.
79 Malta has exercised the option adding a condition to (b) ‘where the CfR is satisfied that the
financing arrangements for the project have special features which justify such treatment with
regards to other financing arrangements subject to the provisions of L.N. 411’.
Where point (b) of the first subparagraph applies, any income

arising from a long-term public infrastructure project shall be
excluded from the EBITDA of the taxpayer, and any excluded
exceeding borrowing cost shall not be included in the exceeding
borrowing costs of the group vis-à-vis third parties referred to in
point (b) of paragraph 5.
Where the taxpayer is a member of a consolidated group for

financial accounting purposes, Malta applied option (a) from para.
5 of Art. 4 of the ATAD 1.
To this effect, the taxpayer has been given the right to fully
deduct its exceeding borrowing costs if it can demonstrate that
the ratio of its equity over its total assets is equal to or higher than
the equivalent ratio of the group and subject to the following
conditions:
(i) the ratio of the taxpayers equity over its total assets is
considered to be equal to the equivalent ratio of the
group if the ratio of the taxpayer s equity over its total
assets is lower by up to two percentage points; and
( ii) all assets and liabilities are valued using the same method
as in the consolidated financial statements.
In the case of para. 6 of Art. 4 of the ATAD 1, Malta applied
option (c). To this effect, the taxpayer has been given the right to
carry forward, without time limitation, exceeding borrowing costs
and, for a maximum of five years, unused interest capacity, which
cannot be deducted in the current tax period under para. 1 to 5 of
regulation 4.
Para. 7 ofArt. 4 of the ATAD 1 provides for the option to exclude

financial undertakings from the scope of the interest deduction
limitation rules, including where such financial undertakings are
part of a consolidated group for financial accounting purposes.
Malta has applied this option.
The GAAR Rule

Article 6 of the Directive puts forward a new anti-avoidance
provision that significantly overlaps with Article 51 ITA. The
GAAR added by the Directive and transposed in Rule 6 of L.N.
411 prescribes that, for the purposes of calculating the corporate
tax liability, there shall be ignored an arrangement or a series of
arrangements which, having been put into place for the main
purpose or one of the main purposes of obtaining a tax advantage
that defeats the object or purpose of the applicable tax law, are not
genuine having regard to all relevant facts and circumstances. An
arrangement or a series thereof is regarded as non-genuine to the
extent that they are not put into place for valid commercial reasons
which reflect economic reality.
Appendix
The 2019 Tax Consolidation Rules
S.L. 123. 189 INCOME TAX ACT (CAP. 123)

Consolidated Group (Income Tax) Rules, 2019 (the
‘CGR’;)
In the words of Article 22 A ITA,1 the relevant enabling provision,

the CGR provide for a legal framework:
( a) allowing bodies of persons under common ownership to

elect to compute and bring to charge their chargeable
income or losses on a collective basis; and
(b) to comply with the provisions of the ITA as if they are a
single body of persons.
Conditions Regulating Eligibility to Fiscal Unity
The CGR use the term ‘Fiscal Unit’ to describe bodies of persons12
under common ownership that elect to compute and bring to
charge their chargeable income or losses on a collective basis, filing
a single tax return as a single body of persons
1 Passed by Act III of 2013

2 Whereas Article 22A speaks of bodies of persons, the CGR use the term ‘company’.
Rules 3 CGR is one of the most important rules in the CGR by

establishing that a parent345 company4 may make an election5 in order
for itself and its 95% subsidiary to form a fiscal unit. Rule 3 (5)
prescribes that no company shall form part of more than one fiscal
unit at any one time.
The proviso to Rule 3 (1) explains that a parent company

may make an election in order for itself and its 95% subsidiary
to be treated as a fiscal unit if, besides falling under the relevant
definitions, they have accounting periods beginning and ending on
the same dates.
A special requirement is contemplated Rule 3 (2) for a 95%

subsidiary which is not a 100% subsidiary6 - an election shall also
require the approval of the holders of the equity shares which are
not owned, directly or indirectly, by the parent company.
3 ‘Parent company’ and ‘company’ are defined in Rule 2.
The term "parent company" means a company that holds shares in another company (‘the
subsidiary company’) that, in the year prior to the year of assessment in which an election is
made, meets any two of the following conditions:
(a) the parent company holds at least 95% of the voting rights in the subsidiary company;
(b) the parent company is beneficially entitled to at least 95% of any profits available for
distribution to the ordinary shareholders of the subsidiary company;
(c) the parent company would be beneficially entitled to at least 95% of any assets of
the subsidiary company available for distribution to its ordinary shareholders on a
winding up.
4 Rule 2 defines the term ‘company’ by cross-referring to Article 2(1) ITA specifying that the
term is taken to INCLUDE:
(a) a trust arrangement whose trustee has made an election in terms of article 27D(l)(a) of
the Act; and (b) a foundation as defined in the Foundations (Income S.L. 123.114 Tax)
Regulations,
and EXCLUDE:
(i) a foundation whose administrators have made an election in terms of rule 4 of the
Foundations (Income Tax) Rules;
(ii) a securitisation vehicle in terms of the Securitisation Act; and
(iii) a finance leasing company as defined in the Finance Leasing Rules.
A proviso in Rule 2 defines 95% subsidiary as a subsidiary company of a parent company
that meets any two of the conditions set out in paragraphs (a) to (c) of the definition
above.
5 By submitting the form contemplated in Rule 3 (6).
6 A definition of‘100% subsidiary’ is contained in the second proviso in the definition
of‘parent company’ in Rule 2 (viz. a 100 % subsidiary exists when both of the satisfied
conditions are satisfied at a percentage of 100%.
Appendix: The 2019 Tax Consolidation Rules 625
Rule 3 (2) begins to speak of the concept of transparent

subsidiary, a term that becomes relevant in Rule 3 (4) providing
that where a parent company has made an election in respect of its
95% subsidiary and the 95% subsidiary is itself a parent company
of one or more transparent subsidiaries, the 95% subsidiary and
its transparent subsidiaries shall join the fiscal unit of the parent
company of the said 95% subsidiary.
Principal Taxpayer to Absorb Balances
Rules 4 and 5 provide rules regulating joining and exiting a fiscal

unit. Rule 4(1) prescribes that where a 95% subsidiary joins a fiscal
unit:
(a) the balance of any item allowed to be carried forward

or any other tax credits that may be carried forward in
terms of any other law, and
(b) the balance of any profits allocated to the tax accounts,
excluding the untaxed account, of the 95% subsidiary
existing at the end of the basis year preceding that with
regard to which the election for the 95% subsidiary to
join the fiscal unit becomes effective, shall be considered
to be a balance of the principal taxpayer as from the
basis year with regard to which the election for the 95%
subsidiary to join the fiscal unit becomes effective.
In the case of a 95% subsidiary that is not a 100%
subsidiary the aggregation is subject to the approval
of the equity shares that are not owned by the parent
company.
Chargeable Income af the Fiscal Unit
Rule 6 regulates how the chargeable income of a fiscal unit is

determined. Rule 6 prescribes that the chargeable income of a fiscal
unit for a year of assessment shall be computed as if such income
was derived by the principal taxpayer and is charged to tax in the
name of the principal taxpayer at the relevant rates of tax.
Detailed computational rules governing the members of the

fiscal unit and the principal taxpayer especially are contained in the
long proviso to Rule 6(1) which shall be briefly analysed hereunder.
The Ignored Transaction Rule
All transactions7 occurring between two or more companies

forming part of the fiscal unit are classified as ‘ignored transactions’
and are deemed not to have occurred. Two exceptions to ‘the
ignored transaction rule’ apply:
(i) transactions falling within the purport of article 5 A of

the Act or transactions involving the transfer of shares
in a property company are not treated as ignored
transactions:
(ii) Dividends distributed by a transparent subsidiary to
its parent company out of taxed profits that it derived
prior to it becoming a transparent subsidiary shall not
be considered to be an ignored transaction and shall be
deemed to be dividend income derived by the principal
taxpayer of the fiscal unit of which the transparent
subsidiary forms part.
All income derived by companies forming part of the fiscal unit

in the year preceding the year of assessment and which are not
7 Including any receipts, payments, revenues, expenses, transfers of assets, distributions, accruals
or otherwise in the year preceding the year of assessment.
ignored transactions shall be deemed to be derived by the principal

taxpayer. Any such income shall retain the same character and shall
be deemed to have been derived from the same source and the
same country and be allocated to the same tax account as if the said
income was received by the said principal taxpayer.
Special Treatment of Deductions
Subject to certain conditions,8 all outgoings and expenses incurred

by companies forming part of the fiscal unit in the year preceding
the year of assessment and which are not ignored transactions shall
be deemed to be incurred by the principal taxpayer.
Any industrial building, structure or plant and machinery used

or employed in acquiring income by a company forming part of
the fiscal unit shall be deemed to be so used or employed by the
principal taxpayer in acquiring the said income. For the purposes
of compliance obligations stemming from the balancing statement
rules and other rules pertinent to capital allowances, transfers of
assets from and to members of the fiscal unit are disregarded.
8 Further provisos to the proviso to Rule 6(1) confirm that expenses are deductible against
income attributable to the principal taxpayer if they are deductible in terms of Articles 14
to 26 ITA and that it shall be deemed that activities or transactions carried on by any person
comprised within the fiscal unit are carried out by the principal taxpayer. A further proviso
explains that where any outgoings or expenses would have been deductible, save for the
application of these rules, against income which is deemed not to have arisen as a result of the
application of the provisions of paragraph (a), such outgoings or expenses shall be deductible
against income attributable to the principal taxpayer as set out in paragraph (b), if, in the
absence of a fiscal unit:
(i) such outgoings or expenses would have been deductible against income derived by a
company, and
(ii) the expense resulting from the income generated by the company referred to in sub
paragraph (i) would have been deductible in another company:
Attribution Rules
Subject to substance requirements,9 any income or gains derived

by a transparent subsidiary that is not resident in Malta shall be
deemed to be attributable to a permanent establishment of the
principal taxpayer situated outside Malta.
Where any income or gains are derived by a transparent subsidiary

resident in Malta, or a transparent subsidiary not resident in Malta
derives income or gains arising in Malta and the principal taxpayer
is a person to whom the remittance basis of taxation applies all
of the income and gains derived by the transparent subsidiary
resident in Malta is deemed to arise in Malta. In addition, income
and gains arising in Malta of the transparent subsidiary which is
not resident in Malta is attributable to the principal taxpayer.
Nonetheless, when the transparent subsidiary resident in Malta is a
person subject to the remittance basis of taxation, the income and
gains attributable to the principal taxpayer shall be such income
and gains as arise in Malta and such income as arises outside Malta
but which is received in Malta;
Any interest held by a transparent subsidiary in any body of

persons not forming part of the fiscal unit shall be deemed to be
held directly by the principal taxpayer;
Rule 7 regulates issues relating to double tax relief prescribing

that any foreign tax suffered by a company forming part of the
fiscal unit shall be deemed to have been incurred by the principal
taxpayer, and where evidence of such foreign tax is in the name of
a company forming part of the fiscal unit, it shall be deemed that
such evidence is in the name of the principal taxpayer.
9 The proviso to the proviso in 6 (1) CGR refers to ‘sufficient substance in terms of physical
presence, personnel, assets or other relevant indicators, as is commensurate with the type and
extent of activity being carried out in the relevant jurisdiction’.
NID and Refundable Tax Credit System
For the purposes of the NID Rules, the risk capital of the principal
taxpayer is calculated in a particular way.10
Rule 6 (2) regulates the ‘phenomenon’ occurring when

members of a fiscal unit avail themselves of the refundable tax
credit system. Rule 6 (2) prescribes that when the refundable
tax credit system applies to a shareholder of a company that
forms part of a fiscal unit upon a receipt of a dividend from
such company and such shareholder is specifically empowered
to consolidate its results pursuant to Maltese law, the chargeable
income of the fiscal unit shall be fully subject to the standard rate
applicable to the principal taxpayer determined by deducting
from it that resulting from dividing the total amounts claimable
by all members of the fiscal unit and, or persons entitled to
receive distributions from the principal taxpayer in terms of the
provisions of the relevant sub-articles, by the chargeable income
of the fiscal unit. Naturally, Rule 6 (3) confirms that tax paid in
terms of 6 (2) is not refundable under the refundable tax credit
system.
The CGR and TAR
Rule 8 explains how Tax Consolidation dovetails with the Tax

Accounting Rules; the principal taxpayer shall be required to
allocate profits attributable to it in terms of the rules to the same*
(ii)
10 The risk capital is deemed to be:

(i) where the principal taxpayer is resident in Malta, the share capital, any share premium,
positive retained earnings, loans or other debt borrowed by the undertaking which do
not bear interest, and any other reserves resulting from a contribution to the undertaking,
and any other positive balance which is shown as equity in the consolidated balance sheet
prepared in terms of rule 11 ; and
(ii) where the principal taxpayer is not resident in Malta, that part of the risk capital, as
defined in, of that principal taxpayer that is attributable to the fiscal unit.
tax accounts and in the same manner as it otherwise would have,

had it derived those profits directly. The distributable profits of
the transparent subsidiaries shall be allocated to the untaxed
account. Immovable property situated in Malta that is owned by
a company forming part of the fiscal unit is deemed to be owned
by the principal taxpayer. Rule 8 (3) prescribes that the principal
taxpayer may make an election in terms of Rule 9 TAR for the
rule to apply so as to include also all the other companies forming
part of the fiscal unit.
Exclusion of Investment Income Provisions
Rule 9 prescribes that the investment income provisions shall not

apply to payments of investment income where the recipient and
the payor are companies forming part of the same fiscal unit.
Compliance Obligations
Rule 11 imposes special requirements relating to accounts that

must be kept when the option is availed of. Rule 12 provides
for the compliance obligations of the fiscal unit. A special tax
return applicable to fiscal units is expected to be published
soon. Subject to conditions,11 Rule 12 (2) prescribes that
where a company other than the principal taxpayer forms
part of a fiscal unit, such company shall be exempted from
the requirement to file a self-assessment and an income tax
return. Liability to tax between principal taxpayers and 100%
transparent subsidiaries is joint and several but, in certain
12 may be apportioned.
cases,11
11 Namely for a year of assessment in respect of which the company formed part of a fiscal unit
for the entire year preceding that year of assessment and where the chargeable income of that
company is deemed to be derived by the principal taxpayer and is taken into account for the
purposes of determining the total income of such principal taxpayer.
12 Namely when:
The Anti-Abuse Measure
A special anti-avoidance provision is contemplated in Rule 13

which is split in 4 components:
(a) The Rule in 13 (1) providing that when the tax

payable by a principal taxpayer is lower than 95% of
the aggregate of the tax that would have been payable
by all the members of the fiscal unit, there is deemed
to be an advance to shareholders falling under the
purport of Article 46 ITA (‘the deemed advance’)-
The item treated as an advance to a shareholder is
an amount equal to the difference between the tax
payable by all members of the fiscal unit and the tax
payable by the principal taxpayer divided by 35%.13
In addition, a proviso to 13 (1) prescribes that when
a shareholder is a person who is not an individual
and is owned by a person who is both ordinarily
resident and domiciled in Malta or a trust with
beneficiaries that are both ordinarily resident and
domiciled in Malta,14 shareholders shall be deemed
to be beneficiaries;
(b) The deemed advance is treated as a deemed untaxed
dividend.15
(i) the tax due by the fiscal unit may be apportioned between the principal taxpayer and its
hundred per cent (100%) subsidiaries which are transparent subsidiaries as the principal
taxpayer may determine;
(ii) the tax due by the fiscal unit, or part thereof, may also be apportioned to a transparent
subsidiary which is a ninety-five per cent (95%) subsidiary but not a hundred per cent
(100%) subsidiary in accordance with an agreement agreed to by and between the principal
taxpayer and all of the holders of shares in that ninety-five per cent (95%) subsidiary which
are not held directly or indirectly by the principal taxpayer.
13 The relevant rule reads ‘the result of the difference between the tax payable by all fiscal unit
companies and the tax payable by the principal taxpayer divided by the rate set out in article
56(6) of the Act:’
14 An Article 61 (a) (iii) ITA trust
15 Rule 13 (2) and 3 (3).
(c) Tax on the advance is to be of 35%;16

(d) A generic anti-abuse provision is contemplated in Rule
13 (4).17
16 Proviso to Rule 13 (3).

17 Prescribing that where in relation to a transaction, or to a series of transactions, the principal
taxpayer, the shareholders thereof or the individual direct or indirect beneficial owners of
the principal taxpayer, or any person which is controlled and beneficially owned directly
or indirectly to the extent of more than fifty per cent (50%) by the same individuals, is in
a position to obtain an undue advantage which has the effect of reducing their liability
to tax in a manner which is not reconcilable with the object and purpose of this sub-rule,
the Commissioner shall determine the relevant liability to tax in such manner and in such
amount as may be necessary so as to nullify any such benefit or advantage.
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General Index
Accruing, 367/ 159,200,201,204,397,426, Administrative Law, 32,44-96

455 Administrative Review Tribunal, 15,29,44-53,
Activities test, 199,204,207,226,212 100-112,353-359,635-637
Act I of2008,137 Agricultural, Manufacturing and other
Act II of2009,565, 587 Productive Undertakings, 12,203,204,
Act I of2010,587,205,257,229,259,264, 516
321,353,329,359,402,409,412,414, Alimony payment, 11,13,165-170,258-260,
386,416,418,462,465,548,554,564, Til
565,567,580,583,585,603,605,617 Annual payments, 10,11,35,160,163-166
Acts XIX of2010,587,205 Annuities, 10,35,160,165-170,481
Act IV of2011,346,372,403,413,459,443, Anti-avoidance, 579-622 17,23,43,45, 55,74,
517,565,589,605,643 270.339.374.397.404-407,418,492,
Act XVI of2011,476 524.539.566
Act XXII of 2011,136 Appeals, 10,15-20,33-64,71,81,85,99-120,
Act V of2012,50,138,194,261-263,377,418, 212,216,216,224,225
465,560,570,605,606 Artificiale 19,220,258,277,295,344,614,
Act III of 2013 184,188,263 626-636,644
Act XII of2014 161,139,196,264,323,358, Assessments, 8,15,49-55,64-70,72-76,91-
361,544-567 130,281-337
Act XXII of 2014 161 Authentic Interpretation, 37-40, 59,461,498,
Act XXIII of 2014 161 603
Act XXXVII of 2014 161 Avery Jones, John,217-223
Act XIII of2015 175,179,189,200,266,361, Aviation, 19,253,466,469,470,499
417,464,560,566,629 Avoidance, 579-622 17,23,43,45, 55,74,270,
Act XXI of2015 169,179,189 339.374.397.404- 407,418,492,524,
Act XXXIII of 2015 189 539.566
Act XV of2016 169,188,189,214,247,258,
493,474 Bad debts, 13,321,242-244
Act XVI of2017 247,283,421,580 Badges of trade, 44,139,144-167,151-153,
Act VII of 2018 167,193,201,202,413, 167
604-606 Baker, Philip,9,29,63,85,87,90-93,102-105,
Act VII of2019 419,463 116,121,406-408,550,614,615
Additional tax, 16,108,109,112,116,119, Balancing allowance,255,530, 584
170,287,315,338,339,344,358,361- Balancing charge, 255,530, 584
368,372,373,392,395,513, 536,584, Balancing statement, 13,254-256
611 Beneficial ownership, 17,276,399,404-410,
Additional assessments 340, 420,575,583,586,636
Body of persons, 42,169,177,179-181,188, Cuschieri, N,32

217,226,227,347,376,378,403,414- Customary Law, 31
417, 503, 535, 539, 585, 590-592,621
Bonus shares,155-157 Deemed distribution orders, 515, 545,546,
Books and records, 109,371 619-622
Budget 2008,269,314 Deductions, 199-253
Budget 2009,23,32,44,49, 53, 55,77,270, Deemed distributions, 515, 545, 546,619-622
361,419,606,617,635 Degrouping,23,402, 565, 584, 585,606-607,
Budget 2010,257,259, 583-585 617,636
Budget 2011,346-348,403,444-448,466,473, Directors, 109,218-292,314,318,341-342,
476,482-487,515,516 375-387,392-394,468, 525,
Budget 2012,167,265,468 Discrimination,72,84,128-130,133, 196,
277,331
Capital gains, 34,65-67,85,131,137-148,164, Discount, 16,35,155,158,275,292-294,303-
173,180,197,202,206,401-409,426- 307,397,488,542
431,444,452,457,460,490-494,543, Distributions, 18,21,24,155-157,180-183,
561,563-565,571-597,634 277.287.291.406.411-415,418,422,
Caruana Demajo, G, 32 425.435.451.455.459- 461,469, 512-
Chargeable assets, 137,22,34-37 564 516, 526, 528-533,537-539,546-548,
Chargeable income, 36,137,154,170,180, 565.623
188,191-195,245,257,260,275,285, Dividend, 18,21,24,155-157,180-183,277,
287,308,333,337,330-344,354,372, 287.291.406.411- 415,418,422,425,
410,433,474-478,481,484,497 435.451.455.459- 461,469,512-516,
Child care fees, 256,262,263,311 526,528-533, 537-539, 546-548, 565,
Civil Code, 31,37,42,158,163-166,169,178 623
Code of Organisation and Civil Procedure, 133, Doctrinal Interpretation, 12-15
134,209,392 Domicile/domicil, 167-173,179-185,138,
Colombo, Arturo,38 199,202,209-216,226-228,456-472
Collective Investment Scheme, 347,401,414- Double taxation relief,
427,463,494-496,542-454,548,565, Double tax treaty relief, 520-527
574,580 Commonwealth relief, 527-528
Continental Shelf,208,436,473 Unilateral Relief,522-527
Controlling interest, 22, 546-550 Flat-rate foreign tax credit, 528-533
Commutation of pension, 161,329,481 Due process, 54-72
Consolidation, 188,441, Appendix
Compliance,303-342 Ecclesiastical and allied income, 180
Constitutional Law,31-103 Employment or office, 259-301
Constitution of Malta, English Law,38-40,149,165,173,217
Article 37,32-52 Equity holding, 160,402,411,412-417,535
Article 39,56-73 European Convention on Human Rights,
Article 73,120 (‘ECHR’), 31-98
Article 74,120 European Court of Human Rights, (‘ECtHR’),
Construction, 7-28 31-98
‘Company registered in Malta’, 187,370,409- European Court ofJustice/Court ofJustice of
416,489, 501, 512,527-536, 548, 553, the European Union, 43,49,128,132,
555,558-566,621,642 143-145,185,195,273,276-279,363,
Criminal charge, 86,90,92-96,102, 112-119, 366-368,374,390, 531-532, 538, 556,
367-368 612.623
Criminal Code,37, 57,72,92-94,114,122, Evasion, 8,23,31,45,53,72,99,124,154,339,
369,614 345-347,365-369,405,417,609-616,
Cultural and Creative Teaching Institutions, 630,635
14,265 Exemptions, 367-390
Index
Final and conclusive, 97,127,392 Article 27,178-180,189,345,414,451,

Final settlement system, 15,85,313-316,391, 455-459,490,493,504,592
505-508 Article 28,204,416, 554
Final tax account, 171,243-245,244,422,475, Article 31A.516
512-520,530, 533 Article 3 IB, 168
Foreign income account, 21,157,184,285- Article 31C.168
287,421,425,489,509, 511-515,526- Article 33, 541,548
537,544,533,559-561 Article41-42,511-518
Foundations, 318,472, 564 Article 43,184,189,276,283,532, 548,
Fraud, 31,53,71,74-76,80,114,124,223, 566-570,619,621
339,366,389,417,469,610-613,630 Article 49,192,202,260-263,445
Fringe benefits, 259-299,194,306,312-316, Article 50,193,258
325,463,466,485, 504 Article 51,24,43,601-652
Article 52,640-643
General principles of law, 42,448 Article 56,180-202,320-503,514, 531-
Groups of companies, 180,181,236,350,503, 539,548, 556,571
114-118,178,180-188,236,244,249, Article 68,513-515, 533
250,276,291,301,312,348-353,402, Income Tax Management Act (‘ITMA’),
428,434,436,440,442,489,498, 503, Article 5, 205
524, 528, 532, 556,565, 577-582, 585- Article 7,376-400
589,590-596,605-607 Article 30,338-345,359,369,378,612
Article 31,337-340
Homes for the elderly fees, 129,263 Article 33,352
Hotel, 141-143,213,249,304-306,428,437 Articles 37,358
Human Rights, 31-103 Article 48,41
Article 27,189, 592
Immovable Property Account, 157,184,422, Article 43,566-567
512, 533 Article 49,102
Income arising outside Malta, 197,199,202, In dubio pro reo, 57-58
206-208,447-449,457,477 ‘In the production of the Income’, 230-241,
Income derived in Malta, 204,197,199-207, 250-253,266-274,433
446,447,456,477 Industrial building or structure, 141,249-254,
Income Tax Act (‘ITA’), 584
Article 2,37-42, 59,119,127,180,187- Initial allowance, 244-255,632
189,208,217-219,415,426,437, Insurance companies, 347,464,489
464,489, 501, 512-515, 527-536, 574 Intellectual property, 172,247,418, 564,648
Article 4A.462 Interest, 71,75,78-80,82-112,172,176,236-
Article 5,34,36,41-55,137-146,398-431 257,274-276,283-288
Article 6,463-466 Interest and Royalties directive, 404,420
Article 12,157-259,329,336,397,400- Interpretation, 7-25
426 Interpretation Act, 10-13
Article 14,88,128-130,162,172,176, Investment income provisions,511-519
1820185,189,229,231-283,312, Investment services and insurance expatriates,
316 463-466
Articles 16-22,180,181,236,350,503, Investment services companies, 463-465,
114-118,178,180-188,236,244, 494-497
249,250,276,291,301,312,348- Italian law, 267
353,402,428,434,436,440,442,
489,498,503, 524, 528,532, 556, Judicial review, 82,104,344
565, 577-582, 585-589,590-596,
605-607 Literal and Logical Interpretation, 14-18
Article 26,229,272-276,316 Losses, 138-148,179-189,231,237-245,258,
301,325,400,485,491-499, 503-505, Rents, 35,49,139,160,167,177,194,199,

526,530, 567,578, 582, 592,-595,617- 211-213,236,256,265
619,632 Residence, 127,169,180,184-309,350-353,
377,442-447,462,572-575,598,601-
Maltese taxed account,499-500 605,645-646
Management and control, 180,216-227,292, Retrospectivity, 51-55,59,64,65,78,131,395
384,386 Returned migrants, 445-447
Married couples, 176,195 Royalties, 35,139,167,172,207,276,397-
Motor vehicles, 233,353-256,278,293-296, 404,416-420,456-460
306 Roll-over relief,255, 584
Rulings,111, 160,164,186,220,244,348, 531,
Official secrecy,100,357 539,575,623,640-643
Parental computation, 194 School fees, 260-263,265,272,465

Parent subsidiary directive,417,420, 538,629 Scientific Research, 245
Participating holding,50,160,409-417, 527, S.L. 123.01 Deduction for Wear and
529,534,537,641 Tear of Plant and Machinery
Participation Exemption, 409-411,416,472, Rules, 229, 252
511,516,534,545,622 S.L. 123.07 Income Tax Deductions
Part-time Rules, 162,316-320,324 Rules, 229,253
Passive interest or royalties, 172,416-417, S.L. 123.21 Income Tax Exemption
534-537 Order, 161-163
Patents, 418,564, 580-582 S.L. 123.26 Deduction of Expenses
Peremptory term, 110,353,611 in respect of Immovable
Permanent establishment, 276,284,285,288, Property Rules, 171, 229,
351,397-400,408,410,417-420, 500, 250,256
527, 530, 539, 559,624-650 S.L. 123.27 Capital Gains Rules, 563-594
Pension, 35,77,160-165,314,317-320,329, S.L. 123.39 Part-time Work Rules, 162,
383,476,480-485 317-320
Permanent residents, 200-203,442-447,480, S.L. 123.51 Collective Investment
621 Schemes (Investment
Petroleum companies, 187,204,473-478, 516 Income) Regulations, 421-
Petroleum profits, 187,204,473-478, 516 430
Plant and Machinery, 218-224 S.L. 123.55 Fringe Benefits Rules, 289-
Portfolio investment, 416,417,535 300,504
Premium, 35,39-41,155 158,167,173,238, S.L. 123.60 Investment Income
241,273,275,285,397,488 Regulations, 421-430
Pre-trading expenses, 229,239,271,495 S.L. 123.61 Deduction (School Fees)
Property Company, 275,401-404,411-415, Regulations, 229,260-272,
426, 586-589 465
Property partnership, 401-405,414 S.L. 123.62 Pre-Trading Expenditure
Property Transfers tax, 567-576 Regulations, 229,239,271,
495
Qualifying Employment in Innovation and S.L. 123.68 Deduction of Additional
Creativity (Personal tax) rules, 466,478 Tax (Omissions) Rules, 360-
363
Redomicilation, 227 S.L. 123.69 Reduction of Additional
Refunds,74,511-516,530, 533, 537, 544-548, Tax (Default in Furnishing
622,640 Return) Rules, 360-363
Refund blocking, 640 S.L. 123.71 Reinvestment Tax Credit
Refundable tax credit system, 479-507 (Income Tax) Regulations,
Remittance basis of taxation, 167-174 529
Index 641
S.L. 123.73 Authorised Financial Swiss Nationals Rules, 478-

Intermediaries (Investment 482
Income) Regulations, 425, S.L. 123.134 Malta Retirement
427, 543-548 Programme Rules, 478-480
S.L. 123.74 European Union Directives S.L. 123.137 Donations (Creativity
Regulations, 420 Trust) Rules, 279
S.L. 123.79 Residents Scheme S.L. 123.140 Rulings (Income Tax and
Regulations, 443,478,481 Duty Treatment of Mergers
S.L. 123.80 Sale of Agricultural Produce and Divisions) Rules, 244,
Rules, 516 575
S.L. 123.81 Tax Credit (Women S.L. 123.141 Qualifying Employment in
Returning to Employment) Innovation and Creativity
Rules, 269 (Personal Tax) Rules,466,
S.L. 123.88 Finance Leasing Rules, 497 478
S.L. 123.89 Trusts (Income Tax) S.L. 123.142 Repatriation of Maltese
Regulations, 451 Persons established in a
S.L. 123.92 Tax on Property Transfers Field of Excellence Rules,
Rules, 597-606 484
S.L. 123.101 Tax Accounts (Income Tax) S.L. 123.148 Global Residence
Rules, 422, 512-530 Programme Rules, 207,477
S.L. 123.102 Donations (Sports and S.L. 123.156 Exchange of Information
Culture) Rules, 229,267 (United States of America)
S.L. 123.112 Deductions and Tax Credits (FATCA) Order, 346
(Pharmacy Of Your Choice) S.L. 123.160 Residence Programme
Rules, 277-280 Rules, 200-202,477,480
S.L. 123.113 Donations (University S.L. 123.163 Personal Retirement
Research, Innovation and Scheme Rules, 161,419,
Development Trust) Rules, 481
278-281 S.L. 123.168 Qualifying Employment
S.L. 123.114 Foundations (Income in Aviation (Personal Tax)
Tax) Regulations, 472, Rules, 466
564 S.L. 123.173 Industrial Buildings
S.L. 123.115 Deduction (Tertiary and Structures (Capital
Education) Rules, 195,264 Allowances) Rules, 245-250
S.L. 123.121 Deduction (Childcare Fees) S.L. 123.174 Tax Rebate (Pensioners)
Rules, 262 Rules, 162-165
S.L. 123.124 Deduction (Electric S.L. 123.176 Notional Interest
Vehicles) Rules, 278 Deduction Rules, 283,287-
S.L. 123.126 Highly Qualified Persons 289
Rules, 465, 469,-471,478, S.L. 123.183 Multilateral Convention
481 (Implementing Tax Treaty
S.L. 123.127 Cooperation with Other Related Measures to Prevent
Jurisdictions on Tax Matters Base Erosion and Profit
Regulations, 287,346-349 Shifting) Order, 349
S.L. 123.128 Securitisation Transactions S.L. 123.187 European Union Anti-Tax
(Deductions) Rules, 187- Avoidance Directives
189,487-490,517 Implementation
S.L. 123.129 High Net Worth Regulations, 643-652
Individuals EU/EEA/Swiss S.L. 372.14 Final Settlement System
Nationals Rules, 478-482 (FSS) Rules, 117,230,314-
S.L. 123.130 High Net Worth 317,324,375,378-395,
Individuals Non-EU/EEA/ 471,484,505-507
S.L. 372.18 Payment of Provisional Tax Index to Cases

(P.T.) Rules, 335-338,445, Judgements of the ECtHR
476,504, 566-569, 587,640 Association Les Temoins de Jehovah v. France,
S.L. 372.21 Notice of Objection 130
Regulations, 352 Bendenoun v. France 90-92
S.L.372.27 Letting of Tenement Bern Lahrsen Holdings AS et v. Norway 121-
(Forms) Rules, 170 122
Borghini v. Italy 85
Securitisation vehicles, 187-188,487-489, 517 Bulves v. Bulgaria 80
Shipping, 204,305,427-442 Burden & Burden v. The UK 129
Sources of interpretation, 31, 38, 43, 46, 150, Chambaz v. Switzerland 99-102
160,173,193-195,208, 236-240 Darby v. Sweden 128-130
Sports fees, 240 Di Belmonte v. Italy 63-65
Stare decisis, 33,393,447 Engel v. the Netherlands 91-95,104
Ferrazzini v. Italy 86-94,104
Tax accounting, 180, 283, 421, 489, 501, 509, Funke v. France 121-123
511-539 Hannu Lehtinen v. Finland 95,118-120,391
Transfers Intersplav v. The Ukraine 80
of beneficial interest in a trust, 460 Kaira v. Finland 63
of business, business permits 564 Kozinets v. Ihe Ukraine 84
of immovable property,36,137,566-571, Lucky Dev v. Finland 116
597-600 Mamidakis v. Greece 365,367
of partnership interests, 596-600 Oao Neftyanaya Kompaniya Yukos v. Russia,
of patents, 418, 564, 580-583 70-76,96-99
of securities, 158,284,288,401-404,426, Paykar Yev Haghtanak v. Armenia, 93, 95, 109
434,496-498,572-576,580,604 Ravon & others v. France, 111
of trademarks, 419, 564, 580-583 Riener v. Bulgaria 126,137
Terminal benefits, 324,329 Ruotsalainen v. Finland 113-116
Trade, business, profession or vocation, 144, Shchokin v. The Ukraine 67
153, 189, 194, 242, 301, 314, 369-372, W, X, Y and Z v. Austria 85-87
418, 502 568
Trusts, 125, 205, 278-283, 344, 377, 407-410,
Judgements of the ECJ
434, 540-462, 472, 487, 546, 564-566,
C-324/00 276
581,605,627
C-446/03 184-187
C-524/04276
Untaxed account, 422,425, 512, 530, 537-539
C-290/04373,449,625
C-76/05 260
Value added tax, 229,258, 314,319, 520,640
C-440/08 276
Value shifting, 402,565,584-587,594,617,636
Wear and tear allowance, 230, 245, 250-255, Judgements of the Constitutional Court
498-500,632 Abela v. Priministru 85
Wholly and Exclusively Incurred,230-239,272, Azzopardi John pro et noe v. KTVM 105
274,288,433, 570 Bianchi Enrietta v. AG 65,66,131
Worldwide basis of taxation, 196,200,444,446, Carter et v. Priminister et 81-83,106-108,116
493,546 Clayton Communications v. Priminister et
104-106,324,329,361
Farrugia Anthony v. Priminister et 821,639,
653
Frendo v. AG 104,107
John Geranzi Ltd v. KTI et 28, 53, 57,108-
119,135,354, 367,371,613
Index 643
Mifsud David v. Priministru et 134-136, 267 Judgements of the BSC

Pig Breeding v. KTI et 104, 352 BSC 17/50 163
Woodline Limited v. KVTM 131,133 BSC 11/52 632
Zahra v. PM 28,113,116-119,653 BSC 13/52 164
BSC 14/52 153
Judgements of the Court of Appeal BSC 33/55 207
(Published) BSC 1/54239
Case 9 58 BSC 30/54164-166
Case 24 173,234 BSC 32/54239
Case 31 13,43,236-239 BSC 9/54234
Case 36 156,238 BSC 46/58 140
Case 38 159 BSC 38/59
Case 40 48,196,234 BSC 41/59 633
Case 42 43 BSC5/60 147
Case 44 58 BSC 5/62 249
Case 45 249 BSC 8/63 39,47,55,58
Case 60 644 BSC 13/63 190
Caselli 139,150 BSC 21/63 339
Case 120 208 BSC 23/64236,644
Case 127 156 BSC28/65 147
Case 129 235 BSC 7/67 237-239,241
Case 154 235 BSC32/67 46,237
Case 174 382 BSC 14/68 644
Case 190 392 BSC 45/69 634,644
Case 191 221 BSC 10/70 173
BSC24/70 149
BSC29/77 147
Judgements of the Court of Appeal BSC43/86 148,269
(Unpublished) BSC 3/71 240
Case 18/1990 47,237,631 BSC 16/71 233
Case 5/2003 39,72-75 BSC 32/83 239-243
Case 1/2004 131 BSC53/87 150
Case 14/2005 48,153 BSC35/87 148
Case 8/2006 39-42 BSC 5/91 140
Case 1/200744 BSC 7/94 140-142
Case 5/2007 57 BSC 1/97 145
Case 22/2007 360 BSC6/99 148
Case 1/2010 33 BSC 13/02 239
BSC23/02 140
Judgements of the Court of Criminal Appeal BSC 18/03 320
Pulizija v. Guido Agius 382 BSC 28/03 16,150
Pulizija v. Antonio Busutill 384-388
Pulizija v. Charlotte Ciantar 382-384 Judgements of the ART
Pulizija v. Carmelo Cutajar 390 Case 24/2011VG 357
Pulizija v. Victor Galea 380 Case 49/2011VG 371
Pulizija v. Christopher Gauci 388 Case 50/2011VG 372
Pulizija v. John O’ Dea 315,378 Case 66/2011VG 54,610,635
Pulizija v. Taddeus Rapa 388 Case 138/2011VG 141
Pulizija v. Anthony Sciberras 382
Pulizija v. Luciano Sciberras 382 Other Judgements
Pulizija v. Joseph Scicluna 383 Agulian v. Cyganik 211
Pulizija v. Gerald Zammit 381 Alliance Assurance Co. Ltd v. FC 232
Associated Insulation Products Limited v. IRC v. Aken 154

Golder 157 IRC V. Gavin, 628
ATC Plastics v. KTI392 IRC v. McGuckian 614
Baldacchino et v. KTI, 395 IRC v. Willoughby 615
Burmah Steamship C. Ltd v. CIR 45,153,637 Kelsall&Cov. CIR 153
Cassar Torregiani v. Gatt 52 Keynsham Blue Lias Co v. Baker 218, 220
Cesena Sulphur v. Nicholson 219-222 KTI V. Alfred Caruana 56, 395
Ciantarv. KTI 49 Laidler v. Perry 326
CIR v. Challenge Corporation Limited 614 Leigh v. IRC 159
Coltness Iron Co. Ltd v. Black 238 Maires v. Haughey, 327
De Beers Consolidated Mines v. Howe 221 Mallalieu v. Drummond 232
Dewar v. IRC 160 Prasil v. Commissioners, 311, 331
Duncan v. CIR 157 Prevost Car Inc v. R 408
Eilbeck v. Rawling 628 Rand v. The Alberny Land Company Limited
Fenech Pace v. Sciberras 33 44
FC ofT V. James Flood Pty Ltd 231 Regina v. Allen 223
Furniss v. Dawson 614,638 Shilton v. Wilmhurst 326,
Gaines Cooper v.IRC 203,210, 212-216 Spiteri v. Soler 210
Grove Enterprises Ltd v. Frank Bowers et Swedish Central Railway Company v.
615-617 Thomson 222
Hamblett v. Godfrey, 326-329 Sundry Limited v. KTI 395
Henley v. Murray 328 The Royal Dutch Case 406
Hinches, Dashwood v. Hinches 614 Unit Construction Ltd v. Bullock 211,222,
Hinton V. Madden & Ireland, 248 225,226
Hochstrasser v. Mayes, 325,327 Wilcock v. Pinto,329
Hudson Bay Co v. Stevens 144 Wilson v. Clayton, 224
Hurll v.IRC 157 Wood and Another v. Holden, 224
Indofood International Finance Ltd v. JP Yarmouth v. France 248
Morgan, 407 Zammitv.KTI 54,381,638-640
Principles of Maltese Income lax Lasv (updated to 2019).
Principles of Maltese Income lax Law provides an up-to-date discussion ol Maltese Income
tax legislation along with the leading decisions of die Courts including substantial extracts
from m;t|or judgements. Areas of fotffls include international taxation, tax police and tax
controversy.
Principles of Maltese Incoine lax Lao' lias been updated caking into account all the latest
starurorv and case law developments that have occurred since rhe publication of Principles of
Maltese Pax Latti (2008).
Practitioners and students reading Law, Accountancv, ACCA, ADI I and the Mi l
diploma can turn to Principles of Incoine lax Laic for an understandable discussion of two of
rhe most dvnamtc and controversial chapters in the Laws of Malta.
brom Critical Acclaims to Principles of Maltese Income Tax Lam (2013):
“Single-handedly, Robert ts generati rm the literature which explains the structure and nuances of the
system m Malta... What you mill find between the cotters is not simply a dry exposition ofiFe-aules,
but a highly erudite explanation of the system as it has deiieloped and in practice... One wishes other
countries had similar taut bars litho cowfcl write similarly enticing boohs to explain their tax codes. ”
Philip Baker
“Robert Attard has assembled a most comprehensire and organic manual on fiscal law, a cast subject
with gentle or assortire tentacles in almost al! other branches of legislation. This is not just an arid
explamttion of the intricate and sometimes opatpte prorifions of taxation law, but an attempt — and
a i wry successful one — to place fiscal law tn the context of superior principles of porernance.. .Attardi
systematic eademecum has the makings of a textbook destined to become a classic, crucial for tax
consultants, practitioners and. not least, for the ritti ms of aggressive fiscal policies. "
Giovanni Bonello
“Dr. Robert Attard, legal expert in his field, is without doubt one of Malta's finest scholars on tax
lati'. Ilis treatment of the subject-matter, whilst oust and thorough, is substantiated by local and
foreign jurisprudence and imiti nites to serre as an iiiiialuable reference for students, professionals
and jurists alike. Dr. Attardi special attention to detail and profound appreciation ojother key areas
accompanying tax law, such as human rights, make “Principles of Maltese Pax Law" a must-read for
all who are either interested or involved in this highly specialised area of law.
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From Critical Acclaims to Responsibilities of Officers of A Maltese Limited Liability

Company (2011)
“ These judgements hare been compreheiisirely discussed in a thotu'ht-proiwkino analysis of the subject
in a book edited by Robert Attard i/tmo himself contributed to rhe publkation). This excellent work
examines the Hit bilily of directors and other officers... "
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Principles of

Maltese IncomeTax Law

First published in 2019

Copyright © Robert Attard, 2019

This book is being sold on condition that it cannot be

Chapter 2 - Interpreting the Income Tax Acts........................... 7

4.5 Ipsae legis cupiunt ut jure regantur

Chapter 3 - Taxation and Human Rights.................................. 31

1.4.2 Maltese Cases on Taxation and the right

4. Taxation and the Right to Privacy....................................... 90

Chapter 4 - Taxable Receipts...................................................... 107

Annuity and Annual Payments......................................... 133

Chapter 5 - The Classification of Taxpayers.......................... 145

Chapter 6 - Jurisdiction to Income Tax.................................... 167

Exclusions from the Remittance Basis of Taxation 170

Chapter 7 - Tax Deductions........................................................ 199

3.6Judge Made Rules................................................... 206

10.7 School Fees Paid to Cultural and Creative

Chapter 8 - The Taxation of Employment Income.............. 259

2.2.1 Category 1 Benefits - Benefits Relating

Chapter 9 - Compliance Obligations 303

12. Appeals to the Court of Appeal........................................ 328

Chapter 10 - The Obligations of Officers of Bodies of

Chapter 11 - Important Tax Exemptions................................ 367

1.2 Gains derived by non-residents upon transfers

Chapter 12 - Special Cases 391

4. Returned Migrants ......................................................... 415

12.1.3 Beneficiary..................................................... 447

22.Branches of Oversea Companies...................................... 470

Chapter 13 - Tax Accounting and the Refundable Tax Credit.

8. Profits that stand to be allocated to the

Chapter 14 - The Investment Income Provisions................... 511

Chapter 15 - The Elimination of International Double

2. Unilateral Relief................................................................... 522

Chapter 16 - Income Tax on Capital Gains.............................533

10. Restriction of the Intra-Group Exemption..................... 553

Chapter 17 - Property Transfers Tax........................................ 567

Chapter 18 - Anti-Avoidance Provisions................................. 579

Surrendering of Losses......................................................... 587

13. The Transposition of the ATAD 1................................... 613

Appendix: The 2019 Tax Consolidation Rules......................... 623

to be and important decisions relating to Malta’s fiscal policy are

I am grateful to the MIM, in particular, to Reuben Buttigieg for

The Maltese Income Tax System

The legal system which regulates Income Tax in Malta is a

/. Sources of Income Tax Law

income. The ITMA was enacted in 1994 and evolved in a ‘stand­

The ITA and ITMA have been passed by Act of Parliament

The ITA contains the substantive rules determining taxable

Judicial decisions remain another important source of law.

The Maltese Income Tax System does not exist in a vacuum

a series of judgments that have created a legally enforceable

In Malta we do not follow the doctrine of judicial precedent

Tl-Kummissarju tat-Taxxi bbaza c-cahda tieghu ghat-talba tas-socjetà

ragunijiet fondamentali: (i) linterpretazzjoni li 1-Qorti ta’ 1-Appell (Sede

The ART’s judgment resonated and was confirmed on appeal.

2. The Taxes Contemplated in the Income Tax Act

In reality, the name of the ITA is a misnomer because the ITA

income. The ITMA was enacted in 1994 and evolved in a ‘stand