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, fis­sistema legali taghna 1­principju
“stare decisis” ma ghandu ebda assolutezza. Qawwija kemm hi qawwija,
1­awtorita tal­gurisprudenza 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:

Tl­Kummissarju tat­Taxxi bbaza c­cahda tieghu ghat­talba tas­socjetà

Rikorrenti fuq is­sentenza fl­ismijiet “Aprilia Hotel Ltd. v. Il­Kummissarju
tat­ Taxxa fuq il­Valur Mizjud”, Appell Nru. 2/11, pronuncjata mill­
Qorti ta’ 1­Appell (Sede Inferjuri) fis­27 ta’ Ottubru 201120, fejn dik il­
Qorti cahdet lapel tas­socjetà Aprilia Hotel Ltd. minn decizjoni tal­Bord
ta’ 1­Appelli dwar Taxxa fuq il­Valur Mizjud li biha ma gietx milqugha
1­pretensjoni taghha li in segwitu ghad­decizjoni taghha li tikri 1­units
f’zewg blocks ta’ appartamenti minnha mibnija bl­iskop originali li
jinbieghu kellha dritt titlob it­tnaqqista’ linput VAT fir­rigward ta’ spejjez
minnha inkorsi fis­snin precedenti ghal tali tabla ghall­kostruzzjoni ta’
zewg blocks ta’ appartamenti.
It­Tribunal qara 1­imsemmija sentenza b’attenzjoni u bir­rispett
kollu lejn il­Qorti ta’ 1­Appell (Sede Inferjuri) ihoss li fil­kaz in ezami
ma ghandux jistrih fuq dak deciz f’dik is­sentenza, u dana ghal zewg

3 On this point Court of Appeal, Appell numru 1/10 Seduta ta’ nhar il­Gimgha, 9 ta’ April,
2010 Numru 1,
“Dan anke ghaliex, kif ben saput, fis­sistema legali taghna 1­principju “stare decisis” ma
ghandu ebda assolutezza. Qawwija kemm hi qawwija, 1­awtorita tal­gurisprudenza 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.
4 Principles ofMaltese Income Tax Law 2019

ragunijiet fondamentali: (i) linterpretazzjoni li 1­Qorti ta’ 1­Appell (Sede

Inferjuri) tagliti tar­Regolamenti introdotti bl­Awiz Legali 318 ta’ 1­2004,
ossia r­Regolamenti dwar Taxxa fuq il­Valur Mizjud (Aggustamenti li
Ghandhom X’Jaqsmu Ma’ Oggetti Rapitali), ma hijiex korretta u lanqas
hija in konformità mal­posizzjoni tal­Qorti ta’ Gustizzja Ewropea fir­
rigward ta’ 1­interpretazzjoni ta’ 1­Artikoli 167, 187 u 189 tad­Direttiva
2006/112 li kif iktar ‘1 fuq osservat giew trasposti fil­Ligi nostrali tramite
1­imsemmija Regolamenti; u (ii) fit­tieni lok, f’dak il­kaz hem cirkostanza
fondamentali li tohloq distinzjoni netta bejn il­legittimità tat­talba tas­
socjetà Aprilia Hotel Limited u 1­legittimità tat­talba tas­socjetà Rikorrenti.
In kwantu rigwarda r­Regolamenti introdotti bis­sahha ta’ 1­Awiz
Legali 318 ta’ 1­2004 il­Qorti ta’ 1­Appell osservat illi 1­Awiz Legali 318
tat­2004 jipprovdi ghal posizzjoni fl­oppost ta’ dak pretiz mis­socjetà
appellanti, u cioè f’kazi fejn tkun saret inizjalment u fil­perjodu relevanti
tnaqqis ta’ input tax fuq 1­infieq kapitali, ghandha dritt li taggusta dan
1­input tax f’kaz ta’ uzu ta ...
Dawn huma fatti li joholqu distinzjoni netta bejn dak li ttentat taghmel
issocjetà Aprilia Hotel Limited u 1­pretensjoni tas­socjetà 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.
6 Principles ofMaltese Income Tax Law 2019

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 over­lap 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 opt­out of PTT and pay
tax on the transfer in terms of the capital gains rules. Recently,
the right to opt­out of the system has been severely restricted.