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
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. Part 1 of this article featured in the summer 2015 edition. In this article other measures will be discussed including measures announced in the 2016 Budget.
Duty relief for First Time Buyers
LN 393 of 2013 issued on 12 November 2013 introduced an exemption from duty on the first €150,000 of the aggregate value of the consideration paid for the acquisition of immovable property by an individual, applicable to transfers of property made on or after 5 November 2013 but before 31 December 2014. The property being acquired must qualify for relief of duty under article 32(4)(a) of the Duty on Documents and Transfers Act, i.e. the purchaser is a person who does not require a permit by the Minister for the purposes of the Immovable Property (Acquisition by Non-Residents) Act and acquires, inter vivos, the property for the purpose of establishing therein or constructing thereon his sole, ordinary residence.
The exemption applies if the property is the first property acquired inter vivos. Even if the individual does not own any property at the time of acquisition, the benefit cannot be availed of if such individual owned, at any time, immovable property. The benefit cannot be availed of if the notice of a promise of sale or transfer relating to the property being acquired has been given to the Commissioner in accordance with the provisions of article 3(6) of the Duty on Documents and Transfers Act or of rules made under that Act before 1 July 2013.
This measure was extended by 6 months up to 30 June 2015 and now following the declarations made during the Budget Speech 2016 it has been extended up to 31 December 2016.
Transfers made by non-resident persons
In the case where a non resident person (not owned or controlled by, directly or indirectly, nor acts on behalf of, an individual or individuals who is or are resident in Malta) transfers immovable property situated in Malta such person may opt out of the final tax system (article 5A) under article 5A(3)(h). On condition that 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 cannot apply for a reduction of the 7% provisional tax paid and such provisional tax shall not be available for refund.
A transfer of property made by a non-resident individual on or after 1 January 2015 is taxed at the following rates under the final tax system:
- Transfer made not later than five years after the date of the acquisition – 5% Final tax
- Property was acquired before the 1st January 2004 – 10% Final tax
- Other transfers – 8% Final tax
If the non-resident individual opts out of article 5A (Final tax system) the transfer will be chargeable under article 5. The individual must register with the Inland Revenue Department and submit a tax return including a computation of the capital gain. The tax return is to be submitted by 30 June of the year following that in which the property was transferred.
If the tax charge on the income declared in the tax return is less than the 7% withholding tax the excess cannot be claimed as a refund – the minimum tax payable is always 7% of the transfer value of the property.
A non-resident has the advantage of paying 7% final tax instead of 8% or 10% final tax by opting out of the final tax system, but must pay additional tax if the 7% withholding tax is less than the tax charge on the capital gain as declared in the tax return.
In the case were the non-resident transfers the property within 5 years from date of acquisition he can apply article 5A (5) (e) and in such case the 5% final tax rate applies. If the property is however transferred after 5 years the non-resident has to decide whether to apply the 8% final tax or else opt out of article 5A and declare the capital gain in a tax return. The method adopted will depend on the tax charge on the capital gain.
Consider the following three examples.
Case 1
A non-resident individual transfers property on 30 April 2015 for a consideration of €200,000. The property was acquired on 10 March 2013 for €150,000.
Option 1: Apply 5% Final tax (property held for less than 5 years).
€200,000 x 5% = €10,000 final tax
Option 2: Opt out of article 5A and submit a tax return declaring the capital gain.
| Transfer value | €200,000 |
| Acquisition cost | €150,000 |
| Capital gain | €50,000 |
| Tax charged | €16,660 |
| 7% withholding tax | €14,000 |
| Settlement tax | €2,660 |
Option 1 (tax at 5% fwt) is the best option since €10,000 is paid while under option 2 he pays €16,660.
Case 2
A non-resident individual transfers property on 30 April 2015 for a consideration of €200,000. The property was acquired on10 March 2008 for €150,000.
Option 1: Apply 8% Final tax (property held for more than 5 years).
€200,000 x 8% = €16,000 final tax
Option 2: Opt out of article 5A and submit a tax return declaring the capital gain.
| Transfer value | €200,000 |
| Acquisition cost | €150,000 |
| Capital gain | €50,000 |
| Tax charged | €16,660 |
| 7% withholding tax | €14,000 |
| Settlement tax | €2,660 |
Option 1 (tax at 8% fwt) is the best option since €16,000 is paid while under option 2 he pays €16,660.
Case 3
A non-resident individual transfers property on 30 April 2015 for a consideration of €200,000. The property was acquired on 10 March 2008 for €190,000.
Option 1: Apply 8% Final tax (property held for more than 5 years).
€200,000 x 8% = €16,000 final tax
Option 2: Opt out of article 5A and submit a tax return declaring the capital gain.
| Transfer value | €200,000 |
| Acquisition cost | €190,000 |
| Capital gain | €10,000 |
| Tax charged | €2,660 |
| 7% withholding tax | €14,000 |
| Settlement tax | €0 |
Option 2 (tax at 7% fwt) is the best option since €14,000 is paid while under option 1 he pays €16,000.
Tax on rental income
In the 2014 Budget an optional 15% final tax system on rental income was introduced. The 15% tax rate applies to any person renting immovable property, being a tenement leased as a residence or garage, to an individual or individuals.
Tax is charged at the rate of 15% of the gross rental income received. Such tax shall be 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.
Where a person, in a relevant year, derives rental income from the letting of more than one tenement and the option has been exercised for such year, the total rental income received in the said year from all the tenements let out by such person is to be taxed at 15%.
Where an enquiry is conducted any rental income which has not been declared shall be charged to tax at the rate of 35% of the gross rental income received and such tax shall be in addition to any interest and additional tax payable under the Income Tax Acts.
As from 1 January 2016 this measure will also apply to commercial leases and therefore, as of this year, all income deriving from the lease of property will be subject to a final withholding tax of 15% if the option is availed of. However companies that form part of the same group of companies and which lease properties to each other will be excluded.
Transfer / acquisition of property situated within an urban conservation area
Two measures have been introduced in the 2016 Budget with the objective of reducing vacant property and ease the pressure for new buildings.
A reduced duty rate of 2.5% will apply in the case of a transfer inter vivos of immovable property situated within an urban conservation area or scheduled by the Malta Environment and Planning Authority in terms of article 81 of the Environment and Development Planning Act, made on or after 1 January 2016 but before 1 January 2017 to a person who does not require a permit by the Minister for the purposes of the Immovable Property (Acquisition by Non-Residents) Act.
The reduced duty rate applies if the below conditions are satisfied:
- Together with the notice referred to in article 51 of the Duty on Documents and Transfers Act, there shall be submitted to the Commissioner for Revenue a certificate issued by the Malta Environment and Planning Authority certifying that the property falls within a development area known as an Urban Conservation Area (UCA), or is a scheduled property in accordance with article 81 of the Environment and Development Planning Act.
- No relief was claimed under this scheme in respect of any previous transfer of the said property.
- No relief is claimed under article 32C of the Duty on Documents and Transfers Act.
The person who acquires the property must submit to the Commissioner for Revenue any information, forms and documentation that the Commissioner for Revenue may require by means of a notice in writing within the period, not being less than thirty days, specified in the notice.
The benefit is forfeited if at any time during the period of ownership MEPA notifies the Commissioner of Inland Revenue that illegal development has taken place on any part of the property and / or the property is not regenerated according to the characteristics of the area or restoration of the said property.
When the benefit is forfeited the reduced rate of duty shall not apply and the duty chargeable on the transfer shall be the duty that would have been chargeable in accordance with the provisions of the Duty on Documents and Transfers Act had the benefit of the reduced rate not been claimed however the duty chargeable shall not be less than the duty already paid when the property was acquired.
In the event that the benefit is forfeited and duty becomes chargeable, the excess, if any, of the amount of the duty so chargeable over the amount of duty that was paid on the deed shall become payable to the Commissioner by the person to whom the transfer was made on the date MEPA issues the notification.
In the case where the purchaser qualifies under the First Time Buyer scheme, duty on the first €150,000 of the consideration shall not be charged and duty on the excess shall be charged at the rate of 2.5% (two euro and fifty cents on every one hundred euro or part thereof of the amount or value of the consideration for the transfer of the property or of the value of the property, whichever is the greater).
The tax on a transfer of property made on or after 1 January 2016 which is situated in an urban conservation area or scheduled by MEPA in terms of article 81 of the Environment and Development Planning Act, and which has been restored and /or rehabilitated after the date of acquisition by the owner in accordance with a planning permit issued by MEPA providing for the restoration and / or rehabilitation of such property, is to be charged at the rate of 5% of the transfer value.
The reduced final tax rate applies if the following conditions are satisfied:
- this reduced rate was not applied in respect of any previous transfer of the same property;
- the restoration and / or rehabilitation works have been certified by MEPA as satisfactory;
The certificate issued by MEPA must be 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.
The person who transfers the property must submit to the Commissioner for Revenue any information, forms and documentation that the Commissioner for Revenue may require by means of a notice in writing within the period, not being less than thirty days, specified in the notice.
Transfer of shares in property companies
Article 42(3) of the Duty on Documents and Transfers Act which provided for the computation of the real value of shares in a company was deleted by Act XIII of 2015 and rule 11(1) of the Duty on Documents and Transfers Rules was amended to provide that the provisions of sub-rules (5), (6) and (7) of rule 5 of the Capital Gains Rules will apply for the purpose of determining the real value of a company and the real value of shares in a company. This has simplified the process since previously there were two systems to arrive at taxable / dutiable value of the shares transferred. Article 42(2)(c) of the DDTA must be taken into account for calculating the amount subject to duty.
This article prescribes that for determining the real value of a company and the real value of the shares transferred, any liability in excess of the value of all assets excluding the value of any immovable property, other than a bank loan relating to the cost of acquisition and improvements of the immovable property or real right thereon or a debt registered at the Public Registry relating to the acquisition cost of the aforesaid immovable where such debt is registered within three months from the date of acquisition of the said immovable, shall not be deducted.
Two new provisos were introduced in the 2015 Budget. Where the immovable has been acquired from a group company and such transfer qualified for duty relief under article 32(6), the date of acquisition taken into account in determining whether the debt is registered within three months as aforesaid shall be the date when the immovable was acquired by the said group company. The objective of this measure is to remove the possibility of converting a non-deductible debt to a deductible debt by transferring the property to a group company and registering the debt within 3 months from the intra-group transfer.
Also where the company has in issue any marketable securities consisting of shares which do not participate in any way in the profits of the company other than by way of a fixed rate of return, which resulted from a conversion of debt, other than a deductible debt, such marketable securities shall be treated as a liability. The objective of this measure is to remove the possibility of converting a non-deductible debt to preference shares so as to reduce the real value of the company and shares being transferred.
This is the second and last part of two articles authored by the Commissioner of Revenue and intended to explain the major changes to the property tax system through measures introduced in 2015.
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.
