This article was penned by Mr Marvin Gaerty who currently serves as Commissioner for Revenue. He heads all the Revenue Departments including Inland Revenue, Vat and Customs. We are reproducing this for your quick reference since it gives a good summary to understanding the current property tax regime.
BACKGROUND
On 17 March 2006 legislation was enacted (ACT No. II of 2006) to introduce a final withholding tax system on transfers of immovable property situated in Malta. A new article 5A was introduced in the Income Tax Act imposing a final withholding tax of 12% on property transfers. In the case of transfers made not later than 5 years after the date of the acquisition, the transferor had the option to elect to exclude the transfer from the scope of article 5A and where such an election was made, the transfer would be taxable either under article 5 (capital gains) or article 4 (trade or business). The 5 year opt out period was extended to 7 years in 2010 (ACT No. I of 2010) and to 12 years in 2013 (ACT No. III of 2013). ACT No. XIII of 2015 (Budget Measures Implementation Act, 2015) introduced major changes to the property tax system, in particular the reduction of the 12% rate to 8%, other final tax rates applicable to certain transfers and, with certain exceptions, the removal of the option to elect to exclude a transfer of property from the scope of article 5A.
A. FINAL TAX RATES
| ART 5A(5) | FWT | TYPE OF TRANSFER |
| (a) | 8% | Default rate |
| (b) | 12% (TV – AV)* | Property acquired in terms of a transfer causa mortis that happened after 24 November 1992 |
| (b) | 12% (TV – AV)* | Property acquired in terms of a donation made more than 5 years before the date of the transfer |
| (c) | 7% | Property acquired in terms of a transfer causa mortis that happened before 25 November 1992 |
| (d) | 7% | Transfer of property in the circumstances referred to in article 31C(1) |
| (e) | 5% | Transfer of property not forming part of a project made not later than 5 years after the date of the acquisition |
| (f) | 10% | Transfer of property acquired before 1 January 2004 |
| (g) | 2% | Transfer of property by individuals made not later than 3 years after the date of acquisition |
| (h) | 5% | Transfer of property situated in Valletta acquired before 31 December 2018, made not later than 31 December 2023 |
* TV = Transfer Value; AV = Acquisition Value
Restored property:
The transfer of immovable property which has been restored by the owner 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, is chargeable at the rate of 7% of the transfer value. If a notice of a promise of sale or transfer relating to that property has been given in accordance with the provisions of article 3(6) of the DDTA before 17 November 2014, the tax thereon shall be chargeable at the rate of 10% of the transfer value.
Transfer of property not forming part of a project made not later than 5 years after the date of the acquisition:
A transfer of property made by a person (individual or company) not forming part of a project that is made not later than 5 years after the date of the acquisition is chargeable at the rate of 5% of the transfer value. If the property was acquired by the transferor by means of a transfer that qualified for an exemption in terms of sub-article (4)(f) or article 5(9), the 5 year period applies from the date on which the property had previously last been acquired by a company by means of a transfer that did not qualify for the intra-group exemption.
The 5% rate does not apply where the property was, at any time within the period of 5 years preceding the transfer, owned by a person related to the transferor and the property formed part of a project at such time. An individual is deemed to be related to the transferor if the transferor is a body of persons of which the said individual is, directly or indirectly, a shareholder, partner or member; and two bodies of persons are deemed to be related persons if they are, directly or indirectly, controlled or beneficially owned as to more than 25% by the same persons.
Property is treated as forming part of a project if it has been developed by the owner into more than one transferable unit or divided for transfer into more than one transferable portion.
Property acquired before 1 January 2004:
A transfer of property that was acquired by the transferor before 1 January 2004 is chargeable at the rate of 10% of the transfer value. In the case where the notice of promise of sale has been given before 17 November 2014, the tax chargeable shall be at the rate of 12% of the transfer value. If the property was acquired by the transferor by means of a transfer that qualified for an exemption in terms of sub-article (4)(f) or article 5(9), it is treated as being acquired from the date on which the property had previously last been acquired by a company by means of a transfer that did not qualify for the intra-group exemption.
Transfer of property by individuals made not later than 3 years after the date of acquisition:
A transfer of property made not later than 3 years after the date of acquisition, 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, is chargeable at the rate of 2% of the transfer value.
To qualify for the 2% rate the individual must not own any other residential property at the time of the transfer. The notary who receives any deed of such a transfer shall 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.
Transfer of property situated in valletta acquired before the 31 December 2018:
Property situated in Valletta, acquired by the transferor before 31 December 2018 and transferred not later than 5 years from the said date, that has been restored and / or rehabilitated after the date of acquisition in accordance with any planning permit issued for this purpose by the Malta Environment and Planning Authority (MEPA), and on completion of such restoration and, or rehabilitation works are certified as satisfactory by MEPA before 31 December 2018, is chargeable at the rate of 5% of the transfer value.
Transfer of property in respect of which a notice of a promise of sale has been given before 17 November 2014:
A transfer of property, in respect of which a notice of a promise of sale has been given before 17 November 2014, which is made not later than 12 years after the date of the acquisition, may at the option of the transferor be excluded from the scope of article 5A if the property is transferred to the same person or persons appearing on the promise of sale agreement before 1 January 2016.
B. PROPERTIES FORMING PART OF A PROJECT OR SITUATED WITHIN A SPECIAL DESIGNATED AREA
In the case of transfers made on or after 1 January 2015 of property that forms part of a project or of property situated within a special designated area, where the transferor had elected to be excluded from the 12% final tax system, such an election will no longer apply as from 1 January 2015, and any transfers taking place after this date will be subject to either 8% final withholding tax or else 10% final withholding tax (in the case where the property was acquired before 1 January 2004), unless a notice of a promise of sale relating to the property has been given before 17 November 2014.
Where a notice was given, the property transferred in respect of which such notice was given will remain outside the scope of the final withholding tax system if transferred before 12 years from the date of acquisition. If however the property is situated in a special designated area, it will remain outside the scope of the final withholding tax system indefinitely.
Where the transferor had not elected to be excluded from the 12% final tax system, any transfers taking place after 1 January 2015 shall be subject to either 8% final withholding tax or else 10% final withholding tax (in the case where the property was acquired before 1 January 2004) unless a notice of a promise of sale relating to the property has been given before 17 November 2014. Where a notice was given, the property transferred in respect of which such notice was given shall be subject to 12% final withholding tax.
Where the transferor had not transferred any units forming part of the project by 31 December 2014 but a notice of a promise of sale relating to a unit has been registered before 17 November 2014, the transfer of such unit may, at the option of the transferor, be excluded from the scope of article 5A if transferred before 12 years from the date of acquisition.
Transfer of property forming part of a project by a company which has issued debt securities to the public:
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, may elect, 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 the transfer of property forming part of a project from the scope of article 5A. The opt out only applies where 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 project.
An election may only be made if the transfer is the first transfer made by the said transferor, on or after 1 April 2015, of property forming part of that project and when such an election has been made, it shall also apply to all subsequent transfers of property forming part of that project.
Where an election has been made, provisional tax is payable at the rate of 8% of the consideration (instead of 7%) and brokerage fees are not allowed as a deduction from the consideration. In the case where the property was acquired by the transferor before the 1 January 2004, the provisional tax payment shall be equivalent to 10% of the consideration.
Income derived from the transfer of immovable property forming part of a project, in respect of which an election under article 5A(3)(j) has been made, shall be deemed to constitute separate chargeable income which is charged at the tax rate of 35%. Special provisions (article 27G) have been enacted prescribing rules for the purpose of determining the chargeable income and tax payable derived from the transfer of units forming part of the elected project.
Provisional tax paid during or in respect of the year preceding any year of assessment, shall be set-off for the purposes of collection in the following order:
- First against the tax charged on the chargeable income derived from the transfer of immovable property forming part of a project;
- Any excess to be set-off against the tax charge on other sources of income;
- Any excess after the aforesaid set-offs have been made is available for refund.
However, an amount of provisional tax paid during or in respect of the year preceding any year of assessment as determined by the following formula shall not be available for set-off against the tax charge in respect of other sources of income and shall not be available for refund for any purposes of the Income Tax Acts:
Unutilised provisional tax = (0.625 x A) – B
Where –
- ‘’A’’ is the total provisional tax paid on the transfer of units forming part of the elected project during or in respect of the year preceding any year of assessment; and
- ‘’B’’ is the tax charged on the chargeable income derived from the transfer of units forming part of the elected project in respect of the same year of assessment.
Example 1: Company X sold 5 properties forming part of a project during 2015 for €200,000 each. Provisional tax paid in respect of such transfers amounts to €80,000. Company X derived €20,000 rental income during 2015. The chargeable income in respect of the sale of properties amounts to €120,000.
| Year of Assessment 2016: | Project | Rent |
| Income | 1,000,000 | 20,000 |
| Expenses | 880,000 | 4,000 |
| Chargeable income | 120,000 | 16,000 |
| Tax at 35% | 42,000 | 5,600 |
| Provisional tax | 80,000 | – |
| Balance of provisional tax(0.625 x 80,000) – 42,000 | 38,000 | – |
| Unutilised provisional tax | 8,000 | – |
| Available for set-off & refund | 30,000 | – |
| Set-off against rental income | 5,600 | 5,600 |
| Refunded | 24,400 | – |
| Unutilised provisional tax c/fwd | 8,000 | – |
Example 2: Company X sold 5 properties forming part of a project during 2015 for €200,000 each. Provisional tax paid in respect of such transfers amounts to €80,000. Company X derived €20,000 rental income during 2015. The chargeable income in respect of the sale of properties amounts to €0 and a loss of €20,000 has been incurred.
| Year of Assessment 2016: | Project | Rent |
| Income | 1,000,000 | 20,000 |
| Expenses | 1,020,000 | 4,000 |
| Chargeable income | – | 16,000 |
| Tax at 35% | – | 5,600 |
| Loss c/fwd | 20,000 | – |
| Provisional tax | 80,000 | – |
| Balance of provisional tax | 80,000 | – |
| Unutilised provisional tax(0.625 x 80,000) – 0 | 50,000 | – |
| Available for set-off & refund | 30,000 | – |
| Set-off against rental income | 5,600 | 5,600 |
| Refunded | 24,400 | – |
| Unutilised provisional tax c/fwd | 50,000 | – |
Unutilised provisional tax for any year of assessment shall be carried forward to subsequent years of assessment, and set-off for the purpose of collection only against the tax charged on the chargeable income derived from the property forming part of the project for subsequent years of assessment.
The maximum amount that shall be available for set-off in any subsequent year of assessment shall not exceed an amount determined by the following formula:
Y = C – D
Where –
‘’Y’’ represents the amount to be determined;
‘’C’’ is the tax charged on the chargeable income in respect of the subsequent year of assessment; and
‘’D’’ is the total provisional tax paid during or in respect of the year preceding the same year of assessment.
Example 3 (example 1 continues): Company X sold 5 properties forming part of a project during 2016 for €200,000 each. Provisional tax paid in respect of such transfers amounts to €80,000. Company X derived €20,000 rental income during 2016. The chargeable income in respect of the sale of properties amounts to €250,000.
| Year of Assessment 2017: | Project | Rent |
| Income | 1,000,000 | 20,000 |
| Expenses | 750,000 | 4,000 |
| Chargeable income | 250,000 | 16,000 |
| Tax at 35% | 87,500 | 5,600 |
| Provisional tax | 80,000 | – |
| Balance of tax due | 7,500 | – |
| Unutilised provisional tax for year | – | – |
| Unutilised provisional tax b/fwd | 8,000 | – |
| Less balance of tax due | 7,500 | – |
| Set-off against rental income | – | – |
| Tax due | – | 5,600 |
| Unutilised provisional tax c/fwd | 500 | – |
Example 4 (example 2 continues): Company X sold 5 properties forming part of a project during 2016 for €200,000 each. Provisional tax paid in respect of such transfers amounts to €80,000. Company X derived €20,000 rental income during 2016. The chargeable income in respect of the sale of properties amounts to €250,000.
| Year of Assessment 2017: | Project | Rent |
| Income | 1,000,000 | 20,000 |
| Expenses | 750,000 | 4,000 |
| Chargeable income before loss | 250,000 | 16,000 |
| Loss b/fwd | (20,000) | – |
| Chargeable income for year | 230,000 | 16,000 |
| Tax at 35% | 80,500 | 5,600 |
| Provisional tax | 80,000 | – |
| Balance of tax due | 500 | – |
| Unutilised provisional tax for year | – | – |
| Unutilised provisional tax b/fwd | 50,000 | – |
| Less balance of tax due | 500 | – |
| Tax due | – | 5,600 |
| Unutilised provisional tax c/fwd | 49,500 | – |
The amount of a tax loss incurred by a person during the year preceding the year of assessment from the transfer of immovable property forming part of the elected project shall not be set off against any income from other sources (including income derived from the transfer of immovable property forming part of other projects), for the year preceding the year of assessment or any subsequent years of assessment, and shall not be treated as an allowable loss for the purpose of the group relief provisions.
The amount of a tax loss incurred by the company during the year preceding the year of assessment shall be carried forward and set off only against the chargeable income derived from the transfer of immovable property forming part of the project for subsequent years.
For the purpose of ascertaining the chargeable income derived from the transfer of immovable property forming part of the project, no tax losses whether arising before election from the same source, or from any other source, or claimed under the group relief provisions, shall be allowable as a deduction against the said income.
Distributable profits derived from the transfer of units forming part of the elected project are to be allocated to the final tax account.
C. OTHER AMENDMENTS:
Transfers made by non-resident persons:
In the case where the transferor is not resident in Malta, the transferor may opt out of the final tax system (article 5A) under article 5A(3)(h) if the following conditions are satisfied:
- The transferor is resident for tax purposes in another country;
- The transferor 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 confirming the person’s residence and certifying that the person is subject to tax in that country on gains or profits derived from the transfer of immovable property situated in Malta;
- The transferor is not owned or controlled by, directly or indirectly, nor acts on behalf of, an individual or individuals who is or are resident in Malta.
The transferor cannot apply for a reduction of the 7% provisional tax paid and such provisional tax shall not be available for refund.
Transfer of owned and occupied residential property:
Property that has been owned and occupied by the transferor as his own residence for a period of at least 3 consecutive years is exempt from tax. The definition of “own residence” has been amended and now requires that land which the owner has for his own occupation and enjoyment with the residence as its garden or grounds, qualifies for the exemption if such land:
(i) having regard to the size of the dwelling house, consists of an area which is required for the reasonable enjoyment of it as a residence,
and
(ii) is transferred through the same deed with the principal residence.
A garage of not more than 70 square metres (previously thirty square metres) situated within 500 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.
The assignment of property that formed part of the community of acquests:
Article 5A(4)(e) of the ITA exempts from tax the assignment of property that formed part of the community of acquests between the spouses or was otherwise owned in common between them, to one of the spouses on the dissolution of the community, or the partition of such property between the spouses or the surviving spouse and the heirs of the deceased spouse.
A proviso has been introduced stating that on a subsequent transfer of the property assigned / partitioned, the date of acquisition of the share assigned shall be the original date when the property was acquired by the two spouses.
Transfer of property acquired by the transferor in terms of a donation:
A transfer of property that was acquired by the transferor in terms of a donation made more than 5 years before the date of the transfer, is chargeable to tax at 12% of the excess, if any, of the transfer value over its acquisition value.
A proviso has been introduced stating that the 12% final tax on the excess of the transfer value over the acquisition value does not apply where the property transferred consists of a transfer of a unit within a project, that is, property which has been developed by the transferor into more than one transferable unit.
Partition of immovable property held in common:
No duty is charged on a deed of partition of immovable property held in common where the real value of the share of the property assigned under the said deed to each co-owner is equal to the real value of the undivided share held by each co-owner before the partition.
Where the real value of the share of the property assigned to a co-owner exceeds the real value of the undivided share held by such co-owner before the partition, duty shall be paid on such excess.
Transfers between co-owners:
No duty is chargeable on a transfer of an undivided share of a dwelling house, where the dwelling house was, immediately before the transfer, co-owned by two individuals and the transfer is made by one of the co-owners to the other.
The exemption applies where the co-owners had, for the purposes of sub-article (4)(a), 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
About the author
Mr. Marvin Gaerty FCCA., CPA is the current Commissioner for Revenue, heading the three Revenue Departments: Inland Revenue, Value Added Tax and Customs. Before assuming this post he managed the Tax Compliance Unit at the Inland Revenue Department for three years. He was previously tax adviser, stockbroker and compliance officer with a company providing investment services. Mr. Gaerty has been a lecturer in courses and workshops organised by the M.I.A. and M.I.T. He also coached students sitting for the advanced ACCA tax paper and was examiner for the Advanced ACCA Tax paper.
