Malta transposes Pillar 2

The rules are deemed to come into force on the 31st of December 2023 but are restricted to the limited transposition of Chapters I, VIII, IX and of Council Directive 2022/2523, as the minimum measures which are of relevance to ensure the proper functioning of the system of global minimum level of taxation for multinational enterprise groups and large-scale domestic groups. This effectively results in the postponed application (by up to six years) of an Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR). Moreover, it also means that Malta did not introduce (for the time being) a Qualified Domestic Minimum Top-up tax (QDMTT).


The regulations apply to constituent entities located in Malta that are members of an MNE group or of a large-scale domestic group which has an annual revenue €750 million (including the revenue of the excluded entities) in its ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years immediately preceding the tested fiscal year. The regulations, in line with the Directive, do not apply to the following excluded entities: a government entity, an international organisation, a non-profit organisation, a pension fund, an investment fund or a real estate investment vehicle that is a UPE (and to entities owned to the extent of 85% (in certain cases 95%) by such entities and subject to specified conditions). There is a possibility for an election not to treat an entity as an excluded entity.


The substantive and administrative provisions of the rules transposed the indicated chapters of the Directive and include the following rules:
 

A.    Establishing the location of constituent entities (CE)

• Deemed to be in the jurisdiction where it is considered to be resident for tax purposes based on its place of management, its place of creation or similar criteria, and where this cannot be determined, the jurisdiction where it was created. 
• Flow through entities are deemed to be stateless unless it is a UPE or required to apply an Income Inclusion Rule, in which case it is deemed to be located in the jurisdiction where it was created.
• Additional rules apply to determine the location of the permanent establishment, depending on the rule through the PE is deemed to exist. 
• Moreover, reference is made to tax treaties when a CE is deemed resident in two jurisdictions, and in the absence of treaties, a deeming rule assigns the location of the CE to the jurisdiction which charged the higher amount of covered taxes for the fiscal year.

 

B.    Obligation to file a top-up tax information return

• A constituent entity located in Malta shall file a top-up tax information return with the Commissioner, on such form and in such manner as the Commissioner may require. In the case of multiple CEs in Malta, a designated local entity may be appointed to file such return.
• However, a CE shall not have the obligation to file a top-up tax information return if such return has been filed by: (a) the UPE located in a jurisdiction that has, for the reporting fiscal year, a qualifying competent authority agreement [4] in effect with Malta; or (b) the designated filing entity located in a jurisdiction that has, for the reporting fiscal year, a qualifying competent authority agreement in effect with Malta. In this case the Malta CE must notify the Commissioner of the identity of the entity that is filing the top-up tax information return as well as the jurisdiction in which it is located.
• The top-up tax information return is filed in a standard template and includes the following information:
  • (a) an identification  of  the CEs (including their tax identification numbers, if any), the jurisdiction in which they are located and their status;
  • (b)  information on the overall corporate structure of the MNE  group  or  large-scale  domestic  group,  including  the controlling  interests in the CEs held by other CEs
  • (c) the information that is necessary in order to compute:
    • (i) the effective tax rate for each jurisdiction and the top-up tax of each CE;
    • (ii) the top-up tax of a member of a joint venture group;
    • (iii) the allocation of top-up tax under the IIR and the UTPR top-up tax amount to each jurisdiction; and
  • (d) a record of the elections made in accordance with the regulations.
• Additional provisions apply in the case of a CE located in Malta with an ultimate parent entity located in a third-country jurisdiction that applies rules which have been assessed as equivalent to the regulations.
• The top-up tax information return must be filed within fifteen months from the last day of the reporting fiscal year and any notification (see above) within twelve months from the last day of the reporting fiscal year. However, in the year of the first applicability of the rules, both the top-up tax information return and the notification can be filed no later than 18 months after the last day of the reporting fiscal year. 
• The rules indicate the validity period of the various elections afforded by the European Union Global Minimum Tax Directive.
• Failure to file the top-up tax information return results in a penalty of €200 plus an additional €100 per day of default, capped at €20,000.
• Failure to report the required information in the top-up tax information return results in a penalty of €200 plus an additional €50 per day of default, capped at €5,000.
• Failure to notify the Commissioner of the identity of the entity that is filing the top-up tax information return as well as the jurisdiction in which it is located results in a penalty of €200 plus an additional €500 per day of default, capped at €5,000. The same penalty applies when the designated local entity fails to notify the Commissioner of the start of the initial phase of the MNE group’s international activity (see below for an explanation). 

 

C.    Transition rules

• When determining the effective tax rate for a jurisdiction in a transition year [5], and for each subsequent fiscal year, the MNE group or a large-scale domestic group shall take into account all the deferred tax assets and deferred tax liabilities reflected or disclosed in the financial accounts of all the CEs in a jurisdiction for the transition year. Deferred tax assets and liabilities are to be taken at the lower of the minimum tax rate and the applicable domestic tax rate. However, a deferred tax asset that has been recorded at a tax rate lower than the minimum tax rate may be taken into account at the minimum tax rate if the taxpayer is able to demonstrate that the deferred tax asset is attributable to a qualifying loss.
• However, the impact of any valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset is disregarded. In addition, deferred tax assets arising from items excluded from the computation of qualifying income or loss are also excluded from the computation above, when such deferred tax assets are generated in a transaction that takes place after 30th November 2021.
• Special rules apply to establish the taxation basis of assets transferred between CEs after 30th November 2021 and before the commencement of a transition year.

 

D.    Substance based income exclusions 

• The Directive provides that when computing the top-up tax, the net qualifying income for a jurisdiction shall (but there is a possibility of a voluntary election to ignore this rule) be reduced, by an amount equal to the sum of the payroll carve-out and the tangible asset carve-out for each CE located in the jurisdiction. The carve-outs for the first ten years shall be as follows:

Payroll carve-out -  for each fiscal year beginning from31st December of the following calendar years
 

Year	%
2023	10
2024	9.8
2025	9.6
2026	9.4
2027	9.2
2028	9
2029	8.2
2030	7.4
2031	6.6
2032	5.8

                              
Tangible Asset carve-out -  for each fiscal year beginning from31st December of the following calendar years
 

Year	%
2023	8
2024	7.8
2025	7.6
2026	7.4
2027	7.2
2028	7
2029	6.6
2030	6.2
2031	5.8
2032	5.4

                              

E.    Initial phase of exclusion from the IIR and UTPR of MNE groups and large-scale domestic groups

• In the first 5 years of the initial phase of the international activity of the MNE group, and in the first 5 years, starting from the first day of the fiscal year in which the large-scale domestic group falls within the scope of the regulations for the first time, the top-up tax due by a UPE located in Malta, or by an intermediate parent entity located in Malta when the ultimate parent entity is an excluded entity, shall be reduced to zero.
• The same rule (top-up tax reduced to zero) applies to Maltese CEs forming part of an MNE group in its initial phase of international activity, when the UPE of the MNE group is located in a third-country jurisdiction.
• In applying this rule, an MNE group is considered to be in the initial phase of its international activity if, for a fiscal year it has CEs in no more than six jurisdictions and the sum of the net book value of the tangible assets of all the CEs of the MNE group located in all jurisdictions other than the reference jurisdiction [7], does not exceed €50 million. 
• The 5 year period starts from the beginning fo the fiscal year in which the MNE group falls within the scope of Pillar 2. In the case of MNE groups and large scale domestic groups, already in scope when the Directive came into force, the 5 year period starts on 31st December 2023 31st December 2024 when the UPE is in a third country jurisdiction).
• The designated filing entity which is located in Malta shall inform the Commissioner of the start of the initial phase of the MNE group’s international activity by no later than twelve months after the last day of the reporting fiscal year. 

 

F.    Election for a delayed application of the IIR and the UTPR

• A UPE of a MNE group located in Malta is required to nominate a designated filing entity in any other Member State (and which Member State has not elected for a delayed application of the IIR and UTPR in terms of Article 50(1) of the European Union Global Minimum Tax Directive as Malta did) or, if the MNE group has no CEs in another Member State, in a third-country jurisdiction that has, for the reporting fiscal year, a qualifying competent authority agreement in effect with Malta.
• The CEs located in Malta must provide the designated filing entity with information necessary to comply with European Union Global Minimum Tax Directive and shall be exempted from the top-up tax information return, but are still required to provide the notification identifying the entity that is filing the top-up tax information return as well as the jurisdiction in which it is located. 
• The UTPR percentage for Malta shall be deemed to be zero for the fiscal year. 

 

G.    Other provisions

• The rules include provisions that establish the parameters to be met by the domestic law of a third-country jurisdiction in order for such to have been deemed to have a regime equivalent to a qualified  IIR. The applicable conditions are as follows:
  • (a) it enforces a set of rules in accordance with which the parent entity of an MNE group shall compute and pay its allocable share of top-up tax in respect of the low-taxed CEs of the MNE group;
  • (b) it establishes a minimum effective tax rate of at least 15% below which a CE is considered to be low-taxed;
  • (c) for the purpose of computing the minimum effective tax rate, it only allows the blending of income of entities located within the same jurisdiction; 
  • (d) for the purpose of computing a top-up tax under the equivalent qualified IIR, it provides for relief for any top-up tax that was paid in a Member State in application of the qualified IIR and for any qualified domestic top-up tax set out in the European Union Global Minimum Tax Directive; and
  • (e) is included in the list of third-country jurisdictions that have implemented a legal framework in their domestic law which is considered to be equivalent to a qualified IIR in conformity with the conditions above. 

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